Fast Moving Consumer Goods (FMCG): Long-term Best Buys?


(Donald Francis) #1

http://www.equitymaster.com/research-it/sector-info/consprds/Consumer-Products-Sector-Analysis-Report.asp

I have always found Equitymaster's Sector briefs (see link above) a good source for coming upto speed fast - on sector basics. Taking the liberty of quoting verbatim (the basics part) from the above to serve as a sector primer of sorts (which we will keep refining in time) before we dive headlong into identifying long-term best buys from the Sector.

Fast Moving Consumer Goods Sector


The consumer products industry has been growing at a brisk pace in the past few years backed by robust economic growth and rising rural income. Growth drivers such as premiumization, rapid urbanization, evolving consumer lifestyles and emergence of modern trade have shielded the industry from the slowdown.

The consumer products or the Fast Moving Consumer goods (FMCG) sector is valued at Rs 1.6 trillion (Source: Nielsen). The industry is urban-centric with 66% share of the goods being consumed by urban India. Metropolitan cities & small towns (population of 1-10 lakh) have been driving the FMCG consumption in urban India since 2002. In fact middle India, comprising of the small towns and consuming 20% of overall FMCG sales, has been growing the fastest across rural and urban segments. As per Nielsen, the FMCG market size of middle India is set to expand from Rs 287 bn in 2010 to over Rs 4 trillion by 2026. Rural India, where 70% of the population resides but only 34% consume FMCG goods, presents the biggest market potential for the industry. Backed by low unit packs and aggressive distribution reach, rural market size has expanded four times to Rs 564 bn since 2002. Companies such as Hindustan Unilever (HUL)andDaburwhich derive nearly half their sales from rural India have been increasing their reach.

  • FMCG goods are retailed through two primary sales channels - General Trade and Modern Trade. General Trade comprising of the ubiquitous kirana stores is the largest sales channel forming 95% of overall retail sales. However, growth of consumer goods retailed through Modern Trade channel is outpacing the growth of FMCG products in General Trade. Factors such as a comfortable and modern store experience, access to a wide variety of categories and brands under a single roof and compelling value-for-money deals are attracting consumers to organized retail in a big way. But modern trade is still an urban phenomenon with 17 key metros contributing to 73% of overall modern trade in India. Product categories such as packaged rice, liquid toilet soaps, floor cleaners, breakfast cereals, air fresheners & mosquito repellent equipment have a higher penetration in modern trade channel. Despite the relatively recent performance of private label products in India, it is already close to 7% of modern trade sales. Modern Trade is expected to gain greater importance with opening up of foreign direct investment in multi-brand retail.

  • The implementation of the Goods and Services Tax (GST)is expected to benefit the sector immensely by reducing the overall incidence of taxation. GST aims to reduce the cascading effect by replacing a multitude of indirect taxes such as central excise, service tax, VAT and inter-state sales tax with a single GST rate. Moreover, FMCG companies will be able to optimize logistics and distribution costs in the GST era. The resulting cost savings by the companies can be passed on to the final consumer thereby boosting demand. However the implementation of GST has currently been put on the backburner by the government.


    Key Points


    Supply: Abundant supply through a distribution network of over 8 m stores across the country. Distribution networks are being beefed up to penetrate the rural areas. HUL has tripled rural network in 2011 and Dabur wants to double rural reach by FY13.

    Demand: Being items of daily consumption, demand is least impacted by economic slowdown.

    Barriers to entry: Huge investments in setting up distribution networks and promoting brands and competition from established companies.

    Bargaining power of suppliers: Inputs being mostly agri-commodities, the suppliers are numerous and lack scale to wield bargaining power. Companies like ITC that are integrated backwards have lower dependence on suppliers.

    Bargaining power of customers: Customer does not have bargaining power in case of branded products but intense competition within the FMCG companies results in value for money deals for consumers.

    Competition: Competition is faced from domestic unorganized players and established MNCâs. Price wars are a common phenomenon. Private labels offered by retailers at a discount to mainframe brands act as competition to undifferentiated and weak brands.

