The Thing You May Not Know about Brands
Nifty 50: -2%
Nifty FMCG: +2%
Hindustan Foods: -3%
Founder’s Recap
Rural Consumption Saves the Day
The markets have been under pressure for the last month. Last week too, the markets were down by 2%. Mid and small caps got battered even more, with them being down 3% and 4% respectively.
But in the face of this, where overall sentiment is pessimistic, one sector did surprisingly well - FMCG, with the index rising by 2% in the last week. Marico was the top performer in the Nifty FMCG index, with it rising by 13% in just a week.
Giants like HUL, Britannia, Godrej Consumer Products were up by 5-7%. The entire consumer pack was driven by one factor - a rise in rural demand.
What’s Happening?
For the first time in nearly three years, the growth in sales of FMCG goods in rural areas surpassed that in cities.
As per a report by Neilsen IQ, rural markets saw a consistent volume growth of 6.5% in both December 2023 and January 2024, followed by a notable increase of 11.1% in February. Conversely, urban markets experienced a growth rate of 6.1% in December 2023 and 4.7% in January 2024, and a rise to 8.7% in February.
Until November 2023, rural demand, along with underperforming urban markets, had been dampening overall growth for several years. The last time villages outpaced cities in FMCG sales expansion was in March 2021.
Why Is This Happening?
Over the past two years, markets worldwide were marred by inflationary pressures. Consumer companies were some of the hardest hit - with cost pressures arising on all fronts - raw materials, energy, packaging and even transport.
However, in the last few months, due to aggressive rate hikes by central banks world over, inflation has trickled down, resulting in price cuts by companies.
Additionally, over the last few months, wages in rural India have been on a rise, at levels that are higher than inflation. This increase in real wages has boosted purchasing power, further propelling rural demand.
The confluence of these factors can also been seen in the lower demand for work under MGNREGA, which has become a fallback option for rural workers. Data suggests that the number of households seeking work under the scheme has actually declined to 1.8 crore in March 2024, compared to 2.3 crore last year.
Why Should You Care?
Rural demand accounts for 40% of the FMCG demand, and makes for a lot of incremental potential given increasing penetration, awareness and changing lifestyles.
Most of the major FMCG companies in their 4QFY24 results commentary have guided for double-digit growth in volumes in FY25 on account of encouraging signs in rural demand.
The timing of the rural bounce-back, and subsequent upping of growth guidance comes in the backdrop of an already battered sector, fears of high valuations in the rest of the markets, and an easing of the rally that had been seen over the last year.
The combination of high growth, with greater visibility provides for a good safe space in FMCG stocks during these choppy times.
Market Stories
Hindustan Foods: The Brand Behind Brands
Did you know that most of the branded stuff you use, is not really manufactured by the brand itself? The manufacturing of most branded goods is outsourced to companies that work behind the scenes, while the brand focuses on design, development and sales.
And this stands true for most things you use in your daily life. A lot of the consumer electronics are made by a company called Dixon Technologies, Pepsi is made by Varun Beverages, burger buns in McDonalds are made by Mrs Bectors Food Specialities, and the list goes on.
At Rupeeting, we’ve been very fond of such companies, having advised Varun Beverages in the past. The latest addition to our list has been a lesser-known, but skyrocketing company called Hindustan Foods.
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Hindustan Foods, Who?
Historically, Hindustan Foods has been best-known for being the manufacturer of Farex - which is a popular baby food product, sold by Glaxo since 1934. Hindustan Foods made Farex and nothing other than that for a good 25 years, from just one factory; until 2013.
But then there was a leadership change at Hindustan Foods - which changed the course and how. Since then, Hindustan Foods went from a Farex maker to a producer of:
Other than this, it also started manufacturing tea and coffee, liquid detergents, disinfectants, ice-creams, flip-flops and sandals, bath soaps, cosmetics, and much more.
A 5-Bagger Over the Last 5 Years
In a span of 10 years (FY14 to FY24) - Hindustan Foods has grown multifold, from a revenue of just Rs. 3.2 crore to a run-rate of over Rs. 2,700 crore.
Unfortunately, investors couldn’t make a proportional 800x return - the stock only got listed in August 2019. Nonetheless, it now trades at close to Rs. 500 per share, from a listing price of Rs. 92.
Despite the large scale-up Hindustan Foods has seen over the last decade, the story is far from over. The company has set a goal of reaching a revenue of Rs. 4,000 crore by FY25, and aims to become the largest FMCG contract manufacturer, diversified across product categories and geographies.
Will the Winning Streak Continue?
The past gives enough validation of Hindustan Foods’ ability to scale and succeed. Even if the company were to continue applying the same formula in the future, the market is large enough for Hindustan Foods to continue scaling, even from here.
A few things we’ve observed as contributing factors for Hindustan Foods include:
A Growing Market
Hindustan Foods has a bright opportunity of further scaling its business, as contract manufacturing itself becomes increasingly relevant. We expect sustained double-digit growth for the market, driven by:
Additionally, contract manufacturing has historically predominantly been unorganised and fragmented, which like every other industry is being driven towards a more formal and concentrated play.
50% Growth Next Year?
Hindustan Foods ended FY23 with a revenue of Rs. 2,600 crore, and should do north of Rs. 2,700 crore in FY24. Yes, after all that multiplying, you get single-digit growth this year! The company has faced the brunt of a slowdown in FMCG demand.
However, despite the severe slowdown in growth in FY24, the company has been confident of meeting its FY25 target of Rs. 4,000 crore revenue; which if it achieves would mark near-50% growth next year.
The company seems to be backing on the following factors for growth:
Over and above this, as seen in the past, inorganic opportunities, and utilisation of more funds (like the raising of Rs. 400 crore in warrants in December 2023) can further propel growth.
While realistically, and given the current environment, Hindustan Foods may / may not achieve its own target. But, on a larger scale, there seems to be ample headroom for growth, which can result in a meaningful scale up for the company as more brands you use outsource their manufacturing to the likes of Hindustan Foods!
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