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.
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.