Top Story

e4m_logo.png

Home >> Marketing >> Article

FMCGs and the hinterland

06-August-2005
Font Size   16
Share
FMCGs and the hinterland

The old saw among FMCG analysts is that the industry operates on the “rule of two”. Two successive years of high GDP growth and two decent monsoons in a row is enough to ensure that people brush their teeth more often, bathe more often and wash their clothes more often.

Well, it’s not as simplistic as that obviously. But the major driver for FMCG growth in India is the increase in per capita in Bharat, where 60-odd per cent of the population still lives off the land.

The purchasing power of that 60 per cent is dependent on agriculture and, by extension, on the monsoons. When members of that rural population move up the income scale, they upgrade from tree-branches to toothpaste and from soap-flakes to soap, detergent and shampoo.

Sales in the rural hinterland are also dependent on the ability of the FMCGs to get their goods to consumers. There are vast swatches of Bharat where soap, shampoo, etc, is not easily available due to a lack of decent roads.

The major improvement in the Indian road network over the last 2-3 years has helped FMCGs improve distribution. At the same time, the improvement in telecom coverage and the computerisation of banks has also lowered the costs of doing business in Bharat.

VAT should help listed FMCG players because it narrows the tax-differential versus unorganised players. And, of course, India is now in its third successive year of decent GDP growth and the monsoon, which was okay in 2004 has, thus far, overperformed in 2005.

For two years, there has been a bitter price-war across the FMCG space. P&G changed its strategy and cut prices. Nirma has always been a price-warrior. As a result, the entrenched “biggies”, Hindustan Lever (HLL) and Colgate were also forced to drop prices to hold marketshare. In addition, HLL was going through a complicated brand-exercise of winnowing down its portfolio.

It seems the rule of two still holds for HLL. After four quarters of flat revenues and declining profits, the company has delivered decent topline growth and a (more marginal) expansion in operating profit.

The jewel in the Unilever portfolio has its financial year aligned with its parent so, April-June is Q2. In Q2, 2005, HLL had revenues of Rs 2836 crore, a 10 per cent growth over Q2, 2004. That was quite an improvement over the 6.5 per cent growth of Q1, 2005 over Q1, 2004.

Segmenting down, HLL has fought off competition in shampoos (revenues grew 20 per cent) and in personal products overall, (up 17 per cent). This augurs well because these were areas where it seemed vulnerable. There was a turnaround in the food division, where revenues rose 11 per cent (versus 3 per cent reduction in Q1). Beverages delivered 15 per cent growth.

Margins are still falling — but the deceleration seems to have slowed. HLL delivered y-o-y operating profit growth of just under 5 per cent but sequential improvement over Q1, 2005 was over 30 per cent. The net profit was considerably better at Rs 300 crore, registering y-o-y growth of 18 per cent with a jump in treasury income and a drop in interest costs.

HLL now trades at 30 times FY05 expected earnings. EPS growth is expected to be around 15 per cent in 2005 so, the valuations are still stretched. But the stock could nevertheless be an outperformer. HLL has risen around 29 per cent in June-July beating the indices comfortably.

Tags

Markus Noder, Managing Partner, Serviceplan International, shared innovative tools, ideas and methodologies to generate tangible business values

The primary reason that led to growth of OTT is the constant improvement of internet speed and service across the country: Sandeep Gupta, ACT Fibernet

Siddharth Kumar Tewary, Founder, Chief Creative, One Life Studios and Swastik Productions, on owning the IP on his most ambitious project 'Porus,' the risk of recovering its cost and his distribution strategy

Webscale plans to build the brand around smooth operations for the e-commerce sector and then move on to demand generation

The Tata Group is considering review of its Public Relations mandate which is currently handled by PR firm Edelman in association with Rediffusion. The review is likely to happen post January 2018.

KVL Narayan Rao, Group CEO, and Executive Vice Chairman of NDTV passed away at 63 after battling cancer for two years

Week 44 (October 29-November 4, 2017) of RAM Ratings saw Big FM and Fever FM dominating Mumbai. Meanwhile Fever, Radio City and Radio Mirchi dominated Delhi, Bangalore and Kolkata respectively.