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FMCG: Fast moving! - Views on News from Equitymaster
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  • Dec 13, 2006

    FMCG: Fast moving!

    The Indian stock market was in the midst of an unprecedented bull run until the last two days, with the benchmark BSE-Sensex having breached the 14,000 mark for the first time in history. After the steep correction in May and June 2006, the Sensex has gained 46%. Foreign funds have returned with a vengeance after dumping US$ 2.5 bn worth of stocks during the May-June tumble. The net Foreign Institutional Investors (FIIs) investment so far this year is more than US$ 5.5 bn, still lower than the US$ 10.7 bn seen in 2005. However, since June 14, the foreign investors have bought local shares worth more than US$ 3.5 bn, surpassing the amount they sold during the rout. The BSE FMCG index, comprising 15 FMCG stocks, including giants such as HLL, ITC and Dabur among others has risen more than 24% since June 14. In this article, we see which of the FMCG stocks under our coverage have garnered investor interest and the reasons for the same.

    Company Price on Price on %
    Dec 12, 2006 (Rs) Jun 14, 2006 (Rs) Change
    BSE-Sensex 12,995 8,929 45.5%
    BSE FMCG 1,972 1,593 23.8%
    Marico 530 374 41.7%
    GSK 540 404 33.7%
    P&G 875 713 22.7%
    Dabur 142 116 22.4%
    HLL 225 186 21.0%
    ITC 174 147 18.4%
    Colgate 363 329 10.3%

    Marico: Leading the pack of gainers is Marico with 42% gains since its low in June 2006. The company has been performing well in last few quarters. All its brands have been reporting strong growth. Organic revenue growth in the focus brands portfolio combined with the inorganic growth (Nihar, Manjal, Camelia and Aromatic that Marico acquired during the course of FY06) has led to an all round performance for the company. Its margins also have powered ahead due to good management of costs.

    GSK Consumer: Following Marico is leading beverage player GSK Consumer. The stock has notched 34% gains since the June fall. The company is performing well on the volume front. Its flagship brand 'Horlicks' continues to report strong double-digit growth. The company faced pressure on the margin front due to higher raw material prices. However, it is investing in brand building and introducing new variants.

    HLL: HLL has continued with its growth momentum driven by higher volumes and richer mix of products that are contributing to 3/4th of the company's growth, while the remaining 1/4th is due to higher realisations. Solid performance in HPC and foods segment has helped the topline growth. Due to selective price increases and cost effectiveness programs, the company has also managed to improve margins. Also, HLL like its peers is heavily investing in brand building exercise - indicating increasing need to push products and fight competition. The restructuring effort has further helped the company.

    ITC: The diversified major has over the last few quarters been successful in reducing its dependence on the core cigarette business. However, the strong traction in the cigarette business indicates continuing volume growth. Also, the other businesses especially the hotel and paper business are witnessing strong growth. ITC is investing heavily in increasing its capacities in paper and FMCG segments. It is also planning to add new hotels.

    What to expect?
    From 7% growth in 2005 to 18% growth till August this year, the Indian fast moving consumer goods (FMCG) industry is living up to its name. Higher value growth on the back of price hikes undertaken by various companies this year along with volume growth have proven to be benign. The latter has been possible with more customers at the lower end of the market switching to branded products. The cyclical recovery appears to be underway with a combination of increasing incomes, improved marketing and innovation and better price-value equation. Powerful factors at play such as favorable demographics, rising incomes and outsourcing will also 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. While the urban demand will remain stable, a sharp pick up in the rural demand is expected to fuel the future growth. The expanding distribution network coupled with the higher number of product variants will help increase the volume growth. On the margin front, they 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. 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.



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