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FMCG: Where to from here? - Views on News from Equitymaster

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FMCG: Where to from here?

Jul 15, 2009

The FMCG sector witnessed strong double digit growth over the last three years. Growth was robust at 20% CAGR as compared to a 6% growth witnessed during the period 2001-05. Not only that, the growth has been broad based. The recent budget announcements of a sustained focus on rural areas and increase in income in the hands of the people have further given a boost to the sector. In this article we shall have a look at what is in store for the sector going forward. Is it slowing down?
As per the AC Nielsen's report, the FMCG sector saw a growth of 16.2% YoY during April-May '09. This is lower than 19% YoY growth reported last year. The sample size consisted of retail stores, traditional and modern, and was based on the performance of 10 FMCG companies - Godrej Consumer Products (GCPL), Hindustan Unilever (HUL), Dabur, Nestle, Colgate Palmolive, Marico, Britannia, Proctor & Gamble, Tata Tea and GlaxoSmithKline Consumer Healthcare (GSKCH). In the period April to May 2009, we believe that the growth was lower due to lower inflation which led to price cuts. Volume growth remained robust. Except in toilet soaps, washing powder and detergent cakes segment, volumes continued to be robust. We are therefore of the view that the price growth for consumer companies would be subdued during FY10. During the current financial year, sales growth would be volume-driven, unlike FY09, where price hikes led the growth.

Monsoon a crucial factor
The India Meteorological Department (IMD) has predicted below normal rainfall this year. Rainfall, which spans from June through September, will be 93% of the normal. The rural market accounts for 45% of the FMCG sales. The sector growth has a strong positive correlation with average rainfall, as it affects incomes of a large mass of rural consumers. Further, 58% of the cultivable land is still dependent on rain. Poor rainfall in CY00-04 had affected the sector's growth. However, the rainfall deficit is expected to be lower than those years and the contribution of agriculture to rural GDP has come down over the years. While companies like HUL, Dabur and Colgate which have larger rural exposure may see some slowdown, the companies have introduced lower priced units to target the rural areas. However, any further delay in rains could hamper the crop production and thereby agricultural growth.

Source: Equitymaster

Margin outlook
The commodity prices had softened during the last quarter of the previous year. However, they are on a growth trajectory now. Further, poor rains could lower agricultural output and push up prices. Since price hikes are likely to be difficult, the companies may not witness a huge expansion on the margin front.

Input prices: firming up
Input price % rise since Jan09
HDPE (high density polyethylene) 48.0%
Palm Oil 70.1%
Copra -20.0%
Sugar 20.6%
LAB* (linear alkyl benzene) constant
* in April prices were Rs 71 per kg, have gone up 7%
Source: Bloomberg

Going forward...
While monsoons would play a critical role during the current year, the continued focus of the government on rural areas, lower penetration and consumerism would aid the FMCG sector in its growth. Further, implementation of the proposed Goods and Services Tax (GST) and opening of Foreign Direct Investment (FDI) would fuel growth. As per the Ficci-Technopak report, the industry's size is expected to reach US$ 47 bn by 2013 and US$ 95 bn by 2018.

While the company valuations have run up, those companies, which have products that are market leaders, products whose penetration is lower and those companies which have a large distribution network would stand to gain.


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