Fast-moving consumer goods (FMCG) companies have a good reason to heave a big sigh of relief. The sector, which has been battling several odds like untamed food infl­a­tion and is now bracing for a severe hit tha­nks to the fuel hike, looks strong on the back of better-than-expected monsoon rains predicted by weather forecasters. This will eventually cool infl­ation and boost people’s purchasing po­wer besides leading to an increased de­m­and in rural areas.

Monsoon impact

The Indian Meteorological Departm­ent (IMD) has updated its forecast of a normal monsoon with 98 per cent rain, and raised the quantum to 102 per cent for June-September of the long period average (LPA). LPA is the average rainfall received across the country over a 50-year period.

Industry analysts say a good monsoon will moderate input costs, thereby easing pressure on margins.

Companies with agriculture-based inputs are a better bet if we have a good monsoon. Moderation is expected in pr­ices of milk, sugar, wheat and rice, which will benefit companies such as Britan­nia, Nestle, Dabur and GSK Consumer. Britannia seems to be among the major gainers because prices of its key inputs such as sugar and wheat flour rose sharply in the previous year. Nestle will gain due to lower/stable milk prices. Ho­w­ever, the monsoon will be largely neutral for Hindustan Unilever (HUL) and Asian Paints as they use a higher proportion of crude-based inputs.

According to a recent report by brokerage firm Motilal Oswal, the monsoon can be a big turning point for the FMCG sector this year. “We have seen volume growth suffering in high penetration categories such as soaps, detergents and sh­a­mpoos. Down-trading has also been ra­m­pant across product categories, especially in those that cater to the lower and middle-income sections of society. Com­panies have been reluctant to hike product prices despite an increase in input costs,” analysts Amnish Aggarwal and Nikhil Kumar said in the report.

Again, some FMCG categories use agriculture-based inputs, whose costs have increased significantly. Still, the companies have not increased prices because of stiff competition as also to stem slackening of consumer demand.

Agriculture-based inputs have shown a firm trend over the past year. Sugar prices declined by 30 per cent from their peaks but are still up by 63 per cent from December 2008 levels. Liquid milk pr­ices are up 15 per cent year-on-year and skimmed milk prices are up 5 per cent. Wheat prices are down by 10 per cent.

Competition woes

The Indian consumption story is forcing many global and do­mestic players to get into new segments and product lines. Here, pricing is the tool as high inflation makes lower-priced products attractive. Competition is already fierce with existing players cutting prices to pr­otect their market share, and new entrants using the pricing tool to gain a foothold.

Prices of detergents (economy and mid-priced segment) and shampoos ha­ve fallen by 15-30 per cent. Some have also cut toilet so­ap prices by as much as 5 per cent. An­a­lysts say there has been lower consumer offtake and down-trading in some high-penetration categories such as soaps, de­tergents and shampoos.

In fact, recent instances of Procter & Gamble (P&G)-HUL detergent price wars (Wheel/Rin and Tide), price cuts by Marico (amla oil) and P&G in the sh­ampoo market indicate a strategic intent to gain market share through lower prices.

Again, new players have entered high-growth categories such as instant noodles and skin creams. They are either looking for a niche va­riation in product attributes or an attractive price point to make an impact. Wh­ile HUL launched Knorr Soupy Noodles to create a selective market in a fast growing instant noodles catego­ry by of­fering a soup with noodles, GSK is testing Horlicks Asha, targeted at value-for-money consumers.

Laundry war

There has been no impact on input costs for laundry detergents because they are largely crude-linked.

“We expect profitability to take a kn­ock in the near term due to price cuts in powders and bars, steps to improve product quality, and a significant step-up in competitive advertising,” the Motilal Oswal report said. However, for the long term, analysts expect big players like HUL, P&G and Ghari to gain share, thus squeezing the margins for smaller players. Here, P&G's aggression could change the ga­me. With P&G adopting an aggressive strategy to increase its share, the laundry segment is witnessing a second round of price war.

This follows consumer down-trading from the mid-priced segment, which was P&G’s mainstay with its Tide brand. Also, P&G and HUL have lost market share to regional players such as Ghari in the past 18 months. Ghari is expanding its distribution network and emerging as a pan-India player from being a company foc­used on Uttar Pradesh, Madhya Pradesh and Bihar, till a few years ago.

Tide Naturals marked P&G's entry in­to mass-market detergents. Although it was launched at a premium of 70 per cent to existing brands, the premium was later reduced to 33 per cent. Tide Naturals is available at a discounted price of Rs 32 (normal price Rs 40/kg) in a some areas.

“Price cuts by larger players aim to stimulate consumer uptrading and ret­a­in consumers who have been downtr­ad­ing,” said a senior industry analyst.

Soap opera

The Rs 10,000-crore toilet soaps segme­nt is fast evolving as smaller brands target specific price points and niche product segments to increase their market share in a sector where the market lea­der has more than four times the share of its nearest competitor.

While Godrej Consumer Products (GCPL) has targeted the sub-popular segment with 76 per cent TFM (total fatty matter), Wipro has positioned Santoor as a soap with natural ingredients for a youthful skin and Reckitt Ben­ckiser has focused on germ protection in Dettol and introduced product variants.

This multi-pronged competitive att­ack has resulted in HUL losing market share over the past two years.

Toilet soap majors’ margins increased sharply since the fourth quarter of FY09 due to robust demand. But in the past few months, toilet soap volume growth has moderated. “This is because companies are reluctant to increase prices des­pite a sharp increase in input costs, partly because of price cuts by HUL to regain its lost market share. There will be tough competition in this category” said analyst Anand Shah of Angel Broking.

Stock performance

On the back of defensive buying amid weak global cues, the FMCG counter has outshined the benchmark indices year-to-date. The BSE FMCG index has returned 14.83 per cent this year, against 0.63 per cent rise in Sensex.

GCPL has surged 32 per cent. The scrip is on a roll on acquisition buzzes and has jumped over Rs 50 apiece to Rs 350 levels from the past one month. Recently, it acquired Tura, a Nigerian company, which deals in soaps. Takeover of Argentina-based hair dyes company Argencos, Indonesian-based insecticides group Megasari, and buying of remaining 51 per cent stake in the Godrej Sara Lee, has spurred sentiments on the counter.

Among the other major gainers, Colgate-Palmolive, Dabur, Tata Tea and ITC have climbed 29.67 per cent, 28.66 per cent, 25.83 per cent and 25.10 per cent, respectively.

Colgate’s revenue jumped 13.40 per cent in the fourth quarter, led by volume growth of 11 per cent.

“Share of staples will decline with slower growth in food and beverages, although share of personal goods will increase on account of high growth rates going forward,” said Ambit Research in a recent note.

Marico, Nestle India, Ruchi Soya, United Spirits and HUL soared 21.99 per cent, 14.12 per cent, 13.72 per cent, 3.25 per cent and 0.68 per cent, respectively. Marico recently dropped from the BSE FMCG index. zz

priyankadasgupta

@mydigitalfc.com

(With inputs from Amit Mudgill)