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PE Ratio: Decoding FMCG companies - Views on News from Equitymaster

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PE Ratio: Decoding FMCG companies

Dec 29, 2009

We are all familiar with the PE ratio. Just to recap, it is the multiple times an investor is willing to pay for the company’s earnings. Let us examine how companies in the FMCG space performed given this ratio. From this graph we find that that the highest increase in PE ratio has been in Procter & Gamble (P&G) and Godrej. While 2009 has been a good year for these companies, the price appreciation has been much ahead of earnings growth. On the other hand the PE ratio of Hindustan Unilever Limited (HUL) has fallen. The reason is that during 2009, the company faced a lot of competitive pressure. This resulted in pressure on margins and loss of market share. From this graph we also find that Nestle is the company which is trading at the highest PE multiple while Britannia is the company which is trading at the lowest PE multiple. Let us further examine the reasons for this and whether we can consider Nestle expensive and Britannia cheap.

Nestle

Nestle had a strong performance in 2009 with its net profits for 9mCY09 growing by 31% YoY. This performance was aided by strong volume growth and operating margin expansion. This shows the inherent strength of the company. However, since the beginning of the year, the stock price has increased by 77%. Clearly one can see that the market is optimistic about the growth of the company. We at Equitymaster believe that Nestle should trade in a PE range of 20 and 25. The stock would be considered a value buy if it trades below 20 and would be considered fairly priced if it trades at 25 times its earnings. As per our calculations, the earnings of the company should grow by 44% YoY for the stock to be fairly priced at these levels. Clearly at the current market price Nestle is an expensive stock.

Britannia

FY2010 has been a very subdued year for Britannia so far. The growth in revenue was a dismal 3.6% YoY, while operating margins remained flattish. However, net profit for the company increased by 13.7% in 2QFY10. This increase was supported by higher other income, lower interest costs and lower effective tax rate. During the year, the price of Britannia increased by increased by 30%. According to our research, Britannia should trade in a PE range of 15 -20. The company would be considered a value buy if it is trading at a PE ratio under 15 and fairly priced at a PE ratio of 20. The company is currently trading at 20 times its earnings. We thus hold the view that Britannia is fairly priced at current levels.

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S&P BSE FMCG


Dec 14, 2018 (Close)

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