The impact of GDP growth hovering around a decade-low of 5% is now clearly visible in the moderating volume growth of consumer goods companies. In the three months ended June 2013, most large-to-mid-sized FMCG companies reported below-average volume growth for the third consecutive quarter. Slow income growth and sticky consumer price inflation are forcing people to contain spending, especially on personal care products, which, in turn, is leading to slower volume growth for these companies.
The slowdown appears to be broad-based, with Hindustan Unilever, GSK Consumer Healthcare, Colgate-Palmolive and Godrej Consumer clocking in below-average volume growth.
The slowdown is stark in the case of HUL, which reported 4% volume growth ? less than half the average of the last 10 quarters. While the HUL management acknowledged that growth is slipping across categories, a pronounced weakness in skin care products has affected sales in the personal products segment, which grew a mere 2% year on year during the quarter.
Not surprisingly, as many as nine brokerages ? including JPMorgan, Macquarie and Kotak Institutional equities ? have downgraded the company, resulting in a 10% correction in the stock price since the quarterly results were announced.
In a recent sectoral note, Nomura downgraded the FMCG space to ‘neutral’ , citing the possibility of a bigger-than- expected consumer slowdown. It notes that while growth in discretionary consumption has already slowed, weakness in non-discretionary consumption is starting to show up in company results.
?A slowing investment cycle implies a significant slowdown in job creation. This will likely hinder the ability of consumers to both spend and trade up,? it added.
Nikhil Vora, MD, IDFC Securities, in a recent interaction pointed out that even as rural consumption, which is generally represented by the demand for mass products, shows resilience, volume deceleration is likely from urban areas, where consumers have started to move towards premium products.
These concerns were clearly reflected by the slowing growth in the mouthwash and toothbrush business segments of Colgate-Palmolive. The company?s overall volume growth in the June quarter fell to 9% from 12% in the previous quarter.
Even GSK witnessed a decrease in the demand for packaged foods, which brought down overall volume growth to 7-8% over the last four quarters.
Even for companies that managed to post near- average volume growth in the quarter ending June, operating margins (OPMs) slipped on account of higher marketing expenses. This was particularly true in case of Dabur, GSK and Godrej Consumer, which have increased advertising and promotional costs aggressively over the last three quarters. In the latest quarter, the OPMs of these companies have shrunk by more than 100 basis points from last year.
Going ahead, slowing volume growth (which may limit potential earnings) and high valuations may limit the upside for FMCG companies. Despite a moderate correction in FMCG stocks since late July, their valuations, as depicted by price-to-trailing twelve-month earnings (P/E), are still near-all time highs.
