FMCG sector is the 4th largest sector of Indian economy and has a market size of about Rs 130,000 crore. It has been growing a healthy CAGR of 11% over the last decade on account of strong domestic consumption demand. As inflationary pressures are quite high and the high input costs are likely to affect the growth prospect, the forthcoming budget might provide some support to this sector.
Hence, it might be a good time to invest in FMCG companies if you are betting on a particular sector. Also, this sector is relatively less volatile than that of other sectors. These aspects make FMCG sector a very good option for investment.
Wish list for FMCG companies
Inflation & FMCG sector: It is generally believed that high inflation in the economy leading to high raw material prices acts as a dampener for the FMCG sector. But this is not true as the business run on different fundamentals. This is a kind of business where the gross margin contribution is around 40-45% and the no single raw material cost is more than 20-25% of the total raw material cost. It means even if there are inflationary pressures in the economy, the companies in FMCG sector needs to increase the net realizable price by only 2-4% to ensure that the inflationary cost doesn’t affect their profit. Hence the business runs on its brand value which is strong enough to pass that sort of price increase.
However, if inflation is prevalent due to structural problems in the economy viz. abnormal price increase by intermediaries and supply chain bottlenecks then it acts as a dampener for the FMCG Sector. Any policy initiative in this union budget related to removing the structural inefficiencies will be a boon for the FMCG sector. The FMCG sector last year gave a return of almost 30%. This is testimony of the fact that FMCG sector is generally unperturbed by inflationary pressures in the Indian economy.
Taxation: Currently inconsistent rates particularly for excise duties have been a dampener for producers in different parts of the country. Hence faster implementation of GST and DTC will help in removing these inconsistencies in taxes. Therefore, it is expected that Government will expedite the implementation of GST and DTC.
However, some daily use edible oils are not in the list of excise duty list and they get concessional VAT in many states. The application of GST will increase the cost of these products. Therefore, if you are investing in a FMCG company engaged in production of edible oils then the budget might impact them adversely.
Intellectual Property rights: It is essential that the intellectual property rights are strengthened. This will avoid the unnecessary litigations for intellectual property rights. Last year big brand like Cadbury and Anchor Foods fought over copyright infringement. Hence if the Government makes any proposal in this regard then it will be a good step ahead for the FMCG sector.
So, you can try your luck in the FMCG sector stocks as the Budget might be pro-market this year. However, you should perform your due diligence in the company before investing in any of the companies. To ensure you do not take undue risk, it is always better to invest in big brands as far as FMCG stocks are concerned.