Stocks of fast-moving consumer goods companies may be trading at higher valuations than in the past, but the sector has not been immune to the slowdown in the economy.

In the recent September quarter, Godrej Consumer Products (GCPL) clocked a mere 5 per cent growth in sales, a far cry from the 17 per cent growth four quarters earlier. Other biggies such as Hindustan Unilever (HUL) and Dabur have seen similar declines in the pace of growth. GCPL, maker of the Good Knight repellent range and Cinthol soaps, holds leadership position in household insecticides and hair colour segments in the domestic markets. In its international geographies too, the company is among the top three players in the segments in which it operates.

But the domestic FMCG market is sluggish and GCPL has seen its growth drop in the household insecticides segment and soaps. Rural consumption can take a hit due to uneven monsoons this year and lower agricultural income. Second, a stronger rupee vis-à-vis the currencies of regions where most of its operations are — Indonesia, Africa and Latin America — has impacted consolidated sales.

Third, the stock’s price-to-earnings multiple is high, at 40 times the trailing 12-month consolidated earnings. This is above its three-year average of 38 times and on a par with fellow FMCG biggie Dabur India and the BSE FMCG index.

But should consumption bounce back on lower inflation and better economic growth, sales are set to improve. GCPL’s growth has always remained ahead of the overall household and personal care market.

Home market slows

Next, if the market takes a breather, having rapidly scaled up far ahead of earnings growth, the stand of FMCG as a ‘defensive’ sector will hold GCPL in good stead. Investors can continue to hold the GCPL stock.

GCPL is the leader in hair colouring; growth here has held up well over the quarters, both in terms of volumes and value. In household insecticides too, the company is a market leader by way of the Good Knight and Hit brands. But the segment’s scorching 20 per cent-plus growth rate of earlier quarters slowed sharply in the past year.

From the 25 per cent growth in the September quarter last year, growth dropped to a meagre 2 per cent in the recent September quarter. Unseasonal rains hurt; competition is also heating up in this space. However, this segment can pick up in the winter months. Premium products such as the Fast Card can also help improve margins.

In soaps, HUL is by far the king of the segment. GCPL felt the heat of falling consumption with both sales volumes and value dropping significantly.

The segment grew between 1 and 7 per cent from the September 2013 to June 2014 quarters. The recent September quarter saw a price-driven growth of 13 per cent, but with a weak winter soap portfolio, the segment’s recovery may take some time.

Green pastures

Growth can come in from new segments — air fresheners (aer), for instance, has taken off well. Face washes is another; however, its penetration is low. Germ protection in soaps is a third, which is around a quarter of the total market. But here, it faces the likes of Lifebuoy and Dettol. The success of these new initiatives, which can help propel growth, needs to be seen.

On the international front, growth was strong in constant currency terms. But in Indonesia and Latin America, the currency effect has dragged down growth for four quarters now.

For instance, Indonesian sales jumped 15 and 21 per cent in the past two quarters, but accounting for the forex change, growth dropped to 1 and 10 per cent.

Margins to improve

But GCPL is scoring on costs. Consolidated operating profit margins crept slightly higher by around one percentage point over the past six months. Cost-control measures are being put in place in high-cost regions such as Argentina.

This apart, the major raw material, palm oil, has corrected over 20 per cent in this calendar alone and is set to remain subdued in the future as well.

Similarly, crude oil derivatives are cheaper following the slump in oil prices. Savings on the raw material front can then be channelled into advertising and promotion spends, which the company has scaled back in recent times. This will be of help given its new product forays.