    Nestle India - FMCG Play
    (Donald Francis) #2

    This FMCG Sectoral dissection is essentially a branch off from our The Tried & The Tested: Quest for the Bluest of the Bluechips discussion forum, where the natural choice was to look first at brand name FMCG companies with obvious moats, pricing power and long term staying power. Indian Markets have also consistently rewarded them.

    This is so that we can bring a systematic sector-specific due diligence process to this quest, to first come to terms with sector basics, prevalent business models, understand competitive advantages/differentiation (as there must be) first from a historical numbers perspective,and then go into individual business/company specifics, recent trends, sutainability, et al.

    The Quest as always: Separating the Men from the Boys

    FMCG specific discussions already in the parent thread will be moved here, and then we can continue in full earnest.

    Request enthusiasts/seniors to point to quality publicly available resource material that can help us in the process. Links to Sector strategy reports, Sector Primers, Current outlook/report on FMCG Sector and other such authentic material that you think can help us identify key issues/patterns and help us gain an edge in FMCG sector anlaysis - most welcome - but not any and every resource.Doesn’t need underlining that “Quality” and “Authenticity” is a pre-requisite.

    Let’s get started.


    (Donald Francis) #3

    Posted byHitesh Patelat January 19. 2013

    Coming to specific stocks in this series of great blue chips I like ITC. It has been consistently churning out good consistent results over the years.

    The next trigger I see is the turnaround of the fmcg business of ITC – namely biscuits, soaps, shampoos, bingo eatables etc. – Once this business starts contributing meaningfully to consolidated profit figures, company can leapfrog into another growth trajectory.

    And by the time this happens the basic businesses of tobacco etc will keep on chugging along.

    So for me ITC remains a preferred pick among the blue chip pack.

    Posted byDonaldat January 19. 2013

    Hitesh,

    I agree with you. I too think there is great opportunity ahead of ITC, and it has been progressing on all fronts. I am also biased since I have been holding it for 6 years plus with great results (not counting the hefty dividends).

    We will attempt a shortlist soon, as we gain a few more insights/perspectives.

    -Donald

    Posted byT Anil Kumarat January 25. 2013

    Hi

    Prof Sanjay Bakshi has discussed about Nestle in one of this lecture, which I thought is relevant to the discussion on this thread. Key takeaways

    • In 1986, Nestle was trading at PE of 46 and in 1992 it was trading at a PE of 62. It is a stock in which investors have made money irrespective of the price they bought it.

    • There were some corporate governance issues at Nestle but Prof. insist that Itas BUSINESS, PEOPLE, PRICE IN THAT ORDER.

    • Buffet quote: Whether appropriate or not, the term avalue investinga is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price earnings ratio, or a high dividend yield. aCorrespondingly, opposite characteristics a a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield - are in no way inconsistent with a avaluea purchase.

    Ddownload lecture 28 from here for complete case study:http://www.sanjaybakshi.net/bfbv/


    (Donald Francis) #4
    Posted byshreyat Monday 00:25

    Hi Folks,

    The following is a compilation of quantitative and qualitative picture of ITC Ltd.Please help me takeforward the discussion about the conglomerate through active participation.

