The fast-moving consumer goods or the FMCG sector comprises the companies that are manufacturers of the daily use products. People by and large use them on a daily or regular basis. This includes toothpaste, soaps, detergents, dish-wash bars, shampoo, oils, and other such products with rapid and regular consumption.
As the speed of urbanisation is increasing in the country, the outlook for the sector remains robust and rock-solid. Even smaller cities, towns and rural India have started to consume branded products from the organised sector and larger conglomerates to satisfy their daily needs. This adds more to the appeal of the sector.
However, the paradigm of the sectors is constantly evolving and dynamic in nature. Despite all the obstacles, the FMCG sector has cemented its performance, indicating a strong future and making such counters a viable and attractive option for investors’ portfolios.
The dynamics of the sectors are so rampant, that companies have to shift their strategies, branding and positioning within a short span of time. For example, with the entry of Patanjali in Ayurveda and Organic Products, the consumer-focused shift towards them. Following the trend, companies like Dabur and Hindustan Unilever altered their plans and jumped into herbal products.
Investors must remember that the FMCG sector is a steady performer, but the growth pace is usually slow. According to the data from Statista, the markets for FMCG space in India has shot four times to $110 billion (Rs 8.15 lakh crore), which was less than Rs 2 lakh crore in 2011.
It is estimated that the FMCG sector will grow at the pace of 15% annually, scaling the volumes to $220 billion (Rs 16.30 lakh crore) by 2025. With the entry of e-commerce giants like Amazon, Flipkart, Reliance and Tatas, the sector is likely to grow leaps and bounces in the coming years.
The government of India has also been encouraging the sector, paving the path for a healthy and wealthy future. The government has provided multiple incentives to support the industry and has allowed up to 100% foreign direct investment (FDI) in single-brand retail.
The central government reduces the burden of corporate taxation on micro, small and medium enterprises (MSMEs) to further boost up the sentiment. The rolling of Goods and Services Tax (GST) has aided the sector even more, boosting the sentiments for the industry.
It is the largest FMCG company inthe country with a market cap close to 6 lakh crores. It is the listed arm of London headquartered British conglomerate Unilever. Itsproduct range includes brands like Dove, Lux, Lifebuoy, Pears, Hamam, Lyril, Rexona, Surf Excel, Wheel, Comfort, Clinic Plus, Sunsilk, Fair & Lovely, Pond’s, Lakmè, Vaseline, Bru, Taj Mahal, Lipton, Brooke Bond, Cornetto, Kisan, Annapurna, Magnum, Close up, Pepsodent, among others.
Established in 1910 as the Imperial Tobacco Company of India was renamed as India Tobacco Company in 1970. Headquartered in Kolkata, West Bengal has a diversified presence across industries such as cigarettes, FMCG, hotels, packaging, paperboards and specialitypapers and agribusiness. It has famous brands like Aashirvaad, Bingo, Sunfeast, Classmate Notebooks, Engage Deo, Classic, Gold Flake, American Club, and Wills Navy Cut.
Vevey, Switzerland headquartered Nestle operates in India via its subsidiary Nestle India. It was incorporated in March 1959. It brags a market capof over Rs 1.7 lakh crore. Nestle is a dairy products focussed company which owns brands like Nescafe, Maggi, Milkybar, Milo, Kit Kat, Bar-One, Milkmaid and Nestea.
Ghaziabad based Dabur India manufactures Ayurvedabased consumer care products. It has a market cap ofover Rs 1 lakh crore. It sells the products with its flagship brand name ‘Dabur’, which is derived from the two words ‘Daaktar Burman’
The consumer product company of the Godrej family owns brands like soap, hair colourants, toiletries and liquid detergents. Its brands include ‘Cinthol’, ‘Godrej Fair Glow’, ‘Godrej No. 1’ and ‘Godrej Shikakai’ in soaps, ‘Godrej Powder Hair Dye’, ‘Renew’, ‘ColourSoft’ in hair colourants and ‘Ezee’ liquid detergent. The Mumbai-based company has a market cap of more than 90,000 crores.
Other listed FMCG brands in India include key players like Marico, Jubilant FoodWorks, Procter & Gamble Hygiene and Healthcare, Britannia Industries, Tata Consumer Products, Colgate Palmolive, Emami amongst others.
To build a solid, strong and steady portfolio, one should buy and hold FMCG shares for a longer period. Not only do they give a decent return, but they are good dividend plays as well. Here are some reasons, why you should own them:
FMCG companies release new products at regular intervals as the market is highly competitive. A company can not depend on older products forever to remain in the game. One such example is the shift of major players like HUL, ITC and others towards herbal and ayurvedic products across the boards. The companies have to constantly launch new products to ensure major market share for them.
India is a market of 1.3 billion people, which is more than 15% of the world’s total population. According to the headcount, a large portion of the population is likely to increase consumption as the rural areas are poised to shift to the organised sector for consumption. As long as government policies are favouring the sectors, the theme of FMCG will continue to grow at a rapid pace, offering handsome returns to the investors.
FMCG companies are known for their constant innovation, to remain in focus. The products and strategies are designed to grab and gain market share. The companies who do not innovate tend to get the last seats in the row. FMCG companies innovate based on market demands, survey research and consumer behaviour. Product placement, schemes and offers are an integral part of these companies.
Just like every other sector, FCMG space has its limitations, which may or may not appeal to a particular investment section. Let’s have a look at the key limitations of this sector:
The sector is considered to be a very defensive bet, which may not appeal to many investors. The speed is usually slow and only long term investors tend to make a good return in the longer run. The tag of being a slow runner might hurt investor sentiments.
Due to the cut-throat competition in the industry, there is a limited scope of fetching higher margins in certain products. Since, if the product rates go beyond industry standards, users shift to the same products of different companies. The margins are limited and dwarf to get higher sales and revenue.
These products tend to have higher cost on the back of advertisement and promotion. A major portion of sales and the annual budget is allocated to such practices. At times, a company has to provide certain offers, schemes or discounts to grab the bigger market shares. This is likely to jitter short term sentiments of the consumer.
The performance of FMCG shares has been healthy. Since the year 2008, the sector has given a decent return at a CAGR calculated in higher teens in percentage points. BSE FMCG index has delivered a 25 per cent return in the last year and a 65 percent return in the last five years. Since its inception in 1996, the index has rallied over 1,84,000%.
FMCG stocks may rise at a slower pace during a bull market, but when the market sentiment turns sour, they hold the fort and perform steadily. Also, since the majority of FMCG companies launch new products at regular intervals, your portfolio is shielded from any adverse movement.
According to market analysts, investors should allocate 10-15 per cent of their portfolio to this sector. Investors can also opt for FMCG related funds, but one must understand the pros and cons of thematic funds. Happy Investing
Disclaimer: Investments in securities market are subject to market risk, read all the related documents carefully before investing.
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