Ratio Analysis and Risk and Return
Industry – FMCG
FMCG – Fast moving consumer goods
Companies - ITC, HUL , Nestle India , Dabur , Godrej Consumer Products The Indian FMCG sector is the fourth largest sector in the economy with an estimated size of Rs.1,300 billion. The sector has shown an average annual growth of about 11% per annum over the last decade. Unlike the developed markets, which are prominently dominated by few large players, India’s FMCG market is highly fragmented and a considerable part of the market comprises of unorganized players selling unbranded and unpackaged products. There are approximately 12-13 million retail stores in India, out of which 9 million are FMCG kirana stores.
Index concentration level:
The index is largely driven by ITC and HUL, as they contribute around 75% to the total index. Both companies have posted good results, thus helping the index to grow despite weak domestic market. If both these companies are excluded then the index comes out to be overvalued by only 7.82%. Therefore, the index has high dependency on these two companies. The Union Budget 2012-13 proved to a mixed bag for the FMCG industry. On one hand, minor increase in the tax exemption limits and some incentives on equity investments were positives as this would increase the disposable income levels. But on the other hand, the increase in excise duty more or less offset the above effect. We feel that smaller players would find it difficult to pass on the duty hikes to end consumers and will chose to take the brunt of this hike in a bid to maintain and grow market share. On the other hand, deep-pocket players like Nestle, ITC and HUL with their leadership position and strong brands will be able to pass on the hike to consumers. Going forward, the easing of raw material prices and appreciation of rupee against dollar would help the FMCG companies to maintain their margins in future. With increase in disposable income and favourable government policies, net sales growth is expected to remain robust in coming quarters. Considering on-going economic uncertainty, we expect that FMCG industry will remain an attractive industry for investment, being a safe haven for investors. FMCG industry, as an investment: FMCG index has consistently given good return to investors over the years. Infact, FMCG index has given a return of 12% in 2011 despite negative returns from Sensex. Going forward, HUL and ITC are expected to record good performance, which could lead to positive impact on the valuation of the overall FMCG index. In FY-11, HUL has changed its business strategy and started focusing on rural market through increase in ad-spends, new launches and expanding distribution network. As a result, it posted good results so far and is expected to deliver good results in coming quarters as well. ITC, market leader in cigarettes, has benefitted by favourable announcement in the Union Budget-13 wherein the Government increased the excise duty on bidi and other tobacco products which could lead to consumers shifting to cigarettes. With favourable government policies and its focus on growing food processing category, ITC is expected to post good results in coming years. Thus, FMCG index, being a defensive sector, will remain a safe bet for investors. But, as the FMCG@MRP figure indicates, most of the companies are trading at a premium to their MRPs. Despite this, there are a few fundamentally sound companies in FMCG industry, which are currently available at a good discount from their MRPs (intrinsic value). With the overall economic situation not expected to change much in the coming quarters, investors would be well-advised to:
| HUL| Dabur| ITC| Godrej Consumer
Products| Nestle India| Industry Average
(2012)| Industry Average
| 2011-12| 2010-11| 2011-12| 2010-11| 2011-12| 2010-11| 2011-12| 2010-11| 2011-12| 2010-11| | | Liquidity Ratios| | | | | | | | ...