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Value buying in FMCG - Views on News from Equitymaster
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  • Dec 7, 2000

    Value buying in FMCG

    Finally, the FMCG sector is attracting some buying interest at lower levels. The sector has been completely ignored by the markets in the TMT fever in the last few months.

    The stocks in the TMT sector are witnessing selling pressure since the last one month, thanks to a sell off on the NASDAQ, led by profit warnings given by software majors. As a result the buying interest in the markets started shifting from software to industrials, pharma and FMCG stocks.

    FMCG stocks are popular among investors 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 6.4% compared to 6.8% in the previous year. Although, the revenue growth of these companies has witnessed a slow down over a period of time, stringent cost control measures have enabled them to maintain their bottomline. As a result, these companies have recorded high cash profits. HLL’s cash profit in December 2000 is expected to increase by 17% and Cadbury’s by 16%. A higher cash flow has enabled them to consistently improve the shareholder returns by way of dividend payments and bonus.

    Domestic subsidiaries of multinational parents (MNCs) continue to outperform in the current year both in terms of financial performance and valuations. Most of these companies are trading at a premium compared to their parents.

    Valuations of select domestic subsidiary companies
    Particulars HLL PGHH Cadbury Nestle Colgate ISPL
    Price (Rs) 193 568 563 534 174 703
    P/E (x) 33.3 17.5 37.7 37.2 39.7 47.0
    Market Cap/Sales (x) 3.7 2.3 3.3 3.1 1.9 3.2

    Valuation of select international companies
    Particulars Unilever P&G Cadbury
    Nestle SA Colgate Gillette
    Price ($) 62 74 28 2255 60 34
    P/E (x) 27.3 29.8 16.1 18.5 36.3 28.9
    Market Cap/Sales (x) 1.7 2.6 2.3 1.2 4.1 3.8

    The reason behind lower valuations of MNC FMCG companies globally is their marginal revenue growth. MNC companies, the world over, are facing stiff competition across all product categories, which has resulted in their subdued topline growth. The growth ratios and profit margins of Indian FMCG companies are much better due to their continuous emphasis on cost control, low raw material cost and relatively lower cost of manpower.

    Instead of investing in the parent companies where the growth rate of the MNCs are skewed and profit margins are narrowing, FMCG companies in India have good growth opportunity given the large potential of the market. Long-term prospects for the sector in India appear to be bright.



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