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FMCG perspective - Views on News from Equitymaster
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  • Jan 2, 2004

    FMCG perspective

    The indices continue their bull run, backed by expectations of continued buoyancy in the economy, favourable political environment as well as expectations of higher allocation to India by foreign funds. One sees renewed interest in the FMCG sector, which was one of the key laggards in 2003. Why so?

    We took a sample of 7 companies in the FMCG sector, namely Colgate, Godrej Consumer, HLL, Gillette, Marico, Nirma and P&G Hygiene and analysed their nine month consolidated performance in the period January to September 2003. The following table reveals what we saw.

    (Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
    Net Sales 36,079 37,763 4.7% 106,043 109,393 3.2%
    Other Income 1,241 1,293 4.1% 3,364 4,168 23.9%
    Expenditure 29,159 30,299 3.9% 87,214 89,756 2.9%
    Operating Profit (EBDIT) 6,920 7,465 7.9% 18,829 19,638 4.3%
    Operating Profit Margin (%) 19.2% 19.8%   17.8% 18.0%  
    Interest 171 489 186.5% 477 618 29.6%
    Depreciation 822 837 1.9% 2,273 2,124 -6.5%
    Profit before Tax 7,170 7,431 3.7% 19,443 21,063 8.3%
    Extraordinary items (82) 272 - 1,148 330  
    Tax 1,706 1,787 4.7% 4,787 5,050 5.5%
    Profit after Tax/(Loss) 5,382 5,916 9.9% 15,804 16,343 3.4%
    Net profit margin (%) 14.9% 15.7%   14.9% 14.9%  
    No. of Shares (eoy) (m) 2,557.9 2,556.9   2,557.9 2,556.9  
    Diluted Earnings per share (Rs)* 8.4 9.3   8.2 8.5  
    P/E ratio (x)   24.7     26.8  
    Market Cap. to sales (x)   3.9     4.0  

    The sector sample saw just over 3% growth in revenues, as well as in net profits during the aforesaid period. There was marginal improvement in operating margins, indicating that the phase of margin expansion in the sector is beginning to taper off. Higher interest outgo was also a bane, as is in the above table. Of course, FMCG major, HLL is a key contributor to this sample contributing 69% to overall revenues and 78% to the bottomline. Interest burden too has gone up owing to HLL's contribution. Based on the nine month performance, the P/E valuation of this sample stands at 26.8x 9m2003 annualised earnings and a market cap to sales of 4x.

    If we take out HLL’s performance, then the balance 6 mid-cap companies have recorded nearly 4% topline growth and an encouraging 23% bottomline growth during the nine-month period (January-September 2003). The interest component for this group has actually declined (down 31%). The group has managed to keep the tax provisioning steady by setting up bases in states where tax incentives are available. The P/E multiple for this group stands at 24.4x 9m2003 annualised earnings and market cap to sales at 2.6x.

    The picture excluding HLL
    (Rs m) 9mFY03 9mFY04 Change
    Net Sales 32,839 34,109 3.9%
    Other Income 526 698 32.7%
    Expenditure 27,327 28,253 3.4%
    Operating Profit (EBDIT) 5,512 5,857 6.2%
    Operating Profit Margin (%) 16.8% 17.2%  
    Interest 399 274 -31.4%
    Depreciation 1,259 1,206 -4.3%
    Profit before Tax 4,379 5,074 15.9%
    Extraordinary items 0 -21  
    Tax 1,468 1,481 0.9%
    Profit after Tax/(Loss) 2,912 3,572 22.7%
    Net profit margin (%) 8.9% 10.5%  
    No. of Shares (eoy) (m) 356.7 355.7  
    Diluted Earnings per share (Rs)* 10.9 13.4  
    P/E ratio (x)   24.4  
    Market Cap. to sales (x)   2.6  

    Looking at individual performances in the group, HLL continued its struggle for both topline and bottomline growth. The company saw 2.8% topline and a 1% dip in bottomline during the nine-month period. But at the profit before tax and extraordinary items level, the company reported a 6% growth, indicating that bottomline dipped owing to a 69% dip in extraordinary income. The company’s business segments continued to outperform the industry average and the relentless drive to exit non-core businesses continued in 2003.

    Shaving major, Gillette, was one of the out performers in the aforesaid sample. Though the company reported a 6% dip in topline, bottomline growth was a staggering 349% YoY. Of course, Gillette enjoyed the fruits of the restructuring undertaken by exiting the Duracell manufacturing business as well as the exit from the Jeep business. The focus is now purely on shaving systems, oral care and allied activities. Not surprisingly, the company’s stock outperformed its FMCG peers in 2003 gaining 124% in 2003.

    Stock market performances…
      31-Dec-02 31-Dec-03 % change P/E* Mkt cap to sales*
    BSE Sensex 3,377 5,839 72.9% 17.1 -
    S&P CNX Nifty 1,094 1,880 71.9% 18.8 -
    Gillette 314 703 124.2% 41.4 6.7
    Nirma 232 460 98.1% 12.1 1.7
    Godrej Consumer 94 177 87.3% 18.3 2.1
    P&G Hygiene 267 469 75.5% 17.5 3.0
    Marico 164 238 44.8% 12.3 0.8
    Colgate 135 160 18.4% 26.2 2.3
    HLL 182 205 12.6% 27.5 4.7
    *Based on latest declared annualised earnings

    Nirma was another out performer with gains of 98%. The company reported a 6% topline growth in 1HFY04 (April-September 2003) and recorded nearly 23% bottomline growth. The company improved its operating margins, powered by backward integration moves. The company's de-bottlenecking and expansion of the Soda Ash plant in Gujarat was completed recently. P&G Hygiene, reported strong numbers in the September quarter with a 21% topline growth. However, operating margin pressure was evident (13% bottomline growth). A bonus issue (1:2), as well as entry into the cough syrup market aided the stock gaining 76% in 2003.

    Hair and edible oil major, Marico, reported a healthy 15% topline growth in 1HFY04, but bottomline growth was lower at 9% owing to operating margin pressure. However, the stock gained a decent 45% during 2003 on expectations of improved performance from the company’s new initiatives in skin care (Kaya Clinics and Sundari Llc) and stronger performance in the export markets. However, the skin care business is likely to take a few more years before it will contribute significantly to the company’s business. Oral care major continued to witness a decline in topline growth (down 4% in 1HFY04), but bottomline growth stood at a healthy 16% aided by cuts in advertising expenditure and lower interest outgo. Consequently, the stock under performed relative to its peers with 18% gains in 2003.

    From the above table, it is clear that a few of the companies are trading at the higher end of the FMCG spectrum. There are also a few companies that are trading on the lower end of the spectrum. It is a known fact that whenever agricultural performance has been good, the FMCG sector has always benefited. The chart below reflects the relationship between the agricultural output over the years and the movement of the BSE FMCG index.

    With agricultural output expected to be nearly 11% in FY04, the expectations that FMCG companies will have a good 2004 are ripe. However, in our view, the overall topline growth is likely to be in single digits, with bottomline continuing to outpace topline growth. The longer term prospects however, are enthusing considering the low per capita consumption in most categories coupled with rising living standards.



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