FMCG SECTOR

FMCG SECTORFast Moving Consumer Goods (FMCG) goods are popularly named as consumer packaged goods. Items in this category include all consumables (other than groceries/pulses) people buy at regular intervals. The most common in the list are toilet soaps, detergents, shampoos, toothpaste, shaving products, shoe polish, packaged foodstuff, household accessories and extends to certain electronic goods. These items are meant for daily of frequent consumption and have a high return.

A major portion of the monthly budget of each household is reserved for FMCG products. The volume of money circulated in the economy against FMCG products is very high, as the

number of products the consumer use is very high. Competition in the FMCG sector is very high resulting in high pressure on margins.

FMCG companies maintain intense distribution network. Companies spend a large portion of their budget on maintaining distribution networks. New entrants who wish to bring their products in the national level need to invest huge sums of money on promoting brands. Manufacturing can be outsourced. A recent phenomenon in the sector was entry of multinationals and cheaper imports. Also the market is more pressurized with presence of local players in rural areas and state brands.

Overview Of FMCG SectorWhat are FMCGs?WE regularly talk about things like butter, potato chips, toothpastes, razors, household care products, packaged food and beverages, etc. But do we know under which category these things come? They are called FMCGs. FMCG is an acronym for Fast Moving Consumer Goods, which refer to things that we buy from local supermarkets on daily basis, the things that have high turnover and are relatively cheaper. FMCG Products and Categories

- Personal Care, Oral Care, Hair Care, Skin Care, Personal Wash (soaps);

- Cosmetics and toiletries, deodorants, perfumes, feminine hygiene, paper products;

- Household care fabric wash including laundry soaps and synthetic detergents; household cleaners, such as dish/utensil cleaners, floor cleaners, toilet cleaners, air fresheners, insecticides and mosquito repellents, metal polish and furniture polish;

FMCG in 2006

The performance of the industry was inconsistent in terms of sales and growth for over 4 years. The investors in the sector were not gainers at par with other booming sectors. After two years of

sinking performance of FMCG sector, the year 2005 has witnessed the FMCGs demand growing. Strong growth was seen across various segments in FY06. With the rise in disposable income and the economy in good health, the urban consumers continued with their shopping spree.

- Food and health beverages, branded flour, branded sugarcane, bakery products such as bread, biscuits, etc., milk and dairy products, beverages such as tea, coffee, juices, bottled water etc, snack food, chocolates, etc.

- Frequently replaced electronic products, such as audio equipments, digital cameras, Laptops, CTVs; other electronic items such as Refrigerator, washing machines, etc. coming under the category of White Goods in FMCG;

Sector OutlookFMCG is the fourth largest sector in the Indian Economy with a total market size of Rs. 60,000 crores. FMCG sector generates 5% of total factory employment in the country and is creating employment for three million people, especially in small towns and rural India.

Analysis of FMCG Sector

Strengths:1. Low operational costs2. Presence of established distribution networks in both urban and rural areas3. Presence of well-known brands in FMCG sector

Weaknesses:1. Lower scope of investing in technology and achieving economies of scale, especially in small sectors2. Low exports levels3. "Me-too" products, which illegally mimic the labels of the established brands. These products narrow the scope of FMCG products in rural and semi-urban market.

Opportunities:

1. Untapped rural market2. Rising income levels, i.e. increase in purchasing power of consumers3. Large domestic market- a population of over one billion.4. Export potential5. High consumer goods spending

Threats: 1. Removal of import restrictions resulting in replacing of domestic brands

2. Slowdown in rural demandTax and regulatory structure

Scope Of The SectorThe Indian FMCG sector with a market size of US$13.1 billion is the fourth largest sector in the economy. A well-established distribution network, intense competition between the organized and unorganized segments characterize the sector. FMCG Sector is expected to grow by over 60% by 2010. That will translate into an annual growth of 10% over a 5-year period. It has been estimated that FMCG sector will rise from around Rs 56,500 crores in 2005 to Rs 92,100 crores in 2010. Hair care, household care, male grooming, female hygiene, and the chocolates and confectionery categories are estimated to be the fastest growing segments, says an HSBC report. Though the sector witnessed a slower growth in 2002-2004, it has been able to make a fine recovery since then. For example, Hindustan Levers Limited (HLL) has shown a healthy growth in the last quarter. An estimated double-digit growth over the next few years shows that the good times are likely to continue.

