Mumbai, July 23 - India's top consumer goods makers, Hindustan Unilever and ITC, should post modest gains in quarterly profit as higher costs of raw materials squeezed margins on soaps and packaged foods.
Rising incomes and expanding modern retail networks in India are helping to boost demand for everything from shampoo to tea, but price pressures and increasing competition from cheaper local brands will keep margins tight in the near term, analysts said.
"Despite topline growth remaining strong as a result of price increases and volume growth, we expect margins to come under pressure," brokerage Sharekhan said in a note.
"We expect profitability to remain under pressure in the next quarter (and) we foresee a couple of risks in the near term: a slowdown in volume growth and a possible shifting to low price point products in the wake of higher prices."
Consumer goods makers have raised prices and cut package sizes to partly offset rising costs of raw materials such as palm oil, wheat, milk powder and linear alkyl benzene, used in detergents.
But 13-year high inflation at nearly 12 percent and higher interest rates are crimping consumer spending and prompting some shoppers to downgrade to cheaper local brands.
Hindustan Unilever, 52.1-percent owned by Anglo-Dutch Unilever Plc, is facing growing competition from local and foreign rivals, and has spun off smaller units to focus on its core portfolio that includes such brands as Dove soap, Surf detergent and Lipton tea.
A Reuters poll of 10 brokerages forecast Hindustan Unilever would report net profit of 5.4 billion rupees ($127 million) in its second quarter to June 30, up nearly 10 percent from the same period last year. Net sales were expected to climb by around 17 percent to 40.76 billion rupees (see table below for details).
Its full-year net profit is forecast by Reuters Estimates to rise by a fourth to 22.05 billion rupees.
Kolkata-based ITC, 31.7-percent owned by British American Tobacco Plc, likely saw a further decline in cigarette sales due to price increases and the scaling back of non-filter cigarettes after a hike in excise tax.
New launches in its growing personal care portfolio, such as Vivel shampoos, have also pushed up advertising and marketing spending, which will increase losses in the nascent category.
ITC, which also has interests in hotels, apparel and packaging, is forecast to report a net profit of 8.55 billion rupees in its fiscal first quarter, an increase of around 9 percent. Net sales were expected to rise about 10 percent to 36.55 billion.
Its full-year net profit is forecast to rise 15 percent to 35.98 billion rupees, according to Reuters Estimates.
ITC is expanding its lineup of packaged foods and personal and household care products, where it expects to challenge the leaders including Hindustan Unilever, Britannia Industries , Marico and Godrej Consumer Products .
Shares of Hindustan Unilever and ITC fell close to 10 percent in the quarter amid a broad pullback in global equity markets, but have still gained around 20 percent and 23 percent, respectively, over the past year.