Indian consumer firms face margin squeeze despite strong quarterly sales
By Surbhi Misra
Oct 14 (Reuters) - Indian consumer goods makers are expected to report narrower September-quarter profit margins despite double-digit sales growth as rising raw material costs outweigh price increases, several analysts said.
Rising costs are squeezing margins at these companies, they said, even as India's largest listed companies are expected to report faster profit growth.
"Companies have taken calibrated, selective price increases rather than broad hikes, and combined them with cost savings and procurement efficiencies," said Tanvi Kanchan, associate director at Mumbai-based Anand Rathi Share and Stock Brokers.
"That has protected revenue, but most companies are still absorbing part of the cost increase in their margins."
Nestle India NEST.NS kicks off the sector's second quarter earnings on Thursday.
Systematix expects operating margins at 10 major consumer staples firms to shrink 45 basis points from a year earlier, despite revenue growth of about 13%, driven by an 8% rise in volumes and price increases of 5%-6%.
Kotak Institutional Equities forecasts a steeper 150-basis-point margin decline across its coverage, while Jefferies expects a 45-basis-point drop for staples firms excluding ITC and Varun Beverages.
The Nifty FMCG index .NIFTYFMCG has fallen 18.8% this year, making it the second-worst performing sectoral index after Nifty IT .NIFTYIT, compared with a 13.2% decline in the benchmark Nifty 50 .NSEI.
MARGIN PRESSURE VARIES ACROSS COMPANIES
Systematix expects Hindustan Unilever HLL.NS and Britannia Industries BRIT.NS to take the biggest margin hits with a drop of about 150 and 137 basis points respectively, as higher input costs weigh on profitability.
Recent quarterly updates have reinforced expectations of healthy demand, with Godrej Consumer Products forecasting high-teens revenue growth and Dabur expecting double-digit sales and profit growth.
Both have flagged rising input costs, while Dabur has also warned of pressure on operating margins.
Investors will watch for further price increases, rural demand after uneven monsoon rains and whether a later Diwali shifts festive spending into the December quarter.
Cost pressures could persist through the second half of the fiscal year due to high crude and palm oil prices and a weaker rupee, which raises import costs, Kanchan said.
"A real margin recovery is more likely from the March quarter onwards, and only if commodities cool," she added.