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FMCG companies like ITC may post modest growth

Fast moving consumer goods (FMCG) companies are likely to face another quarter of modest growth in volumes - more so in case of discretionary consumption products. Industry growth, estimated to be in mid-teens, will largely be volume driven fearing a setback in volume growth and thanks to lower input cost, most companies did not raise prices during the quarter to June. Operating margins are likely to be healthy thanks to benign raw material prices.

Slowdown in volume growth has not deterred companies from launching new products and brand extensions. Companies also spent more on advertising and promoting their products. In line with the quarter to March, spending on advertising is likely to remain high and 
savings on raw materials will be channelised towards more investments in brands.

Since the past two quarters, consumer goods companies have been using the savings on raw materials to fund higher investments on brands. The benefit of these investments is likely to be reaped over the coming quarters. In the near term, the sector will face headwinds in the form of a slowdown in growth, high prices of fruits and vegetables and lower consumer confidence. A good start to the monsoon augurs well for the sector, providing a fillip to rural consumption.

FMCG stocks are quoting now at premium valuations with little room for a further appreciation in price. Yet, among the large FMCG companies, ITCBSE -0.39 % is the favourite among analysts - thanks to its robust cigarette business and the steadily-growing FMCG business.