X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Is Data Pointing Towards a Revival in the FMCG Sector? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  
  • Home
  • Outlook Arena
  • Jun 8, 2018 - Is Data Pointing Towards a Revival in the FMCG Sector?

Is Data Pointing Towards a Revival in the FMCG Sector?

Jun 8, 2018

The investment fraternity is focused on the consumption theme. And going by the recent quarterly results, they have got their call right. Most consumption theme-based companies have performed well and have delivered good results.

Consumption theme is much broader in space and includes a wide variety of sectors. Some of them are non-banking financial companies lending for consumption, automobiles, consumer durables, textiles, paints, media and entertainment, leisure, pharmaceuticals, power, telecom and other utilities. However, Fast Moving Consumer Goods (FMCG) companies make up a chunk of these consumption themed stocks. And that's what we are going to focus on today...

The FMCG sector has seen a significant turnaround this year after turning in below par growth for the two last years. Two years of deficient monsoon and unprecedented events like demonetisation and GST had bruised the sector.

The scenario has now changed. The pains of demonetisation and GST implementation have receded and the benefits of GST are kicking in.

--- Advertisement ---
A Proven Way To Potentially Make Money Even In Sluggish Markets

We often come across phases where there's not much happening in the stock market.

Most investors would take such phases in their stride thinking that sluggish and down phases are a part and parcel of the stock market.

But research analyst Apurva Sheth found that banks and insurance companies were using a secret method that enabled them to generate solid gains even when the markets (or individual stocks) were doing almost nothing.

Yes! To find out all about that secret method, just click here...
------------------------------

FMCG Sector - A Star Performer

The data makes interesting reading. The sector stood at the second position in a six-month time frame. FMCG stocks haven't been in such a dominant position recently.

Sector Indices - Six Month Return vs Over 3 Years (%)

This begs the question, will the FMCG sector continue to dominate in the weeks to come? Here are some of the factors that bode well for the FMCG space, going forward.

Stellar Q4 Results

From Colgate to ITC, Nestle, Britannia and Hindustan Unilever (HUL), all have reported street-beating earnings for the fourth quarter.

FMCG Companies Signal Green Shoots of Recovery

Note that, net sales of the top FMCG companies dropped in the December 2016 quarter due to demonetisation. Similarly, the drop in September 2017 quarter was due to GST implementation woes.

However, despite these twin blows, the sector has shown remarkable resilience and sales seem to be reviving.

And it's not just sales numbers that are doing well. FMCG companies have not only retained strong profit margins, but have improved on it over the year.

In FY18, ITC, P&G, Nestle and HUL reported healthy growth in net profit.

PAT Grows Too

Rural Segment is Quickly Catching Up

The stellar quarterly performance is mainly driven by a revival in rural demand and new product launches.

And when it comes to the FMCG space, revival in rural market demand is what everyone is talking about these days. Growth in the rural segment, which contributes a significant chunk of the FMCG revenue, had slowed down due to demonetisation followed by GST.

In rural India, the income of the consumers is increasing and the lifestyles are changing. The rural FMCG market accounts for 40% (on average) of the overall FMCG market in India, in revenue terms.

According to an India Brand Equity Foundation (IBEF) report, among the leading retailers, Dabur generates over 40-45% of its domestic revenue from rural sales on an average. HUL's rural revenue accounts for 45% of its overall sales while other companies earn 30-35% of their revenues from rural areas.

Further as per the report, the FMCG market has grown at a faster pace in rural India compared to urban India in the last few years. And, FMCG products account for majority of total rural spending.

Rural FMCG Market on Fast Track

4QFY18 saw a pick-up in rural demand, however, companies are in wait and watch mode before calling it a recovery trend. Volume growth (aided by demand pick-up and GST rate cut in November), benign raw material inflation and focus on operating efficiencies were the key themes of the quarter gone by.

The growth in rural India may be a combination of trade channel normalisation, as one-off demonetisation/GST-type events fade, and an expectation of good rainfall and Minimum Support Price (MSP) increase. However, the rural macro indicators have remained muted as wage growth has been subdued and on declining trend since April 2017.

The Rural Drought Seems to have Ended for FMCG Firms

It is only now that the pain of demonetisation, GST, and deficient monsoons seems to be ebbing away.

Demonetisation and GST implementation had disrupted trade channels, particularly the wholesale channel, which is the backbone of the rural distribution channel.

Post the dent in the distribution channels post GST implementation, FMCG companies are now focusing on reducing their wholesale dependence and increase their direct reach. Further, the smooth movement of products in GST regime has also helped the companies in improving their direct reach, even in rural areas.

Further, anti-profiteering measures restricted any major benefits to companies so far as the full benefits of GST rates were to be passed on to consumers. However, this has improved the affordability of several daily use products, leading to a marked uptick in FMCG volumes.

Moreover, companies started signaling some green shoots for the recovery of the rural market in the quarter.

The rural growth revival was reflected in the earnings of the country's largest consumer goods firm, HUL. This uptick in sales was prompted by a cut in GST rates across various daily use product categories such as detergents, skincare, shampoo, noodles, etc., leading to growth in volumes.

Robust Rural FMCG Growth

Overall, FMCG companies grew sales at 13.5% in the year ended 31 March, the fastest pace in last three years. The growth was led by volume growth, which rose 9.1%, or almost 2.5-3 percentage points faster than the previous two years.

Hence, prospects of the FMCG sector look positive given the rural demand revival, GST benefits, product differentiations/innovations, and premiumisation (especially by launching premium products in affordable packs for uptrading).

Moreover, companies with a higher exposure to rural markets can surprise on the growth front.

However, a full recovery is still awaited, and other indicators point to areas of unresolved stress.

Growth in rural wages, for instance, dropped to 3.1% this January, down from 6.6% a year ago. Rising oil prices could lead to inflationary trends affecting the pricing power of FMCG firms. What's more, a below average monsoon can wash away all dreams of revival.

Nevertheless, India's FMCG sector is at an interesting crossroads.

Will the rural consumption theme pan out as expected? Or could external factors delay the long-awaited revival?

We'll be sure to be right on top of it as it pans out.

Warm regards,
Rini Mehta

Rini Mehta

Rini Mehta is a keen follower of the stock markets and economy. At Equitymaster, she covers daily stock market moves and broader market trends across Indian and global markets.


Equitymaster requests your view! Post a comment on "Is Data Pointing Towards a Revival in the FMCG Sector?". Click here!

  

More Views on News

Key Findings From The Launch Of Aditya Birla Sun Life Retirement Fund! (Outside View)

Mar 25, 2019

PeronalfN highlights reasons of increase in the number of people planning their retirement through ABSL NFO press launch update.

How To Improve Your Return On Investments? (Outside View)

Mar 25, 2019

PersonalFN explains about the returns on investment and real returns.

FIIs or DIIs? Who Should You Follow? (Profit Hunter)

Mar 25, 2019

Foreign investors are buying into India, while domestic investors are dumping stocks. Who do you follow? Read on for insights...

What Is This Rare Opportunity Trending In Indian Bond Markets? (Outside View)

Mar 25, 2019

Currently there is an interesting observation about the yield trend in the Indian bond markets. This article talks about unusual bond yield deviations.

These 5 Factors Are Favouring the Bulls Right Now (The 5 Minute Wrapup)

Mar 25, 2019

The month of March is signaling the return of the bulls. But will the uptrend sustain?

More Views on News

Most Popular

My Top 3 Defence Stocks to Buy Now(The 5 Minute Wrapup)

Mar 19, 2019

The urgency to privatise India's defence sector to make India self-reliant was never as strong as it is today.

5 Fundamentally Strong Stocks to Pick for Trading Today(Profit Hunter)

Mar 15, 2019

5 fundamentally strong stocks one could buy to trade in this market right now. Make sure you grab the chance this strongly rallying market offers.

This Small Cap Stock Could Offer Triple Digit Gains from its Current Price(Profit Hunter)

Mar 19, 2019

If you are still waiting for signals, remember, there is no correct timing, only right time to Buy stocks. For select small caps, that time is now.

Elections Don't Matter!(The Honest Truth)

Mar 13, 2019

Ajit Dayal shows us why from the point of view of the Indian economy, elections don't matter.

Two Growth Stocks that Doubled in a Little Over 12 Months!(The 5 Minute Wrapup)

Mar 13, 2019

The elements that fueled profit growth for these two companies led to a surge in their stock prices.

More

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Mar 25, 2019 03:11 PM

MARKET STATS