Consumer Products: Rural centric - Views on News from Equitymaster

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

  • MyStocks


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

Consumer Products: Rural centric

Jan 15, 2001

In the calendar year 2000, consumer products behemoth, Hindustan Lever Limited’s (HLL), results were something like this. Though this FMCG major managed to declare encouraging growth in its bottomline, its turnover was stagnating. This slowdown of growth in turnover probably sums up the calendar year 2000 for the consumer products sector. HLL accounts for a bulk of this sectors’ turnover (almost 50%) and the stagnation in its topline is cause for concern. It is widely believed that the FMCG sector is not affected much by inflation as the consumers continue buying essentials. But the slow growth in turnover and the rising oil prices forced consumers to downgrade their preferences, which in turn put pressure on the company’s margins. Bad monsoons in some states resulted in lower incomes for rural India. This was also responsible for the staid growth in turnover and consumer downgrading.

P&G Hygiene and Healthcare too, saw a similar growth pattern. In quarter ended September 2000, the company’s topline improved by a negligible 0.7%, but its net profit saw a healthy 24% growth. Apart from this, both HLL and P&G, saw a decline in their interest burden The decline in debt servicing costs indicates that the FMCG sector is looking to prune its debt burden.

On the other hand, their depreciation charges saw an upsurge. This is an indication that these companies are making new investments, underlining their confidence in the sector's future growth potential. These companies also took effort to cut their operating costs. This resulted in improvement in their operating margins.

This was one end of the spectrum. On the other end, relatively new companies like Henkel Spic India witnessed robust growth in turnover (31% in the first nine months of 2000). However, this growth was on a lower base and companies like these are just making their presence felt. However, in its third quarter ended September 2000, this company’s turnover too, showed signs of a decline (up 10% only).

The household cleaning major, Reckitt and Coleman’s performance was a little more balanced. In the nine months ended September 2000, the company declared a 15% growth in turnover and its performance remained same over all quarters. And like compatriots HLL and P&G, this company too pruned its interest costs and saw a growth in depreciation provisioning.

The shaving products major, Indian Shaving Products saw a significant 26% growth in turnover in the first nine months of 2000. However, both its interest costs and depreciation costs surged, thereby pruning its bottomline.

These figures bring us to a few conclusions.

  • Traditional consumer products like soaps, detergents and other toiletries are facing a glut and a consumer downgrading.

  • New types of branded consumer products like shaving equipment, household care products and cosmetics, which have lesser penetration, saw volume growth.

    Immense potential…
    Segments Market size Penetration
      (Rs bn) Urban Rural
    Toilet soaps 35 95% 85%
    Hair oil 6 90% 86%
    Cosmetics 6 NA NA
    Hair shampoos 5 25% 8%
    Skin care 4 30% 7%
  • In order to survive the slowdown in growth, companies looked at becoming more cost efficient by pruning debt burdens.

  • The companies also looked at investing more money into new business streams and distribution networks for volume growth.

India is seeing a dramatic shift towards prosperity in rural households. As per National Council for Applied Economic Research (NCAER) the lowest income class will shrink from more than 60% in FY95 to 20% in FY2007. The higher income classes will more than double and hence rural markets for FMCGs will boom.

So, though the slowdown in volume growth and its consequent effect on margins is cause for concern, from the above estimates it is clear that rural prosperity is here to stay. However, the near term concerns include the drought situation in some key states of India and also the roller coaster oil prices.

Growing rural focus
Particulars HLL Colgate Britannia
Retail outlets services 1,000,000 2,500,000 400,000
Cities/towns/villages 50,000 20,000 2,200
Distributors 7,500 2,000 2,500
Rural turnover 50% 35% 30%

India’s rural markets are currently witnessing intense competition in almost all consumer product categories. Since urban markets are saturated in most categories, future growth can come only from deeper rural penetration. FMCG majors are aggressively looking at rural India since it accounts for 70% of the total Indian households.

But going by the trends in 2000, it is clear that the Indian consumer wants to see a wider variety of products and only those companies who can spend on research and development to develop new products and optimally use their resources will gain in the long term. This could also mean that MNC parents of Indian subsidiaries (like HLL, Reckitt, P&G and Henkel) may introduce newer line of products and brands in the coming year.

Equitymaster requests your view! Post a comment on "Consumer Products: Rural centric". 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.

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'.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.


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


Dec 3, 2021 (Close)