    ITC Ltd.
    ITC LTD. SALES EBITDA PAT EPA MKTCAP
    9 YR CAGR 18.31% 17.97% 18.44% 19.19% 28.46%
    5 YR CAGR 15.83% 18.68% 18.65% 24.75% 23.24%
    3 YR CAGR 16.31% 20.56% 22.53% 25.34% 35.35%
    1 YR GROWTH 19.03% 27.07% 24.72% 38.45% 28.82%
    ITC LTD. FY 2012 FY2011 FY2010 FY2009 FY2008 FY2007 FY2006 FY2005 FY2004
    Financial Leverage 1.01 1.02 1.02 1.03 1.03 1.03 1.03 1.05 1.04
    Total liability/Earning 0.95 1.11 1.11 1.28 1.27 1.26 1.29 1.27 2.00
    Debt/Equity 0.00 0.01 0.01 0.01 0.02 0.02 0.02 0.03 0.02
    Interest Coverage 114.89 342.69 84.74 97.21 169.38 234.42 148.39 51.22 N.A
    Working Capital/Sales 7.99% 6.00% -0.57% 16.98% 12.05% 17.27% 14.82% 5.47% -1.29%
    Debtor Days 17 18 19 18 22 21 22 28 15
    Inventory Days 89 94 95 110 106 113 111 117 91
    Cash In/Cash Out Ratio 1.30 1.25 1.35 1.37 1.35 1.42 1.32 1.21 0.65
    Gross Margin 70.47% 67.88% 64.34% 62.68% 59.80% 58.45% 60.60% 64.68% 65.02%
    EBITDA Margin 37.79% 35.40% 35.17% 33.91% 34.30% 35.07% 36.96% 38.89% 38.68%
    Net Margin 23.66% 22.58% 21.32% 20.88% 21.50% 21.69% 22.50% 28.47% 23.46%
    Capital Turns 2.18 2.15 2.28 1.52 1.76 1.78 1.74 1.74 1.92
    Fixed Asset Turns 2.64 2.47 2.25 2.05 2.24 2.58 2.35 1.93 1.88
    Total Asset Turns 1.34 1.34 1.33 1.11 1.17 1.17 1.09 0.96 1.03
    RoA 31.73% 30.16% 28.46% 23.25% 25.11% 25.43% 24.57% 27.32% 24.05%
    RoE 32.16% 30.71% 28.98% 23.84% 25.88% 26.25% 25.32% 28.62% 25.04%
    RoCE 47.33% 43.52% 43.00% 34.09% 36.78% 38.01% 37.09% 33.79% 36.22%
    RoIC 52.59% 46.47% 48.50% 30.28% 36.38% 38.58% 40.06% 38.92% 45.77%

    some important notes andinterpretations about the ratio:

    Total liability/Earning:The ratio has almosthalvedin last 10 years and with its current earnings it can retire all its liabilities with just one year's earning.which is exceptional!
    Working Capital/Sales - dramatically reduced.
    Debtor days: Taking into account the fact that the sales have grown more than 4 folds in last 10 years,the company has done a great job inmaintaining 2 weeks as collection period.
    Inventory days:*calculated using sales instead of COGS.By taking COGS probably a better picture can be obtained.
    cash in/cash out(defined as debtors+inventory/current liabilities): Has reduced over the years.The low ratio indicates that thecompany holds on to cash for longer period.

    PAT(CAGR): 3YR>5Yr>10Yr. The picture may improve going forward, when the food business breaks even.

    Margins(Gross,EBIDTA & Net):(Average Gross Margin 3YR>5Yr>10Yr).The company has improved its gross margin probably by following a mix of the following three strategies: Increasing price above inflation, changing revenue mix over the years and sourcing raw material from a unique source.A clearer picture can be obtained byassessing the individual contribution of the three strategies. EBIDTA &Net Marginshave remained within a thin range over the years.(Indicatingmaintenanceof efficiency)

    Asset turnover:all the asset turnover ratios have improved over the year indicating the company is using its assets more efficiently to generate sales with passage of time.

    Return ratios:All the return ratios have improved consistently over the years.

    Though ITC is a very well known business a few points worth highlighting are as follows:

    1. unique raw material source:The company has made an effort to create unique raw material source for most of its products.E-choupal present across 10 majoragricultural states gives it the added advantage to source quality raw material at cheaper cost by bypassing the middle man and improving its margin even after sharing a part of the cost saving with farmers(supplies raw material for food and agri business). It sources more than 50% of the tobacco produced in India and hence has the advantage of accessing cheap and quality raw material(raw material for Cigarettes). It has also provided support to farmers for growing trees that yield more pulp(this ensures cheap and quality raw material for its paper business).
    2. types of business:The company's ~64% revenue contributors come under addiction(cigarette).which is an amazing thing!Cigarettes have significant price elasticity as the form an insignificant portion of the consumer's budget and the cannot go with out it.A smoker smokes at least 5 cigarettes a day making its demand reoccur 5 times a day(which means at least Rs25 Revenue is fixed from an exsisting customer daily,amazing!) .Moreover cigarette brands command significant brand loyalty(Eg: a smoker who smokes Glold Flake Kings will smoke a Malboro or any other brand in extreme cases(non-availabilityof the brand) and such emergencies rarely arises as ITC cigarettes are among the most widely distributed products in India).However the revenue contribution of food business has been increasing over the years,it currently stands at 15% of total revenue(which is a pricecompetitive business!).
    Posted byshreyat Monday 13:24

