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FMCG: What should you do? - Views on News from Equitymaster
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  • Aug 10, 2004

    FMCG: What should you do?

    The FMCG sector is not among the top picks if one were to go by the market buzz. However, if one looks at it, the Sensex fell by nearly 16% during the quarter, and the BSE FMCG index fell by a lesser 14%. To that extent, one can say that investment in the FMCG sector would have proved to be better as compared to investment in the Sensex as a whole.

    The June quarter was a mixture for the sector. As per the data of companies under our universe, the FMCG sector as a whole grew by nearly 7% in revenues during June quarter 2004, but overall bottomline fell by 7% YoY during the period. But there is much behind these simple numbers. Let's have a look.

    If we separate the consumer products companies from the food focused ones, it is apparent that the former has underperformed as a sector. The topline of consumer product companies grew marginally (3%), but profits fell by nearly 28% during the quarter. But within the consumer products category, Hindustan Lever's (HLL's) poor performance had a key bearing. HLL's topline declined by 4.5% during the quarter and profits fell by a significant 43% YoY. The company accounted for 56% of the consumer product segment revenues and about 58% of its profits. If we exclude HLL's numbers, the segment reported over 13% topline and over 15% bottomline growth.

    Consumer Product companies: HLL woes
    (Rs m) June Q '03 June Q '04 YoY change  
    Company Net Sales  PAT  Net Sales  PAT  Net Sales  PAT  P/E* (x)
     Camlin 539 19 584 17 8.3% -10.5% 9.0
     Colgate 2,271 207 2,427 255 6.9% 23.2% 17.0
     Dabur 2,825 106 3,444 215 21.9% 102.8% 21.5
     Godrej Consumer 1,190 138 1,366 173 14.8% 25.4% 17.2
     HLL 26,934 4,510 25,716 2,564 -4.5% -43.1% 16.7
     Henkel Spic 882 14 1,029 7 16.7% -50.0% 44.4
     Gillette 953 188 1,001 191 5.0% 1.6% 30.8
     Marico 2,092 142 2,439 169 16.6% 19.0% 10.7
     Nirma 5,720 600 6,348 607 11.0% 1.2% 8.6
     Pidilite 1,661 211 1,923 240 15.8% 13.7% 10.7
    Sector Aggregate 45,067 6,135 46,277 4,438 2.7% -27.7%  
    Excluding HLL 18,133 1,625 20,561 1,874 13.4% 15.3%  
    * Trailing 12 months earnings

    Others within the sector, like Colgate, Dabur, Godrej Consumer, Marico and Pidilite performed better. While Colgate reported value growth in its topline (for the first time over the past 4 quarters), its bottomline grew strongly led by operating margin gains. Dabur, Marico, Godrej Consumer and Pidilite, all grew strongly both in topline and bottomline terms (double digit growth). The thing to note here is that all the four companies are more or less focused companies i.e. have offerings in limited space. All have grown playing to their strengths and growing their existing folio. Operating efficiencies too, have helped.

    Overall, the consumer product companies accounted for 52% of the FMCG sample's revenues, but only 41% of its profits, indicating pressure on profitability (led by HLL). Excluding HLL, the consumer product companies accounted for 23% of overall revenues and only 17% of profits, thus indicating that pressure on profitability is not only on HLL, but is a sector phenomenon.

    The food based companies performed better than the consumer product companies, atleast in terms of profit growth. The segment's topline grew by 11% but profits were up an encouraging 16% YoY during the quarter. Within this, tobacco major, ITC, accounted for 41% of revenues and a significant 72% of profits. Excluding ITC, the segment's performance pales, with revenues up only 4% and over 14% bottomline growth.

    Food based companies: ITC led
    (Rs m) June Q '03 June Q '04 YoY change  
    Company Net Sales  PAT  Net Sales  PAT  Net Sales  PAT  P/E* (x)
    AFT Industries 151 -33 109 -11 -27.8% N.A. -5.2
    Assam Co. 207 -34 169 -43 -18.4% N.A. 1.9
    Britannia 3,369 286 3,947 600 17.2% 109.8% 9.7
    Goodricke 336 7 322 67 -4.2% 857.1% 13.0
    Agro Tech Foods 2,909 7 2,479 21 -14.8% 200.0% 15.4
    ITC 14,289 3,972 17,750 4,620 24.2% 16.3% 15.6
    McDowell 2,572 41 2,990 54 16.3% 31.7% 13.0
    Nestle 5,461 670 5,444 428 -0.3% -36.1% 21.4
    Parry's Confectionery 199 3 226 3 13.6% 0.0% 56.6
    GSK Consumer 1,976 223 2,102 186 6.4% -16.6% 16.8
    Tata Tea 6,794 517 7,070 549 4.1% 6.2% 25.0
    Kingfisher Properties 0 -123 15 -65 N.A. N.A. 3.4
    Sector Aggregate 38,263 5,536 42,623 6,409 11.4% 15.8%  
    Excluding ITC 23,974 1,564 24,873 1,789 3.7% 14.4%  
    Grand Total (Food + Consumer Products) 83,330 11,671 88,900 10,847 6.7% -7.1%  
    * Trailing 12 months earnings

    What to expect?
    It is clear that both the segments (food based and consumer products) are affected by the performance of the two majors, HLL and ITC. While clearly ITC is performing well, HLL is facing intense competition from players like P&G. In foods, another big stalwart, Nestle, has had a tough quarter and it may be a sign of things to come. Mid-cap companies (especially in the consumer product segment) are clearly the outperformers. These companies seem to have taken a leaf out of the bigger companies, and have instituted systems much like their bigger counterparts. They are concentrating on efficiencies and better supply chains. Since they have smaller focused portfolios', they are able to adapt faster to market situations and grow even in a tough environment.

    Going forward however, there is a limit to operating efficiency gains and we expect margin profile to more or less stabilise. Secondly, the other income growth of these companies may be limited. So clearly, one has to keep in mind these factors before taking the plunge in the mid cap companies. But overall, select mid-cap companies have a better growth visibility and their valuations too are attractive. In uncertain times ahead, exposure to this sector may not be such a bad idea.



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