Apr 17, 2006|
FMCG: 4QFY06 and beyond
The time has come for corporate India to unravel their March quarter results, and amongst the most awaited is that of the FMCG sector. The sector is often referred to as the 'Sun' and the 'Moon', from the perspective of everlasting demand for consumer products. In our view, the March quarter results will reinforce the underlying robustness in demand for consumer products. We have listed some of the major growth drivers for the sector in this article.
Topline - Watch out for volume and value growth: Growth momentum is likely to sustain in the quarter, backed by increased consumer demand from both urban as well as rural markets. Besides demand, prices have gone up. Increased disposable income has also resulted in select consumers moving up the value chain (basically, upgrades). It can be recollected that growth in the month of February 2006 for FMCG products, on a YoY basis, was the highest in the past 5 years. Though prices hikes are good, we believe that FMCG is a volume-driven business. In the forthcoming quarterly results, investors should watch out for both value and volume growth (value growth was non existent the same quarter last year on a broader scale).
Godrej Consumer Products is expected to maintain strong growth momentum, due to its presence in hair colours (the fastest-growing FMCG product). Given the fact that the company has managed to increase its market share from 9% in 3QFY06, soaps should also propel growth (as per media reports, the market share in 4QFY06 was 10%). Also, the 'Keyline' acquisition will also reflect in the numbers in the current quarter. Looking beyond Godrej Consumer, in our view, HLL will sustain its double-digit growth at the topline level in 1QCY06. Though we have commented only on two companies, at the broader level, we are positive about the topline growth prospects of the sector over the next three to five years.
Margins – Positive outlook: As far as margins are concerned, in our view, the so-called 'price wars' are a thing of the past. In fact, companies like HLL recently increased prices again (the third price in the last 12 months), indicating that the pricing power has returned. Hence, we anticipate margins to expand for almost all companies, some aided by enrichment of the revenue mix, while some due to fiscal benefits (savings in excise and income tax from new plants in tax heavens). In the long-term, margin expansion prospects will be governed by the intensity of competition and economic performance.
What to expect?
While we have outlined the major growth drivers for the FMCG sector, as far as the stocks are concerned, we reinforce the need to have a long-term while investing in FMCG stocks. One must also take into account the fact that valuations are not that attractive at current levels.
Higher penetration levels (breadth) and increased per-capita consumption (depth) will influence the performance of the sector. By breadth, we mean the number of people buying FMCG products (from the organised sector as well as from rural markets). By depth, we mean, higher consumption by the existing consumer base (both in terms of moving up the value chain and increased usage). The FMCG sector, therefore, is a play on 'India's consumption story', for which things are looking up.
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