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FMCG: Not fast moving enough

Jan 3, 2008

While the FMCG sector continued with its growth momentum, the sector nevertheless under performed the BSE-Sensex in 2007. This can be gauged from the fact that while the Sensex notched gains of 45% in 2007, FMCG index grew by just 20%. Of the companies under our coverage, none have managed to beat the Sensex. Inflation, rising input costs and competitive environment played the spoilsports. In this article, we shall take a look at some of the top gainers and losers during this period and the outlook for the industry going forward.

CompanyPrice on Jan 02,2007 (Rs)Price on Jan 02,2008 (Rs)Change
BSE-Sensex 13,942 20,645 48.1%
BSE FMCG1,941 2,397 23.5%
Top Gainers
Britannia1,100 1,480 34.5%
Marico547233.0%
Nestle1,148 1,496 30.3%
Top Losers
P&G855 800 -6.4%
HUL216 216 0.0%

The gainers...
Britannia:
The biscuit major witnessed a turnaround in margins led by a better mix and higher margin products. Its operating margins jumped from 5.8% in 1HFY07 to 9.2% in 1HFY08. The company currently has a 38% share of the market in value terms and has unveiled plans to increase its capacity by 20,000 tonnes a year to over 450,000 tonnes in the next couple of years. Although the market share had come under pressure in recent times (43% in 2003 to 39% currently), the company is clawing its way back. Further, it has also increased its presence in bread, cakes and rusks, which now worth more than Rs 2 bn, has grown at a CAGR of 24% over the last four years. It has also taken the inorganic growth path by forming a partnership with Khimji Ramdas Group to run two bakery product companies in the fast growing Middle East market and by picking up a 50% stake in Daily Bread (retailer of high-end bakery products.). All these factors along with low per capita consumption of biscuits make us positive about the company's medium to long-term growth prospects.

Marico: Marico has continued with its strong double-digit growth in its topline over the last six quarters. Strong brands, better pricing power and the right mix of inorganic acquisitions has propelled Marico on a faster growth path. Also its strategy of shifting from being a branded commodity player to a 'beauty and wellness' major has worked well. It has identified new engines of growth and also is focusing on high margin products. It continues to improve its market share across product categories and is doing well on the international business. The management's uncommon thinking of transforming Marico from an oil company to a health and wellness firm is paying off well.

Nestle: Having a predominantly urban oriented product portfolio, Nestle continues to benefit from a changing lifestyle and increasing consumerism. Also, the food processing business in India is at a nascent stage and is well poised to go into a higher orbit. Currently, only about 15% of the output is processed and consumed in packaged form. Penetration level as well as per capita consumption in India is also low. However, the trend is changing and the new fast food generation is slowly altering its habits. Valued at Rs 4,600 bn in 2004, the food-processing sector is expected to touch Rs 13,500 bn by 2015. Nestle's capacity to introduce new products, pricing power in the market and underlying healthy volume growth makes it a strong player.

The laggards...
Procter and Gamble:
The stock was the worst performer among its peers falling by 6%. P&G is largely a two-product company, of which 'Vicks' being mainly a seasonal product used only in winters, sales are volatile. Further, the company also faces stiff competition in its product categories from smaller as well as foreign players. Also, the Indian market is extremely price sensitive and the company has been witnessing immense pressure from competitively priced products of other players in both its core businesses. However, the company divested its detergent manufacturing business, which led to an improvement in margins (from 25% in 1QFY07 to 31% in 1QFY08). Also, it is expanding its capacity and stands a good chance to be the outsourcing hub for its parent company. PGHH is an indirect play on the growing workingwomen population in our country. Feminine hygiene products still have a relatively low penetration in the Indian market. With improving income levels, the personal hygiene standards would go up too and would help companies like PGHH.

HUL: For the year under review HUL's stock price remained flat. Besides the commodity price environment, which continued to be a major risk, competition from ITC and P&G were further dampeners. Though the dearth of innovations continued in terms of renovation and product extension within existing categories except water purifier (Pure it), HUL has not launched any new products over last few years, which limited its growth. However, the company is undergoing restructuring to focus on its core portfolio, building on its competitive advantage across the supply chain and expanding its foothold into new categories, mainly food and water. Going forward, HUL would benefit from its core, well-penetrated categories across price points. However, the same has to be reflected in its performance.

Looking ahead...
The FMCG companies witnessed volume and value growth last year. They even judiciously hiked prices to beat rising cost pressures. Further, the entry of new players intensified the already existing competition. While these issues are expected to weigh heavy on the performance of FMCG companies in the medium term, from a long-term perspective, the outlook for the sector is positive. Given the huge potential offered by the fast-growing Indian economy, this is not a difficult task. Many were able to sustain growth for a long time because they were comfortably placed in high-growth categories. However, the growth rate witnessed in last couple of years would slow down. Hence the companies will have to either focus on growth-accelerating measures in a specific geography or improving penetration. Those companies which will grow as per the changing environment, attitudes and preferences of the customers would stand a better chance. Considering all these factors and after giving due consideration to valuations, investors need to adopt a stock-specific approach while investing in the sector.


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