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FMCG or TMT – Take your pick - Views on News from Equitymaster
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  • Sep 27, 2000

    FMCG or TMT – Take your pick

    The valuations of FMCG majors have been witnessing a southward movement since the past one-month. The major concern is their topline growth. Also with technology companies recording fantastic financial performance, investors are comparing this growth in some way or other with that of FMCG companies.

    However one thing to note is that the FMCG majors are growing on a higher base and the products offered by them are price sensitive. Also the demand for these products depends on the economic growth and the consumption pattern of the masses. Further demand from urban area is saturated which has forced the companies to focus on rural market to increase volume sales. Increasing competition in the market both from unorganised players and international companies are forcing the companies to stimulate volumes rather than value.

    Stable growth
    Particulars HLL Colgate
    3 years CAGR of sales 15.5% 13.4%
    3 years CAGR of profits 31.5% 22.4%
    * Expected for next 3 years
    HLL, which is the one stop shop for consumer products, has grown its sales revenues at a CAGR of 14% in the past three years and profits at 38%. On the other hand its nearest competitor (in oral care) Colgate’s revenues have grown at a CAGR of 5%, while the profits witnessed a negative CAGR of 20% in the past three years. Stiff competition from HLL in all the product categories of Colgate has adversely affected its financials. Nevertheless, the company has turnaround its negative financials in FY00 by reporting 13% growth in profits. Frequent new product introduction, re-launches, thrust on rural market and operational efficiencies have enabled Colgate to successfully grow its revenues.

    Key Ratios
    Particulars HLL Colgate
    RONW 54.2% 19.2%
    ROA 25.4% 8.5%
    ROIC 51.5% 18.9%
    * Projected for FY01
    At the current market price of Rs 209, HLL is trading near to its 52 week low on a P/E ratio of 33 times its FY01 projected earnings. Its market cap to sales ratio of 4 times is double than Colgate’s 2 times. HLL has always received premium valuations in the market (compared to its peers) due to its ability to grow shareholder’s value despite of stagnant topline growth.

    Comparative valuations
    Particulars HLL Colgate
    Market price 209 160
    P/E 33 36
    Market Capitalisation (Rs bn) 460 22
    Market Cap/Sales 4 2
    * Valuations based on FY01 projections
    HLL has generated remarkable return on net worth and return on capital employed which is comparatively higher than its peers in the industry. The perception of the investors will change once FMCG majors will improve their performance either through organic growth or through acquisitions. TMT stocks are accorded higher valuations due to risk factor involved with the business (technology risk, product risk etc.). On the other hand FMCG business is much more stable and has lesser risks associated with it.



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