A rapidly growing population, widespread urbanisation, rising income levels, and growing 'brand' consciousness among people have fuelled the growth of India's fast moving consumer goods (FMCG) industry, which expanded by 14.5 per cent to Rs 85,470 crore during 2007-08. The industry saw a record number of products launches and re-launches in 2007.

A sector that is driven by changing consumer tastes, FMCG has thrived on growing consumer awareness for skincare and personal hygiene, leading to burgeoning demand for personal care products. In fact, anti-aging solutions and male fairness are among the fastest growing segments in the skincare space, demand that lends more pricing power to FMCG firms.

Major FMCG companies include Hindustan Unilever (HUL), ITC, Marico, Britannia Industries, and Dabur India. Many MNCs have also been launching product ranges from their international collections in India. The development of organised retail and increased consumer preference for processed and packaged food have led to the launch of a slew of products. This has led to alliances like Bharti's tie-up with retail giant Wal-Mart for hypermarkets, supermarkets and grocery stores.

FMCG stocks have always been considered steady and less vulnerable to wider market fluctuations, primarily because they do not witness cyclical variations. Therefore, most scrips in the sector are low-beta stocks, and to a large extent, a trend in these stocks may not necessarily reflect a wider trend in the benchmark index. This can be explained in the following manner:

Calendar year 2007 saw BSE FMCG index gain just about 20 per cent, even as the Sensex clocked a return of about 46 per cent. On the same lines, when the Sensex has lost 19 per cent so far this year, the FMCG index has gained just over 2 per cent in the same period, with Hindustan Lever's stock being one of the best performers on the benchmark index.

High input costs

Rising input costs, coupled with mounting inflation are the biggest concern for FMCG companies. Recently, there has been a sharp increase in prices of key raw materials used by makers of consumer goods. The steep rise in power costs and prices of fuel have also added to the woes.

Prices of palm oil, wheat, sugar and crude have all risen by 20 per cent. In fact, prices of crude palm oil (used in soaps, detergents and shampoos) have surged by more than 60 per cent in the last 12 months. Prices of flour and skimmed milk powder have also increased. Rising wage costs have also pressured margins of FMCG companies.

An ASSOCHAM study said FMCG firms registered a 16.2 per cent rise in cost of raw material during the three months ending March. Net sales, however, rose a marginal 5.76 per cent for the same period. In an effort to avoid margin erosion due to higher input costs, FMCG major HUL recently hiked maximum retail prices of almost all its personal care and homecare products. Similarly, others like Emami, Dabur India, Godrej Consumer, among others have all raised prices of different products. Further price hikes cannot be ruled out.

The latest round of results for companies in the sector have been a mixed bag but they have certainly reflected the pressure exerted by higher input costs.

Godrej Consumer Products (GCPL) sales beat expectations, while HUL sales

disappointed with a marginal year-on-year increase. Hindustan Unilever Level’s profit after tax (PAT) also saw a drop. However, GCPL’s PAT increased by more than 30 per cent. ITC, whose stock has the highest weightage on the BSE FMCG index, saw January-March loss from new businesses, including garments, soaps, shampoos and food more than double, primarily due to development costs for new soaps and shampoos.

Performance of FMCG firms, to a very large extent, depends on how they make their products attractive for the consumer and factors like innovation, powerful advertising and brand positioning, affordability and quality play an important role here.

Prospects

The FMCG sector is poised to see good growth due to a variety of reasons. Growing income levels have helped raise the living standards of the urban population, especially the youth, thereby prompting companies to launch new high-value, high-end products, which command bigger margins.

A concomitant rise in rural incomes has ensured that companies don't lose grip on common products that cater to the general masses. FMCG companies have thus been putting a lot of emphasis on promoting products in rural areas and small towns, besides continuously upgrading their existing products.

According to a survey by the Federation of Indian Chambers of Commerce and Industry, the industry is poised to expand to Rs 95,150 crore this fiscal. The April-June quarter is projected to see a growth of 20 per cent or more in segments like shaving creams, skin and fairness creams, anti-dandruff shampoos. Deodorants are expected to witness a whopping 40 per cent growth. Segments expected to witness high growth of between 10 and 20 per cent are soap & toiletries, washing powder and detergent cakes and women hygiene.

Branded coconut oil and oral care segments are expected to see an 18 per cent growth. All these factors, along with the forecast of a normal or better-than-normal monsoon augur well for the FMCG sector.

The government's recent initiatives to make it easier for foreign luxury brands and retailers to own and operate their own stores in India are also expected to fuel growth in the sector. The foreign players were so operating in India through the franchisee route.

It remains to be seen how FMCG companies counter soaring raw material costs and rising inflation to avoid margin erosion, besides continuing to develop new products. With so many companies crowding the FMCG space, innovation would be the key and thus, advertising and sales promotion activities would also command great importance and witness higher spend.