There has been an uptick in interest in the FMCG sector after a long time and results were pretty good this quarter. Adi Godrej, Chairman of Godrej Industries and Nikhil Vora of SSKI give their perspective on where the FMCG sector is headed.
According to Adi Godrej, FMCG prices will be margin acrretive on a QoQ basis. He says that the price hike is due to a combination of high demand and raw material prices. "Clearly, some raw materials are moving up after crude oil prices have risen quite a lot during the last 12 months.
"It has affected some products which are based on petrochemicals. It has affected prices of vegetable oil because a lot of vegetable oil is now going into bio-fuel consumption," he adds.
Godrej says that there has been a little bit of cost push which is leading to price pushes. He forecasts the industry's volume growth at 15% in FY07 versus 10% in FY06. "I expect that volume growth this financial year will be around 15% against 10% last year."
"So that means if the demand is good, it is easier to increase prices. I think that the FMCG sector is taking price increases because it is good for the sector," he adds.
Adi Godrej expects volume growth to continue very strongly. "I expect both sales growth and profit growth in the FMCG sector to be good. This is mainly predicated on the very healthy growth in the Indian economy."
Nikhil Vora agrees with Godrej's logic. He says that most of the industry players seem to be playing in tandem. 'This intuitively means that there is a some sort of a pseudo cartelisation, which is happening in the system.'
'Clearly the fact is that industry is taking the price level up and that the sugar industry is going to be beneficially impacted on the margin profile moving forward,' he states.
Vora further says that that the price increases have been on the lower level. He says that across the board, price increase might be around 3-3.5%. Categorically, soaps, personal products and oral care have been seeing some impact on the price increases, according to Vora.
On the price increase situation, Godrej says that they are increasong the prices of soaps, toiletries and hair colour. 'In soaps we are taking price increases. We don't expect it to be margin accretive relative to the margin say during the corresponding periods of the previous year, but it will certainly be margin accretive relative to first two quarters of this year.'
'We are also looking at some possible increases in our toiletries and hair colour business, those will generally be margin accretive,' he informs.
As a result of these increases, Vora says that they would increase the earnings target for these companies. "I think, you obviously take into account some amount of price increases during the year. We have been pretty much consistent with our earnings numbers across the board for most of the companies and I think we are pretty much staying put on that," he says.
Vora feels that uptrading is mainly on the back of urban areas. 'If you look at the overall growth in industry, which was close to around 18-19% for this quarter, a significant part of its growth has been value led. Within that we are clearly seeing that there has been uptrading in most of the segments.'
'So in that sense, I am sure that the rural growth is clearly keeping pace on volume, but uptrading is clearly happening in the urban markets,' he says. He affirms that an industry-wise price hike could help improve the margin picture.
Godrej addresses the issue of cartelization happening across the industry. He says, "There is no cartelization. I can vouch for that. But what does happen is that sometimes in some cases when some players take price increases, the others see an opportunity to increase volume by not taking price increases."
"Currently it seems that most players feel it is best for overall revenue increases and overall profit increases to take price increases as competitors do, but there is no cartelization what so ever," he clarifies.
Godrej says that the big growth in the FMCG sector is coming from the non-users becoming users. "It is really at the bottom of the pyramid that the big growth potential lies."
He says, "There is a very strong potential in getting people to use better products, more expensive products. That is the great opportunity in India."For more information about trading and markets log on to www.moneycontrol.com
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