Will maintain stable credit quality over medium term: Crisil
The major players in India's fast moving consumer goods (FMCG) industry will continue to pursue acquisitions over the medium term, given the significant scope for expansion in under-penetrated product segments and geographies and intensifying competitive pressures in the domestic market, according to a Crisil report.
The report further said that homegrown players would continue to scout for small to medium-sized acquisitions, mostly in the highly populated developing nations, where the targets were attractively priced. The Indian subsidiaries of global FMCG majors may, however, pursue domestic targets; the size and cost of acquisition targets are unlikely to be constraining factors for these players, given their robust credit profiles and sizable financial flexibility.
India's FMCG players made 13 major acquisitions in calendar 2010, at an estimated cost of more than Rs.5,000 crore. Most of these acquisitions were global, and helped the acquirers expand their international businesses, particularly in markets such as Africa, Latin America, and South (including South-East) Asia. The domestic acquisition targets appear to be priced significantly higher than those abroad, owing to the large number of takers in India. For the homegrown players, outbound acquisitions are not only more attractive in terms of valuations, but also profitable, and offer quick payback.
Crisil believes that the homegrown FMCG players may prefer small or medium-ticket acquisitions over large, debt-funded ones in the near term, given current profitability pressures resulting from volatile commodity prices and rising interest rates.
Nagarajan Narasimhan, Director, Crisil Ratings, said, “The overseas acquisitions by Crisil-rated FMCG players, such as Dabur India and Marico in the recent past, have strengthened the acquirers' business risk profiles by enhancing their product offerings and geographical reach. Moreover, prudent funding of acquisitions has helped the acquiring companies maintain stable financial risk profiles and credit quality”.
For global FMCG majors, India remains an attractive market, with its growing economy, large population that offers considerable scope for additional geographic penetration, particularly in rural areas, and low per capita consumption. Mr. Narasimhan said “The Indian subsidiaries of global majors have maintained healthy credit quality despite large acquisitions or capital-spending, driven by their strong cash flows and support from the parent.” Moderation in growth in their home markets may drive the global players to expand their presence in India.