Can this FMCG Company be the Next Dabur or Marico?

Pepsi ran an advertising campaign where people were given two unmarked cups. One was filled with Pepsi and other filled with Coke. They didn't reveal which was which.

The audience was asked which one they preferred?

Surprisingly more than half chose Pepsi. The reason it was surprising was because Coke has a much higher market share than Pepsi in USA.

So why such a contradiction when it came to taste?

A neuroscientist, Dr Read Montague, decided to solve this. He assembled an audience, recreated the experiment, and monitored their brain activity.

His findings were in line with the advertising campaign. Pepsi produced a stronger response in the reward centre of his subjects' brains.

But the neuroscientist knew that a great product isn't the only factor in a purchase decision.

So, he did the experiment again, but with a big difference. This time he told people exactly what they were drinking...

And guess what? Coke won.

The subjects brain activity changed too. Regions associated with 'cognition' and 'memory' were lighting up in the test.

People were letting their memories and perception of Coke shape their preferences. In other words, brand power triumphed over taste buds. Hence Pepsi was left behind.

R&D is to pharma companies what employee strength is to IT companies, and what advertising, marketing, and creating a brand is to FMCG companies.

As analysts, we run screeners as a starting point to identify stocks to invest in. These screeners yield results which include growth stocks, momentum stocks, undervalued stocks, dividend yield stocks, and so on.

While the markets has barely fallen 15% from the peak, but certain smallcaps and midcaps are down 30-40% from their peak.

I believe this is the perfect time to run screeners and indulge in cherry picking of good quality, smallcap and midcaps.

So, over the weekend, while running a screener I came across an interesting stock in the FMCG space. It's available at close to single digit P/E ratio. No, it's not ITC.

When you find a FMCG stock at such compelling valuations, it can either be a value buy which will make you at least 2-3x return or it is a value trap. In the second case, there is something wrong with the company which we need to find out.

So I immediately calculated the most important metric used in the FMCG space which is advertising expenses as a proportion of sales.

A back dated analysis of the company showed two important trends.

1. The advertisement spends as a proportion of sales as well as absolute spends have been rising over the past three quarters.
2. Advertising spends for this FMCG company are almost 1.5x than its competitors.

There are two ways to look at it...

The Encouraging Approach

Higher advertising and marketing expense would mean higher brand visibility which would lead to higher sales.

I checked why the advertising expenses are going up. I found the company had launched 5 new products post Covid.

The value picker in me took this point in the company's stride.

I mean, you don't come across FMCG companies with high ROE and ROCEs more than 20%, dividend yield of 3% and the cherry on the top that is valuations, and available at an almost single digit PE ratio.

The Cautious Approach

In stock markets absolute numbers have very little significance. When numbers and company performance are viewed on a relative basis, that is when the bigger picture starts making sense.

The question is, why does the company have to spend almost 1.5-2x the money which its peers spend on advertising?

That clearly indicates it's not the market leader. It also indicates that competition is intense.

In a competitive intensive industry like FMCG, demand elasticity is very important. By that I mean price increases are normally done by market leaders. The other players are normally price followers.

In the battel between arch-rivals Pepsi v/s Coke, we saw how advertising led to brand creation. This changed the perception of the product.

In Conclusion...

What is the Indian company I'm talking about?

Bajaj Consumer.

It's viewed as a single product company. But over the past year, Bajaj Consumer has upped its game. It has launched new products in segments of the hair category it wasn't present.

19% of revenues were spent on advertising in 4QFY22. This is expected to remain elevated. The company is clearly trying hard to push its products in the market dominated by formidable players like Marico and Dabur.

Only time will tell if advertising budgets which are key in FMCG industry, do the magic for Bajaj Consumer.

Or perhaps the competition will continue to dominate market share as well as mind space in the hair oil category.

What do you think dear reader? Share your views in the comments.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure

PS: Join my colleague and smallcap guru at Equitymaster, Richa Agrawal, online at 5 pm this evening at the One Stock Crorepati Summit. Richa will be talking about her favourite small-cap stock in the market. Book your free seat here.