How To Evaluate Consumer Companies ?

Consumer goods sector has given consistent returns and posted growth in profits even during uncertainties.

Despite the overall economic slowdown, double – digit profit growth may still be expected from the sector in in the September quarter 2013

Here is a look at factors that influence profitability of the sector:

• Profit Margins:

The rupee depreciation caused raw material prices to rise for companies. This is because a lot of it is imported. This generally affects profit margins. This is actually the operating or net profit as a percentage of revenue. Most consumer goods companies hedge against a potential rupee fall. They also have high inventories – finished goods ready to be sold. This has acted as a buffer against cost price increases. With costs remaining stable and sales increasing, profit margin of most companies is likely to have widened in the September quarter 2013

• Ability To Effect Price Hike:

A slowdown in revenue growth is also going to be compounded by a pressure on companies to keep prices low to buoy demand. However, impact of rupee depreciation could be seen in the next quarter ending December. This means companies could be under pressure to hike prices. But, companies are not keen on increasing prices without first trying all ways possible to boost revenues and cut costs. Those companies, which have sizeable market shares (like ITC), have some room to increase prices. However, too much hike could impact demand.

• Profit Growth:

Even as margins are estimated to have expanded, growth in profits could be slower than last year. This is predominantly because of higher marketing and advertising expenses, along with a higher tax rate. The Kotak report expects PAT (Profit After Tax) growth to decelerate to around 11% annually in the September quarter. This is the lowest in last many quarters.

• Rural Demand:

A positive factor for consumer goods companies is a good monsoon. Nearly one third of revenues for FMCG companies come from rural areas, which is seen as a key growth driver. A good monsoon means better crop output, and hence more income. This, thus, translates to better demand, even for higher-end segments. Companies have already realised how lucrative rural India can be. They are witnessing higher growth in rural sales compared to urban areas. To tap into this further, they are expanding their footprint in rural areas.

Also Read

• Unilever’s emerging markets warning scares HUL investors.Read more

• Smaller cities drive consumer spending.Read more