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FMCG midcaps: Feel good

Aug 21, 2007

Earlier we had analysed the performance of the FMCG biggies for the June quarter. In this article, we have highlighted the performance of the smaller FMCG players namely Marico, Colgate, Godrej Consumers (GCPL) and GSK Consumer. FMCG midcap companies' results for the June quarter have been stronger in comparison to the large caps for the same quarter. The consolidated topline (4 companies combined) grew by over 20% YoY, faster than the topline growth of the larger peers.

Rs m June07 June08 % change
Net sales 11,880 14,217 19.7%
Expenditure 10,033 11,856 18.2%
Operating profit (EBDITA) 1,847 2,360 27.8%
EBDITA margin (%) 15.5% 16.6%  
Other income 309 396 28.2%
Interest 77 120 55.8%
Depreciation 285 255 -10.5%
Profit before tax 1,793 2,381 32.8%
Tax 494 561 13.6%
Profit after tax/(loss) 1,300 1,820 40.0%
Net profit margin (%) 10.9% 12.8%

India has continued to reach new heights in the economic sphere. Real economy grew by 8% fuelled by strong growth in the service and manufacturing sectors. Besides more and more consumers willing to buy new products, with a strong job scenario, the disposable incomes are also on a rise. The smaller players are more focused on the urban areas as compared to biggies of the sector, which have a greater penetration even in the rural areas. FMCG markets both in the rural and urban areas witnessed strong growth with growth being seen in both food and non-food products.

Another trend, which was visible, was the "Feel Good" categories of products doing well. Hair care, skin care products witnessed higher volumes. Colgate reported a 13% YoY growth in the topline during 1QFY08. The company achieved a strong 9% YoY volume increase led by a 10% growth in its core toothpaste category. In case of Marico, the focus segment of the hair-care range (Parachute Jasmine, Shanti Amla Badam, and Hair & Care) grew by 20% in volume terms (excluding Nihar) for the June quarter, while Kaya Skin care recorded 31% YoY growth. Also, healthy foods are in demand owing to urban consumers getting more conscious about their well being and hence demanding nutritious products. Marico's strategy to promote Saffola on a health consciousness platform paid off with its franchise growing by 28% YoY in volume terms. GSK Consumer reported a topline growth of 18% YoY for the quarter, with its flagship brands growing by 18% in value terms. Further the strong growth in the topline was also witnessed due to contribution from acquisitions and international ventures.

The beauty and the wellness segment would continue to be the future driver. Increasing awareness and expectations, rising incomes, willingness to spend and a variety of new products offered by the companies would led to the strong growth in this segment. The small FMCG players are planning to launch higher end products to capture more market share.

The smaller players also witnessed a rise in operating margins as they offered high end products. For instance, Godrej Consumer Products introduced the Keyline product in India and expects to get more products in the coming quarters. Also, the ad spend in this quarter was lesser as phasing was done by the companies. Godrej Consumer Products reported the biggest reduction of 15.7% in advertising and sales promotions expenditure while Marico, reduced spends by 10%. However, going forward the ad spends are expected to rise, as new products are likely to be introduced over the coming quarters.

Higher operating income, lower depreciation charges and tax expenses led to the bottomline growth of 40% YoY in the quarter, thus outpacing the growth in net profits of their larger peers (up 23% YoY).

Looking ahead...
The personal care segment would continue its growth trend with newer, higher end products hitting the shelf in the coming quarters. Growth in the FMCG sector is expected to remain vibrant. Also, we believe that the small players would increase their penetration in the rural areas. As per industry estimates, the total size of the domestic FMCG market in volume terms is US$ 15 bn, of which US$ 7.9 bn come from rural areas, US$ 2.9 bn from the semi-urban markets, while the metros and other cities contribute US$ 4.2 bn. The FMCG market in the rural and semi-urban regions is likely to grow at a faster pace in the next three years.

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