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FMCG: A retrospect

Oct 5, 2002

The FMCG sector is facing one of the toughest market conditions currently. Economic slowdown, bad monsoon and consequently, consumer down trading have taken a toll on companies. To gauge the extent of difficulty, let’s take a look at the first half of 2002 (January – June, 2002). To understand what’s happened during this period, we separated the FMCG sector into two groups, food processing companies and consumer product companies and took a sample for each of the groups.

Food companies
For representing this group, we analysed the performance of Britannia, Cadbury, Glaxo SmithKline Consumer (SBCH), Nestle and Tata Tea. This group saw its consolidated topline grow by a marginal 3% during January – June 2002, but finished with bottomline growth of 55% aided by huge extraordinary income. Excluding the extraordinary income, bottomline would have been only 6%.

(Rs m)Jan-June 2001Jan-June 2002Change
Net Sales26,80027,5572.8%
Other Income51157312.2%
Expenditure22,88423,3131.9%
Operating Profit (EBDIT)3,9164,2448.4%
Operating Profit Margin (%)14.6%15.4% 
Interest 269225-16.1%
Depreciation59467613.9%
Profit before Tax3,5643,9169.9%
Exceptional items-841,064-
Tax1,1261,33518.5%
Profit after Tax/(Loss)2,3553,64654.8%
Net profit margin (%)8.8%13.2% 
No. of Shares (eoy) (m)261.7260.7 
Diluted Earnings per share*18.028.0 
*(annualised)   
Current P/e ratio 14.7 

The performance really underlines what these companies are facing in the market. Though, within this group companies like Nestle outperformed the sector with an encouraging 13% topline and 42% bottomline growth, the overall performance was staid owing to bad results by companies like SBCH and Tata Tea. SBCH seemed to have gone in for an inventory correction and consequently its performance was affected.

Despite the perceptible negatives in this performance, there were some encouraging aspects too. For one, the operating margins improved indicating that companies have tried to become cost efficient. Also, reduction in interest burden suggested that companies have taken advantage of lower interest rates and have restructured their debt. Though depreciation provisioning was higher, it was a positive in the sense that it indicated addition to the companies’ assets and therefore their faith in the future prospects of the sector.

Consumer Product companies
For this group, we took 7 major companies, namely Colgate, Dabur, Gillette, Hindustan Lever (HLL), Marico, P&G Hygiene & Healthcare and Reckitt Benckiser India. The group’s topline declined by over 8% YoY, indicating that this segment has been the worst hit in the FMCG spectrum. However, this sector’s bottomline growth was better at over 11% (excluding extraordinary income). This segment too saw a marginal dip in interest burden and higher depreciation provisioning.

Over 71% of this group’s topline came from HLL, which was amongst the worst hit in the sector. However, even when we excluded HLL from the group, the topline declined by nearly 6%, which indicates an overall tough market environment. However, at the operating level the consumer product group suffered, excluding HLL. Operating margins dipped marginally and the group finished with a 5% decline at the profit before tax and extraordinary item level. This again indicates that though HLL’s performance affected the topline of the group adversely, at the operating level, HLL’s performance was very encouraging and it outpaced the sample group.

(Rs m)Jan-June 2001Jan-June 2002Change
Net Sales77,28470,850-8.3%
Other Income2,3282,233-4.1%
Expenditure67,81260,175-11.3%
Operating Profit (EBDIT)9,47210,67512.7%
Operating Profit Margin (%)12.3%15.1% 
Interest 213212-0.4%
Depreciation1,2611,2922.4%
Profit before Tax10,32611,40410.4%
Exceptional items1,6591,189-28.3%
Tax2,4502,6538.3%
Profit after Tax/(Loss)9,5359,9404.2%
Net profit margin (%)12.3%14.0% 
No. of Shares (eoy) (m)2,723.42,724.0 
Diluted Earnings per share*7.07.3 
*(annualised)   
Current P/e ratio  22.0  

Going forward…
With the monsoon playing spoilsport, the CMIE expects 12% fall in ‘kharif’ output YoY and a marginal 2% growth in the ‘rabi’ crop. Overall, agricultural output in FY03 is likely to finish with a 6% dip. This indicates even tougher times for the FMCG sector. The consumer product segment is likely to be worst hit, owing to the higher rural dependence. The August retail sales data report suggest that consumer product companies are facing tough market conditions and food-processing companies are faring somewhat better. Food processing companies have largely an urban focus and as such may not be as deeply affected as the consumer product segments.

Valuations…
The valuations of most FMCG companies have taken a beating mirroring the downturn. The stock prices of most companies considered in the sample are trading near their 52-week lows. At one time, the FMCG companies used to get valuations in the range of 25x-40x earnings. But currently, the 2 sample groups are trading at average valuations of 15x and 22x annualised first half 2002 earnings.

 CMP (Rs)52 week H/LP/E
Colgate133177 / 12926.0
Dabur4681 / 4320.5
Gillette300440 / 250-
HLL170266 / 16324.3
Marico160175 / 88.59.4
P&G Hygiene416522 / 38911.6
Reckitt*243257 / 13937.4
 CMP (Rs)52 week H/LP/E
Britannia528641 / 50021.3
Cadbury*494500 / 30529.6
Glaxo SmithKline Consumer270419 / 2649.7
Nestle565580 / 47031.5
Tata Tea154217 / 12012.1
* Mgt. plans to delist company
**P/E based on FY02 earnings

However, despite the short-term concerns, the FMCG sector in India has growth potential in the long term. Per capita consumption for most products is very low when compared globally. Going forward, with the improvement in the economic environment the industry is likely to bounce back.

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