Sluggish Q2 sales dim prospects for consumer goods

Sluggish Q2 sales dim prospects for consumer goods
REUTERS

MUMBAI, NOV 3: Consumer goods companies put in a mixed performance for the July-September quarter with overall margins showing a modest rise, but slowing sales growth in some products raising concerns among analysts.

They recommended a cautious approach to shares in the sector based on individual company stories rather than on assumptions about the industry’s general direction.

A Reuters survey of the top 10 companies in the sector showed the aggregate net profit grew 15 per cent to Rs 524 crore ($112 million) over the year-ago quarter, but sales rose just four percent to Rs 4514 crore. Profit margins firmed to 11.6 per cent from 10.56 per cent, thanks to lower interest costs and improved working capital management, analysts said.

“Sales growth continues to be a problem in consumer goods due to lower rural spending, driven by farmers getting lower prices for foodgrains,” said BNP Paribas analyst Sujay Mishra. “This could deteriorate in the next few months as price increases allowed by the government for the next crop are likely to be low as well.”Hindustan Lever Ltd, a subsidiary of Unilever Plc and India’s biggest consumer goods firm, bore the brunt of the slowdown. The firm makes a wide range of products from detergents and soaps to processed foods. Its sales crawled up 0.4 per cent to Rs 2462 crore in the July-September quarter, squeezed by a sluggish market and tougher competition.

Net profit rose 16.1 per cent to Rs 331 crore on lower costs for raw materials like edible oils and better efficiencies. Analysts had forecast profits to rise by 18 per cent.

SmithKline Beecham Consumer Healthcare Ltd, an affiliate of Britain’s SmithKline Beecham Plc and Colgate-Palmolive (India) Ltd, a unit of America’s Colgate-Palmolive Co also disappointed, analysts said.

“There are broad concerns for the sector as a result ofpoor agricultural growth, but it is too early to make a call,” said Rajesh Kothari, analyst at SMIFS Securities. “One has to follow a stock-specific strategy.

FOODS BLOOM: Foods is doing well compared to personal care or toiletries,” said Kothari. Nestle India Ltd, a subsidiary of Switzerland’s Nestle SAand biscuit maker Britannia Industries Ltd, in which France’s Danone Group has a stake, produced good results.

“Many new product launches and higher marketing spends are driving sales in foods,” Kothari said. The consumer goods sector as a whole benefited from lower input costs, analysts said. “Across the board there has been margin expansion because of a very benign raw material environment,” said Asit Shah, analyst at Credit Suisse First Boston.

BNP Paribas’ Mishra said prices of raw materials such as coffee, cocoa and vegetable oils were low in the current quarter but it was difficult to see them falling further. “Packaging costs will go up with petroleum prices rising,” he said.

SHARES OUTLOOK: The sector underperformed the Bombay index in the quarter. The Bombay Stock Exchange’s FMCG index lost 17 per cent in the period, while the benchmark index fell 14 per cent.

HLL shares, which have the second biggest weighting of 14.22 per cent in the benchmark Bombay index, closed Thursday at Rs 181.75 - about 44 per cent off a 2000 high of Rs 324.90 in late February, but 11.5 per cent up from a low of 163 in October.

Nestle ended at Rs 543.45, barely 1.5 per cent off its mid-September high of 552, due to good results. The shares have gained 91 per cent from their low of 285 in early March.

Britannia finished at Rs 806, close to its high of Rs 932 in January, and off its low of 449 in March. “I would hold on to Britannia, Colgate and HLL,” said Rajat Sabharwal, analyst at Indian brokerage Kotak Securities.

“If Britannia shares were to rise 10 per cent, they would be pricey, as would Nestle as the good news is priced into the stock.”