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Sept 4th, 2004

FMCG Sector: Pick ‘em of the shelf
The fast m ov ing consum er goods indust ry has seen recessionary t rends
in t erm s of it s rev enue and profit abilit y grow t h in t he past 6 - 12 m ont hs
Introduction due to the price war among the major players in the industry, and slower
growt h in consum er spending on non durables. The key reason for t he
price war was t o gain higher m arket share which would drive volum e
growt h. Furt her t he rising populat ion in I ndia, im proving per capita
incom e of an I ndian consum er is expect ed t o drive t he dem and am ong
t he FMCG com panies. The presence of t he MNC in t he rural segm ent has
been significant ly low and is dom inat ed by t he local players. Hence, t o
com pet e wit h t hem and gain a m aj or foot hold in rural I ndia m ost of t he
FMCG m aj ors like HLL, Proct er and Gam ble, Colgat e – Palm olive indulged
into price war to gain market share in such untapped markets.

Structural Analysis of FMCG Industry

Typically, a consum er buys t hese goods at least once a m ont h. The
characteristics of FMCG products are:

The product s oft en cat er t o 3 very dist inct charact erist ics like
necessit y, com fort and luxury. They m eet t he dem ands of t he ent ire
cross sect ion of populat ion. Price and incom e elast icit y of dem and
varies across products and consumers.

Individual it em s are of sm all value but all FMCG product s put
together account for a significant part of the consumer's budget.

The consum er spends lit t le t im e on t he purchase decision. He
seldom ever looks at t he t echnical specificat ions. Brand loyalt ies or
recom m endat ions of reliable ret ailer/ dealer drive purchase

Lim it ed invent ory of t hese product s ( m any of which are perishable)
are kept by consum er and prefers t o purchase t hem frequent ly, as
and when required.

Brand swit ching is oft en induced by heavy advert isem ent ,
recommendation of the retailer or word of mouth.

Scope for branded players

The I ndian FMCG m arket has been divided for a long t im e bet ween t he
organized sect or and t he unorganized sect or. While t he lat t er has been


Sept 4th, 2004

crowded by a large num ber of local players, com pet ing on m argins, t he
form er has been varied bet ween a t wo- player- scenario t o a m ult i- player
one. Unlike t he U.S. m arket for fast m oving consum er goods ( FMCG) ,
which is dom inat ed by a handful of global players, I ndia's Rs.460 billion
FMCG m arket rem ains highly fragm ent ed wit h roughly half t he m arket
going t o unbranded, unpackaged hom e m ade product s. This present s a
tremendous opportunity for makers of branded products who can convert
consum ers t o branded product s. However, successfully launching and
growing m arket share around a branded product in I ndia present s
tremendous challenges.

Take distribution as an example. India is home to six million retail outlets
and super m arket s virt ually do not exist . This m akes logist ics part icularly
for new players extremely difficult. Other challenges of similar magnitude
exist across t he FMCG supply chain. To over com e t hese difficult ies t he
FMCG players have t aken init iat ive t o gain m arket share t hrough price
cuts or through various promotional activities like ‘Ek ke saath Ek free’

Key focus areas for FMCG players

Key focus areas for FMCG players which could drive volum es and help
gain m arket share by indust ry players in t he fut ure are classified here

Rural marketing

Rural m arket ing has becom e t he lat est m arket ing m ant ra of m ost
FMCG m aj ors. True, rural I ndia is vast wit h unlim it ed opport unit ies,
wait ing t o be t apped by FMCG m aj ors. To gain advant age of t his t he
Indian FMCG sector is busy putting in place a parallel rural marketing
st rat egy. 70 percent of t he nat ion's populat ion t hat m eans rural
I ndia can bring in the much-needed volumes and help FMCG
companies to log in volume-driven growth. This would benefit the
FMCG players who have already hit saturation points in urban India.


One of t he age- old problem s t hat FMCG has been facing not only in I ndia
but globally is t hat of dist ribut ion. I nt egrat ing operat ions wit h your
dist ribut ors and channel part ners is a Herculean t ask. Few ways t o
reduce pain involved in this link:

Reducing supply chain cost s by reducing int erm ediaries – Organised
ret ail chains have set up syst em s for invent ory m anagem ent and
quick servicing, t hereby offering t he opport unit y for a
company/supplier t o reduce dist ribut ion cost by reducing
intermediaries such as wholesalers/ distributors and supplying
directly to the warehouse of retail chain.


