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Deeptha Rajkumar

KOCHI, April 14

WITH the Indian marketplace getting more competitive and consumers more savvy, ad spends as a percentage of sales have increased rapidly for companies.

In return, companies hope that it will lead to increase in consumer spending and thereby increase their bottomline.

However, while there is no denying that companies do benefit from this, sometimes it is at the cost of their margins. Higher ad spends could mean lower earnings.

While ad spends by consumer goods companies are comparatively higher than, say ad spends by auto companies or cement companies, either way one needs to factor in advertisement and promotions (A&P) costs while investing in a company, according to analysts.

A recent study by analysts, which takes a closer look at the ad spend as a percentage of sales in select companies in the 2002-03 fiscal, paints a clearer picture of how much A&P costs take away from company revenues.

Top spends on advertisements in the year have been FMCG companies, with HLL leading the pack (at least among listed companies).

But a very interesting factor seen here is that Colgate, with only one product segment (oral care) in its portfolio, spends the highest in terms of advertising as a percentage of sales. During the year, its spending touched around 21 per cent of sales.

"Over the last decade, Colgate's ad spends have increased at a CAGR of 26 per cent but revenues have unfortunately grown only at 10.4 per cent CAGR in the same period," an analyst said.

Colgate has over 50 per cent market share in oral care, which has been showing signs of slowing down due to competition from other players.

The other players in this segment are HLL (36 per cent) and SmithKline Beecham (five per cent).Two-wheeler majors Hero Honda and Bajaj Auto are also among the top spenders on advertisements but their ad spend as a percentage of sales has increased marginally, from one per cent a decade back to 2.4 per cent last year.

However, the advertisement spending for both the auto majors has clocked a 21 per cent CAGR over the last decade.

While Hero Honda recorded 29 percent sales CAGR, Bajaj Auto clocked a respectable 12.7 per cent sales CAGR during the same period.

While the first three months of the current year has seen good ad spend largely due to the World Cup, analysts are of the opinion that it could come down in the coming quarters.

"This quarter, there has been a good jump in ad spend which is bound to positively impact the operating margins of quite a few companies. However, the following quarters may actually see a decline in ad spend what with many companies going in for restructuring and cost-cutting," an analyst with a leading broking house said.

Companies that are already going slow on ad spends this year include HLL, Colgate and Britannia.

Even as they caution investors to look closely at A&P costs while reading the financial statements of companies, analysts believe that for the FMCG sector, growth in earnings coupled with underperformance of the sector relative to the broader market has made valuations more accommodative.

Commenting on the FMCG sector as a whole, analysts said that the current quarter is likely to be sluggish due to the impact of transition issues related to the imposition of VAT and the effect of fall in agricultural production.

"While the March-June quarter will be impacted by transition issues related to VAT, in most cases this would postpone primary sales to the subsequent quarter. However, despite the challenging environment, the aggregate earnings of major companies is estimated to increase by 10.4 per cent year-on-year," an analyst said.

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