Companies & Sectors
FMCG firms to maintain growth on steady demand, profits may be dented on higher costs

Brokerages say demand has been stable in the first quarter, although softening is visible in some categories and this could spread to other areas in the second half as prices harden

The fast moving consumer goods (FMCG) sector, which is dominated by some large Indian companies and multinationals, is likely to maintain revenue growth on steady demand in the first quarter of fiscal 2011-12, but profits would to be affected by increased costs, according to various brokerages.

Several companies are making various attempts to cut costs, like curtailing promotional expenses, according to KR Chowksey. With the competition stiffening, companies particularly in the personal products and processed foods segments have launched new products to try and grow market share.

Motilal Oswal Securities (MOSL) estimates that the packaged goods sector will post a 20% revenue growth (aggregate Rs23,400 crore) and profit after tax (PAT) will grow by 17% (aggregate Rs3,200 crore) in the first quarter. IDFC Securities has projected revenue growth for the sector a touch lower at 19.2% and PAT growth a couple of notches down at 16.3%.

According to MOSL, the demand environment has been stable, although volume growth in a couple of categories like coconut oil and malted food drinks has shown signs of softening. It says that further price increases in the second half of the year could result in softening in other categories as well.

This could affect most companies except ITC, United Spirits and GSK Consumer and margins would be stressed despite the price increases. MOSL expects a decline in margins for 10 of the 12 companies in its coverage universe and believes that investors will have to be cautious as stiff competition and margin pressures persist.

IDFC says more than half of the sales growth in the packages goods sector will be driven by the impact of acquisitions (Sara Lee, Megasari, etc) by Godrej Consumer and a third by Dabur (Hobi Kozmetik's personal care products and Namaste Laboratories' hair care range).

The best performances will come from niche players, like ITC and Pidlite, that have strong pricing power and greater visibility on volume growth and profitability, MOSL says. Godrej Consumer will see acquisition led growth through the low-margin acquisitions in Latin America and Africa.

The brokerage estimates ITC to post 18% sales growth (estimated sales of Rs5,720 crore - 8% cigarette volume growth) and 23% PAT growth (Rs1,320 crore). Pidlite is expected to see sales grow by 24% (Rs780 crore) and profit growth at 15.7% (Rs125 crore).

In the major processed foods business, Cadbury-Kraft launched Tang in the ready-to-mix category, GSK Consumer introduced Boost Glucose, Hindustan Unilever came up with Kissan Creamy Spread and Dabur served Hajmola Mint Masti. In the personal products categories, Dabur came launched Fem Safe Handz and Godrej Consumer relaunched Expert Hair Colour.


SBI to raise $5 billion via offshore loans this year

"Right now, we have a total objective of $5 billion, but we would like to time the market in the second and third quarters. If there is demand for assets, we will go and raise it," SBI chairman Pratip Chaudhury said

New Delhi: India's largest lender State Bank of India (SBI) on Friday said it plans to raise $5 billion through offshore loans by December, reports PTI.

"We hope to raise $5 billion debt by December by means of foreign debt through medium-term notes (MTN)," SBI chairman Pratip Chaudhury told reporters here.

Speaking on the sidelines of a meeting between finance minister Pranab Mukherjee and chiefs of public sector banks here, he said the debt would be raised during the second or the third quarter of this fiscal.

"Right now, we have a total objective of $5 billion, but we would like to time the market in the second and third quarters. We will be raising the funds, but there has to be visibility of credit growth. If there is demand for assets, we will go and raise it," Mr Chaudhury said.

MTN is a kind of bond note with a maturity period usually between five and 10 years continually offered through various brokers, rather than issued all at once like other bonds.

The SBI chief said the bank is confident of maintaining its net interest margin (NIM), which is a measure of the return on a company's investments relative to its interest expenses, at 3.5% this fiscal.

"The margins are improving. This current fiscal we have a guidance of 3.5% (NIM) and we are slightly ahead of it. Overall guidance is 3.5% and we are on track," Mr Chaudhury said.

He said SBI is also looking at increasing its credit growth by 16%-19% in 2011-12.

Regarding recent hikes in rates, Mr Chaudhury said: "Raising of interest rate has not impacted interest margin."

SBI had Thursday increased lending rates by 25% and deposit rates by up to 100 basis points (bps), a move that will make home, auto and other loans more expensive, but will provide better returns to savers.

The bank revised the base rate or the minimum lending rate upward by 25 bps, or 0.25%, to 9.50% with effect from 11th July.

