Sector Analysis: FMCG

Key Highlights During the quarter (Q4 FY09), BSE Fast Moving Consumer Goods index (FMCG index) posted positive return of 2.46% where as BSE 500 posted negative return of 2.04%. Market Capitalization of FMCG index on March 31, 2009 was Rs 1,75,496.78 crore and during Q4 FY09 it augmented by Rs 3,585.73 crore. During Q4 FY09, FMCG index was among top 5 sectoral indices those outperformed the BSE 500 index. Dabur India was star performers on the bourse giving return of 17.50% where as laggard in FMCG sector was United Spirits posting negative returns of more than 26%. During Q4 FY09, companies in FMCG index, on aggregate basis, managed to registered double digit growth of 10.34% (Y-o-Y). High raw material cost resulted in margin erosion of the FMCG companies. Rural demand and an increased focus on rural markets are driving the overall FMCG sector.

Movement in BSE FMCG vis-à-vis BSE 500 (Q4 FY09)

Snapshot FMCG sector has managed to register double digit revenue growth of around 11% in Q4 FY09 (y-o-y), a little lesser than the expected growth of 12-15%. A strong upsurge witnessed in rural demand helped in keeping the sector’s growth momentum intact. However, high prices of key inputs restricted the sector’s OPM growth, though, companies tried to cut costs, like from packaging or selling & administrative, especially after witnessing a year of high volatility in commodity price movement.

