Putting The Best Foot Forward

Updated: Nov 9 2003, 05:30am hrs
Companies in the fast moving consumer goods (FMCG) segment displayed marked improvement in topline during the quarter to September 2003 piggybacking positive growth in demand particularly from rural market. The segment clocked 5.5 per cent growth in topline and an even better double-digit growth in bottomline. As a result the BSE FMCG index has bounced back sharply. The index that slipped to its all time low at 707.46 on April 24, 2003 is currently quoting at 958 levels (about 33 per cent higher). Things were totally different earlier as the segment was one of the worst sufferers owing to poor product offtake.

In fact, the economy was under pressure owing to poor monsoon. As a result, had one invested in FMCG stocks during April it would have fetched him negative returns. This fact is clearly visible considering the movement of BSE FMCG index. Out of the last five years, the index has declined on the four occasions ie, 1999, 2000, 2001 and 2002. The decline ranged from 2.2 per cent during 1999 to as much as 19.6 per cent during 2002.

However, things seem to be changing for the better this time around. Also, strategic changes effected by various FMCG firms have yielded better results. Companies in the organised sector lowered prices of their product so as to take on the unorganised sector and drive up volumes. Apart from lowering prices, new product launches also provided a helping hand in boosting topline.

An analyst with leading brokerage firm pointed out that price realignment and course correction across categories helped various firms grab market shares back from the smaller players. Categories such as soaps & detergents, and oral care are indicative of this trend. The unorganised sector enjoys certain advantages over organised sector by providing cheaper alternative products in the categories such as soaps, detergent, biscuits etc. However, the segment majors had to give in at the operating margin levels as input costs continued to move upwards over the past couple of quarters.

Segment majors such as Bata India, Britannia Industries, Dabur India, Godfrey Phillips, Godrej Consumer Products, Henkel SPIC India, HLL, Marico Industries, Nestle India, Nirma, Proctor & Gamble Hygiene and Tata Tea have done well. HLLs revenues grew 4.2 per cent to Rs 2,467 crore during the latest quarter being the sharpest growth in seven quarters. Its operating profits too have grown by 5.8 per cent to Rs 600 crore. The cigarette major ITC clocked 4.5 per cent rise in topline to Rs 427 crore on the back of 3.5 per cent jump in cigarette business.

While most other businesses including new FMCG business, hotels and paper continued to do well, a 13 per cent decline in the agri-business restricted the topline growth. Godrej Consumer Products sales grew by 2 per cent to Rs 121 crore, its operating profits declined by 15 per cent to Rs 18.6 crore. The strong growth in the soaps portfolio was led by the mass-market brand exercise carried out by the company. The operating margins have come under pressure, as prices of vegetable oil have risen. Colgates revenues were down 3.2 per cent to Rs 255 crore. However, its net profit grew faster at 25 per cent to Rs 37.8 crore on account of lower taxes.

If analysts are to be believed things have just started falling in the right place for the FMCG segment as whole. Analysts are optimistic about the segments future performance citing strong consumer demand and focus on strong topline growth by most of the companies.

However, they cautioned that although the worst seems to be over, the reversal is unlikely to be sharp. But considering recent revision in the GDP growth by RBI that expects GDP growth to top 6.5-7 per cent and inflation rate at benign levels, economic fundamentals too bode well for the future of the segment.