FMCG: Outlook 2008 - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

FMCG: Outlook 2008

Jan 9, 2008

We believe that in a scenario of a buoyant economy and multiple growth triggers being in place, the FMCG sector should sustain robust growth momentum. We expect new product developments, better health and happier taste buds in the FMCG sector. Momentum to sustain: With India rising, the outlook of Indians is changing too. They are willing to experiment and try out new products. Capturing insights into their needs and synthesising these into strategies and final product formats presents a new opportunity for FMCG players. Having witnessed robust growth over the last couple of years, we believe the growth would continue being strong. Up gradation from unbranded to branded goods (packaged grocery, household cleaning products), demand of nascent categories (breakfast cereals, hair colours) and health and hygiene products (chyavanprash) would be the growth drivers.

Going rural: As per Asschom, FMCG will be witnessing more than 50% of its growth in the rural and semi-urban segments by 2010. Currently, nearly 34% of the offtake of FMCG companies come form rural areas. As seen in the previous article , like last year, even in 2008, the rural areas would provide a huge potential. Companies like HUL, ITC and Colgate have already established good distribution networks in these regions. Other companies would start catering to these regions in near future.

Health and wellness: With the growth prospects of the economy and sector in place, though most of the categories will continue their growth, processed foods and the Personal Care segment is likely be the fastest growing segments.

  • Foods: Food forms the largest component of the total consumption expenditure in India accounting for as much as 51%. This is highest compared to 9.7% for an average American person and 15% for both Japanese and British. Though with rising income, the share would go down, but would increase in absolute terms. Further, the companies are widening their health food portfolio to target the rich, health conscious urbans. Dabur, HUL and ITC have made investments in this segment.

  • Personal Care Products: Consumer spending India on personal care products is very less. Further, the penetration levels are low too. With growing urbanisation and higher disposable incomes, consumers are now spending higher on personal care products. Higher growth is seen in premium range of such products. While rural areas will drive the growth of mass consumption products, urban consumers will be targeted for the premium segments.

Value growth: Along with volume growth we expect the value growth to be strong too. The companies would take selective hikes in price to meet the inflationary pressure. Also the consumers would upgrade from mass brands to premium brands, which would be a key driver in the value growth.

Retail formats- boom or bane: India is witnessing a retailing revolution in recent times. While some retail chains are of large retail formats enabling huge volumes, some are focused on affordability and thereby squeezing the margins. The Indian stock market is dominated by more than 12 m small 'mom and pop' retail outlets. However only 4% is in the organised sector, thereby reducing the reach. With FDI expected to be allowed, the share from the retail formats by the FMCG players is expected to increase.

Cut- throat competition: FMCG companies continue to face intense competition. Players from unorganised and organized sectors continue to grab each other's market shares. Highly scattered market and poor transport infrastructure limits the ability of MNCs and national players to reach out to remote rural areas and small towns. Low brand awareness enables local players to market their spurious look-alike brands. Also with entry of existing players in new segments like ITC's entry in personal care products, Dabur's plans to venture into health beverages would add to the already aggressive environment resulting in high pressure on margins.

Commodity prices- a key risk: A worsening of the commodity price environment is a key risk. In 2007, most of the companies had faced pressure on its input prices. Crude, palm oil, wheat and packaging costs were on a rise. Though most of the companies had taken judicious price increases, however, a sustained inflationary environment could hurt growth or margins or both.

Margin expansion to slow: While we expect the revenue growth to be strong, the overall margin expansion would slow down in the coming year. Though the price hike effected by the companies will partly camouflage inflationary pressures, we expect margin expansion to slow down. With increasing competition, the companies have to spend higher amounts on the promotion, distribution and advertising of the products. Further, the savings on account of tax holidays would decline going forward leading to pressure on margins.

Going forward
With the economy on a high growth flight, robust consumerism, greater rural penetration and rapidly growing organised retail, we remain bullish over the growth traction in the FMCG space. While rural regions would drive consumption due to higher penetration, organised retailing in urban markets would help increase value growth led by demand of premium products. The shift from unorganized to organized and from unbranded to branded will add further impetus to growth in this segment. India's immense population of one billion-plus people offers tremendous market potential. But its many languages, size and poor infrastructure can make it a difficult place to operate. The companies will have to align its strategies as per the changing environment, attitudes and preferences of the customers to be successful.

Equitymaster requests your view! Post a comment on "FMCG: Outlook 2008". Click here!

  

More Views on News

What Happens if ITC Hives off ITC Infotech? (Views On News)

Nov 20, 2021

The cigarette to hotel conglomerate is reportedly mulling the demerger of its software business at a valuation of around Rs 250 bn.

What Sparked an 8% Rally in ITC Shares Today? (Views On News)

Sep 16, 2021

ITC did not participate in the rally after the second wave and continued to underperform its peers. Is this about to change?

HUL's Marketcap Tops Rs 6 Tn. Key Factors Driving the Stock (Views On News)

Aug 21, 2021

HUL became the fifth Indian company to achieve the milestone of a Rs 6-tn market capitalisation.

Adani Wilmar IPO to Hit the Market Soon. Should you Apply? (Views On News)

Nov 29, 2021

The parent company of the brand Fortune is set to raise Rs 45 bn from the market.

Key Points to Know Before Applying to Dodla Dairy's Public Issue (Views On News)

Jun 14, 2021

What you should know before applying to Dodla Dairy's IPO.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE FMCG


Nov 30, 2021 (Close)

S&P BSE FMCG 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS