INDUSTRY ANALYSIS

FMCG The Indian FMCG sector is the fourth largest in the Indian economy and has a market size of $13.1 mn. This industry primarily includes the production, distribution and marketing of consumer packaged goods, that is those categories of products which are consumed at regular intervals. The sector is growing at rapid pace with well-established distribution networks and intense competition between the organized and unorganized segments. It has a strong and competitive MNC presence across the entire valuechain. A study of the aggregate financial performance of the leading 10 FMCG companies over the past eight quarters shows that the industry has grown at an average 16-21% in the past two years with average operating margins being 22%. The FMCG sector is valued at Rs 1463 bn or $33 bn (AC Nielsen report). At present, urban India still accounts for the major share of 66% of total FMCG consumption while rural India accounts for the remaining 34%. However backed by low unit packs & aggressive distribution, the resurgence in rural demand that started two years ago continued in 2010-11.

PROSPECTS The FMCG industry has benefitted from rising domestic consumption. Total consumption expenditure forms a lion's share of 69% of GDP. Growing employment, rising disposable income, a relatively young population (median age of 26 years) and changing consumption pattern have led to higher domestic consumption. The FMCG industry grew at a compounded annual growth rate of 11% in the past decade. India is at the cusp of yielding the demographic dividend. As per the International Labour Organization, India will have the highest working age population in the world by 2020. As per National Council of Applied Economic Research, the proportion of middle class population will swell from 13.1% at present to 37.2% by 2025-26. Thus higher working-age population and rising middle class will translate into higher purchasing power & boost consumerism. In the rural markets, deepening penetration and evolution in consumption pattern will drive demand. As per Associated Chambers of Commerce & Industry, the FMCG sector will witness more than 50% growth in rural and semi-urban segments by 2012. The per-capita expenditure in rural market is half that of the urban market. But at 150 million household, rural India is nearly three times bigger than urban India holding immense potential demand. The FMCG sector is expected to grow at a compounded annual growth rate of 12% and reach market size of $ 74 bn by 2018. While the homegrown companies are looking to expand overseas, the MNC subsidiaries are strengthening their domestic base to capitalize on the growing demand. Going forward more MNCs will enter India, as the government is likely to clear 51% FDI in multi-brand retail. Currently organized retail comprises only 5% of FMCG sales with the market dominated by more than 12 m small 'kirana' stores. Strong macroeconomic fundamentals, burgeoning disposable income, robust consumerism, greater rural penetration and growing organized retail will drive future demand in FMCG industry.

Supply:

Abundant supply in metros. Distribution networks are being beefed up to penetrate the rural areas. FMCG sector poised to grow to $74 bn by 2018, says Federation of Indian Chamber of Commerce and Industry-Technopak report. Huge investments in promoting brands, setting up distribution networks and intense competition, but the sector is not capital intensive.

Demand:

Barriers to entry:

Bargaining power of suppliers: Bargaining power of customers:

Some of the companies are integrated backwards, which reduces the supplier's clout. Manufacturing is largely outsourced.

In case of branded products, there is little that the consumer can influence, but intense competition within the FMCG companies results in value for money deals for consumers (e.g. buy one, get one free concept). Private labels which have an advantage of lower marketing expense are offered by retailers at a discount to mainframe brands. These brands are becoming increasingly popular in the current inflationary environment. Competition is faced from domestic unorganized players like HUL, Dabur, Godrej Consumer Products, Marico, Asian Paints, GSK Consumer Healthcare, Procter & Gamble Hygiene and Healthcare and Jubilant Food works is also a reflection of consumption-driven growth , MNCs and also from cheaper imports, which are increasingly visible in urban markets. Price wars are a common phenomenon. Private labels offered by retailers act as competition to undifferentiated and weak brands.

