When most companies across sectors had a bleak picture to present in their second quarter results, fast moving consumer goods (FMCG) players were having a field day instead. It wasn?t without reason. Most had maintained topline and bottomline growth at a time when companies in allied sectors had seen their performance slide from the first to the second quarter on account of the economic slowdown.
Ironically, FMCG companies have had a tough time through the current fiscal. In the first quarter, they had to contend with input cost pressures on account of rising crude and commodity prices. Copra prices, for instance, moved from Rs 2,900 per quintal in October ?07 to over Rs 4,000 per quintal in June this year. Wheat crossed the Rs 1,095-per-quintal-mark in June this year from Rs 1,030 per quintal a year ago. Crude, of course, had moved from about $90 a barrel in October last year to over $140 a barrel by June this year. All of this was bound to impact players in some way. Says an FMCG analyst, ?On an average, the cost index of FMCG companies in the first half of this financial year went up by over 25%.?
Despite this, many of them survived and did well primarily on account of price hikes they had undertaken during the period. On an average, most companies took price hikes of about 10-15% in the first half of this financial year across categories. But it?s worth noting here that the increase in price was actually not commensurate with the raw material price inflation. Says P Ganesh, head of finance, Godrej Consumer Products Ltd, ?We did undertake price hikes, but not all input cost pressures can be passed to the consumer.?
To try and bring down the impact on margins then, companies adopted a slew of measures to cut costs. On one hand, many looked at substituting key inputs to try and mitigate cost pressures. Says Ganesh, ?For instance, palm oil is a key input for us. We did look at some blends.? Says Aditya Agarwal, director, Emami Ltd, ?You have to look at substitutes when there is too much volatility in raw material prices. Finding substitutes is an on-going process. But we try not to compromise on quality.?
Nonetheless, companies did not hesitate to tweak their raw material mix. It was imperative in the face of rising input costs. The other major step was to bring about efficiencies in production and purchase ? something companies intend doing even now, as they tried hedging their price risk. Says Schauna Chauhan, CEO, Parle Agro, the Mumbai-based maker of beverages Frooti, Appy and Bailey, ?My brief to production managers is clear: bring down costs by 10%. How do they do it? By reducing wastage, improving line efficiencies, utilising energy and water frugally.?
But many still did not stop at that. Companies brought down their advertising and publicity and even staff costs in the second quarter to bolster operating margins. Says a Delhi-based FMCG analyst, ?Gross margins in the second quarter were down by about 4-6%, while operating margins were down by about 2-3%. This would have been higher if companies had not brought down their advertising and publicity and staff costs by about 2-3%.?
For companies who depend heavily on advertising, squeezing their ad budgets hasn?t been easy. But tough times call for tough measures. At a time, when the economic slowdown threatens to eat into net sales and profits, companies realise there is need to control expenditure even as they try to make their products visible. In the second quarter, for instance, year-on-year growth in advertising has been merely 12% as against a 27% rise in the June quarter. Says Milind Sarwate, head of HR & strategy, at Marico Ltd, ?We are employing all measures to cut costs. This has been a top priority for us for some time. Cost management cuts across the value chain.?
This relentless drive to protect topline and bottomline is showing in the performance of companies on the bourses. Data complied by Almondz Global Securities show the fall in the FMCG Index in the last two quarters was lower than the fall recorded by the Sensex. It was merely 9.17% (June ending) and 3.89% (September ending) as against a fall of 13.95% (June ending) and 4.47% (September ending) respectively.
In fact, when the markets first crashed from an all-time high level of 21,207 on January 10 this year to below 20,000, becoming range-bound at about 15,000-16,000 by the end of March, the fall in the FMCG Index was merely 12.93% as against a 22.89% drop in the Sensex at that time. ?This shows how defensive the sector is,? says Lokesh Nathany, national head, wealth management & distribution, Almondz Global Securities.
In fact, beleaguered fund houses have found some respite in FMCG funds. The fall in the net asset value of units in these funds hasn?t been as steep as that of other sector-specific funds such as realty or infrastructure. The net asset value of units in Franklin Templeton?s FMCG fund was down by about 11.15%, 8.67% and 1.99% in quarters ending March, June and September this year , which is in line with the drop in the FMCG Index at that time.
ICICI Prudential?s FMCG fund has been a bit of a laggard falling more than the FMCG Index but less than the benchmark Sensex especially during the March and June-ending quarters. For the period in question the fall in net asset value per unit was 19.47% and 11.84%, which was lower than the fall registered by the benchmark Sensex at that time. For the quarter ended September, the fall was steeper at 8.63% respectively. Despite this, nobody denies that these funds have been safer havens as compared to allied sector-specific investments.
Says Anand Shah, research analyst at Angel Broking ?FMCG firms are generally the last to be impacted by a slowdown.? The reason: FMCG products are required for the daily consumption, which is why demand tends to be strong even in a grim scenario.
With the likelihood however of the slowdown lasting for a while, companies expect a fall in the demand of premium products, which is a segment that most of them dwelt on in the last few quarters to increase the share of wallet of consumers. ?The idea was to upgrade consumers to better products and thereby improve price realisations,? says an industry source.
Almost all companies have attempted to upgrade consumers over time. Marico, for instance, has launched a number of variants of its popular Parachute coconut oil, ventured into hair fall solutions for women, male and female grooming products etc. ITC made a splash with its personal care products (soaps and shampoos) in the popular and premium categories this year. Hindustan Unilever Ltd, on the other hand, pushed its Ponds franchise forward with products such as the Ponds Age Miracle, Ponds Personal Wash etc. The company also launched strawberry, peach and almond and cream variants of its Lux soap in the first half of this year besides coming out with new offerings of Axe, Rin, Clinic All Clear and Knorr.
FMCG major Nestle, meanwhile, had a string of products in the confectionary, baby foods, functional foods, beverages and ready-to-eat segments in the first half of this fiscal. GCPL launched new hair colours, while Britannia and GlaxoSmithKline Consumer Healthcare Ltd came out with new variants of its Nutrichoice and Horlicks brands respectively. Dabur launched products in hair care, skin care and home care ? all aimed at pushing up consumer spends. Says Sunil Duggal, chief executive officer, Dabur India, ?There is a likelihood that demand for premium products could soften a bit because consumers choose to spend less in such a period.?
Already, FMCG companies are said to be contemplating a downward revision of prices to keep volume growth intact. The endeavour, say observers, is to pass on the benefits of lower raw material prices to consumers. But the danger here is that value growth could take a beating, which could pull down the stock price of these companies. ?Lower prices could erode underlying value growth,? points an analyst based in Bangalore. Which is why no company has announced anything yet. Ganesh of GCPL, for instance, is cautious when saying whether his company will go in for a downward price revision. ?I see more consumer offers happening,? is all he proffers.