Growth ProspectsWith the presence of 12.2% of the world population in the villages of India, the Indian rural FMCG market is something no one can overlook. Increased focus on farm sector will boost rural incomes, hence providing better growth prospects to the FMCG companies. Better infrastructure facilities will improve their supply chain. FMCG sector is also likely to benefit from growing demand in the market. Because of the low per capita consumption for almost all the products in the country, FMCG companies have immense possibilities for growth. And if the companies are able to change the mindset of the consumers, i.e. if they are able to take the consumers to branded products and offer new generation products, they would be able to generate higher growth in the near future. It is expected that the rural income will rise in 2007, boosting purchasing power in the countryside. However, the demand in urban areas would be the key growth driver over the long term. Also, increase in the urban population, along with increase in income levels and the availability of new categories, would help the urban areas maintain their position in terms of consumption. At present, urban India accounts for 66% of total FMCG consumption, with rural India accounting for the remaining 34%. However, rural India accounts for more than 40% consumption in major FMCG categories such as personal care, fabric care, and hot beverages. In urban areas, home and personal care category, including skin care, household care and feminine hygiene, will keep growing at relatively attractive rates. Within the foods segment, it is estimated that processed foods, bakery, and dairy are long-term growth categories in both rural and urban areas.

Indian Competitiveness and Comparison with the World Markets

The following factors make India a competitive player in FMCG sector:

Availability of raw materialsBecause of the diverse agro-climatic conditions in India, there is a large raw material base suitable for food processing industries. India is the largest producer of livestock, milk, sugarcane, coconut, spices and cashew and is the second largest producer of rice, wheat and fruits &vegetables. India also produces caustic soda and soda ash, which are required for the production of soaps and detergents. The availability of these raw materials gives India the location advantage.

Labor cost comparison

Low cost labor gives India a competitive advantage. India's labor cost is amongst the lowest in the world, after China & Indonesia. Low labor costs give the advantage of low cost of production. Many MNC's have established their plants in India to outsource for domestic and export markets.

Presence across value chain Indian companies have their presence across the value chain of FMCG sector, right from the supply of raw materials to packaged goods in the food-processing sector. This brings India a more cost competitive advantage. For example, Amul supplies milk as well as dairy products like cheese, butter, etc.

Top 10 FMCG Companies

FMCG sector is an ever growing sector and is currently in a boom phase. There are many jobs in

FMCG sector at diiferent levels like sales, supply chain, manager, operations, purchasing, supervisor, administration, general management, product development, HR, Finance and marketing. FMCG sector is famous for jobs that are not only well paying but also gives the best perks and bonuses. Freshers are looking for jobs in FMCGsector as these jobs will give them the best career in the industry.

S. NO. Companies

1. Hindustan Unilever Ltd.

2. ITC (Indian Tobacco Company)

3. Nestlé India

4. GCMMF (AMUL)

5. Dabur India

6. Asian Paints (India)

7. Cadbury India

8 Britannia Industries

9. Procter & Gamble Hygiene and

Health Care

10. Marico Industries

Secondary Players

1. Colgate-Palmolive (India) Ltd.

2. Godrej Consumers Product Ltd.

3. Nirma Ltd.

4. Tata Tea Ltd.

5. Parle Agro

6. H. J. Heinz

Indian Consumer ClassIndia has a population of over 1 billion and 4 climatic zones . Several religious and personal beliefs, 15 official languages, different social customs and food habits characterize Indian consumer class. Besides , India is also different in culture if compared with other Asian countries. Therefore, India has high distinctiveness in demand and the companies in India can

get lot of market opportunities for various classes of consumers. Consumer goods marketers experience that dealing with India is like dealing with many small markets at the same time.

Indian consumer goods market is expected to reach $400 billion by 2010. India has the youngest population amongst the major countries. There are a lot of young people in India in different income categories. Consumer goods marketers are often faced with a dilemma regarding the choice of appropriate market segment.

In India they do not have to face this dilemma largely because rapid urbanization, increase in demand, presence of large number of young population, any number of opportunities are available . The bottom line is that Indian market is changing rapidly and is showing unprecedented consumer business opportunity .

