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FMCG: 2011 expectations?
Dec 22, 2010

The year 2010 draws to a close. To say that it was an eventful year for FMCG stocks would be an understatement. The BSE FMCG index gained 26% this year till date vs. a gain of only 13% for the Sensex over the same period. However, what is interesting is what lies beyond these numbers.

2010 started off with most companies witnessing higher margins on a YoY basis. This was due to the high base effect of commodities. The companies held on to the higher selling prices despite the commodity prices easing off from their peaks. However, as the year progressed, food inflation continued to climb. As a whole, FMCG companies decided to concentrate on pushing for market share rather than passing on raw material prices to protect margins. The end result...we saw a sharp growth in the top lines for most companies. This was on the back of strong rural demand. On the other hand, nearly all companies witnessed margin pressure due to higher spending on advertisement and cost absorption.

However, 2010 will be remembered as the year when Indian FMCG companies went shopping. A phenomenal 13 acquisitions were made by some of the cash rich FMCG companies in Africa, South America and Indonesia. Godrej Consumer Products Limited was the leader of the raiders with 7 acquisitions during the year. Dabur and Marico acquired 2 companies each while Emami bought out 1 company during the year.

What we expect for 2011?

As we move to 2011 we have witnessed another acquisition. This is of Paras Pharmaceuticals by Reckitt Benckiser. Reckitt Benckiser has paid a whopping Rs 32 bn for this acquisition. With robust economic growth and rising affluence of the citizens, global players are increasingly shifting focus to India. While Indian companies hesitate to acquire other Indian companies at current valuations, global companies have little choice. The reason is that it would take them a lot of investment to build any sort of presence and create a distribution network if they have to do so from scratch. However, entry of new players results in aggressive competition as the new entrant would try to establish itself at the earliest. While competition can be good thing as it results in developing the, however, there is a risk of disruptive competition. This can destroy the market for all players. Fortunately, we expect to see strong growth in this sector going forward (13% YoY as per CII for 2011). This would provide an opportunity for all players for some time. Based on this, we expect to see more acquisitions by domestic companies in overseas markets and global companies in the Indian markets.

Food inflation we feel is a reality we all have to live with. This is because without meaningful investment in agriculture, the agri output will stagnate. Moreover, costs of production (seeds, fertilizers and labour) are rising. On the demand side, there is an increase in demand for food as the population moves towards a more nutritious diet. This would further drive up food inflation. As a result, we believe that margin pressure will continue for FMCG companies going into 2011.

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