May 2014

CRISIL Insight

Brands, Scale & Network save FMCGs the Blushes

Analytical Contacts:

Sudip Sural
Senior Director CRISIL Ratings
Email: sudip.sural@crisil.com

Manoj Damle
Director CRISIL Ratings
Email: manoj.damle@crisil.com

Nitesh Jain
Associate Director CRISIL Ratings
Email: nitesh.jain@crisil.com

Kapil Babbar
Senior Analyst CRISIL Ratings
Email: kapil.babbar@crisil.com
Brands, Scale & Network save FMCGs the Blushes
Revenue growth of CRISIL-rated Top10 likely to rebound this fiscal if monsoon is supportive

CRISIL expects the Top 10 rated fast moving consumer goods (FMCG) players in terms of revenue to
record improved revenue growth of 13% assuming higher household consumption growth backed by
a normal monsoon. In case of deficient rainfall however, CRISIL expects lower agriculture GDP and
higher inflation to tamp revenue growth down to 10%.
Income growth slowed while inflation raged last fiscal, leading to lower discretionary spending by
consumers. To top it all, commodity costs increased. All this is expected to have halved their revenue
growth to 11% in fiscal 2014 compared to 20% in 2012.
But there was much they did to cope with the difficult business environment, leveraging their strong
brands, diversified revenue base and economies of scale to cushion the fall in revenue growth.
Healthy rural consumption, thanks to higher growth in agriculture and non-farm income, also helped.
This helped these players to cushion any significant impact on their operating margins.
These players are also expected to maintain a fairly stable financial risk profile with no large
announced acquisition or capital expenditure plans, which will help them to maintain a stable credit
profile.

The year that was

Spending slips as income trips
Sluggish income growth and persistently rising inflation over the last two years have led to a decline in
household consumption spending. Household consumption proxied by growth in private final
consumption expenditure (PFCE) declined to a decadal low of 4.1% in 2013-14, compared with
9.3% in 2011-12 (Chart 1).

Chart 1: PFCE (%, Y-o-Y)

12

10 9.3

8
% Y-o-Y

6.7 6.0
6
4.9
4.3
4
4.1

0
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15-F

GDP Private Consumption

Source: CSO, CRISIL Research

3
 There were two reasons for this:
1) GDP growth rate fell to 4.9% in 2013-14: Slowing growth curbed increase in wages, which
impacted consumption.
2) High inflation reduced households purchasing power: Over the last two years, CPI
inflation has averaged 10% and WPI inflation 8%. This, coupled with limited growth in
government policy-led non-farm income, has resulted in a deceleration in real wage growth.
The decline in household spending resulted in lower revenue growth for FMCG players. Volume
growth, though still positive, has fallen sharply over the past year. It has been more pronounced in
discretionary segments such as personal care, premium edible oils and premium packaged foods
than in detergents, cigarettes and biscuits.
Median revenue growth of the Top 10 CRISIL-rated FMCG players, based on revenue, is expected to
have halved to 11% in 2013-14 (Chart 2). The growth would have been much lower but for price hikes
and changes in product mix undertaken during the year even as volume growth remained in low
single digits.

Chart 2: Median revenue growth of Top 10 CRISIL-rated FMCG players

23 25

20 20
20
17

15
15

11

10

0
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 E

FMCG median revenue growth

Source: CRISIL analysis, E-estimates

Operating profitability remains in a band

Yet despite a fall in revenue growth, the operating profitability of the Top 10 is likely to remain
unscathed. Thats because of efficiency in supply chains. While increasing distribution reach
supported volume growth, economies of scale controlled rising raw material costs. Operating
profitability was protected also because strong brand equity enabled the companies to partially pass
on increases in raw material prices without impacting volumes -- more or less the story of the last
three years (Chart 3).

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 Chart 3: Operating profitability of Top 10 CRISIL-rated FMCG players

14.8 15.1 14.5 15.7

14.1
13.5 13.5

%
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 E

Source: CRISIL, E-estimates

Rural growth a silver lining

Rural India has become a focus area as the governments welfare policies (such as NREGA) have led
to an increase in rural wages, fuelling consumption of discretionary goods. In the seven fiscals to
March 31, 2012, annual per-capita consumption of FMCG goods has more than tripled (Chart 4). In
last 2 years, though, real wage growth has seen sharp deceleration due to stubborn inflation and
limited growth in government policy led non-farm income.

Chart 4: Growth in rural wages from fiscal 2010 to 2012 led to higher per capita consumption of FMCGs

Value (Rs.) of annual per capita

25.0 19.8 consumption
20.0 15.8
Y-o-Y Growth Rate

15.0 11.5 11.8 2043

7.9
10.0
5.0 1.8
-1.0
0.0
-5.0 640
2009-10
2004-05

2005-06

2006-07

2007-08

2008-09

2010-11

2011-12

2012-13

2013-14*

Nominal rural wages Real rural wages 2004-05 2011-12

Source: RBI & CRISIL research, *April to September

This rising purchasing power of rural households has meant rural FMCG consumption growth
outpaced urban growth. FMCG companies anticipated this correctly and expanded their rural reach
significantly, by increasing distribution channels over the last 5 years. Indeed, the CRISIL-rated Top
10 players derive around 30-40% of revenues from the countryside.
What helped also was agriculture grew a solid 4.6% in 2013-14. That compares with an average 3.6%
growth in the 10 fiscals to 2013-14, and 2.9% in the decade up to 2005. The three factors that
improved markedly in the last 10 fiscals were agricultural investment, fertiliser-use intensity and credit
growth, all of which bolstered farm output.

5
 Business risk profile key differentiator
When the chips are down like in these times of low discretionary spends and rising competition it
is brand equity that helps companies offset consumer downtrading.
All the 10 FMCG players have strong brands and dominant market positions (within the top three in
their segments, as Table 1 shows). Therefore, despite declining revenue growth, we expect them to
maintain market positions using discounts and special offers.

Table 1: Top 10 players have strong brands

Company Categories with strong market position

ITC Ltd Cigarettes, Biscuits

Hindustan Unilever Ltd Personal care, Soaps and detergents
Nestle India Ltd Dairy, packaged foods
Britannia Industries Ltd Biscuits
Dabur India Ltd Hair Care, Health supplements
Shakti Bhog Foods Ltd Packaged flour and Rice
Marico Ltd Hair Care, Premium edible oils
Mondelez India Food Ltd Confectionary
RSPL Ltd Soaps and detergents
Godfrey Philips India Ltd. Cigarettes

Scale and revenue diversity helps offset slowdowns

Presence in multiple segments, a large portfolio of products, and lower dependence on specific
brands insulated these companies from seasonal risks and changes in consumer habit. Additionally,
presence across geographies and large operations help minimise risks from regional and national
competition. Companies with higher revenue diversity and large scale enjoy better business risk
profile, which translates into stable revenues and healthy margins. 7 out of the 10 FMCGs had lower
dependence on any single brand or revenue segment (Chart 5).
Chart 5: Extent of diversification

Moderate

Significant to
Moderate

Significant to moderate: Top brand or segment contributes less than 80% of revenue
Modest: Top brand or segment contributes to more than 80% of the revenue

6
The year that could be
Growth upside visible
For 2014-15, CRISIL expects the GDP growth rate to improve to 6%, driven primarily by partial easing
of the domestic policy logjam as well as improved global growth prospects. Further, consumption will
pick up from its current lows due to moderation in inflation and higher farm income led by good rabi
crop in 2014. Rural growth will improve as agricultural income rises.

What if there is a monsoon failure?

A major risk to growth upside this year is enhanced possibility of occurrence of El Nino a climatic
condition that usually causes drought in north-west and central India and heavy rainfall or floods in the
north-eastern regions.
For FMCGs battling weak growth and high inflation, this could be hobbling. Poor rainfall will result in
higher food inflation and worsening of GDP growth, which will further worsen private consumption
growth. This, in turn, will lead to further decline in revenue growth.
Assuming the farm side is flat, GDP growth is expected to decline to 5.2%.
For 2014-15, CRISIL expects these FMCG to report revenue growth in the 10-13% band depending
on monsoon and its impact on GDP and inflation. Growth will be closer to higher band if GDP touches
6% amid benign inflation and it will be driven by volume and improvements in product mix.

