FMCG, Sailing Steady Through Tough Times

The Indian fast moving consumer goods’ (FMCG) companies have been outperforming not only in the domestic markets but also in new geographies. Overseas acquisitions, new product launches, domestic acquisitions and concentration on rural sales have been driving these companies to robust performance. Over the last one year, while the Sensex has dropped by 8.30 per cent, the BSE FMCG Index has seen growth of 26.00 per cent. FMCG is considered to be a safe haven in times of high volatility and uncertainty and this fact has been lived up to rightly.

The global and local uncertainty was handled well by companies by expanding into markets smartly. With increasing competition locally, firms turned to aggressive expansion internationally and acquired companies abroad to increase their international presence and tap the markets. The growth rate for firms is seen to be larger for international markets than for domestic markets. For example, the international business of Godrej Consumer Products grew with 27 per cent organic sales growth while the Indian subcontinent clocked 21 per cent. As per media reports, rural markets contribute to 30 to 40 per cent of the sales of firms and are growing faster than urban areas. Higher concentration is being allocated by companies to make the most of this opportunity.

However, there are certain factors that have impacted the sector lately. The crude prices remained high throughout FY11-12 and this added to inflationary pressures in India. This coupled with a depreciating rupee kept inflation at an alarming level. Rising inflation was expected to cause worries for the sector but with proper resource management, firms have ridden over this issue smoothly. Input costs saw a mixed trend with commodities like palm oil, coffee and copra going down while prices of milk and chemicals like LAB and Titanium Dioxide peaked.

This started to pinch the margins of the FMCG companies. To continue posting a healthy bottomline, the sector continued to lower their advertising and promotion spends and other expenses. The sector growth was a result of both volume and price hikes. HUL’s domestic consumer business grew at 20.5 per cent and volume at 10 per cent. Following a similar trend, Dabur India’s revenues saw a growth of 22 per cent and their volumes of 12.4 per cent.

With uncertainly, volatility and inflationary pressures handled well, concern now seeps into the delayed monsoons which are directly linked to rural income and would hamper the growth from rural India to a certain extent. It would also create supply side bottlenecks in the procurement of commodities. It would result in performance pressures for the next two quarters of the year.

The Director-General of the Indian Meteorological Department (IMD) affirmed that the monsoon is slightly delayed but is catching up and would be normal for the season. The rainfall deficit gap has reduced considerably and the average overall rainfall has improved since the beginning of the month. Looking at the figures and statistics on rainfall, farming activity is expected to improve, thus resulting in no roadblocks in rural income or in commodity supply.

With the major issues tackled well by FMCG firms, a normal monsoon will maintain the credibility of the sector and ensure sustained healthy growth throughout the sector. The Q1 results for FY12-13 results will be out soon and we expect the figures to be in sync with the past performance of the sector where it will continue to post impressive numbers. For now, dark clouds are in need for the sector to shine brighter.