Present and Future King :FMCG Sector

The staggering population of 1.2 billion is generally considered to be a bane .However if seen from the FMCG sectors’ perspective, then it’s a rooster that lays golden eggs.

This I am saying because an unexplored market is awaiting the FMCG sector to dawn upon it. When I say unexplored I am implying the rural markets of India.68% of the Indian economy resides here and accounts for 40% of Indian Economy. Obviously the Corporates can’t afford to neglect this segment. More so about 50% of the population is below the age of 25 years. So to the youth with additional disposal income is another segment that needs to be tapped.

 If statistics are to be believed then the Indian organized retail is just a mere 5% of the US $450 billion market. Thus being the second most populous country in the world we have immense scope for growth.

Let me put forth a gist of why there will be momentum in this 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 contribute 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.
• Media playing an important role in creating awareness of products in rural areas.

Further let me add on to further figures why investing in FMCG stocks is worth it.

SENSEX Vs BSE FMCG Index

FMCG sector is performing well due to strong characteristics and dependence on consumption in domestic market. The returns table (above) portraits that it registered lower drop in 2008 i.e. during slowdown in the economy. The performance of FMCG sector was laggard in 2009 when economy was recovering and major sectors started performing well contributing to growth in SENSEX. However, performance of BSE FMCG index in 2010 was outstanding on back of fiscal stimulus but got hit again in 2011 due to European debt crisis and domestic reasons. In 2011, SENSEX was volatile and gave negative returns of ~25% at end of year whereas; FMCG is the only sector which gave strong returns of ~9% in 2011.

Also according to the Economic Times, The FMCG Sector has been the best performing asset class against Nifty.

The past five-year average returns by the category of Equity FMCG funds have been about 19% against a meager 3.5% returns by the Nifty. In fact, over the past three-year period, average returns by the equity FMCG funds turn out to be as high 35%, surpassing even the returns of Gold ETFs that gave 25% during this period. The three-year returns by the Nifty, on the other hand, are as low as 2.9%.

Why FMCG is top performer among other sectors?

In last 15 months, FMCG sector attracted many investors and gave strong returns to them. The other sector indices gave negative returns in the range of 2% to 38% due to slowdown in the economy, high interest rates and rising inflation

Let me venture into something more captivating. They say all that glitters isn’t gold. But FMCG sector outshone the metal by a decent margin.

Gold may have outstripped other asset classes after the financial meltdown of 2008. However, there is one segment in equities which has surpassed the returns of even the yellow metal - the Fast Moving Consumer Goods or FMCG sector. This sector, has in fact emerged as one of the top performing assets over the past three years.

In 2009, for instance, while gold returned about 24% in terms of absolute gains, the BSE FMCG index generated more than 40% gains in that year alone. Similarly in 2010, the BSE FMCG Index generated returns of close to 32% while gold delivered returns of 23% that year

And even as the year 2011 may have been a bit subdued for the FMCG sector, with the BSE FMCG having clocked just about 9.5% returns against 32 % for gold, this year so far has been another spectacular year for this defensive sector. Since January this year, the BSE FMCG has generated a gain of about 16% against returns of 5% from the yellow metal.

Although a lot of investors would have participated in the gold rally, not many would have realized that while their investment in gold since 2009 till date may have fetched them absolute gains of about 113% an investment in FMCG stocks (BSE FMCG) would have generated about 136% during the same period.

Investments can be done by direct equity mode or via mutual funds.

Let us look into some company financials that have performed spectacularly in this sector.

The table comprise of some best listed FMCG companies in India. The outperformers among these companies are HUL and ITC with strong revenue Rs 199,390 mn and Rs 221,598 mn respectively in FY11. The EBITA margin across the sector has remained in the range of ~15% to ~26.5%. However, EBITDA margin for ITC in FY11 was 37.5%. The companies HUL and ITC registered PAT of Rs 23,066 mn and Rs 50,700 mn in FY11.

Investing through Mutual Fund Route

There are two sector funds available in market which invests mainly into FMCG stocks. So, you can opt to invest in these schemes considering historical returns, portfolio and risk analysis. The returns from mutual fund schemes have outperformed benchmark index from 2009 onwards till date

SBI Magnum FMCG Fund

Fund background: This sectoral fund was introduced from July 1999. The asset management company holding this scheme is SBI Funds Management Ltd. The minimum investment amount required is Rs 2000 and minimum SIP investment is Rs 500. The fund manager is Mr Saurabh Pant since June 2011.

Objective: To achieve maximum growth opportunity through investments mainly in FMCG stocks.

Top Holdings in portfolio: SBI Magnum FMCG Fund invests ~95% fund amount in FMCG stocks. The portfolio has 14 stocks from FMCG and consumer durable sectors. Top holdings of this scheme are ITC (~30%), HUL (~12%), VST Industries (~9%), Marico (~8%), Agro Tech Foods (~7%), Glaxo Consumer Healthcare (~7%), Emami (~6%), etc.

Investment style: Invests mainly in large cap stocks with top down approach.

ICICI Prudential FMCG Fund

Fund background: This scheme was introduced from March 1999. The asset management company holding this scheme is ICICI Prudential Asset Management Company Ltd. The minimum investment amount required is Rs 5000 and minimum SIP investment is Rs 1000. The fund managers are Mr Punit Mehta and Yogesh Bhatt since February 2012.

Objective: To generate long term capital appreciation by investing predominantly in equity and related securities of FMCG companies.

Top Holdings in portfolio: ICICI Prudential FMCG Fund invests ~80% fund amount in FMCG stocks. The portfolio has 9 stocks from FMCG, textiles and chemicals sectors. Top holdings of this scheme are ITC (~35%), HUL (~16%), VST Industries (~8%), Marico (~8%), Britannia Industries (~7%), Page Industries (~6%), Pidlite Industries (~4%), Dabur India (~3%) and Tata Global Beverages (~3%).

Investment style: Invests mainly in large cap stocks with top down approach.

To conclude, I would like to say FMCG sector is a safe bet if invested at least for the period of 3-5 years. Companies are getting into innovative modes to penetrate into rural areas. There could be a slight constraint due to factors like inflation due to which margins may come under strain. However volumes will be the deciding factor. Also HNI segment is on a rise and is so is the general income levels on the whole. If risk needs to be minimized then fmcg sectoral funds are a better bet.

To reaffirm, Nielsen’s research report entitled “Consumer 360”, the Indian FMCG market is estimated to grow to USD 100 billion by 2025 from USD 13 billion in 2012.Hence enter when valuations are cheap and reap excellent returns.