Major FMCG players to continue acquisitions to fuel growth: 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 the intensifying competitive pressures in the domestic market.

Homegrown players will continue to scout for small- to medium-sized acquisitions, mostly in the highly populated developing nations, where the targets are attractively priced, according to a study by Crisil.

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 sizeable financial flexibility, it said.

Crisil believes that the major players will maintain stable credit quality over the medium term, given their strong business and financial risk profiles, and the expected prudent funding of acquisitions.

The FMCG sector's growth prospects remain healthy, supported by its immunity to economic downturns. India's FMCG players made 13 major acquisitions in calendar year 2010 at an estimated cost of more than Rs5,000 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, including the strong global players. For the homegrown players, outbound acquisitions are not only more attractive in terms of valuations, but also profitable, and offer quick payback.

''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,'' Crisil Ratings Director Nagarajan Narasimhan said.

For the global FMCG majors, India remains an attractive market, with its growing economy, large population that offers considerable scope for additional geographic penetration, particularly in the rural areas, and low per-capita consumption.

''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,'' Narasimhan added.

Crisil believes that the homegrown FMCG players may prefer small or medium-ticket acquisitions over large, debtfunded ones in the near term, given the current profitability pressures resulting from volatile commodity prices and rising interest rates.