FMCG in Q4 FY09

Inter-Company Comparison for Q4 FY 2009

Company@ Revenue Growth OPM PAT NPM EPS# Price* PE  (Y-o-Y) Rs. Crore % % Rs. Crore % Rs. Rs. Times Godrej C. P. Ltd. 275.50 29.39 21.34 56.10 20.36 6.29 147.85 23.51 United Breweries Ltd. 463.58 20.89 22.19 32.90 7.10 2.59 118.25 45.66 United Spirits Ltd. 922.90 20.41 16.91 55.62 6.03 29.68 668.80 22.53 Nestle 1,270.78 16.24 24.35 197.30 15.53 59.46 1,740.30 29.27 Dabur India Ltd. 620.23 16.17 18.26 91.71 14.79 4.32 107.60 24.91 Marico Ltd. 429.52 15.17 3.26 6.59 1.53 2.99 62.40 20.87 Ruchi Soya Industries Ltd. 3,770.52 8.33 0.93 1.95 0.05 4.78 34.50 7.22 Hindustan Unilever Ltd. 4,035.37 5.09 12.63 394.99 9.79 11.40 224.50 19.69 Sector 11,788.40 10.34 14.98 837.16 9.40 - - - @ Out of 12 companies under BSE FMCG index, only 8 companies have declared result of Q4 FY09 till May 20, 2009 # Annualized EPS of FY 2009 * Price is of May 14, 2009 Even as large FMCG companies like Hindustan Unilever struggle with revenue growth, mid-tier FMCG companies like Godrej C.P., Marico and Dabur have reported strong spurts in realization as they focus on inorganic growth and rural markets. Godrej C.P. witnessed maximum growth in revenue of 21.34% followed by beverage companies, viz. United Breweries and United Spirits, with the growth rate of more than 20%. On aggregate basis, sector wise, the growth rate is satisfactory at 10.34% but is lesser than the expectation of 12-15% as consumers switched to a smaller pack or a cheaper value product. Hindustan Unilever (HUL), Ruchi Soya and Nestle altogether comprised 77% of sectors’ revenue while remaining 5 companies had less than 10% of revenue’s chunk. Operating margin of the sector stood at 14.98% in Q4 FY09 lower form last year’s 16.69% in the same quarter mainly due to high cost raw material despite the expense on selling and administration remained flat. Raw material comprised more than 57% of the total expenses and there was 9% increase in the same to Rs 6,036.95 crore (y-o-y). Nestle and United Breweries were only ones who managed to register increase in the OPM broadly as revenue grew more than the expenditure. PAT of the sector augmented by 4% to Rs 837.16 crore while NPM stood at 9.40% marginally lesser than the last year’s 9.79%. Quarterly Performance (Q4 FY09 Vs Q4 FY08) Dabur Dabur witnessed 16.17% jump in the net sales to Rs 620.23 crore due to 36% decrease in the excise duty as company’s 3 manufacturing units are strategically located in excise duty free zones - Rudrapur (Uttaranchal), Baddi (Himachal Pradesh) and Jammu.  The net profit of the company has increased by 16.40% to Rs 91.71 crore. Dabur’s hair oils business grew 23% in the fourth quarter, while shampoos grew nearly 31%. Toothpaste sales were up 19.2%, while its baby and skin care business grew 24.5%. Led by Real juices, its foods arm grew 23.1%. Dabur has reported faster growth in rural India due to higher farm output and a host of pro-farmer policy initiatives announced by the Government. In addition, the raw material prices eased in the latter part of the year that also helped in the sustainability of margins. Though, the company has slowed down on expanding its health and wellness retail stores ‘New U’ because of high real estate costs and the need to conserve management time for more profitable and strategically-important businesses. It plans to eventually sell the business. Dabur India also announced a final dividend of 100% or Re 1 per share for FY09. United Sprites (US) Higher interest costs have dragged down the net profit of US to Rs 55.62 crore, a drop of 14.57% for Q4 FY09. The interest costs was up by 72% to Rs 56.50 crore on account of three factors- a rise in overall working capital expansion to fund the growth, a spurt in the interest rates at various points in the fiscal year and a rise in the exchange rate. In addition, the raw material cost of US has increased by 51% to Rs 437.97 crore due to rise in the price of molasses led by drop in the sugarcane acreage coupled with the stand off between the mills and the farmers had delayed the start of crushing operations by a couple of months. Because of the restricted availability of molasses with the sugar mills, prices are expected to remain firm till the commencement of the next crushing season in October 2009. US sold over 9 crore cases during the year 2008-09, which was about 20% higher than the previous year. The net sale of the company has augmented by 20% to Rs 922.90 crore as compared to last year’s corresponding quarter. United Breweries (UB) Liquor-baron Vijay Mallya-led