FMCG stocks: Hit by the software fever - Views on News from Equitymaster

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FMCG stocks: Hit by the software fever

May 18, 2000

A number of stocks in the FMCG (fast moving consumer goods) sector are trading at or near their 52 week low. Yet, there are no takers. The euphoria surrounding TMT (technology, media and telecom) stocks in the past few months has adversely affected stocks in other sectors. FMCG stocks are one of them.FMCG stocks are popular among investor as they provide good returns with minimal risk. The topline growth of the companies in this sector is highly linked to the economic growth. During FY00, India's GDP grew by 5.9% compared to 6.8% in the previous year. With the sustained growth in economic activity, consumer spending has increased, boosting the topline growth of FMCG companies.

These companies have maintained their excellent financial performance over the last few years. Stringent cost control measures have enabled them to improve their profit margins. Also the returns to shareholders (dividend and bonus) is increasing due to higher cash profits. Nothing seems to have changed. Except the valuations.

The table is reflective of the fact that current valuations are not comparable to the valuations enjoyed by the companies in the past.

ParticularsBritanniaNestleSBCH
 Current19991998Current19991998Current19991998
Avg. Market Cap. (Rs bn) 14.2 18.0 24.2 32.1 52.5 36.7 16.1 29.7 20.3
Market Cap to Sales (x) 1.2 1.8 2.8 2.1 3.4 2.3 2.3 4.1 3.1
Market Price to Book Value (x) 6.9 12.1 19.9 11.1 13.7 13.3 5.4 10.0 8.9
Price / Earnings Ratio (x) 24.9 45.5 83.5 30.0 49.1 42.5 16.5 30.4 25.0

In the past companies like Nestle, Britannia and Cadbury enjoyed premium valuations due their high brand value. However, it seems that value of their brands is not reflected in their current market capitalisation. Moreover, it seems that the market is ignoring the fact that these companies have good growth prospects, given the large potential of the Indian market.

FMCG stocks are likely to be re-rated in time to come, once the perception of the investor changes. With TMT stocks having taken a beating, this is more likely to happen sooner than later.

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