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FMCG: Under a microscope - Views on News from Equitymaster
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  • Dec 6, 2000

    FMCG: Under a microscope

    The FMCG (fast moving consumer goods) companies seem back in the reckoning. The bourses are looking at these so-called defensive stocks for refuge as the NASDAQ blues have also watered down to our ‘desi’ TMT stocks. Let’s look at the valuations of some leading FMCG companies and see what they have to offer.

    The valuation matrix
    Companies Current
    52w high/low P/e Ratio P/e Ratio* Mktcap/
    Book value
    Britannia 787 911 / 468 43.0 22.3 1.9 12.6
    Cadbury 563 685 / 408 65.0 31.8 5.2 6.7
    Colgate 174 241 / 136 45.7 33.5 2.1 7.9
    HLL 187 310 / 169 38.4 22.5 3.8 2.0
    ITC 848 1028 / 515 26.3 21.1 2.6 7.4
    Nestle 537 548 / 292 52.5 32.2 3.4 18.0
    P&G 569 842 / 533 17.8 15.2 2.6 6.2
    Reckitt 268 355 / 189 63.0 27.9 1.8 6.6
    SBCH 433 645 / 315 20.1 12.8 2.7 7.1
    Tata Tea 208 599 / 169 9.4 8.9 1.3 1.4
    *calculated on FY02 estimated earnings

    The above table reflects the relative valuations of some of the top companies and offers different opportunities in each of them. Some however, are better than the others. Cadbury stands at the top of the heap as per the current P/e valuations. But this is largely a function of the future growth rates the company is going to achieve. The company profits are expected to grow at a CAGR (compounded annual growth rate) of 54% till FY02. At the current price of Rs 563, the stock trades at a hefty 65 times its FY00 earnings, but if you were to buy the stock at this price today, the based on our estimates for FY02, the stock trades at a reasonable 32 times its FY02 estimated earnings.

    Similarly, though Tata Tea looks attractive at a P/e multiple of 9.4 times its FY00 earnings, but even by FY02 standards, the P/e multiple is more or less the same. This is as a result of an expected stagnancy in its profits even in FY02. But based on book value, the Tata Tea stock looks undervalued.

    But the companies to look out for at the current valuations are FMCG giant Hindustan Lever, Smithkline Beecham Consumer and Reckitt and Colman. Hindustan Lever’s sheer size and scale of operations makes it a company to watch out for. At a P/e multiple of 38 times its FY00 earnings, the stock offers a good entry opportunity. The current valuations, which the stock is receiving, are a result of the company not doing too well in the rural areas this year. Drought situations in certain states of the country have affected growth. However, all this is factored into the current price. The likely triggers for the future could be a good monsoon and acquisitions (which the company is historically famous for).

    For Smithkline Consumer, there are concerns regarding the company’s future partner or owner in India. But the company’s product profile is a winner. Whoever, buys it over (whether HLL, Nestle or Cadbury), this will be a win-win situation for all. A P/e multiple of 12 times based on its FY02 estimated earnings, looks attractive considering the ‘Horlicks’ brand name and positioning.

    The household cleaning major, Reckitt and Colman is a very focused company. Based on its projected FY02 earnings, the company will trade at 28 times, which looks encouraging. However, the only concern for this company should come in the wake of rising competition and its ability to stay and penetrate the market.

    All in all, the sector shows immense potential and hence, is definitely worth a look.



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