As the restrictions on foreign investments were relaxed in 1991, Multi-National Companies have been entering India since then.

  Market Size in $ million

Market Share in %    

    Indian Companies  

MNCs Indian Companies  

MNCs  

  1992 2004 1992 2004

Breakfast cereals

2 25 100 0 52 48

Wafers, potato chips

6 35 100 0 37 63

Washing Machines

40 570 98 2 51 49

TV 630 3,030 97 3 49 51

1992 $=30 rupees2004 $=45 rupeesSource: Center for Monitoring Indian Economy (CMIE)

Indian consumer class can be classified according to the following criteria:

1. Income2. Socio-Economic status3. Age demographics4. Geographical dispersion

Income Based Classification

India has a population of 1.095 billion people, comprising of 1/6th of the world population. India's population can be divided into 5 groups on the basis of annual household income. These groups are:

1. Higher income 2. Upper middle income3. Middle middle income4. Lower middle income5. Lower income

The income classification does not represent a real scenario for an international business because the purchasing power of currencies differs significantly. The real purchasing power of Indian rupee is higher than the international exchange value. In addition to that, income classification is not an effective tool to ascertain consumption and ownership trends in the economy.

Consumer Classification

According to National Council of Applied Economic Research (NCAER) there are 5 consumer classes that differ in their ownership patterns and consumption behavior across various segments of goods.

Consumer Classes Annual Income in Rs. 1996 2001 2007 Change

The Rich Rs. 215,000 and more 1.2 2.0 6.2 416%

The Consuming Class Rs 45- 215,000 32.5 54.6 90.9 179%

The Climbers Rs. 22-45,000 54.1 71.6 74.1 37%

The Aspirants Rs. 16-22,000 44 28.1 15.3 -65%

The Destitute Below Rs. 16,000 33 23.4 12.8 -61%

Total   164.8 180.7 199.2 21%

Source: NCAER

The 5 classes of consumer households (consumer classification) show the economic development across the country based on consumption trends.

Socio-Economic ClassificationIn addition to income classification and consumer classification, Indian households can also be segmented according to the occupation and education levels of the chief earner of the household (the person who contributes most to the household expenses). This is called as Socio-Economic Classification (SEC), which is mainly used by market planners to target market before launching their new products. SEC is made to understand the purchase behavior and the consumption

pattern of the households.The urban area is segregated into: A1, A2, B1, B2, C, D, E1, E2. Socio-Economic Classification

Occupation Education

Illiterate

Less than 4 yrs in school

5-9 yrs of

school

School certificate

Some college

Graduate Post-

graduate

Skilled E2 E1 D C C B2 B2

Unskilled E2 E2 E1 D D D D

Shop owner D D C B2 B2 A2 A2

Petty trader E2 D D C C B2 B2

Employer of-

Above 10 persons

B1 B1 A2 A2 A1 A1 A1

Below 10 persons

C B2 B2 B1 A2 A1 A1

None D C B2 B1 A2 A1 A1

Clerk D D D C B2 B1 B1

Supervisor D D C C B2 B1 A2

Professional D D D B2 B1 A2 A1

Senior executive

B1 B1 B1 B1 A2 A1 A1

Junior executive

C C C B2 B1 A2 A2

Source: Indian readership survey (IRS)

Sections A & B refer to High-class- constitutes over a quarter of urban populationSec C refers to Middle-class-- constitutes 21% of the urban populationSections D & E refer to Low-class-- constitutes over half the urban population

To understand the table, consider an example: A trader whose monthly household income (MHI) is more than that of a person in section A cannot be included in this SEC because his educational qualification or occupation do not qualify him for inclusion.

Sec C constitutes households whose Chief Wage Earners are employed as :

Skilled workers 33%

Petty traders 12%

Clerk/Supervisor 37%

Shop owners 18%

3/4th of them have studied till 10th or 12th class while the remaining 1/4th have studied till 9th class. Less than half of the Chief Wage Earners of households belonging to sections D & E are unskilled workers. Petty Traders are 18%, while Skilled Workers are about 28%.

