FMCG Volumes healthy; gross margins under pressure: Q3FY11 Result Preview: Edelweiss

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FMCG
Volumes healthy; gross margins under pressure: Q3FY11 Result Preview: Edelweiss


􀂄 Key highlights of the sector over the past 12 months
Last year saw launches of several new products and categories. With competition
heating up amongst regional players and MNCs, A&P spends in the FMCG sector
have also skyrocketed. Last year saw a surge in M&A activities, with GCPL, Marico
and Dabur leading the pack. Past 12 months also saw COGS deflation, when
almost all players benefitted. However, in the latter half input costs rose, led by
higher crude prices. Overall, most FMCG players have registered strong volume
growth in the past 12 months.

􀂄 Q3FY11 result season for the sector
Volume growth was buoyant, led by recovery in urban and rural consumption with
rural market growing at faster pace in some categories. Q3FY11 witnessed return
of pricing power to a certain extent. There was margin squeeze Y-o-Y due to
higher input costs; however, some FMCG companies (like Dabur, United Spirits
and Nestle) are better placed than others. Easing off promotional pressure will
cool off A&P spending Q3FY11 onwards. However, companies will continue to
invest in ads, which, we believe, is good for the long term. Regulatory
environment continued to improve for branded liquor. Competition rose in
segments like noodles, toothpaste, shampoos and paints.
􀂄 Outlook for the next 12 months
Favourable macroeconomic factors such as GDP and population growth, coupled
with rising income levels and lifestyle changes could drive growth in the FMCG
sector. With return of pricing power, we believe volumes with higher margins will
drive profitability. Potential price war in the oral care space is likely due to entry
of P&G which is likely to impact Colgate the most. Intense competition is being
seen in the noodles segment with the entry of ITC and GSK Consumer, which
Nestle has dominated for a long time. Cost inflation in crude linked input like LAB,
LLP, etc., is a concern for some FMCG players. Emami and GCPL are actively
looking for inorganic growth opportunities. Value destructive M&A is key concern.
􀂄 Top picks
ITC, Hindustan Unilever, Dabur, Godrej Consumers Products, United Spirits.