Consumer (Fast Moving Consumer Goods) – Positive: Daiwa

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Sector thesis: strong long-term growth should support valuations
Long-term revenue-growth drivers intact. We expect India’s Fast Moving
Consumer Goods (FMCG) Sector to benefit from a number of revenue-growth
drivers in the future: low per-capita consumption in most FCMG categories, low
penetration rates for all categories (except for the personal-wash and fabric-wash
categories), favourable age and income demographics, increasing literacy,
hygiene awareness, and the influence of the media on consumer awareness and
buying behaviour.


Short-term boost from good rainfall and declining inflation. Strong agricultural
production growth as a result of this year’s monsoon rains being considered normal
should boost farm incomes, which in turn should increase demand in the rural
markets for FMCG. We believe increased farm production will also lead to
reductions in agri-commodity prices and improvements in the profitability of the
F&B companies, while declining inflation will be beneficial for consumers and the
FMCG companies.
Near peak valuations, but sustainable, in our view. Unlike in prior years, when
India’s FMCG sector and the BSE Sensex moved in opposite directions, they have
moved in tandem over the past year. Most FMCG companies are trading currently
at close to their peak valuations, which we believe is supported by the favourable
outlook for sales volume and value growth. We favour those companies with
category leadership and what we see as high sales- and earnings-growth potential.
Structural outlook: three-year view
In our view, increasing household disposable income, especially among rural and
urban middle-class consumers, will lead to a rise in the consumption of FMCG.
However, we believe the initial increases in income levels are likely to be diverted
to necessities, such as housing, healthcare and education.
Once the necessities are taken care of, we believe that most of the increases in
household disposable income will be spent on consumer goods. In our opinion, this
will lead to a rise in per-capita consumption, either as a result of increasing usage,
or through a shift to higher-value items in the same category where penetration
levels are already high.
We believe that the competitive intensity will increase, but rising incomes will
facilitate pricing power and protect profit margins. In our view, the entry of new
players, such as Glaxosmithkline Consumer Healthcare (GSKCH), Hindustan
Unilever (HUL), and ITC in the fast-expanding instant-noodles category (currently
dominated by Nestlé India [Nestlé]) will affect the category favourably as it will help
to increase its size. We do not expect any disruptive competition in this category as it
is still small in size and we think has significant sales-growth potential. Although
highly penetrated categories, such as personal-wash and fabric-wash, face intense
competition, we believe low per-capita consumption and consumers trading up to
premium products still offer good revenue-growth potential.