Topic: Investing In FMCG Sector Company Analysis: ITC

Subm itted By: Ankit Saxena Devendra Bhatia

Prateek Jain

INTRODUCTION
FAST MOVING CONSUMER GOODS
Products which have a quick turnover, and relatively low cost are known as Fast Moving Consumer Goods (FMCG). FMCG products are those that get replaced within a year. Examples of FMCG generally include a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include pharmaceuticals, consumer electronics, packaged food products, soft drinks, tissue paper, and chocolate bars.

The FMCG Industry

The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of US$ 13.1 billion. It has a strong MNC presence and is characterized by a well established distribution network, intense competition between the organized and unorganized segments and low operational cost. Availability of key raw materials, cheaper labor costs and presence across the entire value chain gives India a competitive advantage. The FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. Penetration level as well as per capita consumption in most product categories like jams, toothpaste, skin care, hair wash etc in India is low indicating the untapped market potential. Burgeoning Indian population, particularly the middle class and the rural segments, presents an opportunity to makers of branded products to convert consumers to branded products. Growth is also likely to come from consumer 'upgrading' in the matured product categories. With 200 million people expected to shift to processed and packaged food by 2010, India needs around US$ 28 billion of investment in the food-processing industry. Automatic investment approval (including foreign technology agreements within specified norms), up to 100 per cent foreign equity or 100 per cent for NRI and Overseas Corporate Bodies (OCBs) investment, is allowed for most of the food processing sector.

Categories of FMCG Industry Attributes

House hold Care

Type of Products
Soaps, Detergents, Household, Cleaners, Mosquito, Repellents. P&G,

Company Name
HUL, Nirma, ITC, Dabur. P&G, HUL, ITC, Fem Care, Lakme, Emami, Marico, Dabur, Palmolive. Himalaya, Colgate-

Personal Care

Oral C a r e , S k i n C a r e , H a i r Care, Soaps, Toiletries, Cosmetics, Deodorants, Female Hygiene Products.

Food and Beverages

FOOD: Staples/Cereals, Bakery products, Ice Cream, Chocolate, Braded sugar, Branded Flour. BEVERAGES: Health beverage, Soft Drinks, Tea, Coffee, Packaged water, Liquor, Juice

Coca-Cola, Pepsi Co, Dabur, GlaxoSmithKline, Khaitan, United Breweries.

SWOT Analysis of FMCG Sector Strengths:

1. Low operational costs 2. Presence of established distribution networks in both urban and rural areas 3. Presence of well-known brands in FMCG sector

Weaknesses:
1. Lower scope of investing in technology and achieving economies of scale, especially in small sectors 2. Low exports levels 3. "Me-too" products, which illegally mimic the labels of the established brands. These products narrow the scope of FMCG products in rural and semi-urban market.

Opportunities:
1. Untapped rural market 2. Rising income levels i.e. increase in purchasing power of consumers 3. Large domestic market- a population of over one billion. 4. Export potential 5. High consumer goods spending

Threats:
1. Removal of import restrictions resulting in replacing of domestic brands 2. Slowdown in rural demand 3. Tax and regulatory structure

Why You should invest in FMCG Sector Funds

Sector Funds or Thematic Funds A lot of advisors are negative on sectoral funds, but I dont know the reason why they are negative particularly in case of FMCG mutual funds. The Indian Fast Moving Consumer Goods (FMCG) sector is booming from last several years and given steady returns to its investors despite slowdown in the economy. The India Brand Equity Foundation (IBEF) estimates a total market size in excess of US$13.1 billion for FMCG industry in 2012. FMCG sector has several multinational players with strong presence in India such as Nestle, Procter and Gamble, Gillette, etc. There is stiff competition among domestic companies, unorganized segment and MNC companies to increase their sales year-on-year, due to which they operate on low operational cost and margins.

For FMCG sector

Rise in inflation leading to increase in raw material costs, New packaging norms from 1st July which is expected to increase cost of regular products like biscuits, coffee, tea, toiletries and personal care items by about 10% and more, Rising fuel cost leading to increase in distribution costs, Decline in industrial growth, Slowing economy will lead to lower demand of FMCG products affecting its volume growth. Sharp depreciation in the value of rupee against other currencies because most companies such as Marico, Godrej Consumer Products, Colgate, Dabur, etc import raw materials. The margins of these companies will be under pressure until the rupee stabilizes.

