Volume Growth Holds in Q4, Focus Now on Value
Most CEOs expect pricing action in second half of 2016
The fourth quarter results of consumer goods companies for 2015-16 show an improvement in volume growth for most, barring Hindustan Unilever (HUL), which grew only four per cent. Most others grew their volumes between six and 13 per cent. Even ITC, which had seen a sustained decline in cigarette volumes in the past few quarters, saw flattish growth of one to two per cent in the three months ended March.
According to analysts, the focus will shift to value or price-led growth for most companies as input costs firm up.Crude oil is now at $47-48 a barrel, after touching $50 a barrel last week. It was about $30 a barrel earlier this year. Rising crude prices have an impact on its derivatives that go into making most consumer staples. It also impacts packaging and freight costs.
Palm oil, another key input for soaps and detergents, has jumped 21 per cent since January this year. The forecast for copra, used in the manufacture of hair oil, is that it will firm up in the future.
Most chief executives officers (CEOs) of consumer goods companies expect the second half of 2016 to see some pricing action.
"Pricing power will kick in the second half (of the year). Price hikes could be partial based on the demand situation," says Sunil Duggal, CEO, Dabur India.
This point is endorsed by Harsh Mariwala, chairman of Marico, who says companies might have to respond to higher input prices with pricing action in some brands. But, this will be only after assessing the market carefully, he says.
Sanjiv Mehta, managing director and CEO of HUL, says, "We have to keep all things in perspective before increasing prices. One is the price-value equation; the second is the strategic price point of each of our brands. We will respond based on these factors."
Lower input prices saw most companies report double-digit growth in operating margins for the fourth quarter of FY16. On an average, operating margins hovered between 12 per cent and 25 per cent for most companies for the period under review, a significant improvement over the year-ago period. This came despite an increase in advertising and sales promotion expenditure by most companies in the March quarter.
However, as prices move up, the pressure to protect margins is expected to grow, increasing the urge, say analysts, to raise product prices among companies.
According to analysts, the focus will shift to value or price-led growth for most companies as input costs firm up.Crude oil is now at $47-48 a barrel, after touching $50 a barrel last week. It was about $30 a barrel earlier this year. Rising crude prices have an impact on its derivatives that go into making most consumer staples. It also impacts packaging and freight costs.
Palm oil, another key input for soaps and detergents, has jumped 21 per cent since January this year. The forecast for copra, used in the manufacture of hair oil, is that it will firm up in the future.
Most chief executives officers (CEOs) of consumer goods companies expect the second half of 2016 to see some pricing action.
"Pricing power will kick in the second half (of the year). Price hikes could be partial based on the demand situation," says Sunil Duggal, CEO, Dabur India.
This point is endorsed by Harsh Mariwala, chairman of Marico, who says companies might have to respond to higher input prices with pricing action in some brands. But, this will be only after assessing the market carefully, he says.
Sanjiv Mehta, managing director and CEO of HUL, says, "We have to keep all things in perspective before increasing prices. One is the price-value equation; the second is the strategic price point of each of our brands. We will respond based on these factors."
Lower input prices saw most companies report double-digit growth in operating margins for the fourth quarter of FY16. On an average, operating margins hovered between 12 per cent and 25 per cent for most companies for the period under review, a significant improvement over the year-ago period. This came despite an increase in advertising and sales promotion expenditure by most companies in the March quarter.
However, as prices move up, the pressure to protect margins is expected to grow, increasing the urge, say analysts, to raise product prices among companies.
Daljeet Kohli, director of India Nivesh Securities, says the trend of double-digit margin growth will reverse in the next few quarters. "I see this trend bottoming out," he says. "The gains made due to a commodity windfall in the past few quarters will no longer be there. Price is one lever to prop value growth but companies will have to crimp operating level expenditure to ensure decent operating margin growth."
That means, advertising and sales promotion expenditure will come down, according to analysts and company executives.
Reference - http://www.business-standard.com/article/companies/volume-growth-holds-in-q4-focus-now-on-value-116052200796_1.html
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