>CONSUMER MONOPOLIES (MOTILAL OSWAL)

India is on the threshold of a structural uplift in consumer demand. We are approaching the inflexion point, at which the impact of rising per capita income, favorable demographics, changing lifestyle and growing rural prosperity will combine to accelerate the FMCG sector’s growth rate. While the FMCG sector has a steady profit growth trajectory, we believe consumer monopolies can grow exponentially in the emerging scenario due to strong brands, captive consumers, high pricing power and better terms of trade. Consumer monopolies could be one of the best themes to play the domestic consumption story.

What are consumer monopolies?
Consumer monopolies are companies that occupy a dominant position in a product category or segment. We have identified companies in the consumer space that have emerged as monopolies using criteria such as 1) market share at least 3x that of its nearest competitor and 2) the brand or brand portfolio contributes at least 50% of sales or profits of the company.

A monopoly is established over years and is aided by factors such as regulations, firstmover advantage, technology breakthroughs, distribution, brands and industry consolidation. Monopolies enjoy 1) strong pricing power, 2) revenue growth visibility, 3) better terms of trade with suppliers and distributors, 4) rising margins, 5) low capex, and 6) low to negative working capital. All the companies covered in this report, except United Spirits and ITC, have significantly increased their RoE over the past five years.

Indian consumer market approaching inflexion point, sales growth to accelerate
India’s US$25b FMCG market is on the threshold of major growth acceleration. We estimate per capita nominal GDP will grow at 12.2% CAGR over FY10-14 to reach US$1,666 in 2014. This will change the shape of India’s income pyramid, which could have far reaching implications on consumer demand as per MGI (McKinsey’s Global Institute). Rising income levels in urban and rural India and benefits from increasing affordability, favorable demographics, low penetration, increased availability and distribution expansion will increase the FMCG growth rate to over 20%. We expect a sharp increase in demand for value for money products from the people moving out of poverty and for premium products from a fast emerging upper middle and affluent class.

To read the full report: CONSUMER MONOPOLIES