More than 80% of the population of upper strata consumers is living in the top 7 cities. Those top 7 cities are Mumbai, Kolkata, Delhi, Chennai, Ahmedabad, Bangalore, and Hyderabad. With increase in economic prosperity, this population (upper strata consumers) is growing at 10 percent annually.

The rural area is segregated in to: R1, R2, R3, R4.

Education of chief wage earner

Type of House

  Pucca Semi-pucca Kuchcha

Professional degree R1 R2 R3

Graduation/ PG R1 R2 R3

College R1 R2 R3

SSC/HSC R2 R3 R3

Class 4-Class 9 R3 R3 R4

Up to class 4 R3 R3 R4

Self-learning R3 R4 R4

Illiterate R4 R4 R4

Age DemographicsIndia is a very young nation, if compared with some advanced and developed countries. Nearly two- thirds of its population is below the age of 35, and nearly 50 % is below 25.

Marketers explain that the boom in the consumption level and leisure related expenditure is because of this young population. It will have a significant impact over the consumer goods market. In addition to that, it is expected that this will generate trade opportunities and continuous investment in the economy. There is huge potential for further consumption of goods and services due to the increased level of disposable income. The expenditure on essential goods and services has a higher share in developing countries as compared with that of developed

countries. Age distribution if Indian population (In Millions)

Year/ Age 2006 2001 1996

Below 4 yrs 113.5 108.5 119.5

5-14 yrs 221.2 239.1 233.2

15-19 yrs 122.4 109.0 90.7

20-34 yrs 279.1 246.8 224

35-54 yrs 239.2 207.3 178.1

55 & above 118.7 101.7 88.7

Total 1094.1 1012.4 934.2

Consumption Trends

Food Essentials 45.68%

Essential Services (water, power, rent, and fuels)

10.1%

Clothing 4.9%

Footwear 0.63%

Medicare 4.25%

Transport & Communication 14.51%

Recreation, Education, and Culture Less than 4%

Home Goods 3.25%

Geographical Dispersion of Market PotentialThere is large difference in economic prosperity levels among several states in India, linked to the wealth creation from trade, industrial, and agricultural development. There are poor districts in many states, classified according to their market potential. India has 500 districts, out of which 150 districts (category A) and next 150 districts (category B) account for 78% and 15% of the national market potential respectively. Remaining 200 districts (category C) are backward and account for only 7% of national market potential. Category C districts have 40% of the geographical share.

Recent Developments in Fast Moving Consumer Goods (FMCG) Sector

FMCG sector is no doubt registering an up trend in growth. According to CNBC, FMCG sector growth story will continue because of the positive budget. Nevertheless, there are some barriers to the growth of the sector. Indirect taxes constitute no less than 35% of the total cost of consumer products - the highest in Asia. Last year, Finance Minister proposed to introduce an integrated Goods and Service Tax by April 2010.This is an exceptionally good move because the growth of consumption, production, and employment is directly proportionate to reduction in indirect taxes. Budget 2007-2008 for FMCG Sector

Reduction of duty on edible oil will have a positive impact on Marico. Full exemption of excise duty on biscuits priced at 50 rupees or less per kg is positive for

ITC, Britannia, and Parle. Reduction of custom duty on food processing machinery and their parts from 7.5% to

5%. Reduction of excise duty on food mixes from 16% or 8% to nil is positive for ITC. Development of rural infrastructure is in focus, which is beneficial for FMCG companies

because it is a big market for FMCGs. Better infrastructure will improve the supply chain.

Exemption of free samples and displays from the purview of FBT will be beneficial for FMCG companies because they spend huge amount of money on advertising and brand building. HLL, Dabur, ITC, and Marico will be amongst the most benefited companies.

Reliance Retail to Enter the Packaged Tea MarketEmami Set to Invest Rs 220 Crore for Expansion in FMCG SectorGodrej Targeting FMCG Acquisitions in China, Indonesia, and Brazil FMCG Sector on a Buying Spree

Corporate Social Responsibility FMCG companies have now started taking Corporate Social Responsibility seriously. For instance, to encounter domestic violence, Ponds has tied up with the United Nations Development Fund(UNDF) for Women. Surf Excel is funding the education of children. Most brands link themselves with the social causes, thereby linking consumers with the brands and gaining goodwill in the market.

