FMCG SECTOR

Size of The Sector:

 In terms of Money.
The FMCG sector is the fourth largest sector in the Indian economy with a total
market size of around Rs 45,000 crore.

According CII figures for 2005, the size of the fabric wash market is estimated to be
Rs 4,500 crore; of household cleaners to be Rs 1,100 crore; of personal wash products
to be Rs 4,000 crore; of hair care and oral care products to be Rs 2,600 crore each; of
health beverages to be Rs 1,100 crore; of bread and biscuits to be Rs 8,000 crore; of
chocolates to be Rs 350 crore and of ice cream to be Rs 900 crore.

 Contribution to GDP.
The sector accounts for barely 2% of India's GD
.

Growth Trends:

According to a Economic Times report, the pace of growth recorded by the FMCG
industry in the fiscal year 2004-05 is expected to be the highest at 5%-6% in the last five
years, following a sharp rebound in rural demand.

A number of large and medium FMCG companies like HLL, Colgate, Dabur, Marico, and
Godrej Consumer Products have or are in the process of setting up manufacturing units in
tax havens like Uttaranchal, Himachal Pradesh, Jammu and Assam.

Most companies have shifted from outsourcing to manufacturing in a desperate bid to

protect profit margins in the absence of price increases.

According to figures of the National Council for Applied Economic Research, the ratio of
the consuming class to total households will touch 46% by FY-07. With per capita
consumption low in most categories and expectations of the consuming class growing in
significant numbers, the FMCG sector in India has immense growth potential in the long
term.
The government's idea of making India an agri-processing hub will also boost the sector's
growth. Private sector initiatives like ITC's e-choupal and HLL's Shakti will shape the
dynamics of what farmers produce going forward, with improved efficiency.

Swot Analysis

Strengths:

• Well-established distribution network extending to rural areas.

• Strong brands in the FMCG sector.
 • Low cost operations

Weaknesses:

• Low export levels.

• Small scale sector reservations limit ability to invest in technology and achieve
economies of scale.
• Several "me-too’’ products.

Opportunities:

• Large domestic market.

• Export potential
• Increasing income levels will result in faster revenue growth.

Threats :

• Imports
• Tax and regulatory structure
• Slowdown in rural demand

Factors affecting the growth:

Over the years, demand for consumer durables has increased with rising income levels,
double-income families, changing lifestyles, availability of credit, increasing consumer
awareness and introduction of new models. Products like air conditioners are no longer
perceived as luxury products.

The biggest attraction for MNCs is the growing Indian middle class. This market is
characterised with low penetration levels. MNCs hold an edge over their Indian
counterparts in terms of superior technology combined with a steady flow of capital,
while domestic companies compete on the basis of their well-acknowledged brands, an
extensive distribution network and an insight in local market conditions.

With companies opting for information technology a reduction in inventory levels and an
improvement in the working capital cycle is likely. This will benefit companies by
controlling costs and improving margins.

Major Government Policies/Changes in the past three years:

Budget 2005-06: FMCG

Budget Impact
The removal of surcharge on tea and duty on vanaspati and refined edible oils will have a
marginally positive impact on companies like Tata Tea, HLL and Marico.

The focus on replantation and rejuvenation of tea plantations will benefit the sector over the
long term, but there is nothing material in it for companies immediately.

Implementation of VAT is a positive move over the long term. This is likely to pave the way for a
singular tax going forward, which will help companies cut costs ands become more competitive
in the long run.
Reduction in duty on refrigerated vans will give a boost to the processed food industry. A
positive for players like Amul, Nestle, HLL and Britannia.

Area specific excise exemptions for North East, J&K, Himachal Pradesh will continue to
encourage FMCG companies to relocate to these areas.

The corporate tax rate change is unlikely to benefit the FMCG companies much, as most pay
an effective tax rate of less than 30% anyway.

The push to agriculture and rural India is likely to aid rural India's development in the long run. It
has the potential to induce increased usage of FMCG products going forward. Individual tax
benefits too are a positive for the sector.

Some critical news:

Outlook Of Investors(list major investors,FII etc.)

In the context of the positives and the negatives, investing in FMCG stocks is a tricky
prospect.

Given this, one has to be active with FMCG stocks and should book profits as soon as the
targetted returns are reached. Unlike earlier times, nowadays, one cannot afford to buy an
FMCG stock and forget about it for a long time.

