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FMCG: The story continues...

Oct 16, 2006

With results around the corner, lets us analyse some key factors that are at the helm in driving growth for companies in the FMCG sector, and also take a look at the challenges that can impact the overall growth momentum. Macro story - no change: Powerful factors at play such as favorable demographics, rising incomes and outsourcing will help sustain the growth momentum in this sector. India is at a very favourable position in terms of demographic cycle, income as well as age. Rising consumption due to rapidly growing incomes for a major part of the workforce has led to a retail boom. Supporting this are trends in retail lending, which has benefited sectors such as housing and automobiles. Given that the key drivers like the investment cycle upturn, strong trends in consumption and outsourcing, and a increased focus on the rural sector are intact, we believe that growth is on the right track.

Robust demand: Over the past 8 quarters, sales growth for the sector has gained momentum. The managements of the FMCG companies expect the growth rate to be sustained in the ensuing quarters. While the urban demand will remain stable, a sharp pick up in the rural demand will fuel the growth. The expanding distribution network coupled with the higher number of product variants will help increase the volume growth.

Beyond soaps, tea: Indian consumer goods firms are looking beyond their traditional strongholds in packaged tea and soap and tapping emerging trends in health and personal care in search of bigger profits in an increasingly competitive market. Tata Tea, the world's second-biggest branded tea maker, bought 30 % of Energy Brands, which makes Glaceau vitaminwater, for US$ 677 m. Hindustan Lever (HLL) has launched a water purifier and a skin cream for men, while tobacco giant ITC Ltd has rolled out foods and fragrances and is investing more than US$ 1 bn on its rural shops and distribution centres. Marico and Dabur are foraying into areas including men's grooming and ready-to-eat food. New channels of sales, new product categories and new consumer segments are emerging.

Margin pressure: The margins may remain stable due to increase in the input prices. The players in the sector may also face pressure on the packaging front due to higher crude prices. However, the FMCG majors are in a position to hike prices of the products to offset the higher costs.

What to expect?
We expect the strong growth trend to continue in the coming quarters. The players' ability to control the product prices also remains a comforting factor. Overall, we expect the sector as a whole to perform well. However the valuations will remain a cause of concern.

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