Challenges before the Indian FMCG Sector & Designing a Blueprint for FutureTuesday, May 18, 2010

A few FMCG companies have already outsourced manufacturing to some degree - including Sara Lee, Nike and several beverage companies  

Markets all over the world have been on a roll in 2003 and the Indian bourses are no exception having gained almost 60% in 2003. During this period, while there are sectors that have outperformed this benchmark index, there are also sectors that have under performed. FMCG registered gains of just 33% on the BSE FMCG Index last year.

At the macro level, Indian economy is poised to remained buoyant and grow at more than 7%. The economic growth would impact large proportions of the population thus leading to more money in the hands of the consumer. Changes in demographic composition of the population and thus the market would also continue to impact the FMCG industry.

Recent survey conducted by a leading business weekly, approximately 47 per cent of India's 1 + billion people were under the age of 20, and teenagers among them numbered about 160 million. Together, they wielded INR 14000 Cr worth of discretionary income, and their families spent an additional INR 18500 Cr on them every year. By 2015, Indians under 20 are estimated to make up 55% of the population - and wield proportionately higher spending power. Means, companies that are able to influence and excite such consumers would be those that win in the market place.

The Indian FMCG market has been divided for a long time between the organized sector and the unorganized sector. While the latter has been crowded by a large number of local players, competing on margins, the former has varied between a two-player-scenario to a multi-player one.

Unlike the U.S. market for fast moving consumer goods (FMCG), which is dominated by a handful of global players, India's Rs.460 billion FMCG market remains highly fragmented with roughly half the market going to unbranded, unpackaged home made products. This presents a tremendous opportunity for makers of branded products who can convert consumers to branded products. However, successfully launching and growing market share around a branded product in India presents tremendous challenges. Take distribution as an example. India is home to six million retail outlets and super markets virtually do not exist. This makes logistics particularly for new players extremely difficult. Other challenges of similar magnitude exist across the FMCG supply chain. The fact is that FMCG is a structurally unattractive industry in which to participate. Even so, the opportunity keeps FMCG makers trying.

At the macro-level, over the long term, the efforts on the infrastructure front (roads, rails, power, river linking) are likely to enhance the living standards across India. Till date, India's per capita consumption of most FMCG products is much below world averages. This is the latent potential that most FMCG companies are looking at. Even in the much-penetrated categories like soaps/detergents companies are focusing on getting the consumer up the value chain. Going forward, much of the battle will be fought on sophisticated distribution strengths.

Structural Analysis Of FMCG Industry

Typically, a consumer buys these goods at least once a month. The sector covers a wide gamut of products such as detergents, toilet soaps, toothpaste, shampoos, creams, powders, food products, confectioneries, beverages, and cigarettes. Typical characteristics of FMCG products are: -

1.The products often cater to 3 very distinct but usually wanted for aspects - necessity, comfort, luxury. They meet the demands of the entire cross section of population. Price and income elasticity of demand varies across products and consumers.

2.Individual items are of small value (small SKU's) although all FMCG products put together account for a significant part of the consumer's budget.

3.The consumer spends little time on the purchase decision. He seldom ever looks at the technical specifications. Brand loyalties or recommendations of reliable retailer/ dealer drive purchase decisions.

4.Limited inventory of these products (many of which are perishable) are kept by consumer and prefers to purchase them frequently, as and when required.

5.Brand switching is often induced by heavy advertisement, recommendation of the retailer or word of mouth.

Distinguishing features of Indian FMCG Business

FMCG companies sell their products directly to consumers. Major features that distinguish this sector from the others include the following: -  

1. Design and Manufacturing

1. Low Capital Intensity - Most product categories in FMCG require relatively minor investment in plan and machinery and other fixed assets. Also, the business has low working capital intensity as bulk of sales from manufacturing take place on a cash basis.

2.Technology - Basic technology for manufacturing is easily available. Also, technology for most products has been fairly stable. Modifications and improvements rarely change the basic process.

3.Third-party Manufacturing - Manufacturing of products by third party vendors is quite common. Benefits associated with third party manufacturing include (1) flexibility in production and inventory planning; (2) flexibility in controlling labor costs; and (3) logistics - sometimes its essential to get certain products manufactured near the market.

