Fast-moving consumer goods (FMCG), encompassing everyday essentials like chocolates, soft drinks, and medicines, are the lifeblood of any consumer market. In India, with its massive population of 1.4 billion, the FMCG sector thrives, holding a significant share in the stock market.
Traditionally, manufacturers, distributors, wholesalers, and small traders formed the FMCG supply chain. However, the post-pandemic era has ushered in new delivery systems like D2C (Direct-to-Consumer) and O2O (Online-to-Offline), enabling manufacturers to reach consumers directly.
Key Metrics for Savvy Investors (Insights by S. Annamalai, SEBI Registered Consultant)
Investing in FMCG companies requires a keen eye on specific metrics:
Dividend Income History: Companies consistently paying dividends indicate strong financial health. A 5-year history of regular dividends is a positive sign.
Annual Compound Growth Rate (CAGR): This metric reflects a company's growth and value trajectory over time. Look for an upward trend in the past 5 years, indicating potential for future growth.
Operating Margin: An efficient supply chain leads to higher operating profits. Analyze the trend over time and compare it to competitors.
Geography: Location plays a crucial role in FMCG operations, impacting costs, coordination, and procurement. Companies with well-established distribution networks in strategic locations tend to perform better.
Inventory Turnover Ratio: This metric measures how quickly a company sells its inventory. A high ratio indicates good sales or promotional offers, while a low ratio suggests potential sales issues.
Volume Growth: Observing volume growth in FMCG companies reveals how effectively they leverage market opportunities. Aim for companies with volume growth between 9% and 15%.
Revenue Mix: Diversifying across various product segments like sanitation, baby care, and oral care mitigates risk and ensures long-term sustainability.
Ad Expenses: FMCG companies rely on advertising to build brand awareness and introduce new products. Analyze their advertising spend as a percentage of gross profit and consider companies that can increase sales without excessive advertising costs.
While traditional direct sales hold a 92% share in India's FMCG market, e-commerce is rapidly gaining ground, currently at 8%. Companies embracing this online shift are poised for significant revenue growth.
This copy was written by S.Annamalai, SEBI Registered Advisor (SEBI REG No: INH200007575) advisor and edited by finance journalist Saravanan.