Betting on FMCG - Stock Picks

he market meltdown that began in January 2008 and the current economic moderation once again highlight the relevance of exposure to defensive sectors and, in particular, the fast-moving consumer goods (FMCG) segment.

Top Five FMCG Companies By Market Cap

Company     Market Cap. Net Profit y-o-y Net Profit Net Sales y-o-y Sales EPS (basic) Share Price   (Rs cr)1  (Rs cr)2 Growth (%) (Rs cr)2 Growth (%) (Rs)2  (Rs)1 ITC 73,676.33 748.67 -4.37 3,899.70 17.28 1.99 195.5 Hindustan Unilever 52,922.79 558.18 13.2 4,215.67 21.09 2.56 242.95 Nestle india 15,965.48 121.09 26.54 1,035.63 23.45 14.88 1,655.90 United Spirits 13,714.35 117.13 33.74 1,013.39 32.35 11.69 1,369.20 Dabur India 7,814.94 70.14 29.74 524.17 17.71 0.81 90.35 1As on 12 August 2008         2Q1 FY 2009         y-o-y: Year-on-Year         EPS: Earning per share These stocks are not OLM recommendations. They are the top five companies in the sector based on market capitalisation. The market meltdown that began in January 2008 and the current economic moderation once again highlight the relevance of exposure to defensive sectors and, in particular, the fast-moving consumer goods (FMCG) segment. While the Sensex has lost 27 per cent of its value till date from its highest close of 20,873 on 8 January 2008, FMCG index has lost just 13 per cent. Also, big names like Hindustan Unilever and Nestle have been able to deliver positive stock returns during the period. The sector has also continued its growth momentum for past several quarters. Industry estimates the sector to grow at around 15 per cent per annum and cross the Rs 95,000-crore mark in fiscal 2009, supported mainly by rising disposable incomes. The spread of modern retail will help in value growth while penetration in rural markets will help the volume growth. However, rising inflation and interest rates can be a dampener. Individual companies will have to manage cost inflation. Established players can pass the burden on to the consumers while the ones with low brand value may find it difficult. To discuss such issues, OLM brings in experts on the FMCG sector. Get Ready For More Sivasubramanian K.N. Senior Portfolio Manager (Equity), Franklin Templeton Sector growth. Growth in the FMCG sector depends on two structural drivers—increasing penetration and consumption in rural areas, and catering to the changing aspirational values of urban markets. The positive demographics in India and rising disposable incomes should help augment demand. Further, increased investment in rural infrastructure, fiscal stimulus (farm loan waiver) and improvement in farm production support growth in rural incomes. Meanwhile, the robust non-farm GDP growth is increasing urban incomes and changing lifestyles. The sector should benefit from the secular economic growth and increasing disposable incomes, especially in the semi-urban and rural areas.  Cost inflation. Several companies in the sector have announced price hikes to limit the impact of increasing raw material costs on profitability. Given that some of the major players enjoy considerable pricing power, these price rises have not had a major impact on volumes and, therefore, overall operating margins have more or less remained stable. This is particularly so in case of consumer non-discretionary goods.  Concerns. Brand-building activities are key for leading companies, given the competitive landscape. These become even more critical as organised retailing takes off and established brands face competition from house brands. One may see some impact of such exercises on margins in a rising media cost environment. However, from a medium- to long-term standpoint, such activities are likely to help improve earnings growth. Balance Prices Ashish Nanda Partner, Retail & Consumer Products Practice, Ernst & Young Sector growth. A combination of low penetration levels across most FMCG categories, rising levels of disposable incomes, both in urban and rural India, and the demographic profile of the consumer base, a significant portion of which is youth who is generally more aware and willing to spend on brands, augurs well for the FMCG industry in the medium to long term.  Cost inflation. Relative to other sectors, this sector’s growth has been least impacted primarily due to the fact that rise in input costs have been, to a large extent, passed on to the consumer, either directly through price increases, or indirectly through reduced pack sizes. Having said that, while the top-line has shown impressive growth, there have been margin pressures since it is not always possible to pass on the entire burden to the consumer.  Concerns. While the long-term outlook for the industry is optimistic, companies need to focus on capturing this growth in a prudent, cost-efficient manner. The companies that can manage this will emerge successful. Owing to the fast changing retail landscape, it is imperative for manufacturers to re-align their go-to-market models, not just for modern trade, but also the finer segmentation emerging within traditional trade. Further, access to secondary sales and point of sale data provides FMCG companies a great opportunity to accelerate growth and yet judiciously calibrate spends which, hitherto, were typically spent across the board. Need For Innovation Prashant Kothari, Fund Manager, ICICI Prudential FMCG Fund Sector growth. The FMCG sector is expected to witness sustainable and consistent growth on account of increased consumerism and rising income levels. The income tax cuts initiated in the recent Budget, coupled with the Sixth Pay Commission will translate into an increase in household income. Another factor that will contribute to the growth is expected increase in rural consumption that is set to get a boost due to higher agricultural product prices resulting in an increase in rural income levels. The FMCG sector is a good defensive bet because it is supported by the consumption story of India. Under such a scenario, gaining exposure in this sector for the long term will help gain good risk-adjusted returns. Cost inflation. There could be a short-term impact on the sector on account of inflation and price hikes. As companies have passed on the cost pressures to the consumers, many consumers might reduce their consumption or downtrade and settle for a lesser-known brand. However, this is a short-term blip. Concerns. The primary concern facing the FMCG sector is that of innovation. While there is an increasing clutter of products in the mass category, where price is the main differentiator, innovation has become minimal. Another constraint is the high advertising costs, which makes educating consumers about a good product difficult, and the increasing number of communication channels that reduces the attention span of the consumer. The OLM Take Previous quarter results indicate that the growth of the FMCG sector is on track. Both top and bottomlines of FMCG companies grew in double digits. They have successfully maintained their profit margins, based on pricing power and product mix. High brand value and strong demand enabled them to pass on the burden of cost inflation to consumers. In the short term, economic uncertainties may affect the growth, but it will continue in the long term on the back of rising per capita consumption and penetration in the rural market. (Source:  Internet)