FMCG sector margins unlikely to grow

Written by Shubham Batra | Shobhana Subramanian | Shobhana Subramanian | Updated: May 1 2010, 04:48am hrs
It has been a disappointing March quarter for consumer products firm Marico. Thanks to some price deflation, the top line growth has been muted and advertisement spends have eaten into margins.

Saugata Gupta, chief executive officer, consumer products, Marico, in an interview with Shubham Batra and Shobhana Subramanian, indicated that prices for some products would be increased if input costs go up. Excerpts:

Reenues have grown at a very subdued 6.4% year-on-year in the March quarter

There has been 7-8% price deflation but volumes have grown at 14%, which is good. So, one shouldn't look at the top line. If had been in a category which uses milk, sugar and wheat, the inflation would have been 15%. Then with the same volumes, we would have had a 30% growth.

Do you believe volumes can sustain at these levels

Volumes have happened despite food inflation, which has led to downtrading and pressure from look alikes. Also, when input costs go up, our relative competitiveness in the marketplace improves. We have been clocking 13-14% for some time now, and we believe a double-digit growth is sutainable. There is no downtrading pressure this year.

Despite your gross margins having improved by 640 basis points year-on-year, why has the Ebitda margin expanded by just 80 basis points

Last year, we did some extra price promotions and there have also been some one-off adjustments for Kaya. I dont see any margin contraction this year. The FMCG industry is unlikely to see any margin expansion this year because there has to be a balance between growth and expanding the franchise. You could also see some price increases during the year. Also advertisement spends, which were at 13.2% last year, could come down to the levels of 12%.

What kind of price cuts have you taken for your brands

For Saffola, we had taken a price cut some time back, in April 2009. That was something in the range of around 7-8%. In the case of Parachute, we had taken a price cut in only the entry level pack. Apart from this, there has been no cut on Parachute. For edible oils too, there have been some price drops. So, the total deflation component has been 8-9%, which is the price realization component. For Nihar also, we had taken some price drops on the entry point packs, the small ones. For Shanti Badam Amla, we had a promotional offer; so we cut prices by 25% in February since we wanted to expand the franchise.

How do you read the trend in copra and safflour prices

There has been no significant increase in the safflour prices but we are not planning to take any significant price increase as of this quarter. We will wait and watch and if there is an inflationary concern, we will have to pass it on, maybe next quarter.