    Hi folks,

    The following is a crisp picture of Nestle India.Mostly the numbers speak for themselves.However,i have given explanationsfor some ratios that i feel have strayed away from depicting the actual picture.Please help me take this forward through active participation.

    Nestle India Ltd.
    NESTLE INDIA LTD. SALES EBITDA PAT EPA MKTCAP
    9 YR CAGR 16.82% 17.11% 17.59% 18.62% 27.68%
    5 YR CAGR 20.94% 22.30% 23.46% 24.06% 35.15%
    3 YR CAGR 20.70% 23.24% 21.16% 20.42% 42.25%
    1 YR GROWTH 19.66% 23.46% 17.45% 16.89% 32.57%
    NESTLE INDIA LTD. FY 2011 FY2010 FY2009 FY2008 FY2007 FY2006 FY2005 FY2004 FY2003 FY2002
    Financial Leverage 1.76 1.00 1.00 1.00 1.01 1.04 1.04 1.02 1.02 1.22
    Total liability/Earning 4.79 3.83 3.75 4.01 4.24 4.29 3.69 4.16 3.63 4.42
    Debt/Equity 0.76 0.00 0.00 0.00 0.01 0.04 0.04 0.02 0.02 0.22
    Interest Coverage 157.93 1079.81 665.54 474.09 745.13 1105.11 2231.38 500.19 N.A 57.15
    Working Capital/Sales -11.80% -10.49% -11.63% -9.77% -9.96% -8.96% -9.40% -11.61% -6.43% -3.82%
    Debtor Days 1 1 2 1 2 1 1 2 1 1
    Inventory Days 6 4 5 4 6 7 5 4 5 4
    Cash In/Cash Out Ratio 0.04 0.03 0.04 0.03 0.04 0.05 0.03 0.03 0.04 0.03
    Gross Margin 51.44% 49.87% 52.22% 50.59% 49.95% 52.59% 54.42% 53.32% 56.04% 56.32%
    EBITDA Margin 21.15% 20.50% 20.28% 20.10% 20.23% 19.60% 21.23% 19.70% 20.72% 20.34%
    Net Margin 12.84% 13.08% 12.74% 12.34% 11.82% 11.18% 12.51% 11.30% 12.18% 10.62%
    Capital Turns 10.83 17.59 17.23 13.11 13.83 9.75 10.26 16.11 8.55 6.46
    Fixed Asset Turns 4.75 6.18 5.74 5.75 5.82 5.20 5.22 5.61 5.52 5.18
    Total Asset Turns 3.34 7.32 8.85 9.13 8.31 6.96 6.72 6.81 6.35 5.53
    RoA 42.83% 95.70% 112.68% 112.63% 98.22% 77.77% 84.02% 76.96% 77.35% 58.78%
    RoE 75.48% 95.70% 112.68% 112.83% 98.90% 81.03% 87.41% 78.87% 78.53% 71.52%
    RoCE 63.74% 135.07% 160.30% 163.97% 150.33% 120.01% 127.18% 119.20% 118.02% 98.55%
    RoIC 144.80% 232.88% 224.34% 163.06% 165.19% 110.90% 128.13% 184.52% 104.82% 77.29%

    some important notes andinterpretations about the ratio:

    Sales (CAGR) : The sales CAGR has decelerated marginally probably because of price rise and Increased competition in coffee,noodles etc.

    profit (CAGR) : EBIDTA (1Yr>3Yr>5Yr>10 Yr) Indicating that thecompany has been ableaccelerate itsEBIDTA growth consistently, while taking care of its operating cost.PAT hasdeclaredmarginally probably because of the same reasons that have led to deceleration in sales and increased Interest cost(due to loan from the parent company).

