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
Market Cap/Sales (x)
Valuation of select international companies
Market Cap/Sales (x)
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.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407