>FMCG Sector (EDELWEISS)

Marico and GSK: The trend setters

Marico and GSK have been the first companies to report March quarter results. We have listed here the key thoughts and trends that emerge for the FMCG sector from these two results.

Topline and volumes robust in March quarter
Sales growth for both Marico and GSK Consumer Healthcare (GSK) remained robust in the March quarter. Volume growth for Marico remained steady (8% growth in Parachute, 5% in Saffola - 3% Y-o-Y growth in the December quarter). For GSK, volume growth was very high at ~20% (out of this ~6% has come from growth in international business and pipeline inventory of new products).

International markets remains a key growth driver
The international sales of Marico and GSK have grown by 35% and 45% Y-o-Y, respectively in the March quarter. In FY10, growth rate, especially for Marico, is however, likely to come down owing to higher base and lower inflation-led growth in some of its markets. Growth in international markets will be a key factor to watch out for even in the case of Godrej Consumer Products (GCPL), Dabur, and Asian Paints.

Innovation pipeline aids volume growth
Both Marico and GSK have benefitted from their new product launches in the recent past. In the past few quarters, Marico launched Saffola Cholesterol Management and Saffola Diabetic, Parachute Advansed (revitalizing hot hair oil), Saffola Zest and Saffola Rice. GSK too introduced three new prodcuts in the past few quarters (Horlicks Nutribar, Dood, Activ Grow). These new product launches are likely to propel incremental sales growth for the company.

Sharp dip in ad rates expand margins
We had predicted in our report ‘FMCG- Sunny days ahead’, dated November 7, 2008, that ad rates will correct in the March quarter and will help FMCG companies increase margins. In line with our estimates, ad revenues of Zee Entertainment Enterprises (ZEEL) were down 7% YoY (against ~30% YoY growth in H1FY09). For Zee News, ad growth came down sharply from ~39% in Q3FY09 to ~24% in Q4FY09 (largely growth was from new channels). Consequently, EBITDA margins were up 330bps Y-o-Y and 40bps Q-o-Q for Marico, and 203bps Y-o-Y and 980bps Q-o-Q for GSK. We expect the pressure on ad rates to continue in H1FY10, and then see the ad rates firming up in H2FY10 if the economy revives. In case of Marico, ad costs (as a percentage of sales) were down 510bps Y-o-Y and 80bps Q-o-Q in the March Quarter. For GSK, they were down 230bps Y-o-Y and 60bps Q-o-Q. However, both companies expect ad costs to be higher by 200bps for FY10/CY09 over the March 2009 quarter, owing to higher ad investments in new products.

Packaging costs – mixed signals
Packaging costs are partly linked to crude prices and account for 10-15% of costs for most FMCG companies. In case of Marico, it was down 140bps Y-o-Y, while for GSK, it was higher 35bps Y-o-Y, largely due to change in packaging and new launches.

Signs of downtrading visible
In Kaya, same store clinic sales (clinics over a year old) have grown 10% Y-o-Y against 13%
in Q3FY09, which clearly shows that discretionary spends are impacted. Sales growth for
Saffola, although up marginally Q-o-Q, is still lower than the growth seen in H1FY09. This is due to downtrading by consumers to low-cost vegetable oils due to high price differential. We expect the same trend for GCPL and Hindustan Unilever (HUL). In fact, GCPL’s soap volumes are likely to grow faster than HUL’s, owing to down-trading in favour of GCPL’s value–formoney (VFM) platform and the successful launch of Godrej No.1 – Strawberry and Walnut.

Volumes likely to remain robust; margins to expand for other companies
We expect volume growth to remain robust (especially for companies which have a strong presence at lower price points) and margins to expand for most FMCG companies (due to a
mix of lower costs of ad, palm oil and packaging materials) in the March quarter.

To see full report: FMCG SECTOR