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FMCG: Braveheart of 2008 - Views on News from Equitymaster
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  • Jan 6, 2009

    FMCG: Braveheart of 2008

    2008 was a year that left companies across sectors looking for some relief from the downward spiral in sales growth and margins. The gloomy outlook for 2009 even persuaded some to cut down sales and retrench employees. While most of the sectors relented to the slowdown pressure, FMCG companies made hay even when the sun was not shining. The BSE FMCG index was down only 16.5% YoY in 2008 (after growing 19.5% in 2007) as against the fall of 52% YoY in the BSE-Sensex. In this article we highlight the key factors that aided the FMCG sector in the past year.

    Strong balance sheets
    The sustenance of India's structural growth and consumption story continued to be the pillars of the sector. Rising income levels, low penetration, increasing consumerism, new product introduction and up-trading aided the FMCG sector. Further; FMCG companies continue to enjoy strong pricing power and debt-free balance sheets.

    Rural scope
    Rural areas comprising 17% of the total FMCG market continued to be the saving grace for the sector. As per ASSOHAM, in November 2008, the FMCG market size was around US$ 23 bn, of which rural segment sales were valued at US$ 4 bn. Employment generation schemes, farm loan waiver, good monsoons and good agricultural production have raised the level of incomes in these areas. The companies are aggressively pushing fast growing categories such as personal care products, toiletries, soaps and soft drinks in rural markets. While the urban consumer has felt the impact of the economic slowdown, strong volume growth in rural markets helped sustain the momentum.

    Brand and pricing power
    FMCG companies witnessed higher input prices for the first half of 2008. Rising crude prices and steep inflation added to the problems. Even the packaging costs rose by 20% YoY. With the raw material prices witnessing double-digit growth, FMCG companies took price hikes on the final products to offset these costs. In order to beat the effects of high inflation, the companies also promoted small and low-priced packs. Better pricing environment and higher consumerism benefited the companies and they continued to witness robust demand.

    Price changes
    Key inputs YoY change Change from peak Change from June
    LAB 25.9% -27.7% -2.9%
    Sorbitol 8.7% -21.9% 0.0%
    Palm oil -37.5% -56.5% -54.5%
    Copra 24.5% -3.8% 8.5%
    Tea 40.0% -2.8% 25.0%
    Source: Equitymaster

    Good news continued to come in for the sector in the final months of the year. The prices of commodities such as palm oil and petroleum-linked inputs fell by up to 70% from their peaks. Input costs dropped by between 25% and 50% from their 2007 average prices. The FMCG companies, however, despite the decline in input prices did not reduce the final product prices. Easing cost pressures combined with pricing power retention benefited the operating margins. While there is generally a lag period before the consumer-product prices decline, with demand not witnessing any slowdown inspite of hike in prices, the FMCG companies are likely to make the most of the low input and higher realisation scenario.

    Consumer products (Rs) Jan-08 Jun-08 Oct-08
    HLL's Breeze (100gm) 9 10 10
    Godrej's Cinthol Lime (75gm) 16.5 12 16
    Godrej's Cinthol Old (100 gm) 21 22 23
    Reckitt Benckiser's Dettol (125 gm) 28 29 29
    HLL's Dove (100 gm) 35 40 40
    Godrej - Shikakai (100 gm) 15 16 16
    HLL's Lux International (75 gm) 15 13 17
    HLL's Lifebuoy 11 11 12
    HLL's Surf Excelmatic 155 160 164
    P & G's Tide 53 55 62
    HLL's Wheel Bar Blue 3 3 6

    Source: Equitymaster

    Mass market products
    Total new product launches in personal care in the FMCG market dropped to 360 in 2008 as compared to 483 in 2007. All the categories like soap, shampoo, skincare and oral care witnessed decline in new launches. Lower margins on account of higher competition, inability of companies to reinvent and higher expenses involved in brand launches as compared to launching variants led to the lowed growth in new product launches. Further on account of consumers tightening their purse-strings, FMCG companies found it viable to introduce products in popular price point segment or mass market products as demand continued to be strong. Dabur and Marico launched a host of mass market products in personal care segment.

    Inorganic growth
    Emami acquired Zandu Pharmaceutical Works for Rs 7 bn, while Dabur bought a 72% stake in Fem Care Pharma for Rs 2 bn. Godrej Consumer Products expanded its presence in the South African market by acquiring Kinky hair brand. These acquisitions gave the companies an entry in fast growing segments and also increased their geographical reach. With FMCG companies being cash rich and valuations looking attractive, more acquisitions are likely to be seen in the coming year.

    The outlook for 2009
    As per our interaction with companies, during the recent quarter, FMCG markets continue to grow faster in all the categories than it grew in the second or first quarter of FY09. While in some categories value growth was reported, in others it was a mix of both. Also a balanced growth is seen between the urban and rural markets. Both the markets are also growing at the same pace.

    Called as the sun and moon sector, the coming year looks a promising one as well for FMCG sector. The demand scenario will be relatively inelastic for FMCG companies. If the input prices continue at the current levels, the companies will benefit from higher realisations and pricing power. Further, on account of purchase contracts having expired in December last year, companies will get the benefit of lower prices going forward, which will in turn aid their margin expansion. Even the prices of packaging materials have fallen by 50% to 60% from their peak. The FMCG companies also have the option to reduce prices in case of down trading or demand slowdown if input prices remain at lower levels. Overall, considering the not so good macro environment, FMCG will continue to enjoy the safe haven status.



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