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FMCG: What is in store? - Views on News from Equitymaster

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FMCG: What is in store?

Jul 18, 2007

The result season is back! With FMCG companies about to announce their results this week, we review the factors that are expected to impact their performance in the coming quarters. Most categories in the FMCG space are expected to grow at a steady rate led by strong consumer demand and low levels of penetration in India and better lifestyle.'Feel Good' factor: India's GDP continued to grow at more than 8% in the last 3 years. This growth of the Indian economy has led to per capita personal disposable incomes growing at 13% (CAGR) in the last 5 years, which in turn has led to creation of consumption demand. The Indian FMCG industry has been witnessing a strong growth in volume across its categories like shampoo, biscuits and skin care. The FMCG sales grew from Rs 585 bn in 2005 to Rs 713 bn in 2006, a growth of 22%. We believe that the growth will continue. Rising disposable income, buoyant economy, new product launches and better rural penetration will aid FMCG companies in posting strong growth for the coming quarters as well. Price hikes and inorganic growth would lead to better performance of the companies.

Also, the inter-linkages between the rural and urban economy are increasing and are driving a structural improvement in the economy. Accelerating IT and ITES-led job creation is driving the demand for milk and fruits and vegetables, raising rural incomes. This is expected to be a major driver for a strong topline growth in the FMCG sector over the next decade. The FMCG companies have to utilize this potential to enhance their profit margins.

Also, rural India's dependence on monsoon (due to irrigation facilities) has reduced. Around half of the rural GDP is derived from non-agricultural activities. This has boosted the rural incomes, which in turn has led to higher demand and increased penetration. In recent times, rural sales have been growing at a faster rate than in the urban areas. The bottom of the pyramid would be the emerging opportunity for the players.

The food processing industry in India is estimated at Rs 4,600 bn, with a mere 5% held by the organised sector. This segment is expected to touch Rs 13,500 bn by 2015. Awareness of the health and wellness platforms, increase in women work force and changing lifestyle would fuel the growth of this segment. Recognising this as a tremendous opportunity, a number of FMCG majors are entering the space. While Dabur has decided to merger Dabur Foods with itself, HUL and ITC are too investing heavily in this space. This would be a growth driver going forward.

Margin front: Rising inputs cost would remain a cause of concern for the FMCG companies. The price of palm oil has risen by around 35% over the past six months owing to demand for bio-fuels. HUL and Godrej Consumers (soap players) would get impacted to some extent. Prices of copra have also increased thereby affecting the hair oil major, Marico. Wheat prices too have been on the uptrend, thereby affecting biscuit players like Britannia and ITC. However, the FMCG players have taken selective price hikes or rationalised the packet sizes to offset the rising input costs. Also, due to rising incomes, the price hikes would not impact the volume sales.

What to expect?

We expect the feel good factor would continue in this quarter. Further, a good monsoon this year would have a favourable impact on the sector driving higher rural consumption. The higher penetration and demand for value added products would help performance of the sector.


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