FMCG Giants,FMCG leaders, IndiaOpening up of markets have given immense opportunities to the business leaders in India to capture the opportunities over the globe. The time gap in the period of 2001-06 is considered as the best time for India's business leaders. The fast rising economic performance of has created an environment of optimism on the part of the investors to invest more.

Indian Industries in the fields of , , , and some others have brought tremendous success for the country. Here in this section we have covered various sectors of Indian Economy and the successful persons in the respective areas, name of companies and value of equity holding.

This is a complete list of some successful persons in the fields of FMCG:  

Promoter/chairman/family head

Company /group

Value of equity holdings (Rs crore)

Business

V.C.Burman Dabou Group 5,815.94 FMCG

Adi Godrej Godrej Group 5,560.76 FMCG

Karsanbhai K. Patel & family Nirma 3,143.78 FMCG

Harsh C. Mariwala & familyMarico Industries

2,085.63 FMCG

The Agarwal & the Goenka families

Emami 936.06 FMCG

Brief about FMCG Sector

INTRODUCTIONFast Moving Consumer Goods (FMCG), are products that have a quick turnover, and relatively low cost. FMCG products, which are generally replaced less than once a year (e.g. kitchen appliances).

Examples of FMCG generally includes a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, teeth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products and plastic goods. FMCG may also include pharmaceuticals, consumer electronics, packaged food products and drinks, although these are often categorized separately.

Examples of FMCGs are soft drinks, tissue paper, and chocolate bars. A subset of FMCGs are Fast Moving Consumer Electronics which contain innovative electronic products such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops which are replaced more frequently than other electronic products. White goods in FMCG refers to house hold electronic items such as Refrigerator, T.V, Music Systems etc.

FMCG IN INDIA

The Indian FMCG sector having a market size of US$13.1 billion is the fourth largest sector in the economy. A well-established distribution network, intense competition between the organized and unorganized segments, characterizes FMCG sector. FMCG in India has strong MNC presence. FMCG in India has gained a competitive, presence across the entire value chain. It has been expected that FMCG market will reach to US$ 33.4 billion in 2015 from US $ billion 11.6 in 2003. Most of the product categories like jams, toothpaste, skin care, hair wash etc in India has low per capita consumption as well as low penetration level that is a sign of untapped market potential. The middle class and the rural segments of Indian population gives the opportunity to brand makers to convert consumers to branded products.

Now gradually people are shifting to processed and packaged food and the figures are expected to 200 million people by 2010. This left India with the requirement of US $28 million in the food processing Industry.

India is one of the largest emerging markets in FMCG sector because of

Large domestic market India – an extravagant spender on consumer goods Demand-supply gap

Rapid urbanization, increased literacy and rising per capita income

Indian FMCG Sector 4Q FY2010 outlook

Date: 10 April 2010 Contributed by Angel Broking

By Angel Broking

For 4QFY2010, we expect our FMCG universe to post a steady revenue growth of 16%, largely led by companies like GCPL (consolidation effect of Sara Lee), Dabur (new product launches) and ITC (gains from stocking up of inventory in cigarettes ahead of price hikes). We expect HUL and Marico to emerge as key laggards in terms of revenue growth, as we model in lower value growth due to price cuts affected in their core categories.

After the Union Budget, some companies (ITC, GCPL) have been forced to pass on the excise duty hikes to the end customers; however, for most companies the focus continues to be on volume growth. Better reach (significant investments in distribution infrastructure), strong support from higher Ad spends and support from rural markets (higher MSPs, NREGS and rising food prices to drive rural incomes) will be the key drivers aiding a modest volume growth for our FMCG universe.

Input costs exhibit mixed trends

For 4QFY2010, prices of the agri-commodities in general registered a decline. Prices of Barley, Soyabean oil, Groundnut oil and Copra declined between 1-6%, while Sugar and Milk prices declined by about 40% and 12% respectively. Tea prices, which peaked out last year due to drought conditions in India and Bangladesh, are expected to ease out this year due to improving weather conditions. However, Coffee prices have risen by about 20% this quarter and are expected to remain firm in the coming quarters.

Rising crude oil prices (by about 4% this quarter) have increased the transportation cost for all companies in our FMCG universe. HDPE has surged by about 9% this quarter, while LAB, Soda Ash and Caustic Soda prices have declined 0-8%.

