FMCG: Looking for the rural trigger

The consumer products sector has reported a much better performance in terms of turnover growth in the September quarter as compared to the June quarter this year. The sample of the top five companies in the sector reported a 7% turnover growth as compared to just over 2% growth in the June quarter.

(Rs m)	Sep.QFY01	Sep.QFY02	Change
Net Sales	30,983	33,167	7.0%
Other Income	1,011	1,356	34.1%
Expenditure	26,695	28,499	6.8%
Operating Profit (EBDIT)	4,288	4,668	8.9%
Operating Profit Margin (%)	13.8%	14.1%
Interest	54	62	14.9%
Depreciation	479	602	25.7%
Profit before Tax	4,767	5,361	12.5%
Extraordinary items	23	175	651.5%
Tax	1,001	1,171	17.0%
Profit after Tax	3,789	4,365	15.2%
Net profit margin (%)	12.2%	13.2%
Effective tax rate (%)	21.0%	21.8%
Diluted no. of Shares (m)	2423.7	2423.7
Diluted earnings per share*	6.3	7.2
P/E ratio		29.2
(* annualised)

The sample which includes Hindustan Lever (HLL), Colgate, P&G Hygiene, Reckitt and Gillette India has reported a 15% growth in bottomline. This was lower than the 17% growth reported in the June quarter.

The consolidated numbers bring out the sector's efforts to improve operating efficiencies. The operating margins for the September quarter have improved by a minor 30 basis points YoY. However, higher depreciation provisioning and interest burden has pruned bottomline growth. Higher depreciation and interest burden are largely contributed by Gillette India.

If we exclude the extraordinary items effect, then profit growth has been just over 11% YoY. The extraordinary items have largely been contributed by HLL. The FMCG major is also responsible for the better turnover growth showing this quarter.

The sample sector trades at a P/E of 29x annualised September quarter earnings and a market cap. to sales ratio of 3.8x. The sector's valuations are on the higher side as compared to other sectors. The defensive nature of the sector as well as its future growth potential are largely responsible for these valuations. Going forward, a lot would depend on how the demand picks up in the coming quarters.