Companies & Sectors
‘Volume growth of consumer sector to remain subdued in the fourth quarter’

Nomura Research expects a stable earnings performance of the consumer sector and the volume growth to remain subdued in the first half. It is bearish on Hindustan Unilever, Colgate Palmolive and Jubilant Foodworks, while it remains optimistic about ITC and Godrej Consumer.

Nomura Research expects a stable earnings performance of the consumer sector and the volume growth to remain subdued in the first half. It is bearish on Hindustan Unilever, Colgate Palmolive and Jubilant Foodworks, while it remains optimistic about ITC and Godrej Consumer.

Nomura Equity Research expects a steady earnings performance of consumer goods companies for the March quarter. It estimates average net sales are expected to rise by 12.6% year-on-year (y-o-y). It also expects the operating margins to move up by 0.3% and the net income of the consumer sector to rise by 12.5%, according to the research report titled 4th Quarter Results Preview.

Nomura says that the growth of the rural sector, which has been on a slow down in the past few quarters, is susceptible to a further decline. In the report, it says “Risk of poor weather this year could yet imply a rise in input prices as well as a ‘shock’ for rural income growth, which can put any potential recovery of rural growth in FY15F at risk”

On demand growth of the sector, Nomura states, “Company commentaries in terms of demand growth direction over the next couple of quarters will be keenly watched. Urban and rural demand is in a low-growth phase currently and consensus expectations are for a pick-up in FY15F – company commentaries will have an impact on sentiment heading into FY15F.”

Competition may increase the advertising and promotion (A&P) expenses of the consumer sector. Nomura implies that the input prices, which are considerably stable now are liable to rise due to the poor weather patterns. Commenting on the key issue, it says, “Management commentary on how input prices have been managed in the past when weather patterns have been uneven will be a key question across the sector during the quarterly results calls.”

In the consumer essentials, Nomura prefers ITC in large-cap companies, which is showing strong results due to the growth in cigarette business margins. It expects the net profit to increase by 15% on y-o-y basis. It is optimistic on Godrej Consumer Products (GCPL) in the mid-cap companies. It expects GCPL to deliver 18% growth in sales, but estimates muted net income growth due to higher tax rate on y-y basis.

Although Nomura expects the margins to rise by 0.3% y-o-y, it is pessimistic on Jubilant Foodworks (JUBI), Colgate Palmolive (CLGT) and Hindustan Unilever (HUVR). “We expect margins to improve by 30bp y-y for the sector, but we expect negative surprises from JUBI, CLGT and HUVR. The companies started to take some price increases during the quarter which should help maintain margins into FY15F.” It also expects a rise in the A&P costs in this quarter.

In the company specific earnings expectations, according to Nomura, although  Hindustan Unilever’s margins are expected to rise by 0.8%, the commentary is likely to be negative for the next couple of quarters. Colgate’s margins are likely to contract by 2.8% on y-o-y basis. Jubilant is expected to suffer a decrease in margins by 1.65% due to the lack of consumer sentiment, high rental cost and increasing competition.

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Urea producers up in arms against Reliance on gas prices

Reliance believes that the new price will be effective for supplies between 1st April and 30th June. Fertilizer companies, on the other hand, have taken a stand that whatever the new price is fixed by the government, it cannot be applicable 'retroactively'

All the 16 urea producers have been obtaining their gas supplies from Reliance Industries Ltd’s KG-D6, based on a price level of $4.2 per mBtu for the last five years, and this contract expired as on 31 March 2014. The gas supplies from these wells have been going down and, presently, only 13 million standard cubic metres per day are available for distribution among the sixteen fertiliser units.

The Rangarajan Committee had, after great detailed study, recommended a price of $8.34 per unit, based on the gross calorific value (GCV) as against net calorific value (NCV) in the past.

The government notification, dated 10 January 2014, giving effect to this price, was actually gazetted on 17th January, for the price to be effective from 1 April 2014.

Although the contract and revision of price structure has been going on for months now, the Oil Ministry decided to approach Election Commission for clearance to announce the price because of the election schedule. The poll watchdog committee advised the government to hold the rate till mid may, by which time actual voting process would be completed.

In other words, the price (or rate) announcement would not "influence" the voter either way, because the voting would have taken place, and the process of counting and announcement of results would be starting from various places.

In an apparent move to safeguard its own interest, Reliance had sought to obtain additional letters of credit (LoCs) for $4.1 per mBtu more for every unit to be supplied, claiming that the old rate is "invalid", but supplies will be maintained, and that the rate will be as per the new rate applicable, with effect from1st April, as notified in the gazette dated 17th January!

In fact, this was as a sequel to the meeting convened by the Ministry of Petroleum and Natural Gas (MPNG) and Ministry of Chemicals and Fertilizers (MCF) with all stakeholders, who were asked to work the agreement details, while advising Reliance to continue supplies at the prevailing rates till the new rate (price) is announced by the government.

Apart from basic price per unit, Reliance believes that the new price will be effective for supplies between 1st April and 30th June and it is only the dollar value to calculate the price, which has to be announced (or reconfirmed).

Fertilizer companies, on the other hand, have taken a stand that whatever the new price is fixed by the government, it cannot be applicable "retroactively". The new price, in any case, excludes local levies, marketing margins and transmission tariff.

It may be recalled that the MPNG had on 21st November ordered that the margin to be charged over and above gas sale price should be fixed between the seller and buyer in all sectors, other than urea and LPG. It asked the Regulatory Board to determine the margin for supply of domestic gas to urea and LPG producers through its independent process. Now they are in the process of hiring a "consultant" to assist them in the task!

In the past, Reliance charged 13.5 cents per mmBtu as marketing margin over and above government set price of $4.205 per unit from KG-D6 gas, for the first five years' production, which ended on 31st March. Now the proposal base is the margin on gross calorific value (GCV) rather than net calorific value (NCV). If this is done, effectively, the marketing margin will increase by 11% which is opposed by the fertilizer units, who are the only consumers of gas from KG-D6. These urea units want to pay only 12.2 cents to RIL if base is changed from NCV to GCV.

All domestically produced natural gas will be priced at an average of international hub rates and the cost of importing LNG.

So far, fortunately, the urea units have not complained about non-receipt of gas from KG-D6. It is now a question of five-six weeks before this matter can be settled to mutual satisfaction. It is very clear that those involved in gas production have stated, time and again, that the price of gas fixed is not commercially viable and, if the price is increased to realistic level, in line with international prices, chances are both domestic and foreign investors would take a lot more interest in investing in exploration and development of this much needed industry, for national development.

As far as the fertilizer units are concerned, any increase that they have bear in terms of gas costs would be one way or other subsidised by the government. They must also realise that the cost of obtaining local supplies would reduce their dependence upon imports.

Both industries need each other’s support in the long run for their survival.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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COMMENTS

NSriramamurty

3 years ago

uREA pRICE iNCREASES , Consequent to RIL's Gas Price Increase, LEADS TO pUBLIC mONEU pAYING TO RIL, IN THE NAME OF gOVT. Subsidy .What made RangaRajan to say that Our OWN Gas shall be Bought at Imported Gas Price , by Selling at that Prices All Gulf Countries are Become Wealthy , inspite of Spending Well for Their Nations People . Money Life may Provide Link to RangaRajan's Report, so that Indians Know where They went Wrong and Question.

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