Strong rupee brings cheer to FMCG sector

HIGH ON CURRENCY

Mumbai: The strengthening of Indian rupee against the dollar could bring some cheer to fast-moving consumer goods (FMCG) companies which are challenged by fading benefits of lower raw material costs. 

    Prices of raw materials like palm oil, copra, LAB (linear alkyl benzene) and HDPE (high-density polyethylene), which are key ingredients of daily use items like soap, detergent and hair oil, are already showing signs of firming. 
    Palm oil prices, for instance, went up by 34% in the fourth quarter of fiscal year 2010 compared to the corresponding quarter of the previous fiscal. The prices of HDPE, which goes into packaging and thus is much in demand in the FMCG sector, rose by around 40% during the period. 
    A rising rupee would negate the impact of cost increases on imported raw materials like palm oil, which is used in making toilet soaps. 
    "Rupee has appreciated by about 5% in recent past. The benefits would accrue to us on our vegetable oil imports and would mitigate, to some extent, the impact of increased inflation on packaging materials and freight. Since rupee has seen movement in both directions in the last six months, the benefit of appreciating rupee can't be counted as sustainable savings,'' said Dalip Sehgal, managing director, Godrej Consumer Products. 
    Milind Sarwate, chief, finance, HR & strategy, Marico, said the company does not depend significantly on imports and, hence, the rising rupee does not necessarily lead to lower costs. "Most Indian FMCG companies are now MNCs. Therefore, fluctuations in rupee can affect them in several ways, which were not earlier salient. For example, if rupee strengthens, the financial results of overseas subsidiaries of Indian MNCs lose their lustre when consolidated with the Indian parent company's results,'' said Sarwate. 
    The rupee rose to its 19-month high on Friday (April 9) at 44.29/dollar as against 44.46 on April 8. The rise is mainly on account of FII inflows and a weak dollar overseas. 
    According to industry analysts, price increases, irrespective of rising input costs, in the highly competitive space of soaps and detergents are a difficult proposition for companies focusing on increasing their volumes instead. "We believe maintaining profitability and decent profit growth will be the key challenge for most FMCG companies,'' a Sharekhan Research report said. 
    According to the report, fading raw material cost benefits, lower sales realisation (due to the price cuts implemented to improve sales volumes) and heavy spends towards advertisement would limit the margin expansion for companies like HUL, GCPL, Marico.