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FMCG Midcaps: 2QFY07 review - Views on News from Equitymaster
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  • Nov 29, 2006

    FMCG Midcaps: 2QFY07 review

    FMCG midcap companies' results for the September quarter have been stronger in comparison to the large caps for the same quarter. Today, we bring you an analysis of the aggregate performance of 4 mid-cap FMCG companies. The analysis comprises of Marico, Colgate, Godrej Consumers (GCPL) and GSK Consumers.

    Rs (m) September-06 September-07 Change
    Net sales 9,689 12,313 27.1%
    Expenditure 8,193 10,174 24.2%
    Operating profit (EBDITA) 1,496 2,139 43.0%
    Operating profit margin (%) 15.4% 17.4%
    Other income 213 350 64.3%
    Interest 28 95 239.3%
    Depreciation 251 303 20.7%
    Profit before tax 1,430 2,091 46.2%
    Exptraordinary item   (588)  
    Tax 345 338 -2.0%
    Profit after tax 1,085 1,165 7.4%
    Net profit margin (%) 11.2% 9.5%

    (The financials are of Marico, Colgate, GSK Consumers and Godrej Consumer Products)

    The consolidated topline (4 companies combined) grew by over 27% YoY, faster than the topline growth of the larger peers. Increased distribution, wider coverage and lower priced category focus drove the high volumes growth for the quarter. The non-food FMCG sales, which had started recovering from 1 % slump in 2003 to grow at 3% and 5 % in 2004 and 2005, respectively, have moved into the fast track. And this is reflected from growth across the key categories like toothpaste, soaps and shampoos amongst others.

    While, Marico's flagship brand, Parachute Coconut Oil, continued its good run as seen over the last few quarters, Colgate registered a 15% YoY growth in the topline driven by sales across its product categories. Strong sales performance of Horlicks, Boost and other products led to a 16.5% YoY growth in the GSK Consumers' topline in the quarter. Its flagship brand 'Horlicks' witnessed double-digit growth driven by new advertising, packaging innovation and effective consumer promotions.

    GCPL continued to deliver encouraging growth across all its categories. Toilet soaps sales grew 19% YoY in value terms led by growth in both popular and sub popular categories. Inspite of the 5% to 8% price hike taken on its toilet soaps in the quarter, GCPL outperformed (18.7%) the industry growth (12.8%) yet again. The spending habits of urban consumers on foods and non-foods were about the same while in rural areas, people purchased more of non-food items such as home and personal care products.

    Not only has there been higher value growth on the back of price hikes undertaken by various companies this year, but even volumes have increased as more people at the lower end of the market are switching to branded products. And the good news is that the growth will be sustainable.

    The expenses of the 4 mid-caps under consideration increased at lower pace than sales, which resulted in operating profits expansion of 43% YoY. Though Marico and Colgate witnessed decline in raw material prices (as a % of sales), GSK and GCPL's margins were under pressure due to higher raw material costs. The advertising costs were more or less stable as not many new products were launched in the quarter. The other expenses also witnessed a decline as a % of sales. The companies had increased the prices of the final products to offset the input pressure. However, going forward, not all companies may be able to pass on the price hike to the customers as fear of losing market share may pop up. Hence, adding new value added products and increasing the volume is likely to be more challenging than before.

    The consolidated net profits (including extraordinary items) grew by 7.4% YoY in this quarter, which is lower than the large peers. The main reason for this is the higher interest cost. Marico and GPCL both faced higher interest costs due to their expansion plans. However excluding the extraordinaries, the bottomline has grown by a whopping 62% YoY. All the above factors, coupled with a considerable increase in other income, resulted in a PAT growth for mid-cap FMCG companies. Also aiding bottomline growth was a lower tax outgo, which reduced as a percentage of PBT by 790 basis points. Mid-cap companies have set up their plants in tax havens like Baddi in Himachal Pradesh, which provide them with tax holidays for several years.

    Of the 4 companies, Colgate clearly stole the show with its bottomline bloating by a huge 47% YoY, followed by Marico with a 34% YoY growth.

    What to expect?

    The good performance of the mid-cap FMCG companies over the last few quarters have helped them close the valuation gap with their larger peers (in some cases, even higher than their peers). The smaller FMCG companies have the potential to explore the untapped markets. Acceleration in rural growth, better distribution network, shift in consumer preference will continue to be the growth factors. We believe that selective mid-cap FMCG companies are good investment options from a long-term perspective as their commanding valuations leave little upside from a near term perspective.



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