Magna Industries & Exports Ltd Management Discussions

The Rs. 85,000 crore FMCG market in India is growing at a fast pace despite of the economic downtrend. The increasing disposable income and improved standard of living in most tier II and tire III cities are spearheading the FMCG growth across the nation. The changing profile and mind set of the consumers has shifted the thought to "Value for Money" from "Money for Value". Over the years companies like HUL, ITC and Dabur have improved performance with innovation and strong distribution channels. Their key categories have strengthened their presence and outperformed peers in the FMCG sector. On the contrary, Colgate Palmolive and Britannia Industries are strong in single product category i.e. tooth pastes and Biscuits. In addition companies have been successful in reviving their presence in the semi-urban and rural markets. The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of US$ 13.1 billion. It has a strong MNC presence and is characterized by a well established distribution network, intense competition between the organized and unorganized segments and low operational cost. Availability of key raw materials, cheaper labour costs and presence across the entire value chain gives India a competitive advantage. The FMCG market is set to treble to US$ 33.4 billion in 2016. Penetration level as well as per capita consumption in most product categories like jams, toothpaste, skin care, hair wash etc in India is low, indicating the untapped market potential. The burgeoning Indian population, particularly the middle class and the rural segments, presents an opportunity to makers of branded products to convert consumers to branded products. Growth is also likely to come from consumer upgrading in the matured product categories. With 200 million people expected to shift to processed and packaged food, India needs around US$ 30 billion of investment in the food-processing industry. Though fall of rupee against major currencies, new norms of standard-size packaging, increase in raw material costs due to upward spiraling interest rates and inflation together might dent the performance of the fast moving consumer goods (FMCG) sector, still there is silver lining of growth momentum. According to analysis, a sharp depreciation in the value of rupee and new packaging norms are going to have a drastic effect on the FMCG industry which is likely to increase cost of regular products like biscuits, coffee, tea, toiletries and personal care items in FY15. Input cost inflation, persistent rise in raw material price, rising fuel costs, fluctuation in the currency, dipping industrial growth, slowing global economy together with an overall moderating consumer sentiment might lead to a slow volume growth of FMCG segment.

KEY DRIVERS FOR GROWTH IN FMCG SECTOR:

Rapid increase in the rate of urbanization, Rise in disposable incomes enabling the companies to focus on premium product brands, Constant innovation in existing products from customer feedback, Penetration to rural markets with strong distribution channels, Rise in rural non-agricultural income and benefits from government welfare programmes contributes to top-line growth for FMCG companies, Investment in this sector stocks also attracts investor’s attention because the demand for FMCG products is throughout the year

KEY CONCERNS FOR FMCG SECTOR:

Rise in inflation leading to increase in raw material costs, New packaging norms from 1st July which is expected to increase cost of regular products like biscuits, coffee, tea, toiletries and personal care items by about 10% and more, Rising fuel cost leading to increase in distribution costs, Decline in industrial growth, Slowing economy will lead to lower demand of FMCG products affecting its volume growth, Sharp depreciation in the value of rupee against other currencies because most companies such as Marico, Godrej Consumer Products, Colgate, Dabur, etc import raw materials. The margins of these companies will be under pressure until the rupee stabilizes.

FUTURE OUTLOOK:

According to Nielsen’s research report entitled "Consumer 360", the Indian FMCG market is estimated to grow to US$ 100 billion by 2025 from US$ 13 billion in 2016. According to report, the key areas driving this growth would be increase sales and acceptance of branded products, regular consumption of FMCG goods, etc. However, this growth will not be smooth there will be some untimely jerk led by economic slowdown, increase in inflation, etc.