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Drivers of FMCG sales

Parvatha Vardhini C | Updated on January 13, 2019 Published on January 13, 2019

Rising rural demand, increasing preference for premium and natural products are driving FMCG sales

With markets turning volatile over the last year, one of the few sectors that held its head above water was consumer staples (fast moving consumer goods or FMCG). Amidst the mayhem, while bellwether indices Sensex and Nifty managed a 1-4 per cent gain, the BSE and Nifty FMCG indices fared better, gaining 10-13 per cent.

Headwinds such as high interest rates and tight liquidity among non-bank lenders saw stocks in other big-ticket consumer segments such as auto and durables take a knock. But true to its ‘defensive’ tag, staples remained resilient. As a result, many FMCG stocks stood tall, despite the choppiness in the markets. Rural demand, which is growing faster than urban, powered volume growth for most companies.

Increasing preference for premium and herbal/natural products saw FMCG-makers launch a host of products in these segments. Thanks to the robust demand, many companies could also wield pricing power and pass on the rise in input costs to customers. Here’s a look at what’s driving FMCG sales and what’s in store.

Boost from GST, rural comeback

The three months ended June 2017 were forgettable for most FMCG companies. Just as they were getting their act together after the demonetisation blow, the move to GST took the wind out of their sails. Apart from having to maintain a thin inventory pipeline with wholesalers/distributors in the run-up to the changeover, what also affected domestic volumes for this segment was the non-procurement by CSD canteens (run by the government for the armed forces) beginning in the first week of June 2017, in the run-up to GST implementation.

While Hindustan Unilever (HUL) recorded a flat growth in volumes this quarter, Colgate, Dabur and GSK Consumer saw volumes drop by 4-5 per cent. Marico’s higher dependence on the CSD channel for its Saffola oils was one of the reasons for the company’s 9 per cent decline in volumes for the quarter. As the macro-economic environment stabilised, most companies regained vigour.

HUL picked up steam immediately, clocking a 4 per cent volume growth in the quarter ended September 2017. In the four quarters since then, it has shown a consistent 10-12 per cent volume growth. Biscuit major Britannia too has seen four consecutive quarters of 12-13 per cent volume growth from the September 2017 quarter.

GST-induced price cuts also aided the comeback. GST rates for hair oil, toothpastes, soaps were reduced to 18 per cent from July 2017, down from over 20 per cent earlier.

From 28 per cent, GST rates were cut to 18 per cent for detergents, face/body wash, cosmetics, hair-care products and deodorants in mid-November 2017 too.

Thanks to this, Godrej Consumer (GCPL), for instance, a major player in the hair-care segment, saw its volume growth come in at a robust 18 per cent in the October-December 2018 period. The company continues to see double-digit growth in this segment.

Rural demand, which has been growing faster than urban in the last one to two years also helped FMCG players. For instance, in the last few quarters, Dabur — which has a strong rural-centric portfolio — saw rural sales grow 1.5-3.5 times higher than urban sales.

To cash in on this trend, other players such as Britannia consciously stepped up rural presence in this period. The company improved its rural footprint and its presence in States such as Uttar Pradesh, Madhya Pradesh, Gujarat and Rajasthan — areas in which it has traditionally been weak. With health drinks such as Horlicks yet to make a dent in rural India, HUL, which recently acquired GSK Consumer (the maker of Horlicks), plans to use its wide rural reach to grow volumes for the brand.

Richer product mix helps

While companies did see volume pick-up across the board, there were pockets that stood out. What distinguished the men from the boys was the product mix. Products with lower penetration such as air fresheners and hand wash, newer categories such as men’s grooming as well as premium products, driven by an urban consumer wishing to upgrade himself, put up a better show. Take GCPL for instance.

Over the last few quarters, premium products such as cream-based hair colour (Expert Rich Crème), BBLUNT range of hair-care products, hand wash (Protekt) have led sales growth for the company in the soaps/personal care and hair care segments.


Even as sales in the insecticides segment, which typically consists of mosquito coils and mats, faltered across the industry, GCPL’s newly-launched personal repellents and fabric roll-on products, under its ‘Good Knight’ brand, saw good offtakes. Again, new product lines, led by home and car air fresheners (Aer), have also seen strong revenue growth of over 20 per cent in the last many quarters for the company, led by high volumes in this segment.

Liquid detergents is another new product which has seen good growth; HUL has established its presence in this segment under the popular ‘Rin’ and ‘Surf’ brands in the liquid format. Companies such as Jyothy Labs and Britannia are also nudging customers to upgrade to their premium offerings through low unit packs of the same. In the last few quarters, ‘Henko’ — a premium detergent from Jyothy Labs — has seen double-digit volume growth after the introduction of the ₹10 sachets. Britannia too is focusing on improving penetration of premium biscuits such as the Good Day Chunkies and Deuce.

Other products with low penetration such as croissants and cream wafers have been added to its portfolio. It is reinvigorating its dairy business by setting up a fully integrated dairy operation at Ranjangaon in Maharashtra. Focus on value-added products such as whey, skimmed milk powder and milk-based drinks, will benefit margins. Even Horlicks has been given a ‘niche’ twist with the introduction of Horlicks Growth +, Cardia + and Protein + to woo the urban consumer.

