Analyzing India's FMCG Sector: Understanding the Past, Present & Future- Part II

Today, India's FMCG sector is the fourth largest sector in the Indian economy. The demand for FMCG products is not seasonal which makes it steadier than stocks of other sectors. Keep reading to know more about the FMCG sector.

Analyzing India's FMCG Sector: Understanding the Past, Present & Future- Part II

The one challenge forever present for any investor in the stock market is how to pick the right stock? And say, if somehow you were able to decide that, what is the guarantee that the stock you have invested in will keep growing? Questions like this scare every investor.

So, to make your investing process easy, Captwist recently started a Sector analysis series where we are publishing a range of articles analyzing the different sectors of the Indian economy.

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Sector analysis is part of the top-down investment strategy that involves assessing the economic status of a specific sector. It is based on the assumption that different sectors perform differently during the business cycles.

Part II in the series, today we have covered the FMCG sector.

Three main segments of India's FMCG sector; Source: IBEF
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Click here to read- Part I: Analyzing India's IT Sector

ANALYZING GROWTH OF THE FMCG SECTOR IN INDIA

To present a simplified picture, we will be dividing the trajectory of the FMCG Sector into three phases:

  1. Phase I (1950s to 2000)
  2. Phase II (2001 to present)
  3. Phase III (2022 onwards)

PHASE I (1950s to 2000)

“In the business world, the rearview mirror is always clearer than the windshield.”
- Warren Buffett

Although big players like Hindustan Unilever Limited, ITC Ltd., Dabur, and Parle Biscuits Ltd. existed in the market since the pre-independence era, they were limited only to the fewer upper segment of society. Needless to say, the pre and post-independence years were economically challenging not only for the government but also for the people of India.

Insufficient money in the pockets, lack of rural penetration, and a greater focus on agriculture and related industries in the initial five-year plans hampered the growth of the FMCG companies in India.

"Population Trends of Urban India" Source: ResearchGate

So what changed?
Well, as the saying goes, 'one player can turn the entire game' this is exactly what happened! What started as a single-man operation in 1969, Nirma revolutionized the Indian market. By selling detergents at Rs. 3-4/ kg when HUL's detergent was at Rs. 13-15/kg, Nirma penetrated the low-income areas of the country. By 1985, Nirma became the face of detergents and soaps in India.

This led HUL and its contemporaries to revisit their business strategies. Moreover, Liberalization of the Indian economy in 1991 and encouraging foreign investment in the sector, along with rising in purchasing power of rural people, FMCG's growth shot up.

The uptrend in consumer spending in India (INR Billion)

PHASE II (2001 to present)

Today, India's FMCG sector is the fourth largest sector in the Indian economy. In the FY21, the sector registered a growth of 16%, the highest in the previous nine years. You'll be surprised to know with the rapid growth of semi-urban and rural segments, FMCG products account for 50% of the total rural spending!

NIFTY FMCG Index Historical Chart Source: IndianCompanies.in

Moreover, the FMCG sector's revenue growth will double from 5-6% in FY21 to 10-12% in FY22, according to CRISIL Ratings.

The Indian FMCG sector is not recession-free but recession-resistant.
- inc42

But what is leading to this positive leap in the FMCG sector? Note that these are the same reasons that make the FMCG sector an attractive place for buying stocks.

Data on top FMCG Companies in NIFTY50; Source: Tickertape.in; Last Updated:17.4.2022 

Competitive advantage

The sheer strength of the sector lies in the essential nature of the products since substantial products are part of our day-to-day life! Low operational cost, competition and resultant innovation, distribution reach, and networking effect are other factors adding to the sector's competitive advantage.

FDI inflows

According to the IBEF, the FDI inflows were worth $18.59 billion from April 2000 to June 2021. In 2016, the government of India allowed for 100% Foreign Direct Investment (FDI) in food processing and single-brand retail and 51% FDI in multi-brand retail. The move bolstered the supply chain and high visibility for FMCG brands, thereby bolstering consumer spending and encouraging more product launches.

Source: IBEF

Policy support

One of the biggest support systems by the government of India has been in the form of the PLI scheme or Production-Linked Incentive scheme. In 2020, Union Cabinet approved the PLI scheme in 10 key sectors to boost domestic manufacturing capabilities and exports, promoting the ‘Atmanirbhar Bharat’ initiative.
The more recent announcements regarding increased focus on infrastructural development in the Union Budget 2022-23 have only made the FMCG sector hopeful of an uptake in purchasing power of the people, which will eventually pump up the FMCG demand.

According to Ahmed ElSheikh, President of PepsiCo India, “digitization combined with infrastructural creation will accelerate economic development, stimulate innovation, and enhance living standards. The 100 new railways logistics hubs coupled with steps like enhancing local oilseed production, extending the last date for starting production for new manufacturing units, and encouraging alternate cropping will aid the growth of the FMCG sector and further strengthen the Govt’s vision of an Atmanirbhar Bharat.”


PHASE III (2022 onwards)

The FMCG market in India is expected to increase at a CAGR of 14.9% to reach US$ 220 billion by 2025, from US$ 110 billion in 2020. The Indian packaged food market alone is expected to double to US$ 70 billion by 2025. It is crucial to attribute such a bullish prospect of FMCG to the expansion of E-commerce in the country. It has not only assured easy access for every corner of the country but has also widened the available choices.

Source: Retail.com
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Click here to know the Best FMCG Stocks to Buy in India- 2022

Conclusion

One important point to note here is that the demand for FMCG products is not seasonal. It is this consistency in demand that leads to year-long investments in the sector. As a result, FMCG stocks may grow slowly, but during a slow economy or recession period, the stocks of FMCG are much steadier than stocks of other sectors.

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If there's anything you want us to cover in our next article, please write us at 'hello@captwist.in'