FMCG Crasher Sep 2023

CREDENCE CAPITAL
(Investment Club of IIM Lucknow)

OVERVIEW OF THE INDIAN FMCG SECTOR
Main Segments:
a) Food and beverages: It account for 19% of the sector. This segment includes health beverages, staples/cereals,
Structure of bakery products, snacks, tea/coffee/soft drinks, processed fruits and vegetables, dairy products, and branded flour.
FMCG Sector b) Healthcare: It accounts for 31% of the sector. This segment includes OTC products and ethical.
c) Household and personal care: It accounts for 50% of the sector. Includes oral care, hair care, skin care,
cosmetics/deodorants, perfumes, feminine hygiene and paper products, fabric wash, and household cleaners.
Hindustan Unilever, ITC, Nestle India, Tata Consumer Products, Britannia Industries Ltd., Godrej Consumer Products,
Major Players Dabur India Ltd., Jubilant Foods Ltd, Marico Ltd., Colgate-Palmolive (India) Ltd., United Spirits Ltd., Varun Beverages Ltd,
P&G Ltd, Emami Ltd and, United Breweries Ltd to name a few
FMCG sector is a vital contributor to India’s GDP and the 4th largest sector in the Indian economy. It is forecasted to grow
from $110 billion in 2020 to $220 billion in 2025 registering a CAGR of 14.9%. One of the key factors which will drive
Market Size growth in this sector is expected to be rise in rural consumption. Currently, it contributes ~45% to the overall FMCG
industry. Improved distribution channels of manufacturing and FMCG companies have increased the demand for quality
goods and services in rural areas. Low penetration levels in the rural market offer room for growth with premiumization
driving urban growth.
Inventory Turnover Ratio: Cost of Goods Sold/Average Inventory
Operating cycle: Inventory Days + Receivable Days – Payable Days
Operating Profit Margin: Operating Profit/Annual Sales
Key financial
Net Profit Margin: Net Profit/Sales
metrics
ROCE: Operating Profit/Total Capital Employed
PEG Ratio = PE Ratio/EPS Growth
Revenue CAGR over the last 3-5 years
Shift to organized markets: Organized sector is expected to grow as the share of unorganized FMCG market has seen a fall
with increased level of brand consciousness. Growth in modern retail will augment the growth of organized FMCG sector.
Increase in penetration: Low penetration levels of branded products in categories like instant foods indicating a scope for
volume growth.
Growth Drivers Rural consumption: Rural consumption has increased, led by a combination of increase in income and higher aspiration
levels. There is an increased demand for branded products in rural India. Currently there is huge untapped rural market.
Easy access: Availability of products has become way easier as internet and different channels of sales has made the
accessibility of desired product to customers more convenient at required time and place. Online grocery stores and online
retail stores like Grofers, Flipkart, and Amazon are making FMCG products more readily available.
Structural Investment: Enhancing digital capabilities across the supply chain
impact due to Acquisitions: Corporates with capital may set out to acquire an incumbent, expertise or access to new market verticals
COVID-19 Margin expansion is set to become tougher due to rising input costs driven by global inflation
a) Strengthening rural network
Strategic b) Building Direct-to-customer channels and enhancing e-commerce engagements
Measures taken c) New market entry into hygiene, cleaning and, ayurvedic products
by top players d) FMCG companies are looking to invest in energy efficient plants to benefit the society and lower costs in the long term
e) Analytics: Use machine learning for quality control, product enhancement and optimizing supply chain
f) PLI for food processing a game-changer, to boost agri-exports: The government approved a production-linked incentive
(PLI) scheme for the food processing sector, entailing an outlay of Rs 10,900 crore. The move is expected to help create more
jobs in the sector, ensure the availability of a wider range of value-added products for consumers and the Indian companies
to establish themselves in the foreign markets.
g) New goods and service tax (GST) would simplify tax structure: Introduction of GST as a unified tax regime will lead to
Government re-evaluation of procurement and distribution arrangements. Elimination of tax cascading is expected to lower input costs
Initiatives and improve profitability. Changes need to be made to accounting and IT systems in order to record transactions in line
with GST requirements and appropriate measures need to be taken to ensure smooth transition to the GST. Tax refunds
on goods purchased for resale implies a significant reduction in the inventory cost of distribution.
h) The Government has allowed 100% Foreign Direct Investment (FDI) in food processing and single-brand retail and 51%
in multi-brand retail. This would bolster employment, supply chain and high visibility for FMCG brands across organised
retail markets thereby bolstering consumer spending and encouraging more product launches.
Globally, the Indian market is one of the fastest growing markets for FMCG industry although the per capita consumption of
FMCG products is amongst the lowest. Hence, immense growth opportunities exist in the market. The long-term outlook for the
Sector Outlook sector remains positive on the back of growth in e-commerce industry, favourable demographics, increase in disposable income
among other enablers. Rise in the share of women workforce is expected to lead to double income households and thereby
increasing the household’s propensity to spend and is also expected to lead to increase in demand for ready to eat food items.
For further
reference • https://www.ibef.org/industry/fmcg.aspx
08-09-23 FMCG Sector in India Arav Sangai

FMCG Crasher Sep 2023

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CREDENCE CAPITAL

(Investment Club of IIM Lucknow)

08-09-23 FMCG Sector in India Arav Sangai

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