FMCG stocks on a pur­ple patch

Val­u­a­tions have ex­panded sharply for lead­ing play­ers


The com­bi­na­tion of a re­vival in con­sump­tion and volatil­ity in the mar­kets worked well for frontline FMCG stocks in the last year. With con­sumer sta­ples be­ing con­sid­ered a de­fen­sive bet in choppy/fall­ing mar­ket con­di­tions, stocks of lead­ing FMCG play­ers gained up to 45 per cent in this pe­riod.

Nes­tle, Bri­tan­nia, HUL and Zy­dus Well­ness are among the top gain­ers, with Marico, Go­drej Con­sumer, Col­gate, Dabur and GSK Con­sumer not far be­hind. The rise in stock prices was sup­ported by earn­ings growth as well. While the June and Septem­ber 2017 quar­ters showed rel­a­tively muted per­for­mance, many com­pa­nies clocked dou­ble-digit sales and profit growth from the De­cem­ber 2017 quar­ter on­wards. Apart from ro­bust vol­ume growth, HUL’s dou­ble-digit sales and profit growth in the re­cent quar­ters, for in­stance, was helped by value growth due to favourable prod­uct mix and price hikes, to pass on in­put cost rise.

Earn­ings growth

On the other hand, com­fort on the raw ma­te­rial front helped Bri­tan­nia and Nes­tle ex­cat­e­gory pand their op­er­at­ing mar­gins and carry through their strong top-line growth to the bot­tom line.

Al­though the price of wheat — the key raw ma­te­rial for bis­cuits — inched up in the last few months, Bri­tan­nia’s hedge against price rise helped the com­pany ex­pand its mar­gins in the last two quar­ters.

Nes­tle too ben­e­fited from lower milk and sugar prices.

In­vestor in­ter­est in Zy­dus Well­ness was partly fu­elled by its ac­qui­si­tion of brands such as Com­plan, Glu­con-D and Ny­cil from Heniz in Oc­to­ber last year. At 20 times EV/ EBITDA, the deal was val­ued at a dis­count to big­ger play­ers in the food and health drinks such as GSK Con­sumer and Nes­tle, mak­ing it at­trac­tive. GSK Con­sumer too was ac­quired by HUL in a share swap deal in early De­cem­ber 2018. The for­mer sports a one-year gain of about 15 per cent.

Val­u­a­tions inch up

Thanks to the bet­ter­ing con­sumer de­mand since the sec­ond half of 2017 as well as the mar­ket rally that year, FMCG stocks sport en­vi­able re­turns over a three-year pe­riod too. Nes­tle, Bri­tan­nia and HUL have more than dou­bled in the last three years, while Marico, Dabur and Go­drej Con­sumer too show ro­bust re­turns.

This up­move has seen valu­a­tion of many stocks in the FMCG space ex­pand­ing over the last three years. For ex­am­ple, HUL trades at 66 times its trail­ing 12-month earn­ings, higher than 63 times a year ago and 45 times, three years ago. Bri­tan­nia now trades at 68 times, vis-à-vis 61 times a year ago. Marcio too has seen its valu­a­tion inch up.

With the base ef­fect catch­ing up, FMCG play­ers may no longer see the scorch­ing pace of growth wit­nessed in the last few quar­ters. With most stocks perched on high valu­a­tion, the up­side may not be high from hereon. Nev­er­the­less, with long-term prospects re­main­ing san­guine, cor­rec­tions of over 10-20 per cent in stock prices due to mar­ket volatil­ity can be used to ac­cu­mu­late stocks of lead­ing play­ers.

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