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FMCG: What's it upto?

Apr 11, 2005

Fast moving consumer good (FMCG) stocks have been the talk of the town from sometime now, not because of abnormal returns given to investors unlike all other sectors, but for clearly underperforming even the benchmark indices from a while.

Vs the Sensex...
BSE-Sensex 184
HLL 60
ITC 169
Colgate 122
Britannia 125
PGHH 158
*Current value of Rs 100 invested in April 2001

From the above table, we infer that the top 5 key FMCG players have clearly under performed the Sensex, the benchmark index.

HLL:  The FMCG bellwether in India grew in strong double digit figures throughout the nineties but has been struggling from sometime now for topline as well as bottomline growth. It was hit badly last year when P&G declared a price war in the detergents segment through its 100% subsidiaries forcing the major to offer hefty price cuts.

ITC:  With a 70% market share in the cigarette segment, the undisputed leader pays a huge sum as excise and other taxes to the exchequer, which is amongst the highest in the globe and as per the company, almost 130% of the MRP. ITC has not been able to grow much in the past few years owing to the higher taxes and measures like ban on advertising and smoking in public places.

Colgate:  Colgate India has lost considerable market share from 65% in FY95 to around 49% currently, owing to HLL's competitive pressure. Added to that, the oral care segment has hardly grown in volume terms over the last 3 years. The company has seen de-growth of 4% on a CAGR basis from FY00 to FY04. All this, and new entrants like Anchor and Dabur, forced the company to cut prices by 17% in FY03 in a bid to kick start volume growth. Though volumes have picked up, the near term future of the company depends on its worldwide archrival, P&G, which has plans to launch its toothpaste brand Crest in India.

Britannia:  Market leader of the Rs 30 bn biscuit segment, the company has a strong brand folio with successful brands, but off late, it is facing stiff competition from players like Surya Foods (Priyagold) and ITC (Sunfeast) since they offer the same type of product at significantly lower prices. Moreover, archrival, Parle, is not far behind. The company has grown at a CAGR of 6% over last 5 years. However, with the consuming class burgeoning in India, considering the lower price points of the biscuit category, the sector is likely to grow at a decent pace.

P&G Hygiene:  The company is focused on two-products (Vicks and Whisper) and also carries out manufacturing of detergents on contractual basis for its parent's 100% subsidiary. P&G has traditionally adopted the high quality, premium pricing policy for its products. The Indian market is extremely price sensitive and the company has been witnessing immense pressure from competitively priced products of other players in both its core businesses.

Combined revenue snapshot of 5 majors...
(Rs m) 2000 2001 2002 2003 2004 CAGR
Net sales 165,649 176,246 186,478 185,021 195,648 4.2%
Other Income 5,146 5,333 5,808 6,393 7,635 10.4%
Expenditure 137,264 141,587 146,878 140,235 147,856 1.9%
EBITDA 33,531 39,992 45,409 51,179 55,427 13.4%
Operating margin % 20.2% 22.7% 24.4% 27.7% 28.3%  
Net profit after Tax(Loss) 20,825 25,315 31,810 33,829 36,836 15.3%
Net profit margin % 12.6% 14.4% 17.1% 18.3% 18.8%  

It is visible that the 5 company's have shown a CAGR of 4% over the years while the Sensex grew at 16-17% Y-o-Y during the same period.

What's the future?
FMCG sector has seen some signs of revival in recent months. Owing to availability of cheap consumer durable finances and home loan EMI's, consumers were downtrading their purchases in this segment and migrating to other aspirational products. However, the trend is slowly changing, owing to competitive pricing and more choice among products.

Implementation of VAT is a major boost for FMCG companies. There might be some initial hiccups but brands will become more affordable in the long run. The entire supply chain will be streamlined making life easier at both ends. Also, import duties on raw materials like linear alkyl benzene (a key input in detergents) being lowered in the recent budget is a positive for the sector.

The FMCG sector still holds promise and inclusion of the sector is a must for a stable portfolio. Macroeconomic factors are in the favour of FMCG companies, which is a big positive. Consumer lifestyle is changing, wit greater focus on health and nutritious food in his diet. Although topline growth is negligible, bottomline growth has continued due to continuous cost cutting and supply chain innovations.

With a direct co-relation to monsoons, which have been quite good last year, downside for these stocks seems limited. But at the same time, over the long term, FMCG companies will need to re-examine the price-value equation and be satisfied with lower margins, and higher volumes. They must remember that FMCG is more of a volume game than a value one. These steps would build a secure growth, which cannot be overlooked. Competitive pricing can raise the per capita consumption, which is low in almost all products compared even to other developing nations, leave alone developed ones.

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