ITC to acquire spice maker Sunrise Foods.

When we observe corporate stalwarts or ‘giants’, we see that they are never satisfied. They are always looking for more. If they have acquired a decent market share, they look for diversification of their offerings. If they have successfully diversified, they look for integrations (forward and backward). And, this keeps going on. The Fast Moving Consumer Goods (FMCG) industry is slightly more dynamic in this case. And hence, FMCG giants are always on the move.

Now, you would have bleakly understood why ITC is acquiring spice maker Sunrise Foods. For your information, ITC has entered into a share purchase agreement to acquire 100% stake in packaged spice maker Sunrise Foods, which is based out of Kolkata. Sunrise Foods is a market leader in the eastern India region and deals in basic as well as blended spice segments (fast growing spices category). The acquisition will help ITC in scaling up its FMCG business.

What Does This Mean?

ITC is already selling spices under its Aashirvaad brand which is quite popular in Andhra Pradesh and Telangana. As we’ve told you earlier corporate giants are always on the move hence, ITC is rapidly moving towards strategically scaling up its FMCG business to counter its rivals in the food business such as HUL. The acquisition of Sunrise Foods is a step towards the same. The deal value has not been disclosed however, some analysists have speculated it to be around 2000 crores. Also. The ITC shares have risen around 5% post the announcement of this deal.

Sectorial Talks - Textile Industry

Textile Industry is one of the oldest industries established in India. It constitutes about 15% of all exports and thereby became one of the largest contributors to GDP (2%) FY19.  The manufacture of textiles in India has grown to $60.46 billion (2019) with an 8Yr-CAGR of 4.66%. India is the second largest producer of textile in the world and the third largest producer of cotton. During the period 2018-2028, this industry is expected to grow at a CAGR of 3.7%. The textile & apparel market size is expected to grow up to $223 billion whereas the exports figure is expected to be $82.00 billion by 2021 which can further be benefited due to ongoing US-China trade war.

This sector can be sub-classified as organized (spinning mills and composite factories) and unorganized or decentralized (handloom, power loom, and khadi) sector. Based on the type of fibre/fabric it can also be divided into natural (wool, jute, silk, and cotton) and man-made fibre (rayon, blended, and synthetics). The Indian textile industry is unique because of its linkages to the agriculture sector, culture & tradition of India and its roots in the unorganized sector. This industry is extremely varied with the hand-spun textiles sector on one end while the technologically advanced mills at the other end. The wide spectrum of activities of this sector employs a major chunk i.e. 45 million in 2018-19 (2nd largest after agriculture sector) of informal labour consisting largely of women workers.

With the increase in disposable income, the demand for premium products is increasing. Large players have better financial health because of higher demand, better margins, and economies of scale. Given the wide spectrum of the industry, it is easier to enter on the lower side but barriers to enter at the other end are high because of technological needs, skilled labour, distribution network, and more importantly access to consumers. Bargaining power for domestic customers is low whereas it is high for global consumers because of the availability of alternate premium products at lower costs. As the industry is dependent on exports, it faces extensive competition from other global players producing fabrics at lower costs. 

Some of the major factors of the growth of this industry are the availability of raw materials, skilled labour, growing domestic market, rising per capita income, organized retail and e-commerce landscape, and favourable government policies, etc.

Given the above-mentioned factors, to pick a stock from the textile industry following financial aspects such as stability, growth, profitability, and activity ratios should be considered:

• Sales growth It should be greater than 7.53% (3Yr-Average)

• Operating profit growth should be greater than 8.4% (5Yr-Average)

• Operating profit margin should be greater than 16.32% (5Yr-Average)

The better the stock fits into the above-mentioned criterion, the better option it would be for investment. It’s quite simple, first, the criterion needs to be right to select the right stock. The data regarding the company’s revenue, expenses, and financial ratios are available on ticker.finology.in