Increased focus on volume growth coupled with lower input costs should ensure healthy growth for FMCG companies
There is no doubt that the economic slowdown impacted a large number of sectors in the second half of the last fiscal year. But, a robust sales (value) growth of about 18-19 per cent and profit growth of about 14-15 per cent in 2008-09 reported by the fast moving consumer goods (FMCG) sector does not suggest any slowdown. In addition to business performance, the defensive attributes of the sector came to the fore enabling the stocks in the sector to outperform the broader markets for most part of 2008-09---a trend similar to that seen during 2000-01 and 2002-03. Without the likes of ITC, the FMCG index heavyweight accounting for around half of weightage, most stocks have outperformed the BSE Sensex during February 2008-March 2009. However, since March 1, 2009, the FMCG index (up 15 per cent) has significantly underperformed the Sensex (up 73 per cent) since March 1, 2009. So, what has changed? To know more, and how the sector (and companies) are expected to fare in 2009-10, read on.
Good so far
Growth from underpenetrated segments, marginalisation of regional players and greater contribution of sales from the rural segment helped the companies maintain robust growth momentum. The revitalised growth from rural markets was due to initiatives like rural employment programmes, farm loan waiver and an uptrend in crop realisations in recent years (in addition to good harvest). Says Hemant Patel, Enam Securities, “In the last two years, the rural growth has converged with urban; rural FMCG market grew at a CAGR of 13 per cent in the last three years and now constitutes about 35 per cent of sales (in value terms).”
Improving rural mix was stark in the economy segments; greater volumes came from rural folk who are typically considered to be price sensitive. For example, Dabur’s toothpaste brand “Dabur Red”, which caters to popular segments outgrew the segment; posted 21 per cent growth as compared to 14 per cent for the segment.
In addition, increasing urbanisation has also helped brands in the economy segment. The price increases (10-20 per cent) in most brands subsequent to price inflation was not able to bog down healthy growth during most of 2008-09. Driven by price increases, both GCPL and Marico registered a top line growth of 25-26 per cent, of which volumes contributed 14-15 per cent to growth.
The volume game
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Select categories however, were impacted as volumes came under pressure due to the sharp price increases taken by FMCG companies in the last three quarters of 2008-09. Although the move was to offset to pressure of rising costs and it helped in protecting margins, it negatively impacted volumes as consumers resorted to down-trading. Says Patel, “Hindustan Unilever (HUL) went for profitable growth through price hikes and took volume hit subsequently”. Patel’s estimates suggest that HUL reported a 4.2 per cent decline in average volumes, the first time since 2005, for the March 2009 quarter on account of multiple factors. However, going forward, he suggests that volumes could recover as the management initiates price cuts among other measures.
On the other hand, mid-sized FMCG players like Godrej Consumer (GCPL) delivered better volumes in the toilet soap category as it adopted a strategy of lower price increases. Consequently, its soap sales segment grew at 25 per cent, which is higher than the industry growth of 18 per cent. This has helped the company, which derives around two-thirds of its business from soap segment. Analysts expect GCPL to churn higher volumes in toilet soaps and outperform the industry in the future as well.
The way ahead
FMCG companies are now increasingly focusing on boosting volumes through price-cuts. Had it not been for the reversal of raw material costs, introducing price-cuts would not have been easy. The raw material costs have declined by 20-40 per cent from the peak, while the excise duty reduction from 14 per cent to 8 per cent has also helped; these savings are being passed on to consumers in a bid to boost volumes. Price reductions are not only believed to arrest a decline in volume growth but to boost market share also. This is the way ahead, as competition is on the rise from regional brands and modern retail sales is slowing. Dabur management expects price inflation to be stable until October 2009; provides leeway to reduce prices in favour of volume expansion without sacrificing the presently improving margins.
The impact of prices cuts however, will be visible in the form of lower topline growth. Analysts have estimated a sales growth of 13-14 per cent. Vijay Chug, analyst, Ambit Capital says, “We expect industry value growth for FY10-11 to be weak, in the region of 13 per cent vis-à-vis 19 per cent for FY08-09 and 17 per cent for FY05-09.” The good part is that many companies are expected to post a visibly higher profit growth (18-20 per cent) over the next two years.
The slow onset of monsoons could be an irritant, and may play a spoilsport by impacting the fortunes of the sector. With about 30-35 per cent of rural land self-sufficient in terms of irrigation, monsoons have major influence on agricultural realisations as well as rural purchasing power. Abhijeet Kundu, VP Research, Antique Stock Broking says, “Companies that derive greater proportion of revenues from economy segments could get affected by a poor monsoon.” Here, companies like Marico and Nestle that derive a relatively proportion of revenues from rural areas could see a lesser impact if monsoons are below normal estimate analysts.
| IN GOOD SHAPE | |||||||||
| FY09 growth in (%) | |||||||||
Rural share
in sales (%)
EPS (Rs)
(Rs)
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* For HUL, volume growth is average of last four quarters; for ITC, it is estimated to have reported a dip in cigarette volumes.
Since many companies are present in multiple categories, the sales volumes are an average as estimated by analysts;
EPS for FY10 and FY11 are analysts’ estimates; The PE is based on actual FY09 EPS
Bright spots
Traditionally FMCG sector has traded at a premium to Sensex. The premium is expected to continue in the future as well, as the respective companies in the sector display robust business visibility, low-debt and better profit growth rates. Consequently, Sensex is ruling at 14-15 times its FY10 earnings in comparison to FMCG Index’s 19-20 times. The old adage of FMCG sector stocks as a refuge in uncertain times still holds true and vice-versa does not hold true.
What’s more important is the growth rate a company delivers and it’s relatively valuation. Points out Unmesh Sharma, senior analyst, Macquarie Capital Securities, “There has already been a turnaround in the markets (a bear market rally) and we expect expensive names such as HUL to underperform.” Among stocks that look investment-worthy believe analysts are Britannia, GCPL and Marico, while Dabur and Colgate could be considered on dips. Lastly, while Nestle looks expensive (it has traditionally traded at higher valuations), one could consider it on dips but only with a long-term perspective.