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FMCG: March quarter 2003 update… - Views on News from Equitymaster
 
 
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  • May 3, 2003

    FMCG: March quarter 2003 update…

    The year 2002 was a tough one for the FMCG companies. We saw in our recap on the FMCG sector that our sample of 5 leading companies finished 2002 with a 6% dip in topline. However, improvement in operating efficiencies helped the sample achieve a respectable 13% bottomline growth (excluding extraordinary items) during the year.

    Let's do the same exercise for the March quarter. This time too, our sample includes 5 leading FMCG companies. But this time around, since Colgate has not declared its results as yet, we have taken in Gillette India, the shaving product major. During the March quarter (2003), the consolidated turnover of these companies was up a marginal 2%, which is better than the 2% dip that sample had reported in December quarter.

    (Rs m) Mar Qtr'02 Mar Qtr'03 Change
    Net Sales 27,925 28,581 2.4%
    Other Income 999 1,490 49.2%
    Expenditure 23,363 23,973 2.6%
    Operating Profit (EBDIT) 4,562 4,608 1.0%
    Operating Profit Margin (%) 16.3% 16.1%  
    Interest 64 20 -68.8%
    Depreciation 552 427 -22.5%
    Profit before Tax 4,944 5,651 14.3%
    Tax 1,057 1,303 23.3%
    Extraordinary items 747 -12 -
    Profit after Tax/(Loss) 4,635 4,336 -6.4%
    Net profit margin (%) 16.6% 15.2%  
    No. of Shares (eoy) (m) 2,329.0 2,342.1  
    Diluted Earnings per share* 7.9 7.4  
    Current P/E   19.3  
    *(annualised)      

    While operating margins dipped marginally, falling interest rate advantage was evident in the 69% decline in the interest burden of the sample. Depreciation provisioning was also lower, as companies continued to hive off or close the unviable assets or businesses. The focus on efficiencies seems to have also resulted in freeing of cash and consequently, other income for the group was higher by nearly 50%. All these helped the sample post a 12% growth in bottomline (excluding extraordinary items).

    The small upturn in topline largely came as a result of a turnaround in FMCG major, HLL's topline performance. The company reported a sales growth of 1.2%, the first signs of growth in the last 5 quarters. HLL accounts for almost 83% of the sample's topline and over 88% of the net profit. So it was but natural that the March results of the sample reflect HLL's performance in a large way.

    The HLL management at its analyst meet in early 2003 had indicated that they are now largely satisfied with the overall profitability of the company and would now concentrate on getting the topline momentum going. The March quarter gave us an indication of that. However, the rise in sales came backed by a minor dip in operating margins. This dip in operating margins is thus, reflected on the sample as a whole.

    Without HLL…
    (Rs m) Mar Qtr'02 Mar Qtr'03 Change
    Net Sales 4,540 4,906 8.1%
    Other Income 39 78 96.7%
    Expenditure 3,952 4,204 6.4%
    Operating Profit (EBDIT) 588 703 19.5%
    Operating Profit Margin (%) 12.9% 14.3%  
    Interest 29 2 -93.7%
    Depreciation 168 120 -28.5%
    Profit before Tax 431 658 52.7%
    Tax 82 140 70.3%
    Extraordinary items 0 -12 -
    Profit after Tax/(Loss) 349 507 45.2%
    Net profit margin (%) 7.7% 10.3%  
    No. of Shares (eoy) (m) 127.8 140.9  
    Diluted Earnings per share* 9.9 14.4  
    Current P/E   15.1  
    *(annualised)      

    If we exclude HLL to get a view on how the smaller players in the sample performed, we get a different view of the March quarter. The 4 companies, viz. Godrej Consumer, Gillette, Marico and P&G, together reported a healthy 8% topline growth. In contrast to HLL, operating margins for this sample improved to nearly 15%. Interest and depreciation provisioning too saw a significant dip, adding to the overall profitability.

    Other income swung even more sharply for the 4 smaller players (up 97% during the quarter). All this led to the 'small 4' group reporting nearly 50% net profit growth (excluding extraordinary items). The key contributors to this favourable performance were Gillette (which is in the turnaround mode) and P&G Hygiene that reported a 17% topline and a 25% bottomline growth. Marico seemed a laggard in the group with just 1% bottomline growth. Though Godrej Consumers reported a 22% bottomline growth, this was largely led by tax benefits and not by operations. Higher other income too, aided the company's and indeed the sample's bottomline growth.

    At the current valuations, the sample sector (including HLL) is trading at a P/E multiple of 19.3x and a market cap to sales of 2.9x annualised March quarter earnings. Excluding HLL, the sample trades at 15.1x March quarter annualised earnings, market cap. to sales to 1.6x. It is clear from the performance as well as the valuations that HLL is the key to the fortunes of the Indian FMCG sector. Though a change in topline growth trend is encouraging, it has still not enthused investors towards the sector. Uncertainty over the monsoons has also not helped the sector's investment case.

      CMP (Rs) 52 week H/L P/E **
    Godrej Consumer 108 124 / 70 11.6
    Gillette India** 334 409 / 258 33.4
    Hindustan Lever 138 214 / 135 17.3
    Marico 158 183 / 145 8.1
    P&G Hygiene** 412 480 / 310 10.1

    * P/E based on FY03 earnings
    **For Gillette P/E is based on March quarter annualised EPS
    ** For P&G P/E is based on annualised 9mFY03 EPS

    But these are all short term concerns. In the longer term, we remain convinced that the Indian FMCG sector offers good growth opportunities considering that the per capita consumption of most categories is still low as compared to the developed countries. Backed the infrastructure initiatives, as the economy develops and the living standards rise, the sector is likely to be one of the key beneficiaries of economic growth.

     

     

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