Chart 6: Revenue growth estimates (%, Y-o-Y)

25 23

20 20
20 17
15
15 13
11
10
10

0
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 E 2014-15 F 2014-15 F*

Source: CRISIL analysis, F-forecast

*in case of monsoon failure

Higher-rated players have strong financial risk profile

A majority of these FMCGs follow a conservative financial policy and have paid stable dividends in the
last three years.
Overall, these companies have a strong capital structure with a median gearing of less than 0.5 times,
and require modest working capital due to strong relationships across distribution channels. Further,
healthy accretions to reserves and equity infusions have offset substantial capex and M&As in the last
3 years (worth Rs.150 billion between fiscals 2012 and 2014). The capex was largely to bolster

7
 capacities, enter new segments, and acquisitions. Despite this, the ratings of these companies have
remained stable -- even improved in some cases -- over the last three years because of strong free
cash flows. In the milieu, and in the absence of large acquisitions, FMCGs will focus on returns to
shareholders through higher dividends or buybacks.

Credit outlook
CRISIL believes Indias economic growth is likely to see a mild, fragile recovery in 2014-15 with GDP
accelerating to 6% from an estimated 4.9% in 2013-14, steered by partial debottlenecking and
improved global growth prospects and assumption of normal monsoon.
Higher industrial growth will have a positive rub-off on services such as trade, transport and telecom.
FMCGs will benefit as consumption picks up from current lows following a moderation in inflation and
a rise in farm incomes. A mild recovery in PFCE will also benefit them this fiscal.
Overall, however, the recovery will be far below Indias long-term potential.
CRISILs ratings on these 10 FMCGs will remain stable, except in the case of aggressive acquisition
leading to deterioration of capital structure. Their credit quality will remain stable despite the economic
headwinds. All have strong business risk profiles backed by solid brands and diversified revenues.
Revenue growth will recover this fiscal riding on improving market position and higher distribution
channels after a modest showing in 2013-14. Higher-rated FMCGs have a stronger financial risk
profile backed by strong capital structure and stable free cash flows, despite acquisitions of the past
and volatile raw material prices. The rating outlook for all these companies is stable. They are not
expected to see any negative rating action in the medium term unless they go for a significant
acquisition or capex, which can impact their financial risk profile.

Table 2: Top 10 CRISIL-rated FMCG companies by revenue

S.No Name Credit Rating Revenue

Rs. Billion (2012-13)
1 ITC Ltd CRISIL AAA/Stable/CRISIL A1+ 310

2 Hindustan Unilever Ltd CRISIL AAA/Stable/CRISIL A1+ 270

3 Nestle India Ltd CRISIL AAA/Stable/CRISIL A1+ 83*

4 Britannia Industries Ltd CRISIL AAA/Stable/CRISIL A1+ 62

5 Dabur India Ltd CRISIL AAA/Stable/CRISIL A1+ 61

6 Shakti Bhog Foods Ltd CRISIL A-/Stable/CRISIL A2+ 53

7 Marico Ltd CRISIL AA+/Stable/CRISIL A1+ 46

8 Mondelez India Food Ltd CRISIL AAA/Stable/CRISIL A1+ 41*

9 RSPL Ltd CRISIL AA-/Stable/CRISIL A1+ 31

10 Godfrey Philips India Ltd. CRISIL AA/Stable/CRISIL A1+ 21

*for year ending December 31, 2012

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About CRISIL Limited
CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are
India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest
banks and leading corporations.

About CRISIL Ratings

CRISIL Ratings is India's leading rating agency. We pioneered the concept of credit rating in India in 1987. With
a tradition of independence, analytical rigour and innovation, we have a leadership position. We have rated over
75,000 entities, by far the largest number in India. We are a full-service rating agency. We rate the entire range
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Last updated: May, 2013

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