Will FMCG move fast in FY06? - Views on News from Equitymaster

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Will FMCG move fast in FY06?

Jun 15, 2005

The results season is over with Tata Tea being the last one to come out with its numbers a few days back. We decided to take the top 5 FMCG companies under our coverage and compare its performance against that of last years. The five companies include HLL, ITC, Nestle, Britannia and Tata Tea.

(Rs m)20042005Change
Net Sales 232,493 245,859 5.7%
Expenditure178,390 191,8377.5%
Operating Profit (EBDIT)54,103 54,022 -0.1%
Operating Profit Margin (%)23.3%22.0% 
Other Income4,037 4,218 4.5%
Interest 1,867 1,727 -7.5%
Depreciation5,136 5,798 12.9%
Profit before Tax51,137 50,715 -0.8%
Tax14,544 14,420 -0.9%
Profit after Tax36,593 36,295 -0.8%
Net profit margin (%)15.7%14.8% 
Effective tax rate (%)28.4%28.4% 
*HLL and Nestle follow the calendar year

What does the report card say?
The consolidated topline has grown at an unenthusing 6% YoY inspite of the FMCG sector on the path to revival, indicating that smaller companies have benefited more from the increase of share of consumers wallet. Expenditure has gone up more in proportion to sales, indicating higher input costs (mainly due to commodity prices) and inability to pass on the entire burden to consumers. This has resulted in operating margins declining by 130 basis points. Depreciation increased by around 13% YoY, mainly because of ITC's hotels expansion (30 % YoY increase). Interest burden has gone down by 8% YoY, mainly due to HLL re-deeming its debentures to the tune of Rs 300 m and the overall softness in interest rates.

A combination of these factors resulted in a marginal fall in profits. However, if one were to exclude HLL's performance during the quarter, net profit has actually risen (HLL reported a fall of 32% YoY decline in its bottomline). We will soon be analyzing the results of 5 other smaller companies and compare their performance with these larger ones.

What to expect?
The FMCG sector, which had been under performing some time ago, is on the path to recovery, with acceleration in rural growth and higher consumer share of wallet. As per the latest HLL annual report, 70% of India's population lives in 627,000 villages, creating a huge market for FMCG companies. As per NCAER estimates, consuming class will touch nearly 50% by FY08 and much of this growth will come in the rural hinterland. With infrastructure push continuing along the length and breadth of the country, rural India seems the place to be, especially for the FMCG majors.Despite this, per capita consumption in all FMCG segments is considerably lower in India than other developing countries, thus indicating a huge growth potential. With the modern retail sector opening up, FMCG companies are sure to benefit. Although, currently only 4% of industry sales are through this venture, going forward this figure could rise appreciably.

Also, commodity prices are softening and will further decline in time to come, resulting in margin expansion for FMCG companies.

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