United Breweries’ net profit grew 68% to Rs 32.90 crore in Q4 FY09 over the corresponding period a year ago. The net sales of the beer producer rose to Rs 463.58 crore from Rs 383.47 crore, a rise of 20.89%, for the same period. OPM of UB increased by 710 bps to 22.19% led by curtail in the expenses of employee and Power & Fuel. However, the interest expense of the company has increased by more than 97% due to which the NPM has hampered to stand at 7.10%. UB has also declared a dividend of Rs 3 per cumulative redeemable preference shares on 1.72 crore shares. Marico The company's net profit plunged by 74% to Rs 6.59 crore as against Rs 25.50 crore. Its net sale was up by 15.17% at Rs 429.52 crore versus Rs 372.93 crore. OPM fell by 698 bps at 3.26% due to 65% rise in the other expenses. Marico has planned to sell its entire stake in its U.S.-based spa products business, Sundari LLC, to Wellness Systems, as it had decided to focus on the growth markets of Asia and Africa. Ruchi Soya Industries Net profit of Ruchi Soya declined 94.83% to Rs 1.95 crore as against Rs 37.72 crore. Net sales rose 8.33% to Rs 3,770.52 crore as against Rs 3,480.64 crore. OPM & NPM reduced by 278 bps & 103 bps to 0.93% & 0.05% respectively. Segment-wise, revenue from Oil and Food products increased by 23% where as Seed Extraction and Vanaspati experienced fall of 15% in revenue while other segment witnessed jump of 14% from last years corresponding quarter. However on the basis of PBIT, except Food products (+ 15%) all other segments experienced negative growth of 89%. Raw material cost comprises approx. 75% of the total expenditure and from last year it has increased by 15% to Rs 2,801.54 crore.  Nestle India Nestle India witnessed 16% growth in total income to Rs 1,276.16 crore due to higher domestic sales. Net domestic sales increased by 19% to Rs 1,191.97 crore on account of both volumes and realization. The export sales decreased by 15% to Rs 73.86 crore largely on account of lower exports to Russia partially offset by improved realizations due to the depreciation of the India Rupee against the US Dollar. OPM of the company increased by 191 basis points to 24.35% due to favorable sales mix, lower petroleum prices and improved net realizations. As a result, the profit at tax increased by 23% to Rs 197.30 crore. The board of Nestle India has declared interim dividend at the rate of Rs 9 per share for the year 2009. HUL The company's net sales for the quarter ended March 09 has increased by just 5% to Rs 4,035.37 crore. FMCG maintained strong value growth of 12%, in the context of a challenging environment, trade de-stocking and outlet consolidation in organized retail. HPC Business grew at 11% driven by carry forward impact of pricing in Soaps and Detergents which grew 16%. Personal Products grew 2%, affected by outlet consolidation in organized retail and decline in Oral Care. Foods business grew by 13% with Beverages at 13% and Ice-Creams at 22% leading growth. Pure-It is now Rs 200 crore brand with more than 1 million units sold in last 12 months and more than 2 million homes protected till date. OPM of the company decreased meagerly by 0.34% to Rs 509.49 crore due to rise in staff cost by 10%, selling & administrative by 3% and other expenditure by 18%. The net profit of the company has increased by just 4% to Rs 394.99 crore. Godrej Consumer The net sales of the company grew by 29% to Rs 275.50 crore. OPM of the company has decreased by 161 bps to 21.34%, this is due to incline in raw material expense by 21% and staff cost by 16%. However, selling & advertisement decreased by 40%. There was an interest income of Rs 8.12 crore, resulting in increase of 43% in PBDT to Rs 66.91 crore. This was on account of interest received on proceeds of the rights issue which have been invested. Depreciation has decreased by 24% to Rs 2.87 crore. As a result, the PBT has inclined by 49% to Rs 64.04 crore. The company's net profit has increased by 51% to Rs 56.10 crore due to interest income and net profit margin increased by 292 bps to 20.36%. GCPL continues to be the second largest toilet soaps player with a market share of 9.9 % for Q4 FY09.The company declared a fourth interim dividend and final dividend of 75% each on the shares of face value of Re 1/- each for the FY 2009. FMCG on Bourses FMCG index was fickle during Q4 FY09 but managed to post positive return of 2.49% while BSE 500 index delivered negative return of 2.04%. FMCG index was among the top 5 BSE sectoral indices that posted highest return in Q4 FY09 (Q-o-Q).

