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After FMCG majors disappoint, all eyes on next rung

A string of fast-moving consumer goods (FMCG) companies will declare their results over the next one week. These include Colgate-Palmolive, Asian Paints, Emami, Dabur, and Tata Global Beverages. Marico, Godrej Consumer, Glaxo-SmithKline Consumer Healt-hcare, Britannia, and Procter & Gamble Hygiene and Healthcare will declare their earnings in February.

After the disappointing set of numbers reported by FMCG majors Hindustan Unilever (HUL), and ITC, the question on most minds is: will the next rung follow suit?

Consensus estimates by leading brokerages peg the net sales and profit growth of Colgate at 12.44 per cent and 21.49 per cent, respectively; of Asian Paints at 15 per cent and 30.58 per cent; and Emami at 16.44 per cent and 12.33 per cent, respectively. Dabur’s net sales and profit growth has been estimated at 12 per cent and 14 per cent, while Tata Global’s net sales have been estimated at 4.4 per cent. Its net profit growth is expected to be flat, according to data compiled by BS Research.

This means, the next rung, barring Tata Global, might not disappoint the Street to the extent that ITC and HUL did. “I expect the next set of FMCG companies to be fairly steady in terms of their earnings. While there will be challenges on the revenue growth front, the commodity correction should aid gross margin expansion,” said Kaustubh Pawaskar, FMCG analyst at brokerage Sharekhan.

According to Amnish Aggarwal, senior vice-president (research) at Prabudas Liladhar, volume growth for this pack is expected to be 5-8 per cent as the slowdown is likely to bottom out this quarter. “Demand environment,” he said, “was benign with a meaningful recovery in a couple of quarters”.

HUL’s managing director and CEO Sanjiv Mehta had reiterated this point during the company’s third-quarter results on Monday. He had said, “This is likely to be the last of the quarters where volume growth will be tepid. The slowdown has bottomed out… We should start seeing volume growth pick-up across segments from the next quarter. It is currently restricted to a few categories; it should broad-base going forward.”

The gross margin expansion thanks to commodity correction is expected to give companies operational leeway to raise ad spends. According to consensus estimates, advertising and sales promotion expenditure, as a percentage of sales, is expected to hover in the region of 12-13 per cent for the quarter. HUL’s ad spends as a percentage of sales was 12.9 per cent of its net sales for the third quarter, which Mehta had described a healthy number to have. ITC does not give a break-up of its advertising and sales promotion expenditure during the quarter.

Analysts say companies such as Colgate-Palmolive, Dabur, Asian Paints and Emami are expected to maintain the 12-13 per cent range in terms of ad spends on account of competitive intensity. The third quarter traditionally is high in terms of ad spends on account of it being the festive quarter. While categories such as e-commerce and handset makers were big spenders in the three months ended December 2014, FMCG companies also kept ad spend levels high to stave off competition from small and regional players, who entered the market taking advantage of the commodity correction.


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