Interest rates on fixed deposits with a maturity period of one to 10 years have been fixed at 9.25%. The new deposit rates will also be effective from 11th July.

The bank has also raised its benchmark prime lending rate (BPLR), which is used to determine floating interest rate loans, to 14.25% from 14%.

The decision follows the rate hike announced by the Reserve Bank of India (RBI) in its policy review last month. Several banks, including major private lender ICICI Bank, Canara Bank and Bank of Baroda, have already raised their lending rates.

Asked about inflationary pressure, which has prompted the RBI to hike rates 10 times since March, 2010, Mr Chaudhury said: "Inflation is continuously above 7%. So any policymaker would be worried."

Headline inflation stood at 9.06% in May and is expected to breach the double-digit mark in July due to the recent hike in prices of diesel, cooking gas and kerosene.


Oil ministry blocks Cairn’s Bhagyam oil field plans

The oil ministry wants Cairn to calculate profit from the Rajasthan block after treating royalty as cost recoverable item. On the other hand, Cairn believes that the royalty, which is paid by state-owned ONGC, is a licensee obligation and hence not cost recoverable from revenues

New Delhi: In fresh confrontation, the oil ministry has blocked Cairn India’s plans to begin crude oil production from the Bhagyam oilfield, the second biggest find in the prolific Rajasthan block, reports PTI.

Cairn had plans to put the Bhagyam oilfield into production by October to take total output from the Rajasthan block to 175,000 barrels per day.

Sources privy to the development said the ministry at the 10th June meeting of the panel that oversees operations of the block, stonewalled the FY11-12 production rate, work programme and budget for the Bhagyam field.

The ministry wants Cairn to calculate profit from the Rajasthan block after treating royalty as cost recoverable item. Cairn believed that royalty, which is paid by state-owned Oil and Natural Gas Corporation (ONGC), is a licensee obligation and hence not cost recoverable from revenues.

This view has been contested by the ministry, which has made cost recovery of royalty as a precondition for allowing UK’s Cairn Energy to sell 40% stake in Cairn India to London-listed mining group Vedanta Resources, they said.

The Cabinet Committee on Economic Affairs (CCEA) had last month agreed to making this a precondition for approving the $9-billion deal and so, the ministry now insists that it will not approve further programme on Bhagyam unless Cairn calculates profits to be divided among stakeholders and the government after adding royalty to the cost.

All project cost are first deducted from revenues earned from oil sales and then profits split between partners Cairn India, ONGC and the government. Cairn holds 70% interest in the fields, while ONGC has the remaining 30%.

Cairn on 21st June wrote to the oil ministry saying the issue of profits entitlement “should not be linked to production from Bhagyam field and Bhagyam production should be allowed to commence from October 2011, as per schedule.”

“It will be appreciated that increasing crude production at this juncture is in the best interest of all stakeholders and the nation when crude has to be imported at exorbitantly high prices,” it wrote.

Currently, Mangala, the biggest of the 18 oil discoveries in the Thar desert block, is producing 125,000 barrels per day (bpd) but has potential to do “much more”.

Bhagyam is targeted to produce a peak output of 40,000 bpd by the year-end.

Cairn said it had executed Bhagyam field development in line with approved development plan. “So far the contractor has committed more than $250 million towards the development cost against approved Field Development Plan (FDP) estimate of $470 million.”

Cairn said Bhagyam field can commence production from October 2011 and total production in 2011-12 from the field is estimated to be about 6.7 million barrels.

“However, the ministry of petroleum and natural gas representative present at the Management Committee meeting (on 10th June) directed that the Bhagyam program quantity of 6.7 million barrels and the associated production budget of $15.5 million should be removed from the Work Programme and Budget till the issue relating to the Entitlement Interest (profit of stakeholders) is resolved,” it said.

CCEA had last week decided to give approval to the $9-billion deal subject to Cairn/Vedanta allowing royalties from Cairn India’s prize Rajasthan oil fields to be added to project costs and recovered from sales.

Also, it has to end arbitration proceedings against the government disputing its liability to pay cess, or tax, on its 70% share of oil from the fields.

ONGC pays royalty on its 30% share of oil from Rajasthan fields as well as on operator Cairn India’s 70% take.

It will contractually continue to pay royalty on all the oil produced from Rajasthan but this will be added to project cost, which is first deducted from revenues earned from sale of oil before profits are split between partners.


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