11 January, 2024
What is FMCG?
FMCG (Fast Moving Consumer Goods) refers to a set of consumer goods characterised by a high turnover rate or quick / repeated sales. They are often low-cost products like soaps, shampoos, beverages, etc.
Look around your household, and you will find a plethora of goods falling into this bucket. These items span from a bag of potato chips to your toothpaste, beauty products, and even cleaning agents. The list goes on and on. Given the mass usability of these products, it makes sense to consider this industry for investment if you are trying to target the Indian consumption theory.
Despite having an endless product list, almost all FMCG products share some characteristic features -
Quick turnover - This feature provides the term 'fast moving'. FMCG products are sold quickly and frequently, leading to a high turnover and sales volume.
Low-cost items - Almost all the products in this category have brands that offer them at very affordable prices, simply because these are frequent purchases made by the masses and aren't a luxury.
Essentials - Most FMCG products, like personal care and house cleaning products, are essentials. Hence, their demand is need-driven. This ensures consistent sale volume for these manufacturers and distributors.
Short-lived shelf life - Given the nature of these products, they are consumed quickly and hence, are purchased repeatedly and frequently. This eliminates the need to make these products last on the shelf, living up to their name of fast-moving.
Large number of customers - Since these products are low-cost essentials, they tend to have a vast customer base. They are consumed in urban and rural areas alike, leading to an increase in sales volume. Manufacturers of these products usually come up with different brands basis the target market, which are tailored to the respective market's needs and purchasing power.
As long as people consume goods and services, the FMCG industry will thrive. The future of FMCG in India looks promising, as the growth story of the Indian economy cannot be doubted. The growing population and their expanding needs and desires will contribute to the expansion of the FMCG sector.
IBEF (India Brand Equity Foundation) is a trust established by the Ministry of Commerce and Industry. According to a report from IBEF, the FMCG market is expected to reach ₹18.22 lakh crores by 2025, from ₹9.11 lakh crore recorded in 2020, making an average growth rate of 14.9% per annum.
How to identify the best FMCG stocks to invest in?
With a multitude of FMCG stocks in India, you might be pondering how to narrow down your selection to choose the right one. Though there are no pre-defined criteria by which you can select the best out of the lot.
Yet, some key performance indicators can be used to assess and compare the various companies. Following are some major key performance indicators to look at in the FMCG sector -
Sales volume - The FMCG industry is a volume game. The company that can sell the most products in any given period tends to lead the industry. Owing to the characteristic features of quick turnover and low cost, it is crucial to maintain a large volume base.
Product portfolio - Usually, every FMCG player will have a vast product portfolio. Companies tend to have different kinds of products and multiple brands in the same category. Upon examining the toiletries within your home, you might notice that a single company owns two separate brands of soaps or shampoos.
Any successful FMCG company needs a wide range of brands in its portfolio. The same product has to be sold in varied markets with different needs and purchasing power.
For example, a soap manufacturer should ideally not sell the same soap brand in a high-end urban city and a rural area. The reason is that these markets have very different needs. The urban market would want better product features and design, whereas the rural market is more price-sensitive.
Profit margin - It is essential to check that the company you are looking to invest in isn't driving volumes simply because of a lower profit margin than its peers. Every company needs a healthy margin to survive and grow in the long run. Looking at profitability ratios like profit margin, return on assets and similar indicators might be a good starting point to assess this.
Market share - Given the volume-centric nature of the industry, it is vital to check if the company in question enjoys a good market share or not. The targeted company should ideally be one of the market leaders among a few product categories. This will ensure a sustained stream of cash flows in the future and a strong brand presence.
Inventory turnover ratio - This is a significant ratio to look out for in the FMCG sector. It tells you how quickly the company can efficiently distribute and sell its inventory. It is calculated by dividing the cost of goods sold by the average inventory for a given period. A higher ratio is a good sign as it depicts the company's ability to sell its inventory quickly.
Conclusion
Thus, it is safe to assume that FMCG is one of the most sought-after industries among investors. You can use the aforementioned parameters to assess the companies and make a smart judgement call. However, just like any other financial security, investments in the FMCG sector are also subject to market risk, and you should conduct thorough research before investing.
To invest in the right FMCG stocks, you also need the right Demat Account. This is where the HDFC Bank Demat Account can help you. The account can be opened seamlessly in just a few minutes and allows you to invest in an array of securities.
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*Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
