FMCG sector faces rising raw material prices

May hit firms which reported better margins in the September quarter due to lower prices

The better-than-expected performance of fast-moving consumer goods (FMCG) companies in the September quarter, on the back of higher margins due to lower raw material prices, may not be sustained in the coming quarters. According to industry experts, the prices of almost all raw materials are moving up, and this trend may continue.
 
"Raw material costs were about 45% of sales in the first quarter of FY10 but increased by 200 basis points (bps) in the second quarter. In the next quarter, they can go up to 50% of sales," said HK Press, vice-chairman, Godrej Consumer Products Ltd (GCPL).
 
Last year, GCPL’s raw material costs were about 60% of its sales, but they dropped to around 47% in the current fiscal. During the September quarter, prices of palm oil, linear alkyl benzene (LAB) and high density polyethylene (HDPE) were down 18.5%, 49.1% and 8.2%, respectively from the same quarter last year.
 
“During the quarter to end-September, earnings before interest, taxes, depreciation, and amortization (EBITDA) margins widened 50-250 basis points (bps) due to lower raw material costs. On the other hand, advertising spend as a percentage of sales rose 50-150 bps. Net profit, at 26%, was below EBITDA growth because of lower interest rates and higher tax rates, from expiry of some tax holidays and increase in the MAT rate,” said Anand Rathi Financial Services Ltd, in a research note.    
 
The decline in palm oil prices boosted the margins of soap manufacturers like Godrej and Emami, which reported overall revenue growth of 121% and 27%, respectively during the September quarter. GCPL's revenue from soap sales grew 28% on volume growth of 16% while revenue from its hair-colour business rose 48%.
 
Hindustan Unilever's soaps and detergents segment recorded sales growth of 9% in the September quarter, while its raw material cost was down 9% from the corresponding year-ago period.
 
However, Dabur's raw material cost increased 3% for the September quarter; yet sales rose 15% compared to Q2FY09.
 
Nestle India’s revenues in July-September were up 18% from a year ago, to Rs1,302 crore, driven by strong domestic and international sales. Its operating profit increased 28% to Rs269 crore due to a better product mix and lower commodity prices (except for milk solids and sugar). "Changing lifestyle, increasing disposable income coupled with strong consumer spending will be the key drivers for companies like Nestle India. The only risk which we see is a likely pressure on margins with increasing prices of agri commodities with below normal monsoon this year," said Kisan Ratilal Choksey Shares and Securities Pvt Ltd, in a report.  
 
Petroleum prices also fell during the September quarter, which mainly benefited the shampoo and detergent segments and also reduced packaging material costs across the FMCG segment.
 
But despite a deficient monsoon and increasing raw material prices, the FMCG sector may be able to sustain higher margins with volume growth. Anand Rathi Financial Services said, "A good rabi (winter) crop and negligible impact of the poor monsoons should, in our view, lead to the sector reporting steady growth rates. With ‘modern trade’ reviving and companies’ efforts to launch price-point-based SKUs could also help the sector. If raw material prices rise, most companies would be able to exercise their pricing power to maintain or improve margins." 

 

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Proposed law on plastic packaging may hit FMCG players
 
Fast-moving consumer goods (FMCG) companies, which reported healthy operating profit margins for the first half of the current financial year, may face an erosion in margins in the coming quarters due to rising raw material prices. In addition, on 17 September 2009, the Ministry of Environment and Forests released a draft notification that seeks to ban the use of recycled or biodegradable plastic for storing, carrying, dispensing or packaging foodstuffs.
 
This means that FMCG firms can use only ‘virgin’ plastic in a natural shade for packaging foodstuffs. Pigment dyes cannot be used to colour the plastic.
 
The proposed law will also ban the use of paper-laminated plastics for packaging soaps, hair dyes, snacks and shampoos. This means FMCG companies will have to use plastic bottles instead of sachets, which will increase their packaging costs.
 
The notification also stipulates that all plastic packaging materials should have a code or mark engraved which reveals the type of plastic used—virgin, recycled or bio-degradable plastic—and they should be less than 12x18 inches (30x45 cms) in size and less than 40 microns in thickness. 
 
If the notification becomes law, it will have a huge impact on the Rs7,500- Rs8,000 crore plastic packaging industry.
 
“Many of us feel that what has been proposed in the draft notification is not consistent with what is required. It will increase the cost of FMCG products and will make them unaffordable for the common man,” said Mr Venkatrangan, head of commercial, Paper Products Ltd.
 
The government has sought feedback from the industry within 60 days after the notification was released. However, FMCG companies claim to have received a copy of the notification only 15 days back and they now have only a week to put forth their views on the proposed law.
 
“We are approaching ISTMA (Indian Soap & Toiletries Makers' Association) with our suggestions, as the proposed law can have unintended consequences. The government has welcomed our suggestions so that we come out with a solution that is eco-friendly and also does not impact the FMCG industry,” said HK Press, vice-chairman, Godrej Consumer Products Ltd.
 
ISTMA will forward the suggestions of various industry players to the Confederation of Indian Industry (CII) which will then take up this issue with the government.

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NPS gets lukewarm response so far
 
The NPS was introduced amid much fanfare by the previous government, as a much needed reform in social security. This far-reaching initiative was intended to serve as a vehicle for retirement savings. Five years down the line, there are very few takers for the scheme, even among Central government employees.
 
The NPS, introduced in 1 January, 2004, is mandatory for Central government employees who joined service on or after that date. The scheme was subsequently opened to all citizens on voluntary basis with effect from 1 May, 2009. Citizens, especially in the non-government segment, have shown complete apathy towards the NPS. The number of non-government subscribers to NPS registered as of 21 October 2009 is a minuscule 2,321. The response from government employees too is not very encouraging. The total Central government employees registered under the NPS is just 5,38,276 and in case of State government employees, the figure stands at a mere 1,10,024. Considering that there are more than 50 lakh government employees in India, these numbers indicate the true extent of penetration achieved by the NPS.
To popularise the scheme, the Pension Fund Regulatory and Development Authority (PFRDA) has appointed 22 Points of Presence (PoPs) and six Pension Fund Managers for offering NPS to citizens. Branches of the registered PoPs designated as PoP Service Providers (PoP-SP) act as the initial point of contact and collection points for all citizens other than government employees desiring to obtain a Permanent Retirement Account Number (PRAN) under NPS. There were in all 798 PoP-SP branches as of 16 October 2009, and between them, these branches have managed to collect only 2,291 application forms so far. The poor response to NPS can be attributed to several reasons like higher enrolment cost, lack of confidence in the system and absence of distributors. Also, distributing and managing NPS funds is not exactly a profitable proposition.
Sanket Dhanorkar [email protected]
 

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