Going natural pays off

With herbal/ayurvedic/natural (HAN) products beginning to capture a fair share of the consumer wallet, FMCG companies left no stone unturned to grab their share of the pie. As categories such as toothpaste and honey faced intense competition from products of Patanjali Ayurved, players in this segment upped the ante. Take Colgate Palmolive, the market leader in toothpastes. Stiff competition from Patanjali (Dant Kanti) as well as other HAN offerings in the market resulted in Colgate’s toothpaste market share eroding progressively from about 57.3 per cent in 2015 to 53.4 per cent for the year ended March 2018. While it slid further in the June 2018 quarter, the company has been able to arrest the decline since then.

Colgate spruced up its ‘Naturals’ portfolio by launching the Cibaca Vedshakti and Swarna Vedshakti. It has also launched a natural variant in the high margin ‘Sensitive’ toothpaste segment called the Sensitive Clove Essence. Dabur countered the Patanjali onslaught in honey by lowering prices and increasing promotions over the last one to two years and has regained most of its lost market share. Dabur’s healthcare supplements segment, which consists of Chyawanprash and Honey, have grown in double-digits in the last few quarters.

The company has, in fact, begun trimming promotional offers for honey in recent times. For the next wave of growth in the HAN segment, Dabur is betting on its OTC medicines such as Honitus and Lal Tail. Other companies have extended HAN offerings to home, personal care and food categories too. HUL at first acquired Indulekha, a HAN brand in the hair care space and later rolled out its ‘Lever Ayush’ brand last year, across categories such as skin, hair and oral care.

Jyothy Labs has also leveraged on the demand for HAN products to bring out Neem Active Toothpaste, Margo Glycerin Neem and Margo Neem/Saffron Facewash. With FMCG majors taking Patanjali head on and succeeding in attracting consumer interest, the threat factor has also somewhat cooled off. Patanjali too slowed down after more than doubling its revenues to ₹10,561 crore in 2016-17 from the earlier year. It ended 2017-18 on a flat note.

What’s in store?

Pent-up demand due to disruptions caused by demonetisation and GST as well as the advantage of a lower base due to the same reasons have seen FMCG companies record good volume growth in the last few quarters. Although crashing farm prices squeezed the wallets of farmers, higher government spending on building rural roads, electricity and housing, created jobs and helped improve non-farm income of rural India, putting more disposable income in the hands of the rural consumer. Good demand helped frontline companies such as HUL, GCPL, Dabur and Jyothy Labs pass on price increases in crude oil-based inputs and other raw materials, at least to an extent.

However, with the effect of a high base kicking in from the second half of 2018-19, volume growth may be in for a moderation. Companies which have an urban focus, with niche offerings or products in under-penetrated segments, may continue to fare better. That said, a cooling off in crude oil prices from its peak last October and benign prices of other inputs for FMCGs such as milk, palm oil, copra and sugar is a positive. Measures to boost consumption close to the general elections will be a shot in the arm for the sector.

FMCG stocks on a purple patch

Valuations have expanded sharply for leading players

The combination of a revival in consumption and volatility in the markets worked well for frontline FMCG stocks in the last year. With consumer staples being considered a defensive bet in choppy/falling market conditions, stocks of leading FMCG players gained up to 45 per cent in this period.


Nestle, Britannia, HUL and Zydus Wellness are among the top gainers, with Marico, Godrej Consumer, Colgate, Dabur and GSK Consumer not far behind. The rise in stock prices was supported by earnings growth as well. While the June and September 2017 quarters showed relatively muted performance, many companies clocked double-digit sales and profit growth from the December 2017 quarter onwards. Apart from robust volume growth, HUL’s double-digit sales and profit growth in the recent quarters, for instance, was helped by value growth due to favourable product mix and price hikes, to pass on input cost rise.

Earnings growth

On the other hand, comfort on the raw material front helped Britannia and Nestle expand their operating margins and carry through their strong top-line growth to the bottom line.

Although the price of wheat — the key raw material for biscuits — inched up in the last few months, Britannia’s hedge against price rise helped the company expand its margins in the last two quarters.

Nestle too benefited from lower milk and sugar prices.

Investor interest in Zydus Wellness was partly fuelled by its acquisition of brands such as Complan, Glucon-D and Nycil from Heniz in October last year. At 20 times EV/EBITDA, the deal was valued at a discount to bigger players in the food and health drinks category such as GSK Consumer and Nestle, making it attractive. GSK Consumer too was acquired by HUL in a share swap deal in early December 2018. The former sports a one-year gain of about 15 per cent.

Valuations inch up

Thanks to the bettering consumer demand since the second half of 2017 as well as the market rally that year, FMCG stocks sport enviable returns over a three-year period too. Nestle, Britannia and HUL have more than doubled in the last three years, while Marico, Dabur and Godrej Consumer too show robust returns.

This upmove has seen valuation of many stocks in the FMCG space expanding over the last three years. For example, HUL trades at 66 times its trailing 12-month earnings, higher than 63 times a year ago and 45 times, three years ago. Britannia now trades at 68 times, vis-à-vis 61 times a year ago. Marcio too has seen its valuation inch up.


With the base effect catching up, FMCG players may no longer see the scorching pace of growth witnessed in the last few quarters. With most stocks perched on high valuation, the upside may not be high from hereon. Nevertheless, with long-term prospects remaining sanguine, corrections of over 10-20 per cent in stock prices due to market volatility can be used to accumulate stocks of leading players.

Published on January 13, 2019
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