What are the factors to look out for before investing in FMCG stocks?

Volume Growth  - Volume growth in FMCG companies is the most important operational data point one should check for in quarterly results. Volume growth is a reflection of the company’s ability to capture opportunity in a particular category. Generally, sharp price increase in discretionary categories adversely impact volumes. However, volumes in essentials is unhindered despite sharp price hikes. 

Market share gain – Market share gain is also an important parameter to understand unorganised to organised shift in a particular category. The underpenetrated category & higher proportion of unorganised sectors given larger opportunity size for the established brands to grow.

Gross margin  - FMCG companies command higher gross margins (40%-60% depending upon category). Higher gross margin gives companies greater flexibility to spend towards advertisements & promotions expenses. In the last few quarters, gross margins have been under pressure given the sharp increase in commodity prices globally.  

Advertisement spend  - FMCG companies spend anywhere between 7-13% of sales on advertisement depending upon their gross margins. The advertisement spends is essential for brand building and new product launches. Moreover, foray into a new category also require higher spends towards advertisement in the initial phase.

Distribution expansion  -  India has 10 million retail outlets for FMCG products. FMCG companies’ direct & indirect distribution reach defines product penetration. It is also important for these companies to enhance their direct distribution reach to reduce dependency on wholesale network, which is prone to frequent disruptions.

Operating margin  - Operating margin defines company’s profitability from core business. FMCG companies have the ability to sustain margins by manoeuvring overhead or advertisement spends in a short period of time. FMCG companies also have pricing power given their high brand value.  

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