FMCG: Monsoons the key... - Views on News from Equitymaster

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FMCG: Monsoons the key...

Sep 19, 2003

Monsoons were bad during the last 3-4 years. In fact the country witnessed a drought like situation in 2002. This put pressure on sales in case of FMCG products. The companies resorted to cutting prices in order to increase their sales and hence market share, thereby impacting their bottomline. Monsoons for the current year have been normal. Is it a good sign for the FMCG sector? Will the sector witness renewed interest? From the graph below we find that agricultural growth plays an important role in the FMCG industry. One of the major reasons for this is that any increase in agricultural income, when 70% of the population is dependent on agricultural growth, directly increases spending power of people in rural areas. This increase in spending power is reflected in an increase in demand for consumer non-durable products leading to healthy growth in volumes of companies in the FMCG sector. This becomes clear when one looks at the sales of FMCG majors coming from rural areas. HLL has about 50% of its revenues coming from rural India. However currently the FMCG majors are facing stagnant growth as the urban and semi urban population are preferring consumer durables rather than upgrading their choice in case of non-durables.

Thus now it becomes clear that as agriculture did not post robust growth (barring FY02) in the last few years, it put pressure on the demand front. The companies in an attempt to increase its market share, in an increasingly competitive scenario, resorted to cutting prices and giving discounts to the consumers. This put pressure on the margins and consequently affecting their profitability. However, the downturn in the last couple of years has forced companies to look inwards and analyse their core competencies and strategies. Most companies have more or less decided to do away with non-profitable products or brands. Product rationalisation has become one effective cost control tool (HLL has a core portfolio of 30 brands). The effect of this product portfolio restructuring is already visible in case of FMCG major HLL.

Now that the monsoons have been better than normal in the current year, the agricultural sector is expected to post a robust growth in the current year. This is a good sign for the FMCG sector. The effect would however be seen with some lag. This apart, the restructuring of the portfolio of the core brands is also expected to bear fruits for companies in the long-term. Also, given the fact that, per capita consumption of most categories in FMCG products is still low as compared to developed countries, the Indian FMCG sector offers good growth opportunities. This, backed by the infrastructure initiatives, as the economy develops and the living standards rise, the sector is likely to be one of the key beneficiaries of economic growth. As per NCAER estimates, the ratio of the consuming class to total households will touch 46% by FY07 (17.4% in FY95).

From an investor's point of view, Indian FMCG companies do offer long-term growth opportunities given the low penetration and usage in most product categories. To choose the best investment opportunities look at the shapers (i.e. innovators) that have been constantly proactive to market needs and have built strong, efficient and intelligent distribution channels. Management vision to growth is the key, as consumers going forward are likely to become even more sophisticated in their demand.

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