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Good monsoon bounty for FMCG sector

Latha Venkatraman
Deeptha Rajkumar

Analysts forecast a 20-25 per cent growth for June quarter


Value pick
Many of the FMCG companies' share prices had edged down during the recent stock market crash making them attractive at this juncture.
FMCG companies have chosen the inorganic growth as a route for keeping their topline and bottomline on an upward curve.

Mumbai , July 5

The revival of monsoon rains seems to augur well for the fast moving consumer goods (FMCG) sector as evident in the northward movement of share prices of some of the companies in this segment.

Shares of Hindustan Lever Ltd (HLL) moved up by Rs 9.85 to Rs 242.20 in Wednesday's trade.

Top of the rung

Analysts maintain that of all FMCG companies, HLL stands to gain the most on account of good monsoon rains, which has a direct bearing on farm incomes. HLL's exposure to the rural market is substantially higher than most other FMCG companies.

The FMCG sector has returned to double-digit growth. Rural buying of consumer goods has helped the turnaround of the sector. HLL is seen benefiting the most because of its large presence in the rural markets.

Going forward, analysts forecast a 20-25 per cent growth for FMCG companies for the June 2006 quarter. These include Dabur, Godrej Consumer Products Ltd, ITC Ltd and HLL.

Companies such as Marico and Emami also have a consistent growth story backed by their acquisition strategy, analysts said. "Marico and Dabur are good buys at this juncture because they have credible stories," said an analyst.

Many of the FMCG companies' share prices had edged down during the recent stock market crash making them attractive at this juncture.

Demand likely to pick up

Companies are expected to benefit from a pick up in demand for consumer goods. Volume growth is also seen picking in all categories, analysts said. They believe that GDP growth will translate into better purchasing power in the hands of consumers.

Companies such as Tata Tea and Nestle are also expected to benefit from the overall consumer buying.

Shares of Dabur have been slowly edging up, quoting at Rs 141.55, up Rs 2.3, on the BSE on Wednesday. Tata Tea has also been moving up over the past one month, trading in the range of Rs 760-765 last couple of sessions. On Wednesday, Marico gained by Rs 29.7 at Rs 499.70.

"Today with the revival in consumer demand, companies have the ability to exercise pricing power. This has been a boost to the bottomline," said another analyst.

Additionally, predatory pricing is a thing of the past, analysts say referring to the HLL and Procter and Gamble's approach to detergent pricing a few quarters ago.

Inorganic growth key

Today, FMCG companies have chosen the inorganic growth as a route for keeping their topline and bottomline on an upward curve.

On Tuesday, Godrej Consumer Products Ltd announced that it has entered into an agreement to acquire the South African hair-colour business of Rapidol, UK.

Companies such as Marico, Dabur, Emami, and Tata Tea have looked at acquisitions in the recent past despite the inherent risks involved.

They have chosen an aggressive path and are expected to continue on that course, analysts say.

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