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FMCG 2002: A year that was… - Views on News from Equitymaster
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  • Feb 15, 2003

    FMCG 2002: A year that was…

    At first glance, it looks as if year 2002 was one of the worst years for the FMCG sector in recent years. When we took the consolidated performance of India's 5 leading consumer products companies during 2002, the sample topline showed a decline of nearly 6% YoY. However, looking deeper, we found the reality to be a little encouraging.

    The 5 companies referred to here are Hindustan Lever (HLL), Colgate, Godrej Consumer, P&G and Marico. There were many other companies, which we could have chosen, but we felt this sample was a right mix of the old blue chips and the smaller emerging companies.

    (Rs m) DecQ'01 DecQ'02 Change Jan-Dec'01 Jan-Dec'02 Change
    Net Sales 34,301 33,669 -1.8% 133,232 125,674 -5.7%
    Other Income 891 1,151 29.1% 4,342 4,355 0.3%
    Expenditure 27,493 26,209 -4.7% 112,844 102,249 -9.4%
    Operating Profit (EBDIT) 6,808 7,460 9.6% 20,388 23,425 14.9%
    Operating Profit Margin (%) 19.8% 22.2%   15.3% 18.6%  
    Interest 44 29 -34.9% 175 197 12.3%
    Depreciation 551 541 -1.9% 2,081 1,987 -4.6%
    Profit before Tax 7,105 8,042 13.2% 22,474 25,597 13.9%
    Exceptional items -632 -776 - 1,263 371 -70.6%
    Tax 1,399 1,782 27.4% 5,000 5,879 17.6%
    Profit after Tax/(Loss) 5,074 5,484 8.1% 18,736 20,090 7.2%
    Net profit margin (%) 14.8% 16.3%   14.1% 16.0%  
    No. of Shares (eoy) (m) 2,445.8 2,445.8   2,445.8 2,445.8  
    Diluted Earnings per share* 8.3 9.0   7.7 8.2  
    Current P/e ratio (x)   18.0     19.7  
    M. Cap to sales (x)   2.9     3.1  

    As mentioned earlier, during the year 2002, the consolidated turnover of these companies declined by nearly 6% YoY. Competitive pressures and consumer downtrading forced companies to cut brands, rationalise costs and also offer discounts on their products. However, the downturn in the last couple of years has forced companies to look inwards and analyse their core competencies and strategies. Seeing the cut throat competition, most companies have more or less decided to do away with non-profitable products or brands. Product rationalisation has become one effective cost control tool.

    So we saw that while HLL continued to chop off non-core operations and brands, Colgate finally decided to focus majorly on its oral care business and give its personal products plans a quite burial for the time being. The oral care major slashed its ad budgets significantly to improve profitability. The companies have realised that in this era though topline growth is important, but improvement in quality of earnings is also very crucial to ensure long term viability of the business.

    This focus on efficiencies continued to show results in year 2002, as operating margins improved by 330 basis points to 18.6%. Higher interest and tax outgo, coupled with lower extraordinary income, saw profits growing at a slower 7% in 2002 for these 5 companies. Excluding this extraordinary income effect, the sample logged in an encouraging 13% bottomline growth in 2002.

    FMCG without HLL…
    (Rs m) Jan-Dec'01 Jan-Dec'02 Change
    Net Sales 26,556 26,125 -1.6%
    Other Income 524 510 -2.6%
    Expenditure 23,308 22,259 -4.5%
    Operating Profit (EBDIT) 3,249 3,866 19.0%
    Operating Profit Margin (%) 12.2% 14.8%  
    Interest 98 105 7.4%
    Depreciation 635 646 1.7%
    Profit before Tax 3,040 3,626 19.3%
    Exceptional items 259 -13 -
    Tax 976 1,080 10.7%
    Profit after Tax/(Loss) 2,323 2,533 9.0%
    Net profit margin (%) 8.7% 9.7%  
    No. of Shares (eoy) (m) 244.6 244.6  
    Diluted Earnings per share 9.5 10.4  
    Current P/e ratio (x)   14.2  
    M. Cap to sales (x)   1.4  

    As usual, HLL was the dominant contributor to the sample's numbers. The FMCG bellwether contributed a hefty 79% to topline, 83% to the operating profit and over 86% to the sample's profit before tax. The huge extraordinary income is also a gift courtesy HLL. All the companies in the sample improved their operating margins over 2001.

    If we exclude HLL's numbers, the other 4 registered a marginal 1.6% dip in topline during 2002, and finished with a 9% growth at the net profit level. However, the performance was much stronger at the profit before tax level registering an over 19% growth. This in effect suggests that the dip in HLL's topline (down 6.7%) during 2002 had an impact on the overall sample's performance. More importantly, though HLL continued its focus on improving profitability, the other 4 did an even better job in 2002. For example, while, HLL's margins improved by 350 basis points to 19.6%, Colgate managed to improve its operating margins by 400 basis points to 12.6% in 2002.

    CMP (Rs) 52 week H/L P/E **
    Colgate 128 169 / 124 23.7
    Godrej Consumer 99 124 / 52 10.3
    Marico 169 190 / 123 9.1
    P&G Hygiene 368 524 / 355 7.7
    Hindustan Lever 163 266 / 152 20.4

    * P/E based on FY03 estimated earnings

    At the current valuations, the sample sector is trading at a P/E multiple of 19.7x and a market cap to sales of 3.1x 2002 earnings. Excluding HLL, the sample trades at 14.2x earnings, market cap. to sales to 1.4x 2002 earnings. Restructuring efforts at HLL, P&G and Colgate as well as new product entries for Godrej Consumer and Marico are likely to improve the sector's profitability in the long term. However, with most economists forecasting below 5% GDP growth, and a 4% dip in agriculture output in FY03, the short-term macro outlook for FMCG companies continues to remain difficult.



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    Aug 17, 2017 01:27 PM