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Consumer downgrading to haunt FMCG

Sep 25, 2000

As this quarter comes to a close on September 30, 2000 all eyes will be on how corporate India has preformed over this period. There will even keener performance appraisal of the fast moving consumer goods sector (FMCG). FMCG is historically considered to be a ‘defensive’ sector. In the current turmoil the markets and the economy are in, the investors’ might once again look at FMCG for refuge. Almost all of the top 10 FMCG companies have reported an improved growth in the last quarter (quarter ended March 2000), both year-on-year as well as over the quarter ended March 2000. The only problem area seems to be slower growth in turnover especially for Hindustan Lever (HLL), whose turnover is approximately 60% of the total turnover of these 10 companies. The net profit growth is encouraging when you see it year on year but if you compare it with quarter ended March 2000, net profit for most of these companies has shown a degrowth. It must be noted however, that the FMCG business is seasonal and as such the quarter on quarter comparison cannot be taken at face value.

  Sales
Company Mar-00 Jun-00 q-o-q change y-o-y change
HLL 26,141 28,797 10.2% 4.6%
Nestle 3,480 4,198 20.6% 15.4%
Cadbury 1,393 1,071 -23.1% 13.4%
Colgate 2,927 2,948 0.7% 2.4%
Britannia 3,068 3,320 8.2% 15.8%
Tata Tea 2,443 1,925 -21.2% -9.9%
Reckitt 1,363 1,427 4.7% 10.6%
P&G 1,341 1,308 -2.5% 13.0%
Smithkline Beecham 1,726 1,805 4.6% 28.9%
Indian Shaving 522 828 58.6% 42.7%

  Net Profit
Company Mar-00 Jun-00 q-o-q change y-o-y change
HLL 2,626 2,867 9.2% 26.4%
Nestle 281 371 32.0% 30.2%
Cadbury 105 86 -18.1% 88.4%
Colgate 164 134 -18.3% 10.7%
Britannia 154 142 -7.8% 27.4%
Tata Tea 198 386 94.9% 48.1%
Reckitt 67 83 23.7% 32.2%
P&G 207 174 -16.1% 29.2%
Smithkline Beecham 227 278 22.5% 40.7%
Indian Shaving 37 51 37.3% 9.2%

It is widely believed that the FMCG sector is not affected much by inflation as the consumers continue buying essentials. But the slow growth in turnover and declining margins should be a cause for concern in the coming quarter. Rising oil prices raise the prospects of higher inflation. This is likely to force consumers to downgrade their preferences, which in turn will put pressure on their margins.

Company P/e Ratio
HLL 44.7
Nestle 48.7
Cadbury 37.2
Colgate 42.0
Britannia 37.0
Tata Tea 10.0
Reckitt 68.2
P&G 19.5
Smithkline Beecham 18.6
Indian Shaving 52.6

The P/e valuations for all these companies (barring Tata Tea, P&G and SmithKline Beecham Consumer) are in excess of 35 times their FY2000 earnings. Historically, the P/e ratios of these companies have ranged between 35-50 times their earnings. So, the sector on the whole doesn’t look under valued, especially if you take into consideration the prospects of consumer downgrading and pressure on margins.

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