As can be seen from the adjacent graph, the FMCG sector underperformed the benchmark BSE-Sensex in 2006. Rs 100 invested in the FMCG index would have yielded Rs 118 by the end of the year, while the same investment would have fetched Rs 146 if invested in the benchmark index. Although both the indices moved in tandem until August 2006, the Sensex outdid the FMCG index in the latter half of the year by a reasonable margin. At the start of the year, the outlook towards the FMCG sector in general was bullish.
Company | Price on Dec | Price on Dec | % Change |
23, 2005 (Rs) | 22, 2006 (Rs) | ||
BSE-Sensex | 9,257 | 13,472 | 45.53% |
NSE-Nifty | 2,768 | 3,872 | 39.88% |
BSE FMCG Index | 1,615 | 1,902 | 17.77% |
Marico | 353 | 554 | 56.94% |
Pidilite | 83 | 123 | 48.19% |
Dabur | 98 | 144 | 46.9% |
Colgate | 271 | 382 | 40.96% |
Godrej Consumers | 127 | 151 | 18.90% |
HLL | 193 | 219 | 13.47% |
P&G | 835 | 868 | 3.95% |
Nirma | 453 | 361 | -20.31% |
As can be seen from the table above, Marico and Pidilite were the sector outperformers in the FMCG space. As mentioned earlier, the top four gainers are from the relatively smaller players in the FMCG sector. More so, these companies managed to outperform their larger peers with the bottomline growing by 24% and 22% respectively. Godrej Consumers, the market leader in the hair colour segment, also managed to outperform the benchmark indices considerably (the stock had a stock spilt from Rs 4 to Re 1, which garnered more interest among the investors). Dabur also outperformed the sector index due to good performance. Nirma was the laggard in the sector. FMCG behemoth HLL too gained handsomely, although failing to keep up with its smaller peers. Most companies witnessed input pressures this year and to offset the higher costs, the companies increased the product prices. Another trend witnessed this year was the emergence of new channels, new product categories and new consumer segments.
Company | Price on Dec | Price on Dec | % Change |
23, 2005 (Rs) | 22, 2006 (Rs) | ||
GTC Ind. | 112 | 220 | 96.43% |
ITC | 139 | 170 | 22.30% |
Nestle | 935 | 1100 | 17.65% |
GSK Cons. | 536 | 562 | 4.85% |
Godfrey Philips | 1401 | 1,313 | -6.28% |
Tata Coffee | 328 | 295 | -10.06% |
VST Industries | 472 | 403 | -14.62% |
Britannia | 1303 | 1,107 | -15.04% |
Tata Tea | 933 | 710 | -23.90% |
As can be seen from the table above, the food stocks have not performed as well as the FMCG stocks in 2006. The top two gainers outperformed the benchmark indices over two-fold (all from the tobacco sector). Despite health issues, a growing number of class-action lawsuits and higher prices, consumers still find tobacco products entirely seductive, all resulting in these companies making real fortunes. Nestle too has performed well due to higher topline growth. The company's domestic and export sales escalated despite pressure on margins due to higher operating costs associated with upgraded formulations. We believe that the company will continue to do well due to its market leadership in certain categories.
Given this background, one has to remember that the FMCG sector is a play on 'India's consumption potential', which in turn is a function of competition, emanating from organised retailing and more importantly, is based on the depth and breadth of the consumption. By breadth, we mean the number of people buying soaps (from the organised sector as well as from rural markets). By depth, we mean, higher consumption by the existing consumer base (both in terms of moving up the value chain and increased usage). These are typically long-term drivers and therefore, one needs to be patient to realise the potential.
In 2005, the FMCG sector had recovered from the downturn and so it was more of a volume game. The prices were cut to increase the volume sales. However, in 2006 due to the rising input cost, the prices of the products had to be raised. One thing that emerges from the operating performance is the fact that none of the companies enjoy the sort of pricing power that would shield them from rising input costs. Even in cases where the companies were able to hike prices, the instances were few, indicating a fear of loss of market share. This we believe would lead to increased volatility in the performance of the companies. Internal efficiency and efforts at pushing high value added products could be successful only to an extent. Real long-term sustained growth will only come from an ability to pass on the input price hike to the end user.
All said and done, the environment will no doubt be competitive, but the FMCG sector is a 'volume game'. Market leaders like HLL realised the pitfalls of focusing only on profitability in the last two years. Recent statements from HLL clearly suggest that the focus will remain on increasing market share, even if at the cost of margins. Also, the smaller and unorganised players will lose the competitive edge, which in turn will benefit organised players.
FMCG companies need to understand that the top end of the pyramid is now deep enough to absorb expensive offerings. This creamy layer is affluent, equal to the western countries, and hence will require some kind of differentiation from the mass market. Hence, product differentiation and innovation along with technology and processes will be the critical aspects for growth. Also, Indian companies have now started to spread their wings in the overseas market and there are several examples of this. This is another growth area tapped by players, which will bear fruits in the times to come.
The bottomline from an investor's perspective is to have a balanced portfolio in the FMCG sector (large and niche players) to reap the benefits of the consumption story going forward. More importantly, the FMCG sector is not a high-return sector and to that extent, expectations have to be realistic.
To read our thoughts on year 2006 and our view for 2007, click here - Reflections 2006.
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