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FMCG: Fast moving... - Views on News from Equitymaster
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  • Dec 17, 2003

    FMCG: Fast moving...

    Markets all over the world have been on a roll in 2003 and the Indian bourses are no exception having gained almost 60% in 2003. During this period, while there are sectors that have outperformed this benchmark index by substantial margins, there are also sectors that have not kept pace with the general market trend during the last one-year. FMCG is one such sector, which has grossly underperformed the BSE-Sensex in 2003 by registering gains of just 33% on the BSE FMCG Index (see chart below). However, during the last couple of months, this sector has shot back into the limelight.

    While the chart above shows the BSE FMCG Index lagging behind when considered since January 2003 to date, if we look at their performance over the last couple of months, the BSE FMCG Index has managed to outperform the benchmark index. Just to put things in perspective, while the former has risen by 14% since November 2003, the latter has posted a rise of only 7%. The table below shows some of the FMCG gainers during the last one-month.

    FMCG gainers over the month
    COMPANY % Gain P/E (x)*
    SENSEX 11% 15.2
    TATA TEA 22% 25.1
    ITC 20% 17.9
    DABUR 19% 27.1
    BRITANNIA 16% 14.6
    COLGATE 11% 21.5
    HLL 9% 25.2
    GSK CONSUMERS 4% 19.3
    * Trailing 12 months

    So, what has led to this build up of interest amongst investors towards the sector in the last couple of months?

    The most important of all was the normal and evenly spread monsoons witnessed in the country in 2003, which improved the prospects of our economic growth. The consensus estimate of GDP growth for India rests at about 7% in FY04 and the expectation is that with the improving economic outlook, rural India demand will pick up. The euphoria towards the sector was not immediately seen during 2QFY04 at the time of good monsoons because the effects of good monsoons are generally felt on the economy with a lag effect of about 6 months to 1 year.

    Many of the companies listed above utilized the downturn period to become more efficient, through more focus on their brands and distribution chains. Most companies saw an improvement in their working capital efficiencies. Further, over the long term, the efforts on the infrastructure front (roads, rails, power, river linking) are likely to enhance the living standards across India. Till date, India's per capita consumption of most FMCG products is much below world averages. This is the latent potential that most FMCG companies are looking at. Even in the much-penetrated categories like soaps/detergents companies are focusing on getting the consumer up the value chain. Going forward, much of the battle will be fought on sophisticated distribution strengths.

    From the stock market perspective, the valuations in the FMCG sector were relatively attractive and considering the limited downside and the potential upside for the companies and the sector as a whole, FMCG stocks attracted buying interest. To conclude, as per NCAER estimates, the ratio of the consuming class to total households will touch 46% by FY07 (17.4% in FY95). All this bodes well for the Indian FMCG sector.



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