Budget Blues; ITC takes the brunt

The Union Budget 2010-11 continued with its thrust on Rural Development. The Government continued with its efforts in increasing the disposable income in the hands of the people, by effecting a reduction in indirect taxes and by expanding public expenditure on programs like the NREGS and Bharat Nirman, and on Rural Infrastructure.

For the sector per se, however, the budget was a bundle of woes. Postponement of the GST to next year and increase in the MAT rate to 18% (15%), along with a partial withdrawal of the stimulus package, with a roll-back in excise duty cut (hiked 2%) is negative for select FMCG companies in our universe. The hike in the excise duty between 10-18% for filter cigarettes exceeding 60mm length (negative for ITC), was significantly higher than our expectations. Moreover, the hike in customs duty on diesel and petrol, coupled with a 5% increase in the import duty on crude, will negatively impact the transportation and packaging costs, thus affecting the entire FMCG sector. Crude derived inputs might also see a price increase.

It's raining price cuts for HUL and P&G…

After P&G's launch of Tide Naturals (cheaper variant of Tide) in December 2009, HUL finally reacted in late January by introducing a fresh round of price cuts (10-30%) in Rin and Surf Excel (either via direct price cuts or via grammage increases). In retaliation to HUL's price cuts and the

comparative ads (Rin v/s Tide) broadcast by HUL, P&G finally struck back, taking a 20% indirect price cut (via a 25% grammage hike) in Tide Naturals. Media reports suggest that the company is also increasing the pack size of its mother brand, Tide, by a similar percentage. The grammage increases equate to a price cut of almost 20% in both Tide and Tide Naturals, which will now retail at Rs56/kg (Rs70/kg) and Rs40/kg (Rs50/kg), respectively.

The price war in 2004 took almost a year to get over, when P&G finally announced 4-5% price hikes in February 2005 in Ariel and Tide, which saw HUL following suit. However, that was not before the damage was done to HUL's Margins and Profitability. Hence, we believe that the 2010 price war, though lower in quantum, has just started and is likely to significantly impact HUL's Earnings.

…while the Budget forces others to take Price hike

Forced by the excise roll-back in Budget, GCPL has decided to hike prices in the range of 8-10% in baby diapers and 2-5% in other FMCG categories, which include soaps. CavinKare is also looking at taking price increases on product packs of above Rs10. Britannia is hiking prices in the range of 2-10%, due to an increase in input costs. Emami has also increased prices of its products between 3-7%, due to the increase in the input costs (as a result of the excise duty hike, coupled with the surge in the transportation cost). ITC Foods is also planning to take price hikes for its impacted brands soon.

ITC, which had increased prices of its flagship brand Gold Flake Kings by 7% prior to the Union budget, hiked rates by 8-20% across its portfolio to combat higher excise rates introduced in the Budget.

Acquisitions and Innovations at the forefront

FMCG majors are increasingly focusing on expanding their global footprint by acquiring companies in niche segments to fill gaps in their product portfolio. The companies are also increasingly spending on Research and Development.

Among the most prominent deals completed this quarter was Godrej Consumer's (GCPL) acquisition of Tura, an African personal care brand from Tura Group, owned by the Jatania family of Lornamead fame (recently sold Yardley rights to Wipro for select markets). GCPL is expected to institute a cross-functional team, with members from Rapidol, Kinky, Tura and its

Indian management team to leverage synergies. Another important acquisition, though on a small scale, was Marico acquiring the Malaysian hair styling brand, Code 10, from Colgate-Palmolive. With a deal size of about Rs25cr and a market share of about 10%, this brand has the potential to grow even further in that market.

Moreover, FMCG majors like ITC and Dabur are investing heavily on R&D to launch new innovative products. Dabur is staging a comeback to the pharmaceutical discovery research arena (Ayurvedic Research), with the setting up of Althea Life Sciences in the suburbs of Gurgaon. The group has research contracts with over 20 clients, foreign and Indian, and these are being executed by Dabur Research Foundation (DRF), the group's 30-year-old entity. ITC has recently launched gel bathing bars under Fiama Di Wills brand, a breakthrough made through its unique patented freezing technology.

