FMCG: The smaller the better? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

FMCG: The smaller the better?

Nov 16, 2005

Last week, we wrote about how large FMCG companies performed in the September quarter 2005 in comparison to the same quarter the previous year and the picture was quite decent. Today, we compare 5 other FMCG companies, albeit this time from the mid-cap space. The five companies included here are Dabur, Godrej Consumer Products, Colgate, Marico and Pidilite.

(Rs m)Sept'04Sept'05Change
Net Sales 11,96613,89616.1%
Expenditure10,16611,66414.7%
Operating Profit (EBDIT)1,8002,23124.0%
Operating Profit Margin (%)15.0%16.1% 
Other Income9318599.6%
Interest 466336.3%
Depreciation2442513.0%
Profit before Tax1,6032,10331.2%
Tax3623866.8%
Extraordinary items(10)17  
Profit after Tax1,2311,73340.8%
Net profit margin (%)10.3%12.5% 
Effective tax rate (%)22.6%18.4% 

Something about the sector...
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. It is quality and innovation of products, which is really driving demand.

What does the report card say this time around?
The consolidated topline grew by around 16% YoY in the September quarter (around 15% YoY growth in the case of large-caps) indicating that smaller FMCG companies have benefited more from the increase in consumer spending. Also, the rise in expenditure was at a slower pace than the sales growth, which could be attributed to lower other expenditure and control over marketing expenses as a percentage of sales, which the smaller companies have been working on for sometime now. This resulted in operating margins expand by 110 basis points (down 60 basis points for large FMCG companies). Depreciation increased by 3% YoY, mainly because of Dabur's acquisition of Balsara, which resulted in an 8% YoY rise for the company. Interest costs have increased by around 36% as companies like Dabur have taken some debt to fund its recent acquisition. Also, other income during the period has almost doubled, indicating higher investment income.

All these factors put together, resulted in a 41% YoY PAT growth for mid-cap FMCG companies, compared to an 11% rise in profits for the larger ones. Of the 5 companies, Dabur and Godrej Consumers reported 49% and 57% YoY bottomline growth respectively. None of the companies posted a net profit growth of less than 10%

What to expect?
We believe that selective mid-cap FMCG companies are a good investment option, though their commanding valuations, as compared to the well-established larger companies, make them somewhat risky. Nonetheless, in our view, the smaller FMCG companies have the potential to explore the untapped markets and are already gaining acceptance.

Also, since these companies follow a different strategy by offering higher margins to wholesalers and retailers, it results in their products being pushed more than others. Further, smaller companies have started exploring rural markets, not through their own network as it is an expensive affair, but through other larger companies networks. For example, Godrej Consumer has tied up with ITC to sell its soaps through the latter's E-Choupal network. However, the only drawback in this strategy is that of marginally lower margins.

The FMCG sector, after having underperformed for some time, is on the path to recovery, with acceleration in rural growth, increasing consumer spending along with the shift in product preference towards those being offered by the newer entrants. With greater possibility of oil prices softening in the medium-term, pressure on operating margins of FMCG companies would stand reduced. That said, it is pertinent to not only look at growth rates, but also the sustainability of the same over the long-term. As organised retailing gains momentum, smaller players are likely to be squeezed more than the bigger FMCG majors by virtue of their size and the number of product offering. To conclude, current margins are no indicator of what lies ahead!


Equitymaster requests your view! Post a comment on "FMCG: The smaller the better?". Click here!

  

More Views on News

SHEELA FOAM LTD Share Price Down by 5%; BSE FMCG Index Down 1.7% (Market Updates)

Sep 22, 2020 | Updated on Sep 22, 2020

SHEELA FOAM LTD share price is trading down by 5% and its current market price is Rs 1,457. The BSE FMCG is down by 1.7%. The top gainers in the BSE FMCG Index is GSK CONSUMER (up 5.1%). The top losers are SHEELA FOAM LTD (down 5.0%) and VENKYS (I) LIMITED (down 6.5%).

BAJAJ CONSUMER CARE Share Price Down by 5%; BSE FMCG Index Down 0.5% (Market Updates)

Sep 22, 2020 | Updated on Sep 22, 2020

BAJAJ CONSUMER CARE share price is trading down by 5% and its current market price is Rs 180. The BSE FMCG is down by 0.5%. The top gainers in the BSE FMCG Index are GSK CONSUMER (up 5.1%) and BRITANNIA (up 1.2%). The top losers are BAJAJ CONSUMER CARE (down 5.0%) and CCL PRODUCTS (down 5.4%).

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why am I Recommending Caution? (Fast Profits Daily)

Sep 9, 2020

This is why I have changed my short-term view on the market.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE FMCG


Sep 22, 2020 03:37 PM

S&P BSE FMCG 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS