Covid-19 has been a major disruptor for many FMCG companies during the initial period of the lockdown, but they have recovered remarkably to post decent results for the June quarter of 2020. Hindustan Unilever Ltd, which is the country’s largest packaged consumer goods company, reported a 7% y-o-y jump in its June quarter net profit at Rs 1,881 crore.
On the other hand, biscuit giant Britannia Industries posted a 118% increase in its net profit for the first quarter of the current financial year 2020-21 to Rs 542 crore while turnover increased by 26% to Rs 3,420 crore over the corresponding quarter.
But ITC took a major hit for the June quarter with a sharp plunge in sales of cigarette, paper and hotel businesses. Margins declined sharply in the above three categories, but it was offset by growth in FMCG sales. The fast moving consumer goods sector is India’s fourth largest sector with household and personal care accounting for nearly 50% of FMCG sales in the country. Growing awareness, easier access and changing lifestyles have been the growth drivers for the sector.
The urban segment which accounts for a revenue share of around 55% is the largest contributor to the overall revenue generated by the FMCG sector in India.
However, recently, the FMCG market has grown at a faster pace in rural India compared to urban India. The retail market in India is estimated to reach US$ 1.1 trillion in the next few years with modern trade expected to grow at 20-25% per annum, which is likely to boost revenue of FMCG companies.
The government has allowed 100% Foreign Direct Investment in the food processing and single-brand retail and 51% in the multi-brand retail sector. This is aimed to bolster employment, supply chain and high visibility for FMCG brands across organised retail markets, thereby bolstering consumer spending and encouraging more product launches.
The Government of India has approved 100% FDI in the cash and carry segment and in single-brand retail along with 51% FDI in multi-brand retail.
The Goods and Services Tax (GST) is beneficial for the FMCG industry as many of the FMCG products such as soap, toothpaste and hair oil now come under the 18% tax bracket against the previous rate of 23-24%.
Cut to the present picture, FMCG companies are witnessing revival in sales in the rural areas after a loss of nearly 45 days between April and June 2020.
Analysts tracking the FMCG sector are expecting rural demand to expand significantly in the next few quarters with rural consumers demonstrating a clear preference towards health, wellness, hygiene and immunity boosting products at the forefront. Items like biscuits, noodles, tea, oils, chawanprakash, handwash sanitisers, soaps, shampoo, etc are showing good growth in rural areas.
We are bullish on the FMCG sector as a whole, but particularly ITC, and expect the stock currently quoting at Rs 200 to deliver a 30% price appreciation in the next 9 months’ time frame on the back of increased revenue from all segments.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.