Home > Business & Investment > FMCGs doing well as demand increases, profits could soar...

FMCGs doing well as demand increases, profits could soar...

Monday, October 25, 2010
By Manik K. Malakar

The Indian consumption success just does not seem to end. After the BFSI and autos sector going up on the back of rural demand it is now the turn of the FMCG (Fast Moving Consumer Goods) sector to benefit from the growth in demand.

Thus the sector is going great guns in terms of volumes… “We initiate the coverage on the Indian FMCG space with an Overweight rating despite the sharp run-up in the indices,” notes analyst Himani Singh of Elara Capital. And the good news for the sector is set to continue…Elara opines that the FMCG sector will be continuing to see good growth for the next five years.

The sector currently is the fourth largest in the Indian economic milieu and as of 2009; they had a total market size of 25.8 billion dollars. FMCG is expected to post a CAGR (Compounded Annual Growth Rate) of 13.6 per cent to touch 43 billion dollars by 2013 and 74 billion dollars by 2018.

While analysts feel that it would be ‘myopic’ to take a short term view of the sector i.e. over the next quarter or two, the long term prospects for the sector will be boosted by India’s demographics, in particular the middle class. The Indian middle class in the next few years is set to touch 583 million people and they will have purchasing power. The rural sector will also be a growth driver. “Volume growth remains robust across segments due to rising incomes in rural and urban India,” note analysts Abneesh Roy, Nitin Mathur and Harsh Mehta of Edelweiss.

There are however going to be some interesting happening in the sector going forward. Consolidation is likely to be the order of the game with the big players dominating the pie. The large FMCG players have been trying to capture the market both in terms of geographies (urban and rural markets) as well as incomes (across all income groups.) “The strategy of the market leaders has been to straddle the pyramid effectively by presenting product offerings across income groups,” notes Elara’s Singh. This is not a strategy that is adopted by regional players.

This strategy is likely to be beneficial as changing demographics and rising incomes in India would translate into more consumers seeking more enhanced products and thus moving up the value chain.

Incidentally, pricing power for the sector seems to be robust, with quite a few companies going in for price hikes. “The price increase marks the return of the pricing power in the soaps and detergent business,” noted Roy, Mathur and Mehta of Edelweiss. They also note the possibility of a price war in the oral care segment as P&G’s entry is likely to make Colgate miffed. Also Dabur and Emami are likely to announce M&A deals.

The price increases also helped FMCG companies take care of raw material cost hikes. Marico for instance hiked prices in its coconut oil segment to tackle copra prices.

And now with India’s normal monsoons the prospects are getting brighter for the sector, with monsoons as of end September registering a two per cent surplus and consequently area under cultivation increasing by 6.9 per cent on a yoy basis.”We expect that higher crop output will ease supply side inflation and higher income will boost purchasing power,” note Amnish Aggarwal and Nikhil Kumar N of Motilal Oswal.

However all these developments mean that the stock price movements and perception of this sector is witnessing a makeover. “The BSE FMCG Index is at its 52 week high and mimicking the broader benchmark indices, rests the debate whether the sector is sheer defensive in nature or a growth bet,” said Singh. “Our view is that it is growth capital that is chasing the sector and not a defensive premium underplay,” Singh continued. Earnings for the various FMCG companies are expected to grow and this along with a P/E (Price/Equity) re-rating will drive share prices upwards in the sector.

Edelweiss Top Picks

  • ITC
  • Asian Paints
  • Dabur
  • United Spirits
  • Emami


Elara Capital Top Picks

  • HUL
  • ITC
  • Nestle
  • Colgate
  • Godrej Consumer
  • Dabur
  • Tata Global Beverages
  • Marico


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