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FMCG: Top performers since start of 2009 rally - Views on News from Equitymaster
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FMCG: Top performers since start of 2009 rally
Mar 15, 2011

9 March 2009. The day the stock market rally started after the financial crisis. We have completed 2 years since then. While there is turmoil in the markets we decided to examine stocks in defensive i.e FMCG space to understand what has been driving the top performers.

GlaxoSmithKline Consumer Healthcare Limited (Gain 258%)

The top gainer over the last 2 years has been GlaxoSmithKline Consumer Healthcare Limited (GSK). With a gain of 89% annually, one would probably take a minute to believe that this is a defensive stock. Where the company's financial performance is concerned, the company's top line grew by 9.4% CAGR while bottom line grew by 13.4% CAGR. However, what doesn't show up in the company's income statement is that the company has started managing its cash better. The result is that GSK consumer now has negative working capital. This means that now the company's creditors are financing the company's business. GSK Consumer has in the last year launched several new products under the Horlicks umbrella. These include biscuits and noodles. So far, the company has seen good response for its new products in areas where the company is strong. To further enhance the brand quality of Horlicks, GSK has earmarked Rs 3 bn for investment in the brand over the current fiscal. At a price of Rs 2,095, the stock is trading at 25 times our estimated CY12 earnings. At these levels we believe that the stock is expensive and advise our subscribers to be "CAUTION".

Godrej Consumer Products Limited (Gain 198%)

With a gain of 70.8% CAGR, Godrej Consumer Products Limited (GCPL) has performed very well during the last 2 years. The company was a key beneficiary of the down trading we observed as a result of the economic slowdown. While GCPL's competitors increased prices as a result of higher commodity prices, the company refrained from passing on the entire increase, thus taking a hit on its margins. However, the company benefited from this strategy in the form of higher market share when consumers down traded. As a result, the market share of soaps increased from 9.7% in 3QFY09 to 10% in 3QFY11. On a TTM basis, sales of GCPL have increased by 134.7% point to point while net profits have increased by 196% YoY. It should be noted that GCPL over the last 2 years has embarked on growth through acquisitions. As a result, the company made 5 acquisitions in Africa, Indonesia and Latin America. While these new companies are responsible for the large jump in sales, we believe that these companies would be the next trigger for growth for GCPL. At the current price of Rs 351, the stock is trading at 30.7 times our estimated FY13 earnings. At this price, we believe that the future growth has been priced in the stock. Hence we would advise our investors to practice "CAUTION".

Nestlé (Gain 176.8% YoY)

Sales of Nestlé grew by 44.7% YoY while its bottom line grew by 53.3% point to point on a TTM basis. However, the share price soared by 176.8% point to point during this period. The reason behind this is the growth expected by the company in the future. Going forward, Nestlé plans to invest close to Rs 15 bn over the next 2-3 years as part of its expansion strategy. The company has earmarked Rs 3.6 bn of investment in their new factory at Nanjangud in Karnataka. The company will also be investing Rs 6 bn in its green field capacity in Haryana. This facility will commence operations by the end of this year. Nestlé is witnessing good demand for its chocolates. For this reason, the company is investing Rs 2 bn in its chocolate manufacturing facility in Punjab. Furthermore, the company plans to set up two new facilities, one in Goa and the other in Himachal Pradesh. For this, Nestlé is investing Rs 12 bn. Nestlé also plans to set up a new R&D centre in India. For this, the company is investing US$ 50 m. The company also plans to launch new products from the stables of its parent company. At the current price of Rs 3,775, the stock is trading at 35 times our estimated CY12 earnings. We believe that at this level the stock is expensive and advise our investors to practice "CAUTION".

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