It is unlikely that the government's initiatives will boost the sector overnight. The ongoing
price wars mean that company earnings will continue to be volatile. Hence, in the short
term, one should look at individual companies' prospects rather than the overall sector's
prospects. This means that it is better to leave mutual funds that concentrate on FMCG
companies and instead buy shares depending upon the company.

It is not necessary that an MNC will be better than an Indian company. One should look at
a company's profile and analyse its prospects before investing in its shares.

It is not that you will lose out by buying FMCG stocks. But, in buying an FMCG stock, it
will be ideal to cash in during short bursts of activity.

Major Merger and Acquisitions in the past two years:

Vijay Mallya's United Breweries Group (through Group entities Mc Dowell & Co,
Phipson Distillery, United Spirits and United Breweries Holdings) acquired a controlling
stake in the Jumbo Group's Shaw Wallace & Company for a total deal value of Rs 16.2
billion ($371.6 million). The deal is made up of an acquisition of a 50 per cent stake from
the promoters (including a non-compete premium) a tender offer for an additional 25 per
cent from other shareholders, and the acquisition of two distribution subsidiaries.

The other Jumbo Group company to be sold was Shaw Wallace Breweries. SAB Miller
increased its stake by 50 percentage points to 99 per cent in the company through its
Indian subsidiary, Mysore Breweries. The stake was held by Shaw Wallace & Company
and, hence, had SAB Miller not undertaken this acquisition, Shaw Wallace Breweries
would effectively have been an joint venture between two rivals — UB and SAB Miller.

McLeod Russell India (part of the B. M. Khaitan Group) acquired a 90 per cent stake in
Williamson Tea Assam for Rs 2.1 billion ($48.2 million). Of this, a 70 per cent stake
came through the acquisition of holding company Borelli Tea Holdings from Williamson
Tea of UK, while the rest is to be acquired by a tender offer to other shareholders.

The P&G-Gillette merger - With the acquisition of Gillette's operations, P&G becomes
the second largest consumer goods company in the world

Expected Future Trends:

Huge investments in promoting brands, setting up distribution networks and intense

competition are what FMCG companies face.

Creating strong brands is important for FMCG companies and they will have to devote
considerable money and effort in developing brands.

Given the fragmented nature of the Indian retailing industry and the problems of
infrastructure, FMCG companies also need to develop extensive distribution networks to
achieve a high level of penetration in both the urban and rural markets. This will require a
lot of resources.

The unorganised sector has a presence in most product categories of the FMCG sector.
Small companies from this sector have used their locational advantages and regional
presence to reach out to remote areas where large consumer products have only limited
presence. Their low cost structure also gives them an advantage. And this will only lead to
price wars, which, though good for consumers, will affect the bottomlines of companies.

According to Adi Godrej, the problem of counterfeiting and globalisation are two of the
biggest challenges facing the industry today. Godrej is all for the Indian FMCG sector
internationalising brands in a serious manner, rather than treating it like shooting an arrow
in the dark.

Key Players:
Company Name
Hindustan Lever Ltd.
I T C Ltd.
Nirma Ltd.
Nestle India Ltd.
Britannia Industries Ltd.
Colgate-Palmolive (India) Ltd.
Godfrey Phillips India Ltd.
Dabur India Ltd.
Smithkline Beecham Consumer Healthcare Ltd.
Godrej Soaps Ltd.
Marico Industries Ltd.
Cadbury India Ltd.
Procter & Gamble Hygiene & Health Care Ltd.
Reckitt & Colman Of India Ltd.
I S P L Industries Ltd.

New players Planned to venture:

Mangalore-based CAMPCO has announced plans to enter the FMCG sector by

marketing, and promoting Effermint toothpaste. For CAMPCO this marks its maiden
entry into the FMCG sector, while for Thrissur-based Effermint India, this is the second
time that it is entering in to a marketing tie-up with a large player. It had on an earlier
occasion partnered with TOMCO, the FMCG arm in the Tata
thanx
Godrej Consumer Products Ltd (GCPL) has launched a new brand of soap, Nimin, on the
germicide platform. Pegged on a par with Lifebuoy's variant in the sub-popular category,
Nimin is priced at Rs 8 for 75 gm and Rs 13 for 125 gm.

GCPL has also decided to enter the hair oil market with a brand under its company name.
The company is already test marketing a thanda tel under the Godrej brand in UP. Now,
players such as Marico have entered the category with Shanti Thanda Tel.

Other Special Observations: