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FMCG: To be or not to be? - Views on News from Equitymaster
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  • 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.



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