Revival hopes trigger IPO rush in FMCG

Mon, 7 Jul Pre-Open

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We are just few days away when, the new government will be presenting Budget for the current fiscal on 10th July 2014. As we have a new government in place now, various reforms are expected across the sectors. And FMCG sector is not an exception.

It's a known fact, that the fortune of the FMCG industry is linked to incomes of consumers. In a populated country like India, FMCG market potential has always been very big. However, low purchasing power due to inflation and slowdown leaves little room for discretionary goods. And this has impacted the growth of this sector.

An article in Business Standard highlights that various FMCG companies are looking forward towards recovery in the economy. And so companies are mulling over various options to raise money in order to expand their operations. Regional firms like Balaji wafers and Cafe Coffee Day are considering IPOs for fund raising. The new government has raised hope of improvement in the economy and this buoyancy is witnessed in the capital markets too. Moreover the recent easing of IPO norms by SEBI has provided an impetus for promoters of small and medium sized companies to utilize the IPO route to raise money. As per the new norms, even companies with market capitalization of less than Rs 40 bn can raise funds of over Rs 10 bn.

Thus while the firms seem to be betting big on the new government for revival to boost growth in the FMCG sector, there are still a number of challenges for the government and the sector as a whole.

For the government, it needs to address various infrastructure bottlenecks in order to boost the penetration of FMCG goods in the rural markets. The rural sector constitutes approx 33% of the total FMCG market. The FMCG industry has awaited the much needed Goods and Services Tax (GST) to boost their sales. But its implementation has been put on hold due to absence of agreement among State Governments and lack of required amendments. Thus the government has a long list to address various loopholes in order to boost India's consumption story

Having said that, long tem growth of the FMCG sector will remain intact riding high on increase in disposable income in rural as well as urban areas, lifestyle changes and under penetration. But not all the companies will be winners. Thus investors should be careful about investing in IPOs and do not get carried away with the current market rally.

We have also discussed why it is important for the investors to be careful before investing in IPOs in one of our editorials - 5 min wrap up.