Competition:

COMPANY ANALYSIS Colgate Palmolive Colgate is present in oral care, personal care and household care products. Oral care contributes a lion's share of 96.4% to total revenues. Colgate dominates in this core business with domestic market shares of 53.1% in toothpastes, 40.3% in others.
COLGATE Financial Summary
No. of Months Year Ending Net Sales Sales Growth Gross profit margin PAT PAT Growth Dividend per share Dividend payout RoCE RoNW Debt to equity ratio Mkt Cap Mkt Cap / Sales Rs m % % Rs m % Rs % % % X Rs m X 12 31/03/2010 19,624 21.7 4,233 20.00 64.3 149.1 129.8 0.0 80,166 4.0 12 31/03/2011 22,862 16.5 22.5 4,025 -4.9 22.00 74.3 135.8 104.8 0.0 110,424 4.6 12 31/03/2012 26,932 17.8 21.5 4,465 10.9 25.00 76.1 135.5 102.6 0.0 132,046 4.7

COLGATE Stock Price Information

BSE NSE P/E* EPS (31/03/2012) Market Cap* 52-Wk H/L*
Prices as on 23/08/12. *On BSE price

Rs Rs x Rs Rs m Rs

1,180.5 (-0.2%) 1,180.3 (-0.1%) 36.0 32.8 160,539 1,250/918

Dabur India Dabur is a leading FMCG company operating in personal care, health care, home care and food products. Synonymous with 'ayurvedic' products, Dabur has big brands like Vatika, Amla, Chyawanprash, Hajmola, Lal Dant Manjan and Babool. The company restructured its business over the years. In 2003, it demerged pharma business which was later sold off and in 2007 the company merged the food subsidiary with itself. It acquired Balsara's hygiene product businesses in 2005 and Fem Care in 2008. In FY11, Dabur acquired 'Thirty Plus' brand and made two overseas acquisitions. It acquired Turkish personal care company, Hobi Kozmetik and US-based Namaste Laboratories operating in ethnic haircare.
DABUR Financial Summary
No. of Months Year Ending Net Sales Sales Growth Gross profit margin PAT PAT Growth Dividend per share Dividend payout RoCE RoNW Debt to equity ratio Mkt Cap Mkt Cap / Sales Rs m % % Rs m % Rs % % % x Rs m x 12 31/03/2010 33,905 18.2 4,992 2.00 34.8 64.7 53.5 0.0 117,558 3.4 12 31/03/2011 41,045 21.1 19.4 5,686 13.9 1.15 35.2 35.0 40.9 0.5 219,328 5.3 12 31/03/2012 53,054 29.3 16.3 6,449 13.4 1.40 37.8 33.6 37.6 0.4 186,405 3.5

DABUR Stock Price Information

BSE NSE P/E* EPS (31/03/2012) Market Cap* Rs Rs x Rs Rs m 119.3 (0.1%) 119.5 (0.1%) 32.2 3.7 207,827

52-Wk H/L*
Prices as on 23/08/12. *On BSE price

Rs

124/92

***All figures are in Crores Calculation of Ratios: RATIOS Dividends Payout 2012 COLGATE DIVIDENDS / EARNINGS 339.98/446.47 =76.14% 299.18/402.58 =74.31% 271.99/423.26 =64.26% 226.47/659.92 =34.31% 200.19/624.38 =32.06% 173.60/551.52 =31.47% DABUR

2011

2010 ROE 2012

4,465/435.39 =102.551 4,025/384.05 =104.804 4,233/326.11 =129.802

6,449/1303.27 =4.9483 5,686/1,101.16 =5.1636 4,992/749.38 =6.6615

2011

2010

Debt to Equity 2012 No Debt 273.27/1303.27 =0.2096 253.35/1,101.16 =0.2300 106.07/749.38 =0.1415

2011

0.05/384.05 =0.0001 4.59/326.11 =0.0140

2010

RECOMMENDATIONS As an Investor, I would prefer investing in Colgate for the following reasons: 1. There is Zero Debt of Colgate and Dabur is having an increasing debt over past 3 years. 2. The Dividend Payout Ratio is very good with Colgate as compared to Dabur. 3. The Return on Equity is also very high in Colgate in comparison with Dabur. CONCLUSION FMCG Sector as a whole is a booming sector, recording growth since past few years and has been forecasted to grow in coming years as well based on the trend and other variables like market forces ,shift in consumer preferences , increase in disposable income. In terms of Company from the two companies analyzed above, Colgate will be the Best option for Investment.