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FMCG: A defensive play

Mar 19, 2008

The worries of an economic recession in the US are having serious repercussion on the global economy and India is no exception. From the highs of 21,000 in Jan 2008, the BSE-Sensex has touched 15,000 in mid March. Further, higher crude prices and rising inflation is adding fuel to the fire. In this article, we shall take a look at the performance of stocks in the FMCG sector during the last three months. As seen from the table, though the FMCG stocks have fallen over the last 3 months, the fall is less than the Sensex. During turbulent times, defensive stocks act as a bulwark in a falling stock market. As the financial fortunes of the FMCG companies are not much dependent on business cycles, they offer growth, as well as dividend income, even in an economic recession.

CompanyPrice on Jan 17,2008 (Rs)Price on Mar18,2008 (Rs)Change
BSE Sensex19,701 14,833 -24.7%
BSE FMCG 2,347 2,131 -9.2%
GSK Consumers690 541 -21.6%
Colgate462 389 -15.8%
ITC217 183 -15.7%
Britannia 1,543 1,300 -15.7%
Dabur11396-14.7%
HUL217 230 6.0%

GSK Consumers: The company has been the worst loser in the FMCG space over the last three months. The company is facing problems on the input cost front with prices of wheat and milk touching new highs. However, it continues to witness strong volume growth. Product innovations, cost cutting measures and increasing distribution channels would aid its performance going forward. Further, low levels of penetration of malted drinks would help its growth prospects.

Colgate: Though raw material cost, increasing competition and higher ad spends would pressurize Colgate's performance, given that the industry is characterised by low penetration and low per capita usage, the company stands to gain with its wide range of products in the oral care category across all the price points and its wide distribution network.

ITC: ITC has leading brands in the non-filter segment like Scissors, Hero, Bristol, and Capstan. Higher excise duty on non-filter segment was announced in the budget. Though this would affect its volumes, the fact that there was no increase in excise on filtered cigarettes was a positive. However, with its non-cigarette segments witnessing strong growth and further investment in other segments, we continue to be positive on its growth prospects.

Britannia: A pick up in volumes in both rural and urban areas, a strong portfolio, distribution reach and inorganic moves position Britannia favorably to capitalise on the industry growth story. The company has witnessed expansion in margins in recent times, indicating its ability to pass on the higher input costs to consumers led by its strong brand strength. The company's other segments (bread, cakes and rusks) are also showing a lot of promise giving the growth momentum an additional boost. It is clawing its way back through new launches, better distribution and newer formats, thus making us enthused about the company's medium to long-term growth prospects.

Dabur: Dabur has created seven growth engines to drive its performance. All its segments, including the international business, are performing well. Further, its toothpaste brands have been growing faster than the oral care segment as a whole. Its toothpaste market share grew to 12.2% in volume terms in 2007 and 9.1% value terms in 2007. It has also increased its focus on the food segment and has merged it with Dabur India to capitalize on the growing demand from the segment. Given the new launches, repositioning, higher ad spends and operating efficiencies, we are positive on the growth prospects of the company.

HUL: Inspite of the FMCG index and its peers falling in recent times, HUL has gained nearly 6% in the times of turbulence. After witnessing a stagnant growth between FY02 and FY04, HUL has performed consistently, competitively and profitably thereafter. Maintaining market share and the margins despite cost inflation is commendable. With the sector scenario remaining robust, HUL with its vast portfolio across price points, strong brands and distribution reach will stand to benefit. Also, its increasing focus on the food segment would augur well in the future. However, the company will have to sustain and improve upon the recent growth momentum to justify the current valuations enjoyed by the stock.

To sum up...
Unlike other sectors, FMCG is a defensive play. The variety of duty cuts and sops would lead to lower product prices, thereby adding higher volume growth. The hike in the individual income tax slab, loan waiver given to small farmers and higher targeted agricultural loan growth will push the consumption in rural as well as urban areas. With the overall size of the retail sector in India expected to touch US$ 427 bn by 2010, FMCG products would get further impetus. However, concerns remain with respect to increased competition, inflation and margin pressure. Faster innovations, introducing new higher end products, increased distribution and cost efficiency will be the order of the day. Growth potential in micro marketing, rural marketing and the rising middle-class will be the key. Given the recent correction in the stocks, FMCG stocks are good investments from a long-term perspective. A stock-specific strategy while investing in the sector would lead to good returns.

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