In the Union Budget too, the finance minister announced 100% foreign direct investment (FDI) in single-brand retail and awarded industry status to retail sector. Reduction in corporate tax for medium, small, or micro enterprises will also boost retail in India in the coming years.
The FMCG sector has steadily grown from US$31.6bn (Rs2.05 lakh cr) in 2011 to US$49bn (Rs3.18 lakh cr) in 2016 and is still rising with a quick pace. It is expected to rise even higher with a compound annual growth rate (CAGR) of 20.6% and will reach US$103.7bn (Rs6.74 lakh cr) by 2020.
Why should you buy and hold stocks of FMCG companies?
There are several reasons to hold shares of FMCG companies:
The FMCG sector has seen cut-throat competition as many new companies have entered the market with better products. Let’s take the example of Patanjali, which came with the motive of making products that were supposed to be pure ayurvedic, and people responded with unprecedented demand. To keep themselves in the game, other FMCG companies like HUL and Dabur came up with new products made with organic substances.
This competition is never-ending, and this has increased the valuation of the FMCG sector even as more and more products are manufactured on a daily basis. Every company is coming up something better to offer and, in the process, driving stock prices higher.
If you ask why the FMCG sector is growing at such a rapid pace, you shall find the answer in rural India: 60% of the total growth of the FMCG sectors comes from rural areas. As the government is taking measures to make more consumer goods available to the people living in villages, the sector has boomed. As long as there is industrialisation and the government makes policies to upgrade rural areas, this sector will keep on growing in valuation, and the stock prices will also increase.
On the other hand, if you look at the growth potential of the FMCG sector, you can easily predict that there will always be a demand for consumer products no matter what. Having shares of a good and financially-sound FMCG company will let you earn a higher return over time and to do that, you must consider keeping your stocks.
Start-up culture and innovation
The main reason for investors being positive on this sector is that it is now providing for innovation, which was rarely seen earlier. Start-ups facilitating online services with door-to-door delivery have made the FMCG sector more advanced. FMCG start-ups have realised that the “me too” business and solely relying on investor funding is not enough for long-term success; as such, they are now focusing on technology to solve the problem of market gaps.
Moreover, online business and better customer service have also become areas of major focus for new FMCG ventures. This has resulted in healthy competition, and access to low-cost quality products. These start-ups provide investors with quick exit options as other investors are always looking to buy shares of a good start-up having growth potential.
The rate of acquisition and mergers are also high with these new ventures, creating higher chances of extraordinary returns. If you are looking to sell your shares of an FMCG company, you should hold off for some years. On the contrary, consider buying more FMCG shares, as there is no stopping this sector from growing.