Find how an Indian Consumption story will help your investments to grow

Beating all odds like a falling GDP rate, a rise in petrol prices, spiraling inflation rate coupled with sliding value of rupee and fresh tensions brewing in the Euro zone, the FMCG funds and its benchmark index BSE FMCG Index have outperformed all other segments over a period of five years.

Key points of the FMCG sector:

·         1) According to ASSOCHAM, the FMCG segment is the fourth largest sector in the Indian economy

·         2) The India Brand Equity Foundation (IBEF) estimates a total market size in excess of US$13.1 billion for FMCG industry in 2012

·         3) The Indian FMCG sector is well-characterised by the presence of some of the world’s most reputed MNCs 

·         4) The sector has a well-established distribution network; fierce competition and low costs are the primary attributes which can be linked with the success story of the FMCG mutual funds 

·         5) Increasing disposable income of Indian consumers coupled with higher consumer spending can take FMCG to reach new highs.

FMCG Funds: A brief overview

FMCG or fast moving consumer good is any product which has quick exhaustion life and are relatively lesser priced. FMCG items are those which generally get exhausted within a year. 

Funds that invest across the fast moving consumer durable industry are known as FMCG Mutual Funds. Companies manufacturing soap, oil, cigarettes, wines etc all fall into the FMCG industry. FMCG may also include pharmaceuticals, consumer electronics, packaged food products etc.

Before going deep into the discussion which will enable us to know more about the FMCG funds and about the sector, let us first glance through the returns of the FMCG funds with few of the stalwarts in the diversified equity fund space. 

Performance of FMCG Funds with Diversified Equity Funds

	CAGR
Scheme Name	1 Year	3 Years	5 Years
Category: Diversified
AIG India Equity-Reg(G)	-2.8837	10.5090	3.4563
Birla SL Equity(G)	-7.3936	5.6734	2.5153
HDFC Equity(G)	-7.9214	13.9953	9.1837
HDFC Top 200(G)	-5.7416	11.0718	10.3598
Reliance Equity Oppor-Ret(G)	2.2325	22.1588	9.5737
Category: Sector Funds
ICICI Pru FMCG(G)	28.0852	34.5657	17.1802
SBI Magnum FMCG	29.1247	39.5516	24.1608
Category: Benchmark
BSE FMCG	25.6129	29.0915	21.7877
BSE SENSEX	-6.9708	5.5815	3.2419
Source: ACE MF, Returns as of 22nd June 2012

Table 1: Showing Performance of FMCG Funds with Diversified Equity Funds

The BSE FMCG returned 25.6% over the time period of last one year and its broader index, i.e. BSE Sensex returned a negative 6.9% over the same period. This growth of the FMCG index shows that the Indian economy is fuelled by high growth of domestic consumption 

As evident from the above table, the FMCG funds when analysed over different time frames, have outperformed some good performing diversified equity funds. The FMCG sector has returned 21.7% over a period of past five years against a mere 3.24% return by the BSE Sensex. 

Both funds from the FMCG segment space have been able to outperform not only other equity funds but also the broader index, i.e. the BSE Sensex.

According to the Indian Brand Equity Foundation (IBEF), multinational and global corporations view India as one of the key markets from where future growth will emerge. The growth in India's consumer market will be primarily driven by a favourable population composition and rising disposable incomes.

IBEF further states that, India's consumer market till recently was broadly defined as a pyramid; a very small affluent class having an appetite for luxury and high-end goods and services at the top, a middles-class at the center and a large relatively economically disadvantaged class at the bottom.

This pyramid structure is gradually collapsing and is being replaced by a diamond – a relatively large affluent class at the top, a huge middle class at the center and a small economically disadvantaged class at the lower end. The diamond represents increasing volume and value across all classes of the Indian consumer market. 

(Source: IBEF)

Industry Outlook:

A research report by the Kotak Institutional Equities opines that “the Indian consumption market will grow two-and-a-half times by 2025, to Rs 110 trillion (US$ 1.96 trillion) from Rs 43 trillion (US$ 764.58 billion) in FY 2010, which classifies Indian households into Real-rich, Upper class, Prospering, Evolving, Emerging and Surviving”.

Separately, Mr. Tarun Arora EVP, Marketing, Godrej Consumer Products Ltd says that most FMCG companies are growing at a much faster pace in rural India. 

This faster penetration into the rural market will help the companies to post better returns in their books. The FMCG sector is also riding on the support of good marketing and distribution networks and availability of raw materials and labour, which are both easily available in India.

The growing population, high disposable income and good education combined with rapid increase of urbanisation can take this sector to new highs in days to come. 

Due to the large Indian population, the demand is ever rising and there remains a chance for these FMCG companies to grow further. Moreover, these goods and services are now available even to rural India which will directly help these FMCG companies to reach to a larger percentage of population and also post healthy volume of growth in their books.

Concerns for the Sector

In its recent press release the Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation stated that Provisional annual inflation rate based on all India general CPI (Combined) for May 2012 on point to point basis (May 2012 over May 2011) is 10.36 % as compared to 10.26 % (final) for the previous month of April 2012. The corresponding provisional inflation rates for rural and urban areas for May 2012 are 9.57 % and 11.52 % respectively. Inflation rates (final) for rural and urban areas for April 2012 are 9.67 % and 11.10 % respectively.

 Source: Ministry of Statistics and Programme Implementation

Inflation rate has never gone below the 4% mark since January 2006 which remains a major cause of concern. Inflation has started to rise which will directly affect the price of the products. A rise in inflation level will lead to an increased price of raw materials. We have already seen due to higher raw materials cost, Marico has increased the prices of its oil products; Parachute and Saffola.

Moreover, a new packaging rule will be implemented by all the FMCG companies from July 1, 2012, which will make daily products like tea, biscuit, coffee, etc more expensive. 

Slow industrial growth coupled with slumping GDP growth can lead to lower demand of the FMCG goods, which can affect the growth of the FMCG companies.

Fund Focus

There are only two FMCG funds currently available in the Indian mutual funds space and both funds are available for transaction on our platform. However, SBI Magnum FMCG stands out from the other one. 

This fund seeks to provide the investors’ maximum growth opportunity through equity investments in stocks of growth oriented sectors of the economy. There are five sub-funds dedicated to specific investment themes viz. Information Technology, Pharmaceuticals, FMCG, Contrarian and Emerging Businesses. 

Investment Strategy                                                                                                 

                                 

The fund invests in Fast Moving Consumer Durable stocks across different market capitalisation. As of April 31^st April 2012, 78% of the fund is invested into large cap stocks and around 15% of the fund is invested into the mid cap stocks. The fund also has a limited amount of exposure into the small cap space. 

Source: SBI MF Factsheet as of 31^st May 2012.

 

Chart 1: Showing Asset Allocation of the fund

Asset Size: The fund's AUM is around Rs. 66.75 crore as of March 31, 2012.

Top 10 Holdings

Source: SBI MF Factsheet as of 31^st May 2012. 

Chart 2: Showing the Top 10 holdings of the fund

Performance

SBI Magnum is the best performing fund and has returned more than 22% and it has even outperformed its benchmark index and the broader index, which posted returns of 19.45% and 2.50% respectively.

My Take

It is expected that the Indian FMCG segment to continue its outperformance in 2012 at the back of the strong consumption growth especially in the rural segment. 

In a nutshell...

The economic growth in India is bringing lifestyle changes to common Indian life. Therefore the demand for basic consumables are all set to rise even more in future. The overall sector has performed well backed by strong consumption by the consumers.