Return posted by BSE sectoral indices vis-à-vis BSE 500 in Q4 FY09 (Q-o-Q)

Particulars Index Value Return 31-Mar-09 % B S E Auto Index 3,061.67 25.24 B S E Oil & Gas Index 7,053.04 16.58 B S E Metal Index 5,795.07 11.14 B S E Information Technology Index 2,285.68 2.59 B S E FMCG Index 2,036.24 2.46 B S E Power Index 1,847.10 0.97 B S E PSU Index 5,230.17 -0.94 B S E 500 Index 3,523.53 -2.04 B S E Teck Index 2,830.11 -4.59 B S E Healthcare Index 1,846.83 -5.15 B S E Capital Goods Index 6,466.03 -6.44 B S E Consumer Durables Index 1,625.45 -15.06 B S E Bankex 4,490.97 -17.67 B S E Realty Index 1,560.83 -31.37

Moreover, return posted by FMCG index has increased by 1,048.25 basis points on Q-o-Q and 374.52 basis points on Y-o-Y basis.

Indices’ Quarterly Return

FMCG index, in Q4 FY09, started at the level of 1,991.98 (January 1). During the month of February, the index touched highest value of 2,059.42 where as in the month of March, it touched lowest level of 1,802.57.

Top Performers in Q4 FY09 (based on Share Price)

Company Name Weightage in the index Close Price Return Market Cap. Gain/Loss of Market Cap (Times) (Rs.) % (Rs. Crore) (Rs. Crore) 19-02-2009 31.12.2008 Q-o-Q 31.12.2008 Q-o-Q Dabur India Ltd. 2.59 98.70 17.50 8,538.54 1,271.70 Colgate-Palmolive (India) Ltd. 3.16 470.75 15.35 6,402.20 852.04 United Breweries Ltd. 0.60 89.45 14.75 2,146.80 276.00 Marico Ltd. 1.57 60.05 8.10 3,657.05 274.05 I T C Ltd. 49.16 184.80 7.79 69,750.91 5,088.54 Nestle India Ltd. 6.75 1,556.40 7.13 15,006.81 999.39 Britannia Industries Ltd. 1.93 1,409.40 6.38 3,367.06 201.87 Tata Tea Ltd. 2.79 585.65 -2.74 3,621.66 -102.04 Godrej C. P. Ltd. 1.24 132.85 -4.36 3,427.53 -157.48 Hindustan Unilever Ltd. 26.21 238.20 -4.82 52,644.58 -2,653.16 Ruchi Soya Industries Ltd. 0.31 22.55 -18.15 425.74 -94.40 United Spirits Ltd. 3.69 649.75 -26.70 6,507.90 -2,370.78 BSE FMCG Index - 2,036.24 2.46 175,496.78 3,585.73

Out of 12 companies on FMCG index, 7 company posted positive returns. Dabur was the star performers on the bourse giving return of 17.50% followed by Colgate & Palmolive (C&P) and United Breweries with return of 15.35% and 14.75% respectively. The laggards in FMCG sector were United Spirits and Ruchi Soya posting negative returns of 26.70% and 18.15% respectively. On the whole, the market capitalization of BSE FMCG index, at the end of January 2009, increased by Rs 3,585.73 crore.

Global Scenario

In April, retail sales in US fell 0.4% from the month of March indicating that the sector still has a tough road ahead. This revelation comes on the heels of a 1.3% decline from February to March. The notion that retail sales had risen in both January and February after trending downward for the previous six months gave investors a false sense of hope that the economy had turned over a new leaf. This unfavorable trend is reflected in the earnings data that has been coming out from a number of companies in the retail space. Macy’s announced first-quarter results that showed that the department store chain had lost USD 88 million versus a loss of USD 59 million in the company’s year-ago quarter. Sales were down 9.5% year-over-year and gross margins also were pinched slightly. Liz Claiborne remained in the red for the first-quarter and Ann Taylor Stores is expected to be in the same predicament. Claiborne’s loss came in at USD 91 million versus USD 31 million in the first-quarter of 2008. Ann Taylor has warned that sales continue to be dragged down as the result of consumers tightening their belts and a shaky reception of product offerings at the company’s namesake division. Value-oriented retailers such as Target and Wal-Mart have fared better than higher-end retailers, but have still experienced their own headwinds. Year-to-date, same-store sales are down 3.7% at Target and Wal-Mart with flat first-quarter earnings that were hampered by the company’s international business segment. One other retailer that investors should keep an eye on to get a sense of direction as to which way this sector is headed is Costco Wholesale which is set to report its quarterly results later this month. The discounter’s same-store sales for the month of April were down 2%.

Outlook FMCG market will continue to grow faster in all the categories than it grew in the FY09. On account of softening of prices raw materials, companies will get the benefit of lower pricing going forward, which will in turn aid their margin expansion. Even the prices of packaging materials have fallen by 50% to 60% from their peak. FMCG companies will also be in the position to reduce prices in case of down trading or demand slowdown, if input prices remain at lower levels. However, considering the not so good macro environment, FMCG will continue to enjoy the safe haven status.