Consumer Products: Rural centric - 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?  

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

Sorry! There are no related views on news for this company/sector.

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE FMCG


Sep 29, 2020 (Close)

S&P BSE FMCG 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS