Credit Suisse is optimistic of the prospects of fast moving consumer goods companies over the next six to 12 months, and expect ITC, Godrej Consumer Products, GlaxoSmithKline and Emami to do well

Credit Suisse expects fast moving consumer goods (FMCGs) segment to perform well going forward on the companies’ ability to control costs and margin expansion. In their recent research note, it says, “FMCG companies have stronger revenue levers today than they had in the early 2000s. Most companies have used the strong growth phase of FY08-13 to strengthen long-term drivers like distribution and innovation.”

Credit Suisse expects ITC, Godrej Consumer Products Ltd (GCPL), GlaxoSmithKline (GSK) and Emami to take advantage of the prevailing trends and perform well. On the other hand, Credit Suisse feels Nestle will be badly positioned.

An important factor in profitability of FMCG companies has been the ability to reign in costs and margin expansion. “In the high growth phase of FY08-13, most companies invested in long-term drivers and allowed significant increases in fixed costs. This is in contrast to the late 1990s when companies did not invest back into businesses in the high growth phase. We see scope for belt tightening on fixed costs if a slowdown were to happen,” Credit Suisse said.

One of the bigger levels towards profitability has been that FMCGs investment in distribution and last-mile interactivity, mainly led by Hindustan Unilever and soon to be followed by others. Credit Suisse expects distribution to double in the next four years. It says, “We expect these companies to add about 20% to their rural distribution each year over the next four years, which would double rural direct reach.”

Another positive lever has been innovation and abilities of FMCGs to crank out newer products with regularity. “Many companies in the FMCG sector have significantly upped the ante on innovation over the past one to two years. GCPL, ITC and Emami have products in ramp-up mode and are also likely to launch more products in the next one to two years. HUL and Marico are also maintaining new launch activity,” said the report.

Increased ad spends to highlight innovations, and rapidly evolving media has made it easier for FMCGs to market products. “Unlike the early 2000s, innovation pipelines of many companies have been much stronger. This makes the marketing levers much more effective for any company, especially for new products or variants, and gives a much better chance for the innovation pipeline to succeed,” said the report.

With a fairly successful monsoon this year, Credit Suisse expects more spends from disposable incomes. It said, “The near term, the FY14 monsoons have been 5% above normal, which should aid growth over the next 6-12 months.”

ITC, GCPL, GSK and Emami were shortlisted by Credit Suisse to perform well going forward. “ITC has by far the best margin levers, in our view. GCPL’s innovation pipeline is the strongest. Emami and GSK will see disproportionate gains from rural distribution expansion as they are off a lower base. GCPL, Marico and Emami could also offset some growth moderation in their international business expansion.”

Below is a summary of valuation of FMCG undertaken by Credit Suisse: