In the era of bailouts and cost reductions, there is one sector that is

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poised to grow in the next couple of years despite the Indian economy expecting a slower growth rate of around 7 per cent. The fast moving consumer goods (FMCG) sector stands to gain the most as consumer preference for lifestyle products changes in India. Companies in the sector, therefore, see a positive outlook that rides on the implementation of the sixth pay commission as well as growth in rural demand.

The FMCG sector in India is the fourth largest in the economy, with a market size of of over Rs 110,000 crore ($24.1 billion) and is estimated to grow to over Rs 185,000 crore ($39.5 billion) by 2014, says Siddharth Maheshwari, R&A director, company intelligence, Datamonitor India.

The industry has a strong Indian as well as MNC presence in the urban and rural markets, characterised by a well-established distribution network, intense competition between the organised and unorganised segments and low operational costs.

According to a recent research report by Mumbai-based Angel Broking, for fourth quarter of FY09, the sector is expected to register a steady topline growth, largely driven by value growth (through price hikes). “Additional support in terms of higher advertising spends, product launches and increased level of promotions are also expected to help FMCG companies sustain modest volume growth. However, weakening macroeconomic conditions and falling income levels could lead to moderation in consumer spending in the ensuing quarters,” the report adds.



Input costs soften

Owing to the sharp correction in global commodity prices, particularly crude, FMCG companies stand to benefit in terms of margin expansion. Home care products are likely to benefit the most due to the dip in palm oil, linear alkyl benzene (LAB) prices and packaging costs.

FMCG majors Godrej Consumer Products (GCPL) and Hindustan Unilever (HUL) stand to benefit the most due to the high contribution of soaps and detergents to their revenue. “The prices of crude-linked derivatives have bottomed out and are exhibiting signs of uptrend, moving up 20-30 per cent in the past couple of months,” says Anand Shah of Angel Broking. The recent fall in copra and safflower oil prices by 15-20 per cent owing to higher supply on account of flush season is likely to aid Marico. However, rupee depreciation may play spoilsport and moderate the gains from the decline in input prices to some extent.

Pricing strategy

Over the past several quarters, most FMCG companies had resorted to judicious price hikes to protect dwindling margins. However, as economic slowdown takes its toll on consumer spending, even as inflation is on the decline, the companies are tweaking their pricing strategy to retain consumers and safeguard volume growth. Thus, fears of losing out on market share and downtrading along with the recent excise reduction benefits are making price cuts a reality.

HUL started the price cuts by slashing the rates of certain soap and detergent brands at the bottom of the pyramid. For instance, the price of detergent Wheel Active Powder has been cut from Rs 75 to Rs 67 on a 2 kg pack. Among other firms, while CavinKare is planning a 5 per cent cut in personal care product prices, Marico is also likely to follow suit. GCPL has no immediate plans to cut prices. However, amid these price cuts, HUL has raised the price of its deodorant brands, Axe and Rexona, by 6-10 per cent while some of the Fair & Lovely face cream SKUs saw price hikes of around 3 per cent. Going ahead, most companies may opt for one of the three alternatives — enhance margins by maintaining prices, increase promotional activity and advertising spends while maintaining the price levels, or resort to price cuts.

Rural opportunity

Leading FMCG firms are betting big on the rural markets to sustain their growth momentum. According to a recent study by the Rural Marketing Association of India (RMAI), rural income levels are on the rise, driven largely by continuous growth in agriculture for four consecutive years. The government’s continued focus on rural development initiatives should further empower rural consumers, fuelling fresh demand for FMCG firms.

The sector has grown by 20 per cent in rural India versus 17 per cent in urban India. FMCG, which trails spend on food (35 per cent), constitutes the second largest spend by rural India (13 per cent).

Product launches

To garner a higher market share and sustain long-term growth, most companies have launched new products, largely in the form of variants/extensions of existing brands. “In terms of categories, we expect personal care, household care and processed foods to drive growth,” adds Maheshwari.

Most of the companies have retained their plans for new product launches. GSK Consumer is backing its Horlicks health drink brand to drive sales and is exploring the possibility of extending the brand in several food categories. It recently launched Horlicks Nutri Bar. Marico has launched several new products under its Saffola brand to boost sales. Earlier this year, it launched its baked snack, Saffola Zest, and followed it up with the launch of Saffola Rice. Marico also introduced a new high-end variant, Parachute Advansed Revitalising Hot Oil. Nestle India, too, launched a range of soups and cooking aids to expand its range of processed foods to effectively compete against HUL’s Knorr and Kissan range.

Shampoo, one of the fastest growing categories in personal care, witnessed lot of action recently. While ITC extended its product portfolio by foraying into the anti-dandruff shampoo range with the launch of Vivel Ultrapro, Dabur has introduced new variants of its shampoo brand Vatika.

Market outlook

The FMCG industry has always been a defensive sector with a relatively inelastic demand. The sector’s resistance to economic cycles has historically helped companies to perform better compared with other sectors during economic downturn.

“We remain bullish on the overall prospects of the Indian FMCG sector. We prefer stocks that are better placed to combat the economic slowdown and sustain margins,” says the Angel report.

Among the heavyweights, analysts prefer Nestle, a strong player in the food processing sector in India, compared with HUL and ITC, owing to its premium-urban centric portfolio and strong growth performance. Among midcaps, GSK Consumer and Marico are the preferred ones, which are available at attractive valuations, given their strong fundamentals, steady earnings growth and superior growth levers.