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Piramal Enterprises

A consensus is building—valuations of FMCG companies have gone through the roof and one should avoid them now.

Before you make a move and start offloading FMCG stocks from your portfolio or avoid buying them in future, it’s time to run a reality check. After all, a helicopter view is important but often isn’t enough to take balanced and well-informed decisions.

First thing first…how expensive are the valuations?

The average of Price-to-Earnings (PE Ratio) of top 7-8 FMCG companies is 57. Therefore, valuations are frothy, undoubtedly. But when you see these valuations on the backdrop of historical performance and governance record of these companies, they don’t look out of the world. These companies have delivered moderate yet steady growth under challenging economic environment that prevailed even before the pandemic. Most of them have robust balance sheets, excellent pedigree of management and stability in business operations.

In short, valuations are expensive but to a large extent backed by impressive fundamentals. No other industry in India earns such impressive return on Equity (RoE) as these top 7-8 companies do.

Will the performance of all FMCG companies quoting at such lofty multiples be lackluster going forward? Or will there still be some winners (read outperformers)?

To find answers to these questions, one must look beyond just balance sheets and dive deeper in their businesses.

Coronavirus pandemic is reshaping business dynamics even for the most stable industries, such as FMCG. During the pandemic, consumer preferences have undergone a sea change. Now companies are busy analyzing how much of that would last beyond the pandemic and what should be their response to changing customer behaviour.

Here’re some interesting observations we made during the on-going result season:

  • In Q4, Dabur witnessed a 400% jump in the sales of Chyawanprash and 80% increase in that of Dabur Honey—a clear sign of growing popularity of Ayurvedic immunity boosters. Taking cues from the shift in consumer preferences Dabur launched 6 news products in the Ayurvedic immunity booster segment.
  • During lockdowns, Marico and ITC entered the kitchen hygiene segment by launching a product each in the vegetable and fruit wash segment. Marico’s offering veggie cleanclaims to get rid of germs, bacteria, dirt, waxes, soil and other chemicals present on the outer surface of fruits and vegetables. ITC offers two variants—soak and wash, and, spray and wash.
  • According Nestle India, the Company witnessed strong contribution from Maggi, KitKat and Munch in Q4 as pantry stockings jumped before lockdowns. Sales through e-commerce rose significantly.
  • ITC acquired a spice manufacturing company—Sunrise Foods for an undisclosed amount.
  • In 2019, AC Nielsen had predicted that e-commerce would contribute about 5% of FMCG sales in India by 2022. Prior to lockdowns, FMCG companies had derived approximately 3% revenue from e-commerce. However, some leading companies saw as much as a 300% jump in the online sales during lockdown.
  •  Some companies have already lined up special Stock-Keeping-Units (SKUs) for online platforms. Now some experts are predicting e-commerce could contribute around 10% of FMCG sales in FY21.
  • The hand-sanitizer market has suddenly become a hot-cake and crowded place as even paint manufacturing companies (for whom hand sanitizer is an irrelevant product considering their traditional distribution channels) also entered the market.
  • Ad spends of Colgate increased to 14% of the revenue in FY20—highest in the past 4 years. At 14.6% Q4FY20 ad spends as a percentage of revenue was even higher. The Company also launched a vendor finance programme to resolve liquidity related issues of suppliers.
  • During lockdowns, Britannia reported an average 24% volume growth with focused 20% brands generating 80% revenue. Interestingly, it had taken 7-8 years for Britannia to reduce the distance to market (for their products) from 650 Kms to 370 Kms. However, during lockdowns the Company witnessed a further drop of 90 Kms. The Company doesn’t expect that to stay for long as the product variety would come back to the market. However, it aims to tap such opportunities.
  • Godrej Consumer Products which earns half of its revenues from foreign markets has announced making hygiene as the new core over the next two-three years. The Company also foresees resurgence in the insecticides business, which accounts for 40% of domestic and 30% of international business.
  • Interestingly, HUL reducedthe prices of some essential hygiene products such as Lifebuoy Liquid Hand Wash and Domex Floor Cleaner. The Company is also protecting the interest of its distributors and partners by offering more flexible terms and enhanced credit facility.

Major themes to track in the FMCG space:

  • Health and hygiene segment is suddenly catching attention of industry honchos.
  • Packaged food may snap up some market share from unorganized sector eateries.
  • Affordability would become even more a compelling criterion for personal care and lifestyle products segment.
  • Use of technology is likely to go up in business planning.
  •  Companies will try to operate at lower fixed costs—use of technology and automation may catch up fast. It’s interesting to track which companies have the space to reduce costs.
  • Flexibility in credit terms and enhanced credit facilities would become a preferred route to preserve distribution channels

As you must have noticed, almost all companies have been sensing a huge opportunity in the health and hygiene segment. The established brands will have the tailwinds of market experience, brand name and already developed distribution channels. Some companies have been slashing prices, at a time when, the market is likely to turn cost-cautious, thereby making it difficult for the late entrants.

Did you know?

Food accounts for approximately 35% of India’s GDP of which just 20% is packaged food and 10% is value-added. According to BusinessWire—a Berkshire Hathaway company, the Indian fruit and vegetable processing industry will become a Rs 25,600 crore industry by FY23—which translates into a compounded annualised growth of 8%. Despite India being one of the largest producers of fruits, vegetables and milk, the food processing industry is still extremely underdeveloped.

HUL derives 20% of its revenue from the food and refreshment category while the segment accounts for 16% of Dabur’s revenues. Won’t these companies focus more on the food segment if they sense greater opportunities?

Labour shortage, closure of small retail shops, roadside pan shops and tea-stalls might disturb the math of some companies. Try to recall which FMCG products people bought the most from these channels—right from Re 1 candy to Rs-5 small biscuit packs and Rs-10 snacks items. Local manufacturers, road-side eateries are likely to lose out some market share to organized players offering packaged food.

In the personal care segment too, consumers are expected to become cost cautious. Premium brands may take some knock and thus might try to diversify into other product segments—a trend which is evident even now. Essentials is a subjective term and its interpretation changes from one market to another. For example, hair dyes and room fresheners might be luxury products for some consumers but might be essentials for others.

The claims of under-penetration in the rural areas don’t hold much ground if you analyse the reach of the top 7-8 FMCG companies even to the remotest part of the country. The higher per capita consumption, especially in the rural areas, might come only with a rise in income. Until then, higher rural penetration for companies in the rural areas would mean cross-selling and eating into one another’s market share or grabbing some share from the unorganized sector.

Connecting dots

Besides stability of businesses and balance sheet strengths, higher PE multiples of FMCG companies also reflect the huge untapped opportunity. The market disruption caused by the pandemic has forced companies to go out of their comfort zones and try out new ways of sustenance and future growth—like what happened in the banking space about a few years ago. Many banks and NBFCs quoted at valuations never seen before; however, as long as they registered higher growth, remained lean on costs and kept their governance record clean, markets rewarded them.

Will that be the case with FMCG companies? Looks like. That said, when the valuations are high, one has to keep expectations moderate and more realistic. If you look upon FMCG companies to give stability to your portfolio and generate average returns; they might not disappoint you but hoping to see them generating supernormal returns may be too much of an expectation.

Please don’t forget, returns come through two components: PE expansion and higher growth. In the case of FMCG companies, there’s not much scope for PE expansion; therefore, the future growth has to be in line with expectations.

Be selective, not biased.

Happy investing!

You may also like to read: Banking stocks to bank on during and after coronavirus pandemic


Please Note (read as a disclaimer): None of the stocks discussed in the article is the recommendation to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.



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