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FMCG: What lies ahead...

Apr 18, 2007

The result season is back! This time, however, it is the end of the fiscal FY07, and the annual result announcements are expected to be the key factors that will drive the markets in the near-term. India Inc's FY07 results have already started trickling in, with the software companies being the first to report their financial performance, as usual. The FMCG majors would also report their results soon and here we take a look at what lies in store in the future. Growth momentum to continue: The FMCG industry is likely to sustain robust growth momentum supported by higher demand, better lifestyle trends, increased realisations and contribution from acquisitions.

The FMCG industry is expected to witness robust growth driven by higher demand in both the rural and urban markets and increased realisations across most categories. Also, shift from the unorganised sector to the organised sector and unbranded products to branded products would support growth. The acquisitions made during the year by Marico and Tata Tea would also contribute to the topline. Companies also undertook price hikes, which were passed on to the consumers in a bid to improve realisations. For instance, Britannia increased the prices and reduced the weight of its packets across its entire portfolio to improve realisations. Also, HLL selectively increased realisations for many products in its portfolio such as Fair and Lovely, Surf Excel, Sunsilk, Rin Advance, Wheel, Ponds Sandal Talc, Rexona Deo, Taj Mahal tea, Lipton tea and the like. ITC, in an effort to stave off the effects of the excise hike and the impending VAT hike, has increased the prices of its key brands - of the premium Wills Classic range by 28.5% and that of the Gold Flake range by 12%.

Steady margins: The pressure from the rising input prices and higher inflation was witnessed at the end of the year. The price of palm oil has been steadily rising to touch around 2,000 ringgits per ton (40% over last year) and is expected to rise further by the end of the current year. Wheat prices are also on the way up due to the demand supply mismatch. However, the companies have taken price hikes to marginally offset the higher input prices, which is likely to keep the margins stable.

Food sector and retailing: During the year, especially the last quarter, many companies had announced plans to foray into retail and food segments. The food-processing industry in India is estimated at Rs 3,000 bn, with a mere 5% held by the organised sector. Recognising this as a tremendous growth opportunity, a number of FMCG majors are venturing into this segment. ITC has recently launched its snacks range called 'Bingo', with a planned investment of Rs 1.5 bn over the next two years. It is also increasing its portfolio in the chocolates and biscuits segments. HLL merged Modern Foods with itself. Also, companies are starting their retail foray in a bid to widen their distribution network. Dabur India is incorporating a wholly owned subsidiary, H&B Stores Ltd, to setup a chain of health and beauty retail stores. It plans on investing Rs 2 bn by 2010 to establish 300 stores over the next 5 years.

To sum up...
Higher margin product-mixes, greater pricing flexibility, better and far reaching network in rural markets and inorganic contributions will be the key factors that will drive growth of the FMCG majors going forward. An expected good monsoon combined with the strong overall growth across the economy is likely to continue driving consumer demand. Also, higher disposable incomes are bound to have a positive effect on the consumer's purchasing power and thus overall on the sector. With strong cash flows, higher return on capital employed and robust growth we are positive about the growth prospects of the FMCG industry going forward.

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