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High consumer confidence fires up growth for FMCG sector

24-October-2005
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High consumer confidence fires up growth for FMCG sector

Improving consumer sentiment across India's urban and rural markets have fired up growth rates in the fast moving consumer goods (FMCG) market. Senior industry officials said there's a sharp reversal in downtrading, and profit margins have improved substantially with consumers seeking value-added and aspirational products.

For August '05, the total FMCG market grew by a strong 6.2% in value terms. Reflecting the consumer confidence, the FMCG index has moved up by 37% over the past six months, even marginally outperforming the BSE sensex. Most companies are expected to post strong growth in sales with some analysts expecting giants like HLL to post double digit sales growth.

In fact, HLL, which has been criticised for years for its performance, may at least be able to convince doubters about its sales potential though its profitability may still be under some strain.

Toilet soaps grew by 4.7%, biscuits by 13.9%, washing powder and liquid detergents by 8%, toothpaste by 4,4% and skin creams grew by 7.5%. CK Ranganathan, CMD of CavinKare told ET that demand has picked up across markets with the rural sector showing a rebound in recent weeks.

“Demand has not only picked up sharply, there's an upswing across categories too” he said. Industry sources said the jump in volumes despite prices hikes by leading players in some categories displayed a strong consumer confidence in the market.

The FMCG industry is seeing a resurgence in growth as demand picks up and companies play the price-value game more sensibly. This comes in the backdrop of an inflationary raw material price trend, putting pressure on costs which has had a welcome, though unintended, effect of curbing freebies. Most companies have also been protected from the rising cost scenario due to their presence in the tax havens of Himachal Pradesh and Uttaranchal.

Adi Godrej, CMD of Godrej Consumer Products said, “Our business segments delivered healthy results making us the second largest toilet soaps player in the country. The FMCG segment is witnessing a healthy demand growth. Clarity on VAT has enabled us to further enhance sales,” he said.

Companies are offering buyers better choices, paying attention to quality and the price-value equation. Most are paying attention to the demand for higher-end products in segments like personal care. These segments can let companies focus on the mass end for volume and top end for margins.

“Demand for high-value products and higher fiscal benefits from investments in tax exempt locations in an upbeat market has clearly helped companies tone up sales growth. We expect top companies to record double-digit growth rates for the next few quarters,” said an analyst at ICICI Securities.

For the quarter ended September '05, the effect of setting up units in tax havens will be more pronounced as more companies have set up units here. The effect of higher petro-based intermediates will be visible on bottom lines, though softer edible oil prices will provide some relief.

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