FMCG - Investment Prospect

16 July 2020

India

Sectoral Research

FMCG

FMCG – Investment Prospect

Mutual Fund Recommendation                                                                                                                      

What's driving FMCG growth?
• Rural areas and essentials driving sales for companies	• Contribution of rural to overall FMCG sales : 33%	• FMCG capacity utilisation in June : 90-100% (of pre-covid levels)	• Consumption growth in rural areas: 85-90% (of pre-covid levels)
• Strong underlying consumer demand in June, led by the hygiene and food categories	• Consumption growth in urban areas: 50-60% (of pre-covid levels)

Q4 FY19-20 and Lockdown
- Saw a subdued consumer demand from beginning of lockdown to mid-April
- Increase in for ‘personal care and personal hygiene’ category, and drastic decline in demand for beauty care products
- Increased demand for health and immunity boosting foods
- Top 10 FMCG companies generated free cash of over Rs 26,000 crore in FY20 despite the adverse impact of the pandemic in the second-half of March
- The market environment for FMCG companies are unlikely to change too drastically
Given the disruptions to the supply chain arising from Covid-19 in March 2020, the annual results still saw some growth in most FMCG companies
The Q4 results didn't see the year-on-year sales growth it usually does, but the numbers fared relatively well.
Overall, the Q4 results paint a picture of recovery, increased consumption and rationalization of product categories.
Recovery in demand seen in June implies that Q1 will not be a complete washout as anticipated earlier

The pandemic and  the consumer behavior
- Trips to grocery stores declined from 34.3 in March to 30.5 in May, indicating pantry loading
- Fewer trips, however, translated into bigger ‘trip size’, described as volume bought per trip, resulting in volume growth for companies
- Expenditure on food, health and homecare products by Indian households grew 4.3% during the covid-19-induced lockdown.
- Parle Products saw a 5% expansion in the packaged foods and packaged biscuits segment, registering better-than-expected growth from March to May
- Britannia Industries sold more biscuit packs in April and May, posting 20% and 28% growth in sales, respectively. This was on account of increased in-home consumption of the company’s brands.
- FMCG companies are witnessing a steep rise in their online sales - some have even claimed that their online business has doubled and tripled in this short span of time.

                                                       

Rural Demand
Factors		Growth
- Migrant workers in urban areas moving back to their hometowns has led to a surge in demand		- Rural sector has been growing much ahead of the urban sector and is expected to continue to outpace it
- Government spending on MNREGA and higher MSPs will cause rural consumption to further see an uptick		- Performing better than the pre-COVID days
- Increased awareness in health and hygiene stimulated demand for the relevant products		- FMCG companies have increased investment in rural areas in an attempt to capitalize on the growing demand
- Fewer infections and a less intense lockdown		- Consumption growth in rural areas reached 85-90 per cent of pre-Covid levels in June against 50-60 per cent in urban areas.
- Several government initiatives for farmers and a good monsoon can further improve demand

Relatively stable demand
In the current economic environment, FMCG may provide some respite in terms of business volatility. While the earnings can be expected to fluctuate, macro economically the demand and sales can be expected to remain relatively stable even in times of turmoil.