FMCG: Deserves the interest? - 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?  

FMCG: Deserves the interest?

Mar 8, 2006

A while ago, we wrote about how small FMCG companies performed in the December quarter 2005 in comparison to the same quarter the previous year and the picture was astounding, atleast on the profitability front. In this article, we analyse the performance of the larger 5 FMCG companies viz. HLL, ITC, Nestle, Britannia and Colgate. If one were to go by the numbers, there are surprises in the offing.

Large cap FMCG companies
(Rs m) Dec-04 Dec-05 Change
Net sales 56,505 68,887 21.9%
Expenditure 43,005 52,848 22.9%
Operating profit (EBDITA) 13,500 16,038 18.8%
Operating profit margin (%) 23.9% 23.3%  
Other income 1,622 1,254 -22.7%
Interest 514 63 -87.7%
Depreciation 1,327 1,570 18.4%
Profit before tax 13,281 15,659 17.9%
Tax 3,535 3,865 9.3%
Profit after tax 9,746 11,794 21.0%
Net profit margin (%) 17.2% 17.1%  
Effective tax rate 26.6% 24.7%  

The FMCG sector has suddenly turned out to be one of the 'hottest' sectors, with every investor wanting to own a piece of it. Since FY00, growth (especially at the topline level) has been the major issue of contention with some section of the investor community writing off the larger companies owing to their size (the common theme being, 'Elephants cant dance'). The consolidated topline in the last quarter of the top 5 FMCG major has grown by an enthusing 22% YoY, indicating that the FMCG sector is on the path to revival, with both rural and urban markets contributing to its growth. Infact, rural growth has outpaced urban growth in the past six months (based on our interaction with FMCG companies).

When compared to 5 smaller FMCG companies (including the likes of Godrej Consumer and Marico), the larger companies have clearly outperformed as far as the sales growth is concerned. Though the net profit growth of the smaller FMCG majors combined has outpaced the likes of HLL and Nestle, in the long-term, we believe that the FMCG sector is a volume game (market share). The common notion that smaller companies are nimble and have the ability to cut prices to gain market share seem to be a farce. Yes, in a downturn, when consumers tighten their pockets, there is a possibility that consumers can be more 'pricey'. In the long-term, the challenge before FMCG players is on two fronts:

  1. Increase the consumer base - Here the semi-urban and rural market is an important leg.

  2. Increase consumption of products per person (including upgrading existing customers to higher priced products in the same category).

Although the FMCG sector has had a very challenging period (FY00 to FY05), we have been optimistic on the sector for more than two years. HLL expects the FMCG sector to triple in value by FY10 and we believe that the sector is on its path to growth. As per NCAER estimates, consuming class will touch nearly 50% by FY08 and much of this growth will come from the rural hinterland. With the modern retail sector expanding at a faster clip, FMCG companies are most likely to benefit. Currently, only 4% of industry sales are through the organised retail chains, which we expect to touch atleast 10% in the next three to five years. However, the profit margins are likely to shrink, albeit by around 100 to 200 basis points. But again, the FMCG sector is a volume-driven game i.e. growth at margin. In our view, investors should choose those companies that have the ability to maintain market share (despite the ups and down in consumer spending) and have the ability to launch products on a continuous basis. By the way, FMCG sector/stocks are defensive in nature and therefore, returns are likely to be stable over the long-term.

Equitymaster requests your view! Post a comment on "FMCG: Deserves the interest?". Click here!


More Views on News

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

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

I Recommended this Stock over Page Industries because it's Relevant to Doubling Your Income (Profit Hunter)

Sep 7, 2020

Things are not often what they seem in the market and how you can take advantage of this.

The NASDAQ Whale Could Harm Your Portfolio (Fast Profits Daily)

Sep 7, 2020

The discovery of Softbank pushing up prices on the NASDAQ will cause volatility in the market. Stay alert!

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.


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


Sep 18, 2020 (Close)