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FMCG: Temporary blip!

Dec 24, 2003

What a year! The BSE-Sensex has gained 57% from January till December 10, 2003, and the year is yet to come to a close. While most sectors either moved in tandem with the benchmark indices or outperformed them, the FMCG sector was one of the few that really got 'left behind' in relative terms. If one looks at the graph below, that compares Rs 100 invested in both the Sensex as well as the BSE FMCG Index at the start of 2003, the underperformance becomes strikingly clear. The Rs 100 invested in Sensex had become Rs 157 by December 10, while the FMCG Index lagged behind with returns of Rs 128.

However, it is not as if the FMCG sector has under performed the Sensex only in 2003, even if we look back at last year, where the Sensex gained only 4% in the entire 2002, the FMCG Index actually showed a decline of 11% during that year. The underperformance is hardly surprising considering that the sector was reeling under poor monsoons, consumer downtrading as well as severe competitive pressure. The agricultural output dipped by over 3% in FY03, one of the worst performances in recent years.

The outperformers...
(Rs) 31-Dec-02 10-Dec-03 % change
BSE Sensex 3,377 5,286 56.5%
S&P CNX Nifty 1,094 1,687 54.3%
Gillette 314 700 123.0%
P&G Hygiene 267 495 85.1%
Tata Tea 174 312 79.3%
Dabur 44 77 74.7%
Godrej Consumer 94 164 73.9%

If we look at individual company performances, out of the key 15 companies in the sector, only 5 were able to outperform the benchmark indices performance in 2003. These included Gillette, Tata Tea, P&G Hygiene, Dabur and Godrej Consumer. Out of these 5, the first 2 companies (Gillette and Tata Tea) reported a strong turnaround and saw an upward re-rating. P&G Hygiene, on the other hand, saw improved performance in both its product categories and also entered the cough syrup market. Dabur saw a re-rating largely led by the management's decision to demerge the company into separate FMCG and pharma businesses. Expectations of increased focus on both businesses, therefore, led to the optimism.

Among the under performers (relative to benchmark indices), FMCG stalwart Hindustan Lever (HLL) finished at the bottom of the heap, hardly creating any capital gains for its shareholders. Increased competition, as well as lacklustre demand from rural India seems largely the reason for this. Also, with investors anticipating hardly any revenue growth, they seemed reluctant to accord HLL the high premium that it has traditionally received over its peers.

The underperformers...
(Rs) 31-Dec-02 10-Dec-03 % change
ITC 660 982 48.7%
Pidilite 229 324 41.1%
Marico 164 232 41.1%
Henkel Spic 23 33 40.9%
Essel Propack 194 258 32.8%
GSK Consumer 261 334 27.9%
Nestle 523 655 25.2%
Britannia 515 606 17.7%
Colgate 135 151 11.7%
HLL 182 188 3.5%

What to expect?

2003 rubbed off a lot of the feel good factor to the sector. Monsoons have been decent and widespread this year. Consequently, as per CMIE estimates agricultural output is likely to record a 10.7% growth in FY04.

If one looks at the relationship between agricultural output and the FMCG Index, the correlation is stark (see graph above). Following the buoyant expectations of an increased agricultural output, the FMCG index has grown by a startling 59% in FY04 so far (April-December 2003). So, in a sense, although the sector under performed the Sensex, 2003 could be the foundation of a buoyant demand season ahead. Also, with improvement in infrastructure across India, it is expected that the ratio of consuming class to total households will touch 46% by FY07 (17.4% in FY95). In this light, companies with strong and widespread distribution networks will be well positioned to take advantage of an upturn in demand.


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