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FMCG: Zero to Hero! - Views on News from Equitymaster
 
 
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  • Sep 28, 2005

    FMCG: Zero to Hero!

    We were all witness to last week's mayhem on the stock markets, as the indices fell like ninepins and investors suffered heartburns. However, the only index to be spared and the sole gainer during the week was the FMCG index (up 3%). Of course, ITC had played a big role in helping this index to gain ground by virtue of its high weightage in the BSE FMCG Index. Nonetheless, we continue to believe that for a stable portfolio, inclusion of FMCG stocks is inevitable. In this article, we talk about the FMCG sector and what has made it the darling of the markets. It must be noted that the FMCG index had been underperforming the benchmark indices since a couple of years.

    What's the growth driver?
    Growth in the FMCG sector is being witnessed in urban as well as rural areas. It must be noted that 70% of Indian population lives in 627,000 villages, creating a huge market for FMCG companies and a market which they cannot afford to overlook. India's two largest companies, ITC and HIND. UNILEVER, have already set shops for their rural patrons.

    ITC, which commands about 70% of India's Rs 120 bn domestic cigarette market, has 6 out of the top 10 brands in India coming from the company's stable. However, the growing awareness on harmful effects of tobacco as well as the government's punitive tax policy forced ITC to move towards de-risking its revenue profile. Consequently, it merged the paperboards subsidiary with itself and invested in growing the hospitality, retailing, packaged foods and IT businesses.

    The ITC group has emerged as the second biggest luxury hotel chain after Indian Hotels. In packaged foods, its product range includes ready to eat (Kitchens of India), staples (Aashirvaad Atta and Salt), confectionery (Mint-O and Candyman) and biscuits. ITC has also entered into garment retailing and has 42 Wills Lifestyle stores. Other initiatives include greeting cards (20% market share), safety matches and incense sticks.

    On the other hand, HLL is India's largest FMCG company with a dominant presence in almost all consumer categories. The company's turnover at Rs 100 bn is over one third of the total branded/organized FMCG business in India. HLL's brand equity remains unrivalled in India. In the last couple of years, HLL has embarked on a major restructuring exercise focusing on improvement in quality of earnings, pruning brand portfolio and securing a viable future for its non-core businesses through JVs or spin-offs.

    Latent demand?
      Mkt size (Rs bn) Per-capita
    (US)
    Per-capita
    (others)
    Per-capita
    (INDIA)
    Per-capita
    (excluding BPL) India
    Tobacco (Cigarette sticks) 142 2,082 1,790 117 189
    Toothpaste (gms) 26 518 262 107 173
    Personal Products(gms) 40 1,475 1,100 460 742
    Detergents(kgs) 45 10 2.0 2.5 4.0
    Bread and Biscuits(kgs) 80 4 0.8 0.5 0.8
    * Source : Newspapers/Equitymaster Research

    As can be seen from the table above, per capita consumption in India for every FMCG product is amongst the lowest in the world, even after eliminating Below Poverty Line (BPL) people who account for 38% of the country's total population.Hence, one can compare our consumption as against USA or even countries like Thailand or China and a back of the hand calculation will tell you all.

    What's the scene like now?
    Today, the FMCG sector is the fourth largest sector in the Indian economy with an estimated total market size of around Rs 450 bn. Further, the growth potential for all the FMCG companies is huge as the per capita consumption of almost all products in the country is amongst the lowest in the world. Further, if these companies can change consumer's mindset and offer new generation products, they would be able to generate higher growth. For example, Indian consumers used to wear non-branded clothes for years, but today, clothes of different brands are available and the same consumers are willing to pay almost 5 times more for branded quality clothes. It's the quality and innovation of products, which is really driving many sectors.

    So what should investors do now?
    In our view, testing times for the FMCG sector are over and rural penetration is the key, which is currently extremely low, as venturing into these markets is an expensive affair owing to infrastructure constraints, thus making distribution a barrier. Although companies like HLL and ITC have started Project Shakti and E-choupal respectively, but have not been able to tap the rural market significantly. Owing to the vast growth potential of the sector, companies like Reliance have also decided to jump onto the bandwagon and open retail chains. All these developments come as no surprise. With 12.2% of the world population living in the villages of India, the Indian rural market is a market that is hard to miss.

     

     

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    Aug 22, 2017 11:49 AM

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