Investment avenues in FMCG sector

You can invest in this sector through equity, by selecting right company stocks to add in your portfolio. The alternative way to invest is mutual fund route. In mutual fund you can invest lump

sum amount or invest regularly through systematic investment plan without worries about volatility in the indices.

Investing though Equity Route

The sector is crowded with small domestic players, established companies with ample experience and multinational companies. You shall invest in FMCG stocks at a right time analyzing the fundamentals and peer comparison of these stocks. FMCG index mainly compose by 3 players i.e. ITC Ltd, Hindustan Unilever Ltd and Nestle India Ltd. They together contribute ~80% market cap to total of BSE FMCG index. So, lot is dependent on the performance of these three stocks which is consistent over the past few years and driving FMCG index to new heights.

ITC
ITC is a conglomerate, with presence in diverse sectors such as cigarettes manufacturing, FMCG, operating hotels, agri-business and paper production. The FMCG vertical, with its product mix and aggressive marketing is likely, to lead the growth in the non-cigarette business. The personal care products are sold under ITC brand while food products are sold with Sun feast brand.

Investing through Mutual Fund Route

There are two sector funds available in market which invests mainly into FMCG stocks. So, you can opt to invest in these schemes considering historical returns, portfolio and risk analysis. The returns from mutual fund schemes have outperformed benchmark index from 2009 onwards till date.

SBI Magnum FMCG Fund

Fund background: This pectoral fund was introduced from July 1999. The asset management company holding this scheme is SBI Funds Management Ltd. The minimum investment amount required is Rs 2000 and minimum SIP investment is Rs 500. The fund manager is Mr Saurabh Pant since June 2011. Objective: To achieve maximum growth opportunity through investments mainly in FMCG stocks. Top Holdings in portfolio: SBI Magnum FMCG Fund invests ~95% fund amount in FMCG stocks. The portfolio has 14 stocks from FMCG and consumer durable sectors. Top holdings of

this scheme are ITC (~30%), HUL (~12%), VST Industries (~9%), Marico (~8%), Agro Tech Foods (~7%), Glaxo Consumer Healthcare (~7%), Emami (~6%), etc.

Investment style: Invests mainly in large cap stocks with top down approach.

ICICI Prudential FMCG Fund

Fund background: This scheme was introduced from March 1999. The asset management company holding this scheme is ICICI Prudential Asset Management Company Ltd. The minimum investment amount required is Rs 5000 and minimum SIP investment is Rs 1000. The fund managers are Mr. Punit Mehta and Yogesh Bhatt since February 2012. Objective: To generate long term capital appreciation by investing predominantly in equity and related securities of FMCG companies. Top Holdings in portfolio: ICICI Prudential FMCG Fund invests ~80% fund amount in FMCG stocks. The portfolio has 9 stocks from FMCG, textiles and chemicals sectors. Top holdings of this scheme are ITC (~35%), HUL (~16%), VST Industries (~8%), Marico (~8%), Britannia Industries (~7%), Page Industries (~6%), Pidlite Industries (~4%), Dabur India (~3%) and Tata Global Beverages (~3%).

Investment style: Invests mainly in large cap stocks with top down approach.

Future Outlook
According to Nielsens research report entitled Consumer 360, the Indian FMCG market is estimated to grow to USD 100 billion by 2025 from USD 13 billion in 2012. According to report, the key areas driving this growth would be increase sales and acceptance of branded products, regular consumption of FMCG goods, etc. However, this growth will not be smooth there will be some untimely jerk led by economic slowdown, increase in inflation, etc. Its recommended to stay invested in this sector for long term to gain strong profits with uptrend in future and defensive characteristics. Invest in FMCG stocks when valuations get cheaper and market is

bearish or opt for safer route to invest regularly in mutual fund schemes. These will invest your amount in various companies with presence in FMCG sector and diversify the risks.