FMCG sector outlook

FMCG sector is the fourth largest sector in the Indian economy. The FMCG market in India is
expected to grow at a CAGR of 23.15% to reach US $ 103.70 billion by FY21 from US $ 68.38 billion in
FY18. The FMCG sector growth is expected to reach 10% beyond 2021. By 2025, India is likely to be
the fifth largest FMCG market. Favourable demographics and rise in income level will boost the
FMCG market. The Indian FMCG industry grew 9.4% in the January-March quarter of 2021,
supported by consumption-led growth and value expansion from higher product prices, particularly
for staples. The rural market registered an increase of 14.6% in the same quarter and metro markets
recorded positive growth after two quarters. The union government’s production-linked incentive
(PLI) scheme has given companies a major opportunity to boost revenue.

Rationale behind choosing the food industry

In the last few years, the FMCG market has grown at a faster pace in rural India compared to urban
India. Rural segment accounted for a revenue share of 45% in the overall revenues recorded by
FMCG sector in India. Demand for quality goods and services is on an upward trajectory in rural
areas on the back of improved distribution channels of manufacturing and FMCG companies.
Structural administrative reforms like amendments to Essential Commodities Act, creating a law to
allow free inter-state movement of farmer’s goods and strengthening the post-harvest agri-
infrastructure backed by effective implementation will give the much needed boost to agri sector
and rural economy thus doubling farmer’s income resulting in increased consumption for FMCG and
other products.

FMCG products account for 50% of total rural spending. The rural FMCG market in India is expected
to grow to US $ 220.00 billion by 2025 from US $ 23.63 billion in FY18. The Food and Beverages
segment is a major contributor to revenues in rural India. Hence these are the industries that are
most likely to benefit from rural market growth. In food and beverages, the major growth is most
likely to be seen in the beverages and snacks/ready to cook segment with products like packaged
tea, cold drinks, noodles, biscuits, chips, milk products etc. The market leaders in these category of
products are ITC, Britannia, HUL, Dabur, and Nestle. ITC, HUL and Dabur have already strong
presence with over 40% of its sales from rural India. Britannia and Nestle are the ones who are
focusing on growth in rural market with a share of 32% and 25% of its total sales respectively.  Nestle
announced in February 2021 that it has plans to reach around 1.2 lakh villages with each having
population of over 5,000 over the next two-three years, supported by distribution expansion and
some portfolio tweaking. Nestle with most of its products having highest market share in its
categories have a huge potential in rural market.

Nestle India Ltd.

Nestle India holds a strong position, with 85% of its product has market leadership in their respective
segments. On supply and distribution front the company has a network of 2500+ coffee farmers,
4600+ suppliers, 1700+ distributors, 1 lakh+ dairy farmers and 1200+ spice farmers for its various
supply chain requirements. The company’s shares have 52 weeks price band of INR 16,835-10,120
and a total market capitalization of INR 1.57 Trillion which makes it a Large-Cap company. Nestle has
the highest Year on year sales growth of 10.3% among its peers for the past five years. It has return
of equity of 68.1% over past three years. Nestle also has the high inventory turnover of 3.81 only
second to Britannia.

Comparisons
1) Management comparison

Parameters Nestle Britannia

Capital Allocation by Average ROA past 5 years is Average ROA past 5 years is
management 21.4. Negligible D/E ratio 21.7. D/E ratio of 0.59

Integrity of management No negative news on internet No negative news on internet

Management shareholding 62.8 %. No change in last 3 50.6 %. Decrease by 0.15% in

pattern years last 3 years

Equity Dilution 0.00% -0.02%

CEO’s pay is 106 times the CEO’s pay is 52 times the

Management’s Salary
median pay median pay

Summary: Overall Nestle is slightly ahead of Britannia. The Nestle management has also
successfully handled the severe crisis of the Maggi fiasco of 2015.

2) Quantitative comparison

Parameters Nestle Britannia

Return on equity (%) 106 46.9
YOY Sales Growth past 5 years (%) 10.3 9.36
Operating Profit margin (%) 24.4 17.9
Debt to equity ratio 0.07 0.59
Inventory turnover ratio 3.81 8.32
Working Capital (Cr.) 1864 805

Summary: Nestle has better fundamentals.

Overall Nestle is a company with strong fundamentals with quality management and a
good growth potential with its product portfolio and its expansion plans, hence it is a
good buy.