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McClatchy-Tribune  07/14/2014 9:43 AM ET
Slower spends, rising inflation to hit consumer goods makers [Mint, New Delhi :: ]

July 14--MUMBAI -- Consumer packaged goods companies are expected to post muted earnings growth in the quarter ended 30 June as demand stagnates amid inflation and consumers continue to postpone purchases across both urban and rural India.

A Mint survey of six brokerages -- Edelweiss Securities Ltd, Kotak Institutional Equities, Prabhudas Lilladher Pvt. Ltd, Religare Capital Markets Ltd, ICICI Securities Ltd and Elara Securities (India) Pvt. Ltd -- shows that analysts estimate profit growth of 9.3-15.7% and sales growth of 10.8-13.1%.

Margins continue to remain under pressure as prices of key inputs increased during the quarter. This has been aggravated by a weaker rupee compared with the year-ago period in the first quarter of 2014-15.

"There is no significant improvement in the June quarter business as the demand environment continues to be stressed, similar to what it was in the fourth quarter of the last fiscal year," said S. Raghunandan, chief executive officer of Jyothy Laboratories Ltd. He feels even the Union budget will not really help as the marginal improvement consumers due to the increase in tax slabs will be eaten away by inflation, which remains a major concern.

"Demand has stagnated in an inflationary environment as consumers are postponing purchases. Small pack sizes are preferred in essential items," said analysts Amnish Aggarwal and Gaurav Jogani of Prabhudas Lilladher in their 8 July report.

As seen in 2013-14, volume growth remained a challenge in rural and urban India in the June quarter.

Moreover, rural growth -- which has been driving overall growth in the past few years by outpacing urban growth -- is slowing down. "The gap between urban and rural growth continues to shrink," said a 4 July report by Edelweiss Securities.

Discretionary categories remain impacted the most with segments such as skin care, deodorants, grooming products and packaged foods facing the brunt of slowdown. Food chains like Domino's and McDonald's continue to reel under poor demand, the Prabhudas Lilladher report said.

"We expect Bata's same-store-sales (SSS) growth to come in at 5-6% over the year-ago period and Titan to post a 12% revenue decline over the year-ago period as jewellery volumes slide 30% off a high base of the first quarter in FY14. Jubilant FoodWorks -- which operates Domino's Pizza and Dunkin' Donutschains in the country -- SSS growth is likely to see a marginal sequential improvement but remain flattish over the year-ago," said a 7 July report by Religare Capital Markets.

SSS is industry parlance for measuring comparable growth in stores that have been open for more than a year and does not take into account growth that comes from opening new stores.

In an attempt to drive sales, retailers like Shoppers Stop Ltd, Aditya Birla Nuvo Ltd's Pantaloons and Dubai-based Landmark Group's Lifestyle have kicked off their end-of-season sales early.

The trend continues from the past year.

Meanwhile, quick service restaurant chains like Domino's have introduced a "refreshed menu" of 10 new types of pizzas and a "Junior Joybox" packing a kids-only meal and a toy to increase footfalls. McDonald's is also expanding its range for adults and introducing an all-day menu.

Meanwhile, consumer packaged companies continue to launch new variants and enter new categories and markets. Hindustan Unilever extended Pond's into the male grooming category with Pond's Men and launched a new variant of Close-Up -- Diamond Attractionâ€"whitening toothpaste, Emami Ltd

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