M&A deals in FMCG sector outlook: Prospects look good, onus on Budget 2018

After two years of surge in merger and acquisitions (M&A) deals, 2017 proved to be a quiet year for the fast-moving consumer goods (FMCG) sector. The sector not only witnessed the least number of deals but the cumulative valuation also went down sharply - thanks to macro-level policy changes and knee-jerk reactions offered by the government.

In 2015, according to data available from UK-headquartered accounting firm Grant Thornton, the cumulative value of M&A transactions surpassed Rs 405 billion. The following year, the number went past Rs 460 billion or 13.6 per cent higher year-on-year (y-o-y) as major players like Hindustan Unilever (HUL), Emami and Godrej Consumer Products picked up stakes in personal care product companies. While, HUL completed acquisition of hair care brand Indulekha for Rs 3.3 billion from Mosons Group, Emami bought another hair care brand Kesh King for Rs 16.5 billion.

However, last year not only the number of deals fell to 16 from 21 in 2016, total valuation of M&As also came down to Rs 300 billion - 35 per cent lower y-o-y. During 2015, when the sector was recovering from a slowdown in the acquisitions space, after the two years of dull, the total number of deals went up to 17. While last year no major deals took place in the personal care space, except Emami acquiring Helios Lifestyle at the end of 2017. According to Dhanraj Bhagat, partner, Grant Thornton, the deal between Lotte Confectionary and Havmor ice creams, in which the former acquired the Ahmedabad-based ice cream company for close to Rs 10 billion, helped the yearly numbers for M&A deals. Another internal deal, where Tata Sons raised its stake in Tata Global Beverages by acquiring 43-million shares from sister concern Tata Chemicals in exchange of Rs 77.7 billion, also added to the yearly numbers.

According to sources, the Rs 3.2-trillion FMCG space in the country, which is the fourth largest globally by market size, is now hoping for a revival in demand and market activities. "Last year was particularly bad for us as the twin blows of note ban and goods of services tax (GST) had to be dealt with. It hardly left us with any time or resources to concentrate on inorganic growth plans as streamlining operations as per ever changing rules remained the focus," said a senior executive from a key FMCG player.

Data collected from annual reports of top FMCG players show, the top seven firms hold Rs 340 billion in reserves and surpluses as of March, 2017. And, cash and cash equivalents of the top five players surpass Rs 74 billion. Among them, the two North India-based firms Dabur and Nestle hold Rs 35.5 billion and Rs 21.4 billion in cash.

In a recent interview with this publication, Sunil Duggal, chief executive officer, Dabur India, had indicated that the comapny was looking to buy suitable firms that were smaller but scalable. He also said the company had a budget of Rs 10 billion for local M&A activities.

Harsha V Agarwal, director, Emami, said, "We are always on the lookout for appropriate opportunities - smaller or bigger - and wherever we feel there is a synergetic and strategic fit with our business plans, we initiate steps to acquire or invest or partner at appropriate price. In 2018, we will keep on looking in the personal and healthcare sector for acquisition, investment, strategic partnership or tie-up."

However, the outlook for 2018 hinges on several factors. Experts say, a lot would depend on what measures government takes in the budget and how they are being implemented. As recovery of demand would also play a role in revival of deals in the sector.

According to Bhagat, activities in the dairy products segment could be visible in the year ahead. "Prospects look good as consolidation is expected to happen. The number of deals, however, could remain same as last year", he said.