Q4FY2007 FMCG earnings preview
Key points
- Backed by a pick-up in rural demand, the fast moving consumer goods (FMCG) sector has seen the volume growth getting better every quarter. The revenue growth for the current quarter is likely to be driven by volume growth as well as improved pricing power.
- Rising input prices is a concern for the industry. Palm oil prices have increased by around 20% in the last three months but LAB prices continue to remain steady. Price increases as well as cost savings would help the companies to maintain their margins.
- We expect the profit of Hindustan Lever Ltd (HLL), the market leader in the segment, to grow by 18.8% year on year (yoy) backed by a strong growth in the home and personal care (HPC) segment and price increases in key products. We expect the margin to improve from 11.8% in Q1CY2006 to 12.8% in Q1CY2007, which would be primarily due to the price hikes taken in many of its products as well as improved product mix.
- ITC's profits are expected to grow by a strong 24% yoy. We expect the growth to be broad-based with the magnitude of losses in the non-FMCG business coming down. The imposition of the value-added tax (VAT) is having a dampening effect but we believe any decline is a good opportunity to buy.
- The long-term potential of this sector appears favourable with higher disposable incomes and increased spending. We believe with strong free cash flows, high return on capital employed (RoCE) and sustainable growth the sector still looks attractive.
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