Backed by a
pick-up in rural demand, the fast moving consumer goods (FMCG)
sector has seen the volume growth getting better every quarter.
The revenue growth for the current quarter is likely to be driven
by volume growth as well as improved pricing power.
Rising input
prices is a concern for the industry. Palm oil prices have
increased by around 20% in the last three months but LAB prices
continue to remain steady. Price increases as well as cost savings
would help the companies to maintain their margins.
We expect the
profit of Hindustan Lever Ltd (HLL), the market leader in the
segment, to grow by 18.8% year on year (yoy) backed by a strong
growth in the home and personal care (HPC) segment and price
increases in key products. We expect the margin to improve from
11.8% in Q1CY2006 to 12.8% in Q1CY2007, which would be primarily
due to the price hikes taken in many of its products as well as
improved product mix.
ITC's profits
are expected to grow by a strong 24% yoy. We expect the growth to
be broad-based with the magnitude of losses in the non-FMCG
business coming down. The imposition of the value-added tax (VAT)
is having a dampening effect but we believe any decline is a good
opportunity to buy.
The long-term
potential of this sector appears favourable with higher disposable
incomes and increased spending. We believe with strong free cash
flows, high return on capital employed (RoCE) and sustainable
growth the sector still looks
attractive.
