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Aarati Krishnan

THE value that the stock market is willing to assign to the multinational and home-grown companies in the FMCG space has converged over the past year. While the price-earnings multiples of domestic entities have been pegged up significantly, those of the MNCs has been whittled down. The recent set of numbers from FMCG companies shows that the stock market was spot on in its assessment of these companies' relative growth prospects.

Companies such as Godrej Consumer, Marico Industries and Dabur India have closed the just-ended financial year with double-digit sales as well as profit growth.

These companies occupied niche areas such as hair colour, hair oil and herbal personal care products to beat the sluggish growth rates for conventional FMCG categories.

But three out of the five multinationals closed their financial year (which coincides with the calendar year) with a decline in profit. Hindustan Lever, Nestle India and GlaxoSmithKline Consumer reported a fall in profit, while Gillette India and P&G Hygiene registered growth.

Back to growth

But the numbers for the latest quarter (ended March 2005) show that the FMCG sector as a whole may be climbing on to the treadmill, after being stuck in a rut for the last three years. Every company, except Nestle India, that has unveiled numbers for this quarter, has grown its sales at a much higher rate than it did last year.

The sales growth rates have ranged from 6.5 per cent (Gillette India) to a robust 15 per cent (Godrej Consumer). Even Hindustan Lever, which is so big that it is almost a proxy for the market, has reported better-than-expected sales growth for the March quarter, at 7 per cent. The recent numbers confirm the trend of gradually improving sales growth that has been underway since the June quarter of 2004.

There could be several explanations for this buoyancy. One, that the good monsoon of 2003 has had a salutary effect on offtake of FMCG products, with its customary lag. And, two, that expanding urban incomes are persuading consumers to loosen their purse strings when it comes to FMCG purchases.

Players also like to point out that the price cuts on key products such as detergents and shampoos have rejigged the "value" equation to make it more attractive to the consumer. Recent numbers suggest that, through these strategies, the larger players have managed to halt the progress of a pack of local brands that snapped at their heels with low-priced offerings.

Challenges to growth

But sustaining the present growth rates and improving on them is no easy task. For one, with volume growth clearly linked to a better "value" equation, players may find it difficult to effect regular hikes in the prices of their products, even if the circumstances demand it.

For instance, the prices of the inputs for soaps and detergent have climbed sharply in recent months on the back of the crude price hike. But players have had to absorb much of this increase, with prices being hiked only in select premium products.

Second, not many of the new big business opportunities that have been identified by the large players have clicked. So the FMCG players are no longer betting big on categories such as branded staples, water or impulse foods, which were once seen as capable of adding substantial size to the conventional FMCG market.

All this suggests that the players will have to count mainly on the changing demographics of the Indian consumer to drive the volume offtake of conventional soaps, detergents and cosmetics.

What does this signal for the investor in FMCG stocks? With a substantial gap in valuations between the MNCs and home-grown companies narrowing, stock prices in the coming months may be dictated entirely by the growth numbers of individual companies. All eyes are, therefore, on their quarterly numbers.

Growth expectations of 15-20 per cent in earnings seem to be factored into the valuations of the MNC stocks. Companies that do not deliver these growth rates may be marked down in the coming months.

As for the Indian companies, with the supernormal returns from the re-rating phase over, their stock prices, too, could come down. However, if these companies manage to sustain their March quarter performance, those still invested in these stocks should have no reason to worry.

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