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FMCG: 1QFY07 review - Views on News from Equitymaster
 
 
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  • Aug 18, 2006

    FMCG: 1QFY07 review

    In recent times, India's consumption story, favourable demographics and rising income levels have led to a good performance of the FMCG sector. In this article, we analyse the performance of the larger 5 FMCG companies, viz. HLL, ITC, Nestle, Britannia and Dabur.

    Rs (m) June-06 June-07 Change
    Net sales 65,390 75,725 15.8%
    Expenditure 51,214 59,523 16.2%
    Operating profit (EBDITA) 14,176 16,202 14.3%
    Operating profit margin (%) 21.7% 21.4%
    Other income 1,761 1,879 6.7%
    Interest 115 91 -20.9%
    Depreciation 1,397 1,492 6.8%
    Profit before tax 14,425 16,498 14.4%
    Tax 4,254 4,538 6.7%
    Profit after tax 9,967 11,925 19.6%
    Net profit margin (%) 15.2% 15.7%

    What has driven performance in 1QFY07?
    Volumes drive the topline: According to AC Nielsen, a leading market research agency, the total market for consumer goods grew by 10% QoQ during 2QCY06 (with rural markets witnessing a 14% QoQ growth and urban markets reporting an 8% QoQ growth). Across categories, volume growth was witnessed. The topline in the last quarter of the top 5 FMCG major has grown by 16% YoY with both rural and urban markets contributing to this strong growth. The launches and re-launches have assisted the good volume growth, while an increase in price realisations has resulted in improvement in margins. HLL posted a single-digit growth, while Dabur, Britannia and ITC posted strong double-digit growth. The improved standard of living, increased rural spending and rapid growth in modern retail formats are expected to keep the growth momentum intact going forward.

    Cost pressures remain high: The sector witnessed cost pressures in select product categories and segments. The impact was more pronounced on products that require crude and agri-based raw materials. The industry has already undertaken selective price increases to ward off the impact of rising input costs, which, along with strong volume growth, will enable the sector to protect its margins to a large extent.

    New product launches, brand building increase: The rising sector growth rates have enthused industry leaders to opt for greater advertising and brand building measures. New product and variant launches have witnessed the maximum acceleration recently. HLL, Nestle and Dabur have been at the forefront of launching new products and variants. The new and innovative products have increased brand differentiation and competitive advantage of leading players. FMCG companies have increased advertising costs substantially. This expense assumes importance as we observe companies entering new consumer categories and existing companies trying to protect their respective shares. New entrants and variants will increase consumer interest and expand the product category.

    Robust bottomline: The bottomline of the 5 companies grew by 19.6% YoY. This was mainly due to the lower interest cost and lower tax outgo. Almost all companies have set up units in tax havens like Himachal Pradesh, Uttaranchal and Assam, which offer them a 100% 10-year tax and 5-year excise benefit. However, with the expiry of the 5-year period the tax rate will go up.

    Going ahead...
    We expect this growth trend to sustain in the coming year on the strength of rising per capita incomes, resulting in higher discretionary income in the hands of the consumer. We, however, note that the industry continues to be impacted by severe cost pressures in crude-based materials and agri-commodities. However, strong demand and selective price increases should enable key players to boost profit growth ahead.

     

     

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