X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Inflation: A litmus test for FMCG companies - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 14, 2012

    Inflation: A litmus test for FMCG companies

    Global runaway commodity inflation has burdened FMCG companies with greater costs. With crude prices remaining buoyant, its derivatives Linear Alkyl Benzene (LAB) and Liquid Light Paraffin (LLP), which are used by personal care & detergent companies continued to remain high in FY11. Palm oil, a vital ingredient used in soaps, saw prices escalating during the year. Thus, the raw material to sales ratio of major FMCG companies which was hovering at around 38-51% in FY11, swelled up to 40-54% during the nine month period April-December 2011.

    To tackle inflation, large FMCG companies held or modestly raised prices. For example, Marico spelt out its volume growth strategy by holding product prices. While off take of such FMCG companies has grown in double-digits contributing to robust sales growth, their profitability has been hit.

    But, the silver lining is the market share gains made by these companies. A look at the chart below shows that frontline FMCG companies, on the back of strong financial health and significant pricing power, have managed to wrest market shares from regional players that could not hold on to competitive rates. FMCG behemoth, Hindustan Unilever (HUL) has grown its market share and even managed to keep profitability in tact by rationalizing advertisement spends in select categories.

    Source: Econ Trends


    Source: Econ Trends

    On the other hand, small and regional companies that lost market shares in their home markets are re-working their strategies in a competitive environment. Jyothy Laboratories which acquired Henkel India in May 2011, decided not to go for a nation-wide launch of detergents to avoid direct competition with the big players. Indore-based firm Panjon wants to expand beyond its home-turf of Madhya Pradesh and Uttar Pradesh to states of Gujarat, Punjab, Haryana and Bihar. SAJ Food Products, which has a strong presence in the eastern markets, is planning a national footprint by 2013, and will be coming out with a public issue in the next two years.

    Food companies Mapro and Wagh Bakri are leveraging on their quality proposition to fend off competition. Delhi-based VI-John is planning to add over 1,700 distributors and 70 stockists to have direct reach in western and southern markets. Ghari, the second largest detergent brand by sales (in 2010), managed to topple the largest selling detergent Wheel belonging to HUL for two months last year. The Kanpur-based private company, Rohit Surfactants which owns Ghari managed to achieve this feat by entering 10 new states in the last three years widening its reach to 19 states. Rohit Surfactants is planning to raise Rs 10 bn over the next two years through the capital market. Reportedly, the funds raised through the capital issue will be utilised to scale up the company’s production and distribution network.

    So, cost inflation has proved to be a blessing in disguise for big FMCG companies. These companies with deep pockets, distribution reach and economies of scale benefits, held or raised product prices rationally. However the small, regional companies facing mounting cost pressures, sacrificed their pricing advantage, and lost market shares to the biggies in the process. The small companies are either scaling up capacity or distribution reach or deferring nation-wide launch. Going forward, the large FMCG companies will face high base-effect, increased pricing and rising competition in an easing raw material environment. This will make sustainable volume growth a significant challenge.

      Madhu Gupta (Research Analyst), Managing Editor, ResearchPro has a post graduate degree in both physics and finance. Having worked with India's leading economic research agency, she has a natural flair for numbers and analytics. She brings with her a near-decade long rich experience in the field of finance. A firm believer of the principles of value investing, she looks for robust businesses with durable competitive advantages. Madhu contributes towards our small cap service Hidden Treasure.

     

     

    Equitymaster requests your view! Post a comment on "Inflation: A litmus test for FMCG companies". Click here!

      
     

    More Views on News

    Marico: Earnings Hit by Lower Volumes and Firming Input Prices (Quarterly Results Update - Detailed)

    Aug 9, 2017

    While GST implementation brought down volumes and profitability in the short run, Marico remains optimistic in the long run.

    P&G: Strong Core Growth (Quarterly Results Update - Detailed)

    Dec 9, 2016

    Procter & Gamble Hygiene and Health Care has announced the first quarter results of the financial year ended June 2017 (1QFY17). The company's sales rose by 12.5%YoY while net profit rose by 50.1% YoY during the quarter.

    Nestle India: Sales Traction From New Products (Quarterly Results Update - Detailed)

    Nov 30, 2016

    Nestle India declared results for the quarter ended September 2016. Here is our analysis of the result.

    GSK Consumer: Price Hike Hurts Volumes (Quarterly Results Update - Detailed)

    Nov 30, 2016

    GSK Consumer Healthcare declared results for the quarter ended September 2016. The revenues dropped by 1.3% during the quarter as compared to a year ago; while the profits declined by 16.6% YoY during the quarter.

    Marico: Margin Expansion Drives Profit Growth (Quarterly Results Update - Detailed)

    Nov 28, 2016

    Marico has reported a flat topline while the bottomline has grown by 18% YoY during the quarter.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE FMCG


    Aug 22, 2017 01:43 PM

    MARKET STATS