News: Indian FMCG sector net increases by 32%

(BS 12/04/2006) Mumbai - While the fast moving consumer goods (FMCG) sector has been back on the growth path for the last few years, the past year saw it come back with a boom.

On a year-on-year basis, the sales for the October-December quarter increased 11.42 per cent (personal care products) and net profit by 31.96 per cent as compared with the negative growth seen in the previous few years.

Milind Sarwate, CFO, Marico Industries said," India has had a GDP growth of over 7 per cent for three years now, but it is only now that the effect is being seen in the largely defensive FMCG sector."

He added that urban demand had increased on two counts, the growth of modern retail and the increase in incomes in the services sector, which had resulted in increased spending.

The best example of this is consumer goods major Hindustan Lever returning to double digit sales growth last year after a six year gap.

At the time of the results, Harish Manwani, chairman, HLL had said," Mass markets are growing and at the same time, there has been an increase in consumer spending and a decline in trade spends."

Nikhil Vora, vice-president research, SSKI Securities pointed out that what has also changed is that companies are starting to look outside their existing business ambit.

"Be it the Keyline acquisition by Godrej or Dabur's takeover of Balsara, most companies are becoming increasingly aggressive."

The other factor which has resulted in an increase in discretionary spending is the current boom where equity, real estate and bullion are all doing well. The ambient effect of this feel-good factor, which although untenable in the long run has led to increased consumer spending.

Shantanu Khosla, managing director, Proctor & Gamble, India said that the improvement has been a result of companies better meeting consumer needs.

"There has been more innovation in the sector and companies have also improved their reach via the distribution and marketing set up, all of which has resulted in increased sales."

What analysts are happy about, is that the growth has been both volume and value driven. Vora added, "The growth has been substantially volume driven. Also the price hikes that have happened have not been across the board but only in a few categories and products."

Also, almost all companies have set up factories in tax-free zones, which has had a positive impact on margins.