Urban demand adds lather to FMCG growth

Urban demand adds lather to FMCG growth

Author | Source: The Economic Times | Saturday, Jan 21,2006 8:58 AM

Urban demand adds lather to FMCG growth

The FMCG sector has been one of the best performers in the stock market with the BSE FMCG index returning about 60per cent in a year, while the ET Brandex returning about 66per cent during the same period.

Aided predominantly by a strong urban demand, the December '05 quarter is expected to see a continuation of good performance by FMCG companies in the year so far. Overall, sales are expected to grow in the range of 12-15per cent, while profits are expected to grow by 15-20per cent.

“The rural market has started to pick up too and will pick up sharply in the coming quarters. Urban growth rates in most categories are quite upbeat and seem to be getting better every quarter,” said the CEO of a leading Indian FMCG company. The past few months have seen the FMCG sector maintain its growth at good levels, aided largely by rising demand in urban markets. But while rural demand has revived, it is still very low in single digits.

But urban demand has been strong enough to drive sales growth of FMCG companies such as HLL, Godrej Consumer Products, Dabur and Marico Industries. Even companies such as Colgate Palmolive (India), which were finding the going tough last year, have started to show good sales growth.

The return of pricing power, even if it was occasioned by a severe hike in input costs, is a welcome relief to the industry. After years of promotions, discounts, price cuts which have taken a toll on margins and even sales growth in categories like detergents and shampoos, there have been price hikes in the range of 5-8per cent in these and other segments.

Thus, apart from volumes growing, a changing product mix and price hikes are expected to have a salutary effect on revenue growth, and may even lead to sales growing higher than expectations.

“Most companies are investing heavily in innovation across price segments. The noise levels in the marketplace too have gone up and created excitement in the consumer space,” said a senior Dabur India official.

However, this will not mean that margins will improve as companies are being careful enough to target price hikes in a manner that does not give any leeway to competition or discourage consumers from spending. In that respect, the fact that sales are growing despite slender price hikes is a comforting sign for the industry. Margins may be under pressure, especially for those companies whose raw materials include petro-based intermediates like cosmetics and detergents.

But the units set up by companies in tax-saving locations will come to their rescue in limiting the damage of rising input costs. That will also be the reason companies will report a robust improvement in profit and higher than sales growth though costs may be rising. The current quarter may also see a change in trend: larger companies narrowing the gap between them and their mid-sized counterparts on the sales growth front.

Consumption levels have picked up sharply, helping the industry market maintain its growth rate at an upbeat 6per cent. Categories innovating the most continue to record good growth rates. Biscuits, for instance, grew at 13per cent, shampoos grew at 16.3per cent, while washing powder grew at 9.4per cent, according to AC Nielsen estimates.

New categories with relatively lower penetration levels such as namkeens, batteries, biscuits, hair oils, scourers, shampoo, mosquito repellents are growing faster than highly-penetrated (over 80per cent) categories like toothpaste, soaps and detergents.

Mid-sized companies such as Dabur, Marico, Parle Products, J&J, Godrej Consumer, P&G and others are leading growth rates. Fast moving consumer goods heavyweights are eyeing global acquisitions, which are proving to be not only more economical than local ones but also giving them a foothold in international markets.

Industry chieftains said valuations of smaller Indian brands have hit the roof with too many merchant bankers chasing few available brands. Multinational companies keen on gaining a foothold in the Indian market are willing to pay an astronomical price for the distribution network of Indian brands than the brand itself.

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