FMCG majors: Not way behind! - Views on News from Equitymaster

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FMCG majors: Not way behind!

Jun 6, 2007

Like the midcaps, though slower, the FMCG large caps continued to sustain robust growth momentum supported by the shift from the unorganised sector, increased realisations and acquisitions. The pressure from the rising input prices was visible leading to a fall in the margins. We give you a review of the performance of the majors like ITC, Dabur, Tata Tea and Britannia for the year.

Rs (m) FY06 FY07 Change
Net sales 165,273 208,469 26.1%
Expenditure 121,488 156,841 29.1%
Operating profit (EBDITA) 43,785 51,628 17.9%
Operating profit margin (%) 26.5% 24.8%
Other income 3,481 4,851 39.4%
Interest 1,329 2,970 123.5%
Depreciation 4,665 5,257 12.7%
Profit before tax 41,272 48,252 16.9%
Tax 11,911 13,823 16.1%
Profit after tax 28,964 35,485 22.5%
Net profit margin (%) 17.5% 17.0%
* financials of ITC, Dabur, Britannia and Tata Tea

Consumption: Increasing income levels are always accompanied by a change in the food basket. As the lifestyle improves consumption of milk, juices, biscuits increase. The demand for convenience and healthy foods increases. Government's financial assistance for setting up and modernising of food processing units, creation of infrastructure, and support for research and development has further provided a booster. The change is not only visible in the food segment but also in case of personal and day-to-day items like soaps, hair care products etc. Consumption is driven by expansions in both the rural and urban markets and increased realisations across most categories. A noticeable shift from the unorganised sector to the organised sector in many categories such as biscuits, personal products and detergents also supported growth. The FMCG industry grew by 22% in the year 2006.

FMCG YTD Dec'06 Sales Value (Rs bn) Value growth (%)
All India (Urban +Rural) 712.9 21.7
All India (Urban) 473.9 18.5
All India(Rural) 239.1 28.8
Source: Dabur presentation

The large FMCG companies witnessed a strong double-digit growth in topline. Selective price hikes coupled with new variants and higher volume growth led to a 26% YoY growth in sales. This was further aided by acquisitions done by Tata Tea and Britannia. ITC witnessed stronger growth of the non-cigarette businesses which grew by 33% YoY.

Changes in FMCG sector

a) 33% surge in the tax incidence on cigarettes with the levy of 12.5% VAT by states effective April 2007 and a 5% excise hike.

b) Companies more open to inorganic growth in India and abroad.

c) Increasing realisations across products, however volumes witnessed growth.

Brand Old price (Rs) New Price(Rs) %
Dabur Amla 25 26 4.0%
Britannia Bourbon Biscuits 18 20 11.1%
Britannia Marie 6 7 16.7%
Aashrivaad Atta 26 28 7.7%
TataTea Refill 98 102 4.1%
Tetley Tea 51 55 7.8%
source: Equitymaster research

Higher costs: Like the midcaps the large caps too faced the pressure from rising input prices, thereby leading to a fall in the operating margins. While ITC margins fell by 200 basis points, Dabur did see inflationary pressure, but the company was able to manage the same by taking moderate price increases in the range of 4% to 5%. Britannia was the worst hit with the operating margins falling to 5.7% from 11.6% in FY06. Britannia's margins in recent quarters have been severely dented by a huge 15% to 20% rise in input costs, especially wheat, sugar and edible oils. However, Britannia is likely to register improvement due to increased realisations and tax benefits.

Net profits: The growth in the net profits was lower than the topline growth. This was mainly due to the higher interest cost on loans taken by Tata Tea to fund its acquisitions. ITC and Dabur faced lower interest charges. However, with the sale of Glaceau, Tata Tea has surplus cash to repay its debt, which would reduce its interest costs going forward.

To conclude...
With the per capita income increasing and the high-income households figure going up, the demand is likely to continue. The companies have surplus cash and hence the rising interest rates would affect them in a small way. Hence, strong free cash flow generation, high return on capital employed (RoCE) and a robust growth outlook, the sector looks attractive.

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