Sept 4th, 2004

I ncreasing sales by driving channel widt h - The relat ive share of
grocers to FMCG sales has dropped from over 50 percent in the early
90’s t o 35 percent in t he lat e 90’s. On t he ot her hand t he
contribution of chemist outlets and paan outlets has been increasing.
This has been a result of bot h SKU’s ( sachet s) and m ini dispensers
being specifically designed to facilitate entry to these outlets and
increase consumer interface.

Brand managers to Business managers

Tough m arket sit uat ions and a m ore aware and savvier dem anding
consum er have necessit at ed t hat yest erday’s brand m anagers be
t ransform ed int o business m anagers who underst and consum ers and can
innovate and be flexible to move with the consumer.

Consum ers who have becom e dem anding yet inscrut able in t erm s of
at t it udes, out look, m oods and behaviour have rendered convent ional
brand m anagem ent t ools obsolet e. This m akes it all t he m ore im port ant
for brand m anagers t o develop st rong consum er insight s and const ant ly
innovat e. This requires im m ersing one self in t he consum er’s life space
and ident ifying new opport unit ies, which could open up wide new
opportunities for the brand.

Recent results and Impact

The aggregat e financials of 31 FMCG com panies have wit nessed a 5%
increase in sales t o Rs 9870 crore. Sluggish growt h in sales revenue was
prim arily at t ribut ed t o 4.8% fall in revenue of HLL t o Rs 2571.64.
Revenue of Agrot ech Foods was also im pact ed by 14.8% t o Rs 247.90
followed by 4.8% fall in revenues of Dabur I ndia t o Rs 285.99 crore and
0.31% in Nest le I ndia t o Rs 544.39 crore. The revenue of t he FMCG
sector shed primarily slow growth in Food processing sector and frequent
price cut result ing from price war in t he indust ry. Nevert heless, 24%
sharp surge in revenue of I TC t o Rs 1774.96 crore and 51.39 percent
growt h in revenue of P & G t o 143.59 crore powered t he overall sales
growth of the industry.

Price war in det ergent m arket t o capt ure m ore and m ore m arket share
has com pelled t he indust ry m aj ors t o reduce t he det ergent prices
drast ically by 40% - 50% . HLL has wit nessed during t he quart er under
review t hat m ore of it s fall in revenue pert ains t o soap and det ergent
business. Another player in the detergent market i.e. Procter and Gamble
m ade t he first m ove of price cut but t he com pany’s m aj or det ergent
brand ( Ariel and Tide) are under t he um brella of P & G hom e product s
which is not a listed company.

Ope r a t ing pr ofit m a r gin s of t he 31 FMCG com panies has declined by
190 basis point s t o 16.5% . The m argins are im pact ed by price cut s
across all t he FMCG product s on one side and rising raw m at erial cost on
the other.


Sept 4th, 2004

Rising prices of m ilk and m ilk fat during t he quart er ended June’04 has
adversely affect ed t he m argins of healt h drink m anufact urer and
chocolat e m anufact uring unit s. GSK consum er Healt hcare and Nest le
I ndia, which are t he m aj or players in t his cat egory has report ed 330
basis points and 600 basis points fall in their operating margins to 17.4%
and 15.4% respectively.

Relative Valuations

Company HLL Nestle P&G Cons. Britannia ITC
Price (Rs) 112.15 545.05 486.45 212.05 670.00 1038.85
EV/Sales (x) 2.6 2.3 1.8 2.4 1.1 3.8
EV/EBIDTA (x) 16.0 14.4 8.4 13.5 12.8 10.6
P/E (x) 16.1 23.0 11.4 17.6 12.8 15.5
Cash P/E (x) 15.0 19.0 10.0 15.5 11.0 13.5
OPM (excl OI)
(%) 16.5 15.9 21.7 17.9 9.0 35.9
NPM (%) 14.7 9.8 15.6 13.4 8.2 23.5
RoCE (%) 60.30 115.90 41.59 121.79 34.68 39.58
RoNW (%) 61.14 84.28 30.36 147.51 24.85 27.34

Figures are as per ttm basis
Debt, RoCE and RoNW figures are as per the last available balance sheet

Valuat ions of t he FMCG com panies have declined sharply over t he past 6
m ont hs due t o concerns of pressure on m argins and subdued t op line
growt h. However, t he long t erm prospect seem s t o be int act as I ndia is
t he second m ost populous count ry in t he world t hus m aking it t he
count ry wit h second largest pot ent ial count ry for FMCG product s. Furt her
the valuat ions of t he com panies in t he sect or looks at t ract ive considering
the past valuations enjoyed by the industry majors.


Sept 4th, 2004

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