FMCG - Risk of Egypt crisis on Indian FMCG companies: Edelweiss

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n  Risk of Egypt crisis on Indian FMCG companies

There have been mass demonstrations against the government and disruption of public life in Egypt. Egypt has been quite attractive to Indian FMCG players as it offers tax cuts, preferential trade treaties, and speedy approvals for business, in addition to high growth. Egypt is also a manufacturing hub for Middle East and North Africa (MENA) for Indian FMCG companies like Marico, Asian Paints etc.

Short term impact: will be on supply side leading to drying up of supplies, increase in cost of delivery and raw materials. Goods produced in tax havens of Egypt are supplied to MENA markets. FMCG companies can export directly from India/other countries, which would increase the cost of delivery. Oil, on back of the Egypt chaos, has touched US$100; a risk for TiO2, LLP, Palm Oil and other commodities which track crude, directly or indirectly.

Medium/ Long term impact: will be on demand side. Egypt and neighboring economies could slow down which could impact FMCG demand.

n  Exposure of FMCG companies to Egypt and likely impact

GCPL: Almost zero sales in Egypt and no manufacturing facility. So no impact.

Emami: Currently sales from Egypt are negligible (INR 5 mn sales in FY11E). Company has recently set up a manufacturing facility in Egypt which will come up in next 6-8 months. Company will continue to export if plant gets delayed. So negligible impact.

Dabur: Egypt accounts for ~2.5% of consol sales. Company has production facility in UAE and Nigeria which can help in sourcing. So minor impact.

Marico: Egypt accounts for ~3% of sales. Entire manufacturing for Middle East is in Egypt (accounting for ~7-8% of sales). Company can complement sourcing from India and it has stopped its manufacturing in Egypt as a safety measure. So minor impact.

Asian Paints: Egypt contributes ~5% to total sales and Company operates two manufacturing units in Egypt. Egypt is an important market for Asian Paints and even during the downturn, market grew. So minor impact.

n  Our View

If the unrest in Egypt is resolved over the next few weeks, we would see only a minor impact on business on supply side. However, if the unrest continues for a longer period of time, there might be impact on demand side. Also we need to watch if this unrest spreads to other neighboring countries as well. We are extremely positive on African opportunity over long term as (a) African GDP is bigger than India; (b) penetration levels of FMCG products lower or similar to that in India 3; (c) multinational FMCG companies are less active in Africa; and (d) support from local governments to set up business in Africa. Political volatility in some countries remains a key risk for FMCG business in Africa.