FMCG companies may be witnessing a slowdown in demand, leading to low volume expansion, but that has not had much of an impact on their operational performance.
In fiscal 2014, the aggregate operating margin for the four FMCG majors (which have declared their annual results so far) stood at a six-year high of 16.09% led by pricing power, focus on premium segments and cost-control measures.
In fact, the aggregate operating margin for these four FMCG companies has been inching up steadily over the last three years. In fiscal 2014, the aggregate net sales of FMCG companies rose 10.18% even as total expenditure rose by 9.2%, helping these companies expand their operating margin by 63 bps. What has helped them so far is the ability to pass on costs to consumers, apart from lower raw material prices.
Raw material costs, which have eased by almost 230 bps in the last two years for these four companies, have also played a significant role in margin expansion. Though inflation continues to remain a concern, with prices of milk, palm oil and palm fatty acid distillate high, WPI has fallen steadily over the last three years, from close to double digit in FY11 to under 6% recently.
Anand Shah, CIO, BNP Paribas Mutual fund, says that strong consumer goods companies continue to command pricing power and they have been able to pass on costs consistently despite the slowdown in volume growth.
The pricing power is apparent considering that though HUL’s volume growth has fallen steadily (from 14% three years ago to 3% in Q4), it has been able to maintain price growth of 6%. pricing growth has been higher in the premium packaged foods and beverages segment for HUL — it stood at 7-9% in the March quarter. HUL has been seeing good traction for some of its premium products such as Surf Easy, Knorr instant noodles and the Tresemme range of hair care products.
HUL’s Ebitda margin in FY14 inched up by nearly 60 bps, with raw material costs as a percentage of net sales falling about 143 bps, even as selling and administration expenses rose 37 bps.
Similarly, in case of Dabur, net sales grew 15.1%, led by strong growth in the food beverages and health supplement segment while total expenditure rose 14.51%, helping the company improve margin by nearly 36bps.
Dabur believes that though premium and discretionary products have been seeing slower growth, certain categories remain immune to downtrading.