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FMCG: Jan-Sep’02 review - Views on News from Equitymaster
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  • Nov 16, 2002

    FMCG: Jan-Sep’02 review

    A couple of months back we had taken stock of the FMCG sector by collating the performance of the top companies for both the food processing companies as well as the consumer product majors. At that time we had analysed the performance for the period January to June 2002. It’s time to go a step further and see what happened in September quarter and what effect it had on overall nine-month period from January to September 2002.

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

    The September quarter proved even worse. The group saw topline growth taper down further to a minuscule 0.5% during this quarter. Operating margins shrunk YoY, and the food majors finished with a 27% decline in net profits. Excluding the extraordinary items, this decline was lower at 11% YoY.

    (Rs m) SepQ'01 SepQ'02 Change Jan-Sep '01 Jan-Sep '02 Change
    Net Sales 15,173 15,246 0.5% 41,973 42,803 2.0%
    Other Income 209 214 2.7% 720 787 9.4%
    Expenditure 12,529 12,640 0.9% 35,413 35,953 1.5%
    Operating Profit (EBDIT) 2,644 2,606 -1.4% 6,559 6,850 4.4%
    Operating Profit Margin (%) 17.4% 17.1%   15.6% 16.0%  
    Interest 140 89 -36.4% 409 314 -23.1%
    Depreciation 333 430 29.1% 927 1,106 19.3%
    Profit before Tax 2,379 2,301 -3.3% 5,944 6,217 4.6%
    Exceptional items 198 -127 -164.0% 114 938 720.2%
    Tax 707 809 14.4% 1,833 2,143 16.9%
    Profit after Tax/(Loss) 1,870 1,365 -27.0% 4,225 5,011 18.6%
    Net profit margin (%) 12.3% 9.0%    10.1% 11.7%   
    No. of Shares (eoy) (m) 261.7 260.5    261.7 260.5   
    Diluted Earnings per share* 28.7 21.0    21.6 25.6   
    Current P/e ratio             15.1   
    M. Cap to sales             1.8   

    As a result of poor September quarter, the food group recorded a lower 2% topline growth during the nine months ended September ‘02 (January – September ‘02). Due to the strong performance in the first half of calendar year 2002, the group managed to improve operating margins YoY, but finished the period with a 1% YoY decline in bottomline (excluding extraordinary income). The sector saved face with a 19% growth in bottomline by including a huge jump in extraordinary income.

    The performance underlines the fact that slowdown has caught up with the food majors. Even Nestle, which outperformed the sector with an encouraging 13% topline and 42% bottomline growth during the first half, saw a 2% dip in topline and only 5% bottomline growth in the September quarter. Tata Tea reported a 2.5% topline growth but net profit declined by 27% during the quarter. SBCH however, recovered after its dismal June quarter and reported 4% topline and 2% bottomline growth.

    However, it must be said that some of the bottomline woes occurred due to internal restructuring. In Nestle’s case it was a one-time hike in staff costs and a write off of its water plant. For Britannia, though topline declined 5% in September quarter, the results were not comparable owing to the hiving off of its dairy business. On a like to like basis, its net sales increased by 7% YoY.

    Despite the perceptible negatives in this performance, the encouraging aspects like reduction in interest burden continued. 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, our sample included 7 major companies, namely Colgate, Dabur, Gillette, Hindustan Lever (HLL), Marico, P&G Hygiene & Healthcare and Reckitt Benckiser India.

    Though this group reported a 4.6% dip in topline during the September quarter, the topline dip was lesser than in the first six months of 2002. Also, this sector’s bottomline growth was better as compared to the food group at over 14% (excluding extraordinary items). The segment too saw a significant dip in interest burden and higher depreciation provisioning.

    (Rs m) SepQ'01 SepQ'02 Change Jan-Sep '01 Jan-Sep '02 Change
    Net Sales 36,974 35,275 -4.6% 114,259 106,125 -7.1%
    Other Income 1,400 1,225 -12.5% 3,728 3,458 -7.2%
    Expenditure 31,767 29,144 -8.3% 99,579 89,319 -10.3%
    Operating Profit (EBDIT) 5,207 6,131 17.7% 14,679 16,806 14.5%
    Operating Profit Margin (%) 14.1% 17.4%   12.8% 15.8%  
    Interest 142 64 -55.0% 355 276 -22.2%
    Depreciation 684 574 -16.0% 1,945 1,866 -4.1%
    Profit before Tax 5,782 6,718 16.2% 16,108 18,122 12.5%
    Exceptional items 175 -147 - 1,834 1,042 -43.2%
    Tax 1,236 1,526 23.5% 3,685 4,179 13.4%
    Profit after Tax/(Loss) 4,721 5,045 6.9% 14,256 14,986 5.1%
    Net profit margin (%) 12.8% 14.3%   12.5% 14.1%  
    No. of Shares (eoy) (m) 2,723.4 2,738.9   2,723.4 2,738.9  
    Diluted Earnings per share* 6.9 7.4   6.9 7.3  
    Current P/e ratio         20.7  
    M. Cap to sales         2.9  

    Nearly 70% of this group’s topline and over 85% of net profits came from HLL, which continues to see topline blues. However, even when we excluded HLL from the group, the topline declined by nearly 5% in the nine month period, which indicates an overall tough market environment. Though the group managed to improve its operating margins (excluding HLL), operating profit growth tapered down. The group (minus HLL) finished with over 5% decline in net profits. This again indicates that though HLL’s performance affected the topline of the group adversely, at the operating level, HLL’s performance continues to be encouraging and it outpaced the sample group.

    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 in doldrums, owing to the higher rural dependence. The recent retail sales data reports 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. But the deteriorating performance of first SBCH and then Nestle suggests that food companies too are unlikely to have an easy ride going forward.

    The valuations of most FMCG companies continue to be lacklustre and stock prices are largely trading near 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 21x annualised nine month earnings (January – September 2002).

    CMP (Rs) 52 week H/L P/E **
    Colgate 127 177 / 124 23.6
    Dabur 44 81 / 43 15.7
    Gillette 300 440 / 252 -
    HLL 161 266 / 152 21.6
    Marico 173 175 / 89 9.5
    P&G Hygiene 369 522 / 365 10.2
    Reckitt* 247 257 / 139 27.4
    * Mgt. plans to delist company
    CMP (Rs) 52 week H/L P/E **
    Britannia 516 641 / 501 15.5
    Cadbury* 476 500 / 425 27.2
    Glaxo SmithKline Consumer 266 415 / 260 11.3
    Nestle 515 580 / 470 22.9
    Tata Tea 154 217 / 145 11.5
    * NSE price, delisted on BSE
    ** P/E based on FY03 estimated earnings (excluding extraordinary items)

    One of the immediate concerns for these companies is that a chunk of raw material prices, which were at all time lows, have started to move up. So going forward, it may not be easy for some companies to keep expanding operating margins. With topline growth still hard to come by, this will further add to their woes. Short-term concerns notwithstanding, the FMCG sector in India has growth potential in the long term as per capita consumption for most products is low when compared globally. Going forward, with the improvement in the economic environment and a positive monsoon outlook, the industry is likely to bounce back.



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