New product launches gain momentum

Keeping abreast with our expectations, most FMCG companies maintained their momentum in launching new products. Nestle led the pack in new product launches. The company launched Maggi Masala-ae-Magic (a taste enhancer), Maggi Rasile Chow (a two-minute noodle for the rural and semi-urban class) in its processed food segment, the premium Nescafé Cappucino in chocolate and vanilla flavors and Nescafé Iced coffee in its beverages segment, and Milkybar crispy and Munch Guru, for 'lighter eating' in its coated wafer segment. HUL ranked a close second, with launches of new variants under its iconic brands Lux and Brooke Bond. The company launched Brooke Bond Sehatmand in the states of Uttar Pradesh, Madhya Pradesh, Bihar, Jharkhand and Chattisgarh for the health conscious customer segment, and a new variant of Lux- Lux Purple Lotus cream. P&G is soon launching toothpaste under its global brand Crest, directly competing with Colgate-Palmolive India, Dabur India and HUL in the oral care segment.

The competition in the instant noodle segment intensified, with GSK Consumer launching Horlicks Foodles and HUL launching Knorr Noodles (already present in Pakistan), competing with Nestle's Maggi. ITC may soon follow suit with its launch of Sunfeast noodles. Dabur launched a new variant of Hajmola- Hajmola Kaccha Aam and is currently test marketing products for its 'ready-to-eat' portfolio under its Hommade brand. Godrej Consumer launched two hair color variants of Renew - Renew Wine Red and Renew Plum Crazy. Marico extended its good-for-heart equity, Saffola, to functional foods, with the launch of Saffola Arise.

HUL underperforms, Midcaps shine

The BSE FMCG Index posted a marginal 1% outperformance vis-à-vis the Sensex, in-line with

our expectations. HUL was the sole underperformer, owing to the intensifying competitive scenario (P&G getting aggressive) and concerns over its impact on profitability. On the other hand, GSK Consumer emerged as the biggest outperformer this quarter supported by new product launches. Additionally, Asian Paints posted yet another quarter of steady gains, owing to steady demand conditions for Paints and a benign input cost environment.

Quarter of robust Earnings, except for HUL

For 4QFY2010, we expect our FMCG universe to post a modest Top-line growth of 16% yoy, driven largely by Volume growth and improvement in the Product-mix. Earnings for the quarter are expected to grow at a strong pace of 21% yoy, aided by Margin expansion for most companies, due to lower input costs (yoy basis) and rationalisation of ad spends (except HUL and Nestle).

Asian Paints, GCPL and ITC are expected to report the strongest Earnings growth during the quarter. HUL, the segment leader, is expected to report a drop in recurring Earnings by 4%, owing to weak Revenue traction and a drop in Margins (price cuts and sustained Ad-spends). We

expect ITC to post 2% increase in Cigarette Volumes, despite price hikes (affected only in March), owing to gains from stocking up of inventory. ITC's Earnings are expected to grow by a strong 33% yoy, aided by Top-line growth (up-tick in Hotel Revenue) and Margin expansion.

Valuations appear rich; Stay Selective

Most FMCG companies have witnessed a sharp rally in the recent past, and are currently trading at rich valuations that are being driven by a steady Earnings growth, significant Margin expansion, and a sustained volume growth. In terms of their One-Year Forward P/Es, most companies are trading in line with their five-year averages, but at a 20-30% discount to their peak valuations (in FY2007). While the long-term consumption story for the FMCG industry remains intact, any further re-rating from the current valuations seems less likely.

We maintain our stance of Equal-weight on the FMCG sector, as we believe that both earnings upgrades and P/E re-ratings are likely to take a breather from the current levels. However, a strong defensive appeal and a steady Earnings growth are likely to cap the downside as well. Hence, we continue to emphasise selective stock picking, and prefer a set of companies with a leadership position in their product categories, a diverse product portfolio and with stronger pricing power.

Among the heavyweights, we prefer ITC (strong resilience to pricing actions in cigarettes, other segments to see up-tick) to HUL (poor competitive environment). In Midcaps, we rate GCPL (steady Earnings growth, news-flow from acquisitions), Dabur (new product launches and benign input costs) and Nestle (strong urban portfolio, low competition and support from parent) as our Top-picks.