Consumer Goods Sector Update – Assessing competitiveness of FMCG categories By Emkay Global Financial Services

Reliance Consumer: Assessing competitiveness of FMCG categories

* Unlike the steady margin expansion and working-capital improvement seen in the sector in the last decade given the rational competition, RCPL’s ambitious foray into the FMCG market may have an impact on sector fundamentals.

* In the USD183bn foods & beverages (F&B) market, RCPL’s thrust is largely on fragmented staples categories, except cola beverages. At this stage, RCPL’s aggressive and competitive product pricing will likely help in category development.

* In the home & personal care segment, the initial thrust is on penetrating essential categories, where RCPL is looking to build its business at the mass-end (except laundry). HUL, Rohit Surfactants, Godrej Consumer, Procter & Gamble (P&G), Jyothy Labs and Reckitt Benckiser are expected to face the heat of RCPL’s entry.

* At this stage, Nestlé India, Colgate, Marico, Dabur and Emami are not likely to be impacted by RCPL’s entry, while ITC and Tata Consumer may benefit from market development (as the market is highly unorganized).

Reliance sets aggressive targets for its FMCG foray

We believe Reliance Industries’ Limited’s (RIL) entry into the FMCG industry with RCPL can be disruptive. RCPL has an ambitious target of achieving Rs500bn revenue in five years, with 10mn outlet reach. RCPL’s entry may unsettle industry norms, given the sustained disruptive pricing, strong focus on distribution with higher margins, and likely extension of credit to traders

F&B play remains critical to achieve large aspirations

RCPL plans to focus on 23% of the USD183bn total addressable market (TAM). For this, the company has devised a six-brand strategy to make an aggressive F&B foray. We believe this strategy will prove to be beneficial for RCPL, as the FMCG market’s success is dependent on consumer trust, which can easily be gained with a successful entry into the kitchens of consumers. HUL’s and ITC’s success is largely based on foods, where their initial success enabled them to widen their category participation. We observe that chocolate and carbonated beverages are the only categories facing intense competition among F&B segments that RCPL intends to explore. Varun Beverages, which is an active participant in carbonated beverages, is likely to face competition from RCPL. ITC and Tata Consumer have a strong presence in F&B, where we observe that RCPL is making a mass-end effort to aid category formalization. However, at this stage, we do not see any meaningful threat from RCPL's move into F&B for Nestle India, Dabur or Marico.

Home & personal care thrust on penetrated essentials

RCPL has been selective on its category foray, where thrust is mainly into soap, laundry, dish wash, toilet and floor cleaner. Branding plays a prominent role, as the bulk of the market is filled with category incumbents. Moreover, competitive intensity remains low because of category development needs. RCPL is looking to gain a share in penetrated categories with disruptive pricing. Among mainstream players, we see increased competition by RCPL's entry for HUL, Rohit Surfactants, Godrej Consumer, P&G, Jyothy Labs and Reckitt Benckiser. Dabur, Marico, Colgate and Emami will not be materially hit by RCPL’s entry at this stage.

Aggression = Sector implications

We anticipate a medium-term impact on selected industry players. In the long run, though, we may see wide industry influence by price promotion and trade terms. The FMCG sector’s oneyear forward PER valuation at 51x (ex-ITC, based on Bloomberg consensus) is down 8% vs. its historical average one-year forward PER. We continue to view the sustained rural slowdown on account of RCPL’s aggressive foray to be a de-rating catalyst for the FMCG sector. Initial thrust towards mass-end products would help in category development; but as RCPL plans value-added opportunities, its presence will have a bearing on category incumbents


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