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FMCG Sector Analysis

FMCG Sector Analysis

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Published by: lisa moh on Dec 28, 2009
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01/30/2013

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FMCG S ECTO
Size of The Sector:
In terms of Money.The FMCG sector is the fourth largest sector in the Indian economy with a totalmarket size of around Rs 45,000 crore.According CII figures for 2005, the size of the fabric wash market is estimated to beRs 4,500 crore; of household cleaners to be Rs 1,100 crore; of personal wash productsto be Rs 4,000 crore; of hair care and oral care products to be Rs 2,600 crore each; of health beverages to be Rs 1,100 crore; of bread and biscuits to be Rs 8,000 crore; of chocolates to be Rs 350 crore and of ice cream to be Rs 900 crore.
Contribution to GDP.The
 
sector accounts for barely 2% of India's GD.
Growth Trends:
According to a Economic Times report, the pace of growth recorded by the FMCGindustry in the fiscal year 2004-05 is expected to be the highest at 5%-6% in the last fiveyears, following a sharp rebound in rural demand.A number of large and medium FMCG companies like HLL, Colgate, Dabur, Marico, andGodrej Consumer Products have or are in the process of setting up manufacturing units intax havens like Uttaranchal, Himachal Pradesh, Jammu and Assam.Most companies have shifted from outsourcing to manufacturing in a desperate bid to protect profit margins in the absence of price increases.According to figures of the National Council for Applied Economic Research, the ratio of the consuming class to total households will touch 46% by FY-07. With per capitaconsumption low in most categories and expectations of the consuming class growing insignificant numbers, the FMCG sector in India has immense growth potential in the longterm.The government's idea of making India an agri-processing hub will also boost the sector'sgrowth. Private sector initiatives like ITC's e-choupal and HLL's Shakti will shape thedynamics of what farmers produce going forward, with improved efficiency.
Swot AnalysisStrengths:
Well-established distribution network extending to rural areas.
Strong brands in the FMCG sector.
 
Low cost operations
Weaknesses:
Low export levels.
Small scale sector reservations limit ability to invest in technology and achieveeconomies of scale.
Several "me-too’’ products.
Opportunities:
Large domestic market.
Export potential
Increasing income levels will result in faster revenue growth.
Threats :
Imports
Tax and regulatory structure
Slowdown in rural demand
 Factors affecting the growth:
Over the years, demand for consumer durables has increased with rising income levels,double-income families, changing lifestyles, availability of credit, increasing consumer awareness and introduction of new models. Products like air conditioners are no longer  perceived as luxury products.The biggest attraction for MNCs is the growing Indian middle class. This market ischaracterised with low penetration levels. MNCs hold an edge over their Indiancounterparts in terms of superior technology combined with a steady flow of capital,while domestic companies compete on the basis of their well-acknowledged brands, anextensive distribution network and an insight in local market conditions.With companies opting for information technology a reduction in inventory levels and animprovement in the working capital cycle is likely. This will benefit companies bycontrolling costs and improving margins.
Major Government Policies/Changes in the past three years:
Budget 2005-06: FMCG
 
Budget Impact
 
The removal of surcharge on tea and duty on vanaspati and refined edible oils will have amarginally positive impact on companies like Tata Tea, HLL and Marico.
 
The focus on replantation and rejuvenation of tea plantations will benefit the sector over thelong term, but there is nothing material in it for companies immediately.
 
Implementation of VAT is a positive move over the long term. This is likely to pave the way for asingular tax going forward, which will help companies cut costs ands become more competitivein the long run.
 
Reduction in duty on refrigerated vans will give a boost to the processed food industry. Apositive for players like Amul, Nestle, HLL and Britannia.
 
Area specific excise exemptions for North East, J&K, Himachal Pradesh will continue toencourage FMCG companies to relocate to these areas.
 
The corporate tax rate change is unlikely to benefit the FMCG companies much, as most payan effective tax rate of less than 30% anyway.
 
The push to agriculture and rural India is likely to aid rural India's development in the long run. Ithas the potential to induce increased usage of FMCG products going forward. Individual taxbenefits too are a positive for the sector.
Some critical news:Outlook Of Investors(list major investors,FII etc.)
In the context of the positives and the negatives, investing in FMCG stocks is a tricky prospect.Given this, one has to be active with FMCG stocks and should book profits as soon as thetargetted returns are reached. Unlike earlier times, nowadays, one cannot afford to buy anFMCG stock and forget about it for a long time.It is unlikely that the government's initiatives will boost the sector overnight. The ongoing price wars mean that company earnings will continue to be volatile. Hence, in the shortterm, one should look at individual companies' prospects rather than the overall sector's prospects. This means that it is better to leave mutual funds that concentrate on FMCGcompanies and instead buy shares depending upon the company.It is not necessary that an MNC will be better than an Indian company. One should look ata company's profile and analyse its prospects before investing in its shares.It is not that you will lose out by buying FMCG stocks. But, in buying an FMCG stock, itwill be ideal to cash in during short bursts of activity.
Major Merger and Acquisitions in the past two years:

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