In this newsletter, we have covered

• Macros of the edible oil sector
• Impact on edible oil prices
• Selecting a potential company based on good fundamentals
• Potential downsides of the sector
• Potential companies to pick for longterm investment

If you see the above chart in 2006 edible oil consumption was just around 4.72 Billion($) but if you look at 2021-2022,
it moved up to 13.18 Billion($) even we had a covid situation imports are increasing YoY.

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If you see the global edible oil production graph it has also increased significantly

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If you look at India's vegetable oil production it's also increasing YoY.

So, Global consumption is increasing, global production is increasing and India's edible oil production is also increasing, despite increasing consumption and production edible oil sector is not as big as compared to other sectors, but since last year it's trending in India, what is the reason for it?

The key reason is prices of edible oils went to the moon, look at the graph since last year prices of edible oil soared more than petrol or diesel.

So if you are worried about increasing the price of petrol and diesel you should be panicking about edible oil prices. Most preferred edible oil in Indian households Sunflower oil went up by 56.31%. Automatically it has a huge impact on food prices.

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But before diving into the food prices & FMCG sectors, let's look at the growth drivers for the sector in India.

1. Import substitutions

If you look at the chart we have completely moved up from self-sufficient to import dependence, our imports have moved up by 91% in just 2 decades. Now as the Government of India is consciously promoting and supporting "Aatma Nirbhar Bharta", it creates a great opportunity for domestic companies in India to become self-sufficient. Ideally, all domestic demands should be fulfilled by domestic companies to reduce imports drastically.

Cheap raw materials & labor force can be a growth driver for import substitutions.

2. Government Expenditure in food subsidy

If you look at the graph, government expenditure is increasing YoY. But it only increased 81% from 2010 to 2021.

Imagine having a portfolio only making 81% returns in 10 years. is it sound good? No, of course not. So government expenditure on food subsidies has not increased as much as it should. As government takes superior steps towards it, it's going to help the sector.

Now let's come to the important part of, how it's affecting the FMCG sector. To understand it, let's see how an increase/decrease in edible oil prices affects the FMCG sector.

If edible oils price move up ⬆️ by 15%,
FMCG companies' NPM (Net profit Margins) falls by 1%, Due to an increase in raw material prices to process foods.
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​Now what happens if it goes down ⬇️ by 15%,
NPM of FMCG companies goes up by more than 1%

That's what happened very recently, Edible oil prices are continuing to fall and researchers say that they may fall by 30% by the 2nd or 3rd quarter of 2022 and that's why FMCG stock prices are going up right now.

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Now, if FMCG stocks are going up then let's look at things to look after before picking stocks.

1. Net Profit > Previous Year

2. Operating cash flow > Previous Year

3. Return on capital employed > 20%

4. Change in borrowings < Previous Year

5. Current Ratio > 1

6. Debt/Equity < 1

7. Net profit margin > 15% of Previous Year
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Best picks according to analysis

Edible Oil Sector

Adani Wilmar

- A joint venture between the Adani Group and the Wilmar Group, it offers essential kitchen commodities such as edible oil, wheat flour, rice, pulses, and sugar

- It derives 65% of its revenue from the edible oil business and sells its oil under the brand name Fortune

- The company also exports to over 50 countries and is India's largest exporter of castor oil

- Revenue grew at a CAGR of 8.8% over the last three years, mainly due to growth in edible oil.

- Net profit grew 21.3% on account of lower finance costs
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Marico

- Leading consumer goods company in India with a diversified product portfolio

- 66% of revenue from the edible oils segment

- 83% market share of the Saffola brand

- Edible oil franchise has grown continuously in value and volume

- In the last three years, revenue has grown at a compounded annual growth rate (CAGR) of 3.1%, due to growth in its edible oil business

- Net profit grew at a CAGR of 2%

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FMCG Sector

Packaged Foods

- Britannia Industries Ltd

Personal Products

- Colgate-Palmolive (India) Ltd
- Dabur India Ltd

Household Products

- Hindustan Unilever Ltd
- Tata Consumer Products Ltd

Tobacco

- ITC Ltd

Soft Drinks

- Varun Beverages Ltd

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FMCG growth drivers :

Digitisation

- FMCG companies are bringing together suppliers, inventory management, and distributor management within one ecosystem with the help of digital capabilities

- A simple ordering app allows retailers to place contactless orders safely and offers visibility on the fulfillment of that orders-right from order placement to logistics to supply

- The margin of profit associated with selling directly to the consumers is gradually tempting brands to set up stand-alone online stores and websites as well as create direct digital sales channels on various digital marketplaces

- Direct Sale to Consumers

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Increased initiatives and investments by the government

- The government has taken some serious initiatives to facilitate further investment in the sector and open up new avenues for foreign companies

- Resilience needs to be the key factor in the manufacturing process, daily operations, retail and logistic channels, consumer insights, and communication to help FMCG companies to withstand the test of time and create more value for consumers

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Some red flags to look after

- Innovation and R&D required

- Inflationary pressure

- Supply chain issues

- CAPEX expansion required

- Storage and Quality control

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FMCG industry in India is expected to grow at the rate of 27.9% CAGR (Compounded Annual Growth Rate) to reach US$220 billion by 2025.
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I hope you find it insightful!

Hey, I am also running #1MillionChallenge where I am investing 100K INR in stocks, ETFs, and mutual funds and trying to convert it into 1M INR, so if you are interested to see my journey I am documenting it every single day on Instagram, you can click on the link here (https://www.instagram.com/geeky__dhruval/) and follow my Instagram handle to get daily updates on it.

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Thank you for reading, Keep Investing!

With Love ❤️
Team Nivedha

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