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FMCG - An investment opportunity

May 11, 2000

Domestic subsidiaries of multinational parents (MNCs) continue to outperform in the current year in terms of financial performance. Despite this, in recent months, domestic FMCG stocks have not found many takers. Unmatched performance
MNC companies the world over are facing stiff competition across all product categories. This has resulted in slowdown in their topline growth. Their Indian counterpartson the other hand seem to chugging along smoothly. As can be seen from the table while Unilever witnessed negative growth rate both in turnover and profits, HLL its Indian subsidiary registered robust growth in financial performance.

Also the profit margins of domestic subsidiaries are comparatively better. The operating profit margin of the US based giant P&G is nowhere comparable to that enjoyed by Procter & Gamble Hygiene & Healthcare (PGHH) in India. The reason for higher margins enjoyed by Indian companies are their stringent cost control measures, low raw material cost and cheap availability of man power. We have compared growth ratios and profit margins for the comparison in the following table.

Key ratios of select international companies

ParticularsUnileverP&GCadbury
Schweppes
Nestle SAColgateGillette
Sales ($ bn)43.738.16.84.69.19.9
Growth2.8%3.0%5.9%4.1%1.6%-2.0%
Net profit ($ bn)3.23.80.82.90.91.3
Growth-7.7%4.4%5.4%12.3%10.5%-12.0%
Op. profit margins10.5%13.8%16.2%9.9%17.9%21.2%
Net profit margins7.3%9.9%11.1%6.3%10.3%12.7%

Key ratios of select domestic subsidiary companies

ParticularsHLLPGHHCadburyNestleColgateISPL
Sales (Rs bn)101.44.75.115.411.02.5
Growth7.0%6.3%19.3%-3.5%10.0%28.3%
Net profit (Rs bn)10.70.60.41.10.60.2
Growth27.7%29.4%52.7%24.1%25.0%5.7%
Op. profit margins12.0%18.3%15.2%15.2%9.0%17.8%
Net profit margins10.5%11.8%7.5%6.9%5.0%7.7%

All in all, the conclusion is instead of investing in International markets where the growth rate of the MNCs are skewed and profit margins are narrowing, the higher growth in the Indian market provides good opportunity to invest. FMCG companies worldwide are getting lower valuations due to slower topline growth. Then there is the new focus on technology stocks. However long term prospects for the sector in India appear to be bright. Also the setbacks to the universe of FMCG stocks in the past few months offers good capital appreciation opportunity from the current level.

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