Most FMCG companies may well have taken the impact of the transition to GST on the chin, if their June quarter results are anything to go by.
Aggregate net sales growth for FMCG players trickled to a muted 2.3 per cent over the year-ago period, while adjusted profits grew by just 2.4 per cent.
These companies did recover reasonably well after demonetisation, recording sales and adjusted profit growth of 7.5 per cent and 15.6 per cent, respectively, in the March 2017 quarter.
However, poor volumes — due to destocking by dealers ahead of the GST — rise in input prices and promotional expenses have been key pressure points during the first quarter of the fiscal.
Volumes take a knock
FMCG companies were also hurt by CSD Canteens — run by the government for the armed forces — halting their procurement in the period before the GST launch.
CSD sales bring 5-10 per cent of the volumes for leading FMCG players such as HUL, Dabur and Marico. Dabur reported a 5 per cent drop in domestic sales, led by a 4.4 per cent drop in local volumes. Marico’s higher dependence on the CSD channel for its Saffola oils was one of the reasons for the company’s 9 per cent decline in volumes for the quarter.
HUL’s volumes in the personal care segment was particularly affected due to the thinning of trade pipelines at CSDs. The company was, however, able to make up for this through higher realisations from price increases in the preceding quarters.
Hence, even as overall volume growth remained flat, HUL recorded a 5 per cent increase in net sales.
According to the management, sales growth was impacted by 2 percentage points due to the complete stoppage of intakes by CSD canteens from June onwards.
Operating pressures
Even as low volumes were a drag on the topline, input cost pressures and higher promotional spends to minimise inventory ahead of the GST rollout dented the profit growth for many companies.
Players such as Godrej Consumer, Marico and Nestle saw raw material costs as a percentage of sales increase 1-4 percentage points over the June 2016 quarter.
Marico, for instance, saw average market prices of copra move up by 69 per cent during the quarter over the June 2016 quarter. But the company did not pass on the price increases to customers, probably to avoid further shrinkage in volumes. Instead, the company tried to reduce this impact to an extent by pulling back on advertising spends. Yet, profit for the quarter fell 15 per cent over last year.
On the other hand, Jyothy Labs increased its advertising spends sharply. This, along with the 15 per cent fall in sales, saw its profits slump by half.
Higher raw material costs and ad spends by Godrej Consumer saw its operating margin come down from 19.7 per cent a year ago to 18.3 per cent now. Profits for its India business declined 2 per cent.
For Dabur, apart from lower volumes, it was a compensation of ₹14.5 crore given out for stocks-in-transition that hit its bottomline. Only those companies that reined in costs on all fronts could do a good job of maintaining both operating margins and profit growth. Stable input prices and a 20 basis points reduction in ad spends helped HUL expand its operating margins by 110 basis points over the June 2016 quarter to 21.7 per cent now.
Despite a 5 per cent drop in volumes, Colgate posted an 8.5 per cent growth in adjusted profits, thanks to lower input prices as well as a cut in ad spends.
In the next few quarters, lower prices under GST for products such as soaps, toothpaste and hair oil will drive volumes for companies such as HUL, Colgate, Bajaj Corp and, to an extent, Dabur and Godrej Consumer.
While all companies will pass on the net benefits under GST to the consumer, some cost savings arising from supply-chain efficiencies under GST may aid margins to an extent. A further pick-up in rural demand following the good kharif sowing will also be beneficial for FMCG players.