The fast moving consumer goods (FMCG) segment in India is already the fourth largest sector of the Indian economy. The retail market for FMCG products was $840bn in 2017 and is expected to scale $1.1tn by the year 2020. What is unique about the FMCG sector is the strong contribution of rural demand; urban contributes 55% and rural segment contributes the balance 45%. The overall FMCG segment is dominated by the household and personal care segment, which accounts for 50% of the overall sector.
Big triggers for the FMCG segment in India
With demonetization came the squeeze but it also brought about a greater acceptance of alternate digital payment methods. That is paying off. Some of the key triggers for the FMCG sector are as under:
The launch of GST takes away the advantage the unorganized sector enjoyed and that is leading to a greater shift towards the organized sector. This trend could become sharper in the coming months.
FMCG sales stood at $53bn as of financial year 2018 but is expected to grow at an annualized rate of 35% to touch $104bn by 2020. That is a big boost to the top-line of FMCG companies.
The GST Council has reduced rates on most food items to the range of 0-5% and even hygiene products of mass consumption have been brought into the 12-18% bracket. GST cuts have been passed on to the consumers; opening up the market.
Specific initiatives in the last few years like farm loan waivers, spending on rural infrastructure and the direct benefit transfer (DBT) scheme has helped. The minimum income guarantee scheme is also likely to be a boost to FMCG demand.
The big growth is expected to come from the rural areas. On an average, rural and semi-urban consumers spend 50-55% of their disposable income on FMCG products. Any income accretion will have a multiplier impact on rural demand.
Finally, the government has also done its bit. It has permitted 100% FDI in food processing and single brand retail and 51% in multi brand retail. In addition, it has increased mega food parks from 2 to 13; food preservation and processing capacity from 3.08 lakhs to 1.41mn; and number of food labs from 31 to 42. All these are likely to be major supportive triggers for the FMCG segment growth.
Big story could be in rethinking logistics
While most of the interest in FMCG stocks is focused on growing demand and the shift to organized sector, another trend is helping the FMCG space. GST will not only organize the industry but change the way FMCG companies handle their logistics. In the past, the logistics and warehousing were designed to give the best sales tax and VAT advantage. With GST subsuming all taxes into a single header, the FMCG companies can focus on the logistics set up that makes business sense. The benefits of such a shift will be visible in profits numbers in the coming quarters.
How has the FMCG sector performed on the bourses?
In the last 22 years, since the NSE FMCG Index has been in existence, the annualized total returns (including dividends) have been 17.60%. In the last five years, the standard deviation of returns of the FMCG sector has fallen from 22.66 to 16.32, while the correlation with Nifty has fallen to 0.61. Apart from healthy returns, FMCG has also been critical in de-risking the portfolio. But the real action could be ahead, as urban and rural India achieves critical mass in consumption. Growth in per capital income could be the next big trigger for the sector.