March 8, 2018

FMCG Industry Analysis

ALWAYS – INVEST IN WHAT YOU KNOW & WHAT YOU CAN UNDERSTAND. DEVELOP CURIOSITY AS A TRAIT

 

Must know facts:

  • Fast Moving Consumer Goods (FMCG) goods, popularly named as consumer packaged goods, play a vital role as a necessity and as an inelastic product.
  • Favourable demographics and rise in income level to boost FMCG market.
  • Food & Beverages constitutes around 53% of total FMCG market, while Personal Care & Tobacco stands at 20% & 15% of the market share respectively.

Influencing Factors for price change:

  1. Trend of individual FMCG stocks is best judged when it is benchmarked against movement – ‘NIFTY FMCG’ & ’S&P BSE Fast Moving Consumer Goods’ indices.
  2. FMCG is purely policy driven market, so any changes introduced by the government can have an immediate effect on pricing parameters which includes both stock price & products of FMCG companies. From stock market perspective, these are safe heavens in terms of price movement & hence one can leverage closer to 15-20% of their overall portfolio in FMCG stocks. Most often the return on investment in stock prices of these are bench market against fixed deposit rates & benchmark bond yields.

For Example: The Government of India’s decision to allow 100 per cent Foreign Direct Investment (FDI) in online retail of goods and services through the automatic route has provided clarity on the existing businesses of e-commerce companies operating in India. In the Union Budget 2018-19, the Government of India has proposed to spend more on the rural side with an aim to double the farmer’s income in five years.

 

Understanding the Industry:

Fast Moving Consumer Goods (FMCG) goods, popularly named as consumer packaged goods, play a vital role as a necessity and as an inelastic product. Rural India accounts for 70% of India’s population, 56% of National Income, 64% of total expenditure and one third of the total savings. The Indian FMCG sector is the fourth largest sector the economy with a total market size of Rs. 167,100crs.

Growing awareness, easier access and changing lifestyles have been the key growth drivers for the sector. The urban segment (accounts for a revenue share of around 40 per cent) is the largest contributor to the overall revenue generated by the FMCG sector in India and recorded a market size of around US$ 29.4 billion in 2016-17. However, in the last few years, the FMCG market has grown at a faster pace in rural India compared with urban India. Semi-urban and rural segments are growing at a rapid pace and FMCG products account for 50 per cent of total rural spending.

 

Estimated Market Size:

The Retail market in India is estimated to reach US$ 1.1 trillion by 2020 from US$ 672 billion in 2016, with modern trade expected to grow at 20 per cent – 25 per cent per annum, which is likely to boost revenues of FMCG companies. In 2016-17, revenue for FMCG sector have reached US$ 49 billion and is expected to grow at 9-9.5 per cent in FY18. Approximately 12-13 million retail stores in India, out of which 9 million are FMCG kirana stores. Thus the sector is responsible for the livelihood of almost 13 million people.

 

Road Ahead:

With the urban market saturated, FMCG companies are now targeting the rural markets. In spite of the income imbalance between urban and rural India, rural holds great potential since 70% of India’s population lives there. Due to the recent government measures like waiver of loans, national rural employment guarantee scheme and increasing minimum support price, disposable income in rural India has been rapidly increasing.

However, rural markets present their own sets of problems. These include poor infrastructure, dispersed settlements, lack of education and a virtually non-existent medium for communication. Furthermore, retailers cannot be present in all the centres as many of them are so small that it makes them economically unfeasible.

Having said above, its clear that rural market is still an untapped market potential for major players including MNC’s who can operate on low margin but at large volumes. Such companies which can sustain with delayed breakeven on longer run. Examples of MNC’s pitching in with rural marketing programmes – Hindustan Unilever Limited (HUL) – Project Shakti, ITC E-Choupal & many more. You could do some thorough research on these initiatives, its amazing how they have evolved overtime amongst rural mindsets.

 

–    Article by Suman Adithya Rao (SEBI Certified Research Analyst, Management Graduate in Entrepreneurship & Small Business Management)
Looking for an investment advice – Click here!

 

Top Stocks in the industry:

EMAMILTD, GODREJIND, TATAGLOBAL, DABUR, JUBLFOOD, BRITANNIA, ITC, HINDUNILVR, UBL, MARICO & many more.

(Please note above stocks are not recommendations, they are purely for information purpose only)

Information Sources / References: IBEF, Makeinindia, ideasmarket,reports from World Bank,The Economic Survey 2016–17, Agricultural and Processed Food Products Export Development Authority (APEDA), Department of Commerce and Industry, Union Budget 2017–18, Press Information Bureau, Ministry of Statistics and Programme Implementation, Press Releases, Media Reports.

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