Feb 26, 2004|
FMCG: To be or not to be?
India is posed to achieve more than 7% growth in GDP with the agriculture sector expected to grow over 12% in FY04. But the performance of FMCG companies has been lackluster till now. The importance of a good agricultural sector performance for the sector cannot be understated. For example, historically, revenues of the FMCG major, HLL have shown a high degree of correlation with agricultural sector growth. Against this backdrop, we conducted a poll on our website asking the investors the following question. 'Post HLL results, your outlook on the FMCG sector is? The three options were positive, negative and neutral.
Among the audience, 38% had a negative view towards the sector. While 23% of the audience were neutral, 39% of the audience still believed that despite HLL's lacklustre results in December quarter, the prospects of FMCG sector are bright. Let us analyse this issue in detail.
Since HLL accounts for almost 50% of total sales of the organised FMCG industry, it is pertinent to look at the company's performance. Since a major chunk of country's population (over 70%) is still engaged in agriculture and agriculture related activities, the purchasing power of this segment will improve if the farm output increases. Typically, a farmer earns six months in a year.
Having seen the correlation between agricultural output and HLL's sales, let us look at the reason for the slowdown in the company's FMCG sales in the last 2 to 3 years. The market size of cleansers like soaps and detergents has been shrinking since 2000 in value terms. This could be attributed to decline in prices and down trading (people shifting to lower value goods or unorganized products and imports). As far as contribution form the rural segment is concerned, rural areas accounted for close to 60% of the tea sales, 58% of toilet soap and detergent sales and 47% of the toothpaste sales. What may have led to the fall in demand for these categories (in which HLL is very strong) is the fact that demand from rural areas is very price sensitive. Due to the erratic nature of monsoons and its consequent impact on agricultural output in the last few years, rural consumers seem to have changed their preferences in favour of cheaper substitutes. This is one of the reasons for the slower growth in HLL's topline in the last 2 to 3 years. And the second reason is higher penetration in key products categories like soaps.
However, we believe that the prospects for the sector over the next two to three years remain promising. Factors like increased infrastructure related activities would result in access to markets for the farmers to sell their output. Connecting remote areas with roads will open up other sources of revenues for the people other than agriculture (like employment). Though the current year GDP growth is higher, there is always a lag effect on FMCG demand. Therefore, we expect higher growth in topline for the FMCG sector in FY05 and beyond.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Aug 16, 2017
And what it has in common with beating the stock market too.
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Aug 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 4, 2017
The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407