    Market cap (CAGR) : (3Yr>5Yr>10 Yr) The market seems to have recognized the consistency and quality of the business.

    debt/equity and financial leverage:Over the years the company has remained virtually debt free.The recent increase in these ratios is due to the debt ofUS$157 mn from Nestle SA for five years under the ECB approval route to fund its capex plans.

    Totalliability/Earnings: The ratio has hovered around 4 in the period of study.It has recently risen to ~4.8 (due to the recent debt from its parent to fund its expansions).This means with the current level of earning it can payoff all its liabilities in less than 5 years,this is fairly good.

    Working capital/sales: The company has had negative working capital for last 10 years and the ratio has declined over the period,that means that the company now operates more on credit with its suppliers and on near cash with its customers.This is also evident from current ratio (its has remained less than 1 for the whole period).This means that the company's earning power is so strong that itdoesn't have to tie loads of money in current assets to secure its current liabilities. (this is an exception to theconventional interpretation of this type ofliquidity position and has beenappreciated as a great quality for a business by "The oracle of Omaha")

    Debtor days:has been 1 and at worst 2! exceptional credit policy and bargaining power with customers!:D

    Inventory days: (*approximated by using sales instead of COGS) The trend has remained more or less stable over the years.

    cash in/cash out(defined as debtors+inventory/current liabilities): Has hovered around .03 over the years.The low ratio indicates that thecompany holds on to cash for longer period.
    Margins(Gross,EBIDTA & Net) The company has maintained its gross margin(remainedhigher than 50% in most of the years and has hovered in a thin range) probably by following a mix of the following three strategies: Increasing price above inflation, changing revenue mix over the years and sourcing raw material from a unique source.A clearer picture can be obtained byassessing the individual contribution of the three strategies. EBIDTA &Net Margins have remained within a thin range over the years(for both3Yr>5Yr>10 Yr).(Indicating improvement in efficiency)

    Asset turnover:all the asset turnover ratios have improved over the year till FY10 and have declined recently most probably due to addition of new plants that are yet to start production. looking at the historical data we get an indication that the company has using its assets more efficiently to generate sales with passage of time.

    Return ratios:All the return ratios also show improvement till 2010 and the reason for their decline most probably is expansion,where the production is yet to commence.Once the production starts the return ratios are expected to improve.Still in absolute terms the company's return ratios are exceptional even with the load ofassetsthat are yet to start production.

    hough Nestle is a very well known business a few points worth highlighting are as follows:

    1. unique raw material source:The company has made an effort to create unique raw material source for most of its products. Milk which is a majoringredient for most of its product issourced from over 100000 farmers in Monga district of Punjab. It collect 1.3 million liter per day from its strategically located quality collectioncenters. About 50000 farmer are on Nestleâs regular payroll. It has taken significant amount of time, effort and capital to build this unique and assured source of supply. This probably serves as one of its greatest competitive advantage and a significant barrier to entry.

    2. types of business:The company's ~40% revenue contributors come undernecessity(Baby food formula,Milk powder etc),~45%(confectioneries,coffee,Noodles) undermildaddiction and habit.which is an amazing thing!These products have significant price elasticity as the form an insignificant portion of the consumer's budget.Its products demand reoccurs very frequently with Maggi, coffee and confectioneries being the fastest.Maggi and Nescafe command brand loyalty as isevidentfrom the fact thatit issynonymous to Noodles and coffee respectively,Kit-Kat and Munch arewafer basedconfectioneries(differentiated from Cadbury'sconfectioneries which are pure chocolate based) are the market leader in this sub-segment,Baby food formula this segment is driven by trust of customers and Nestle over the years has built a reputation for itself and hence leads the segment.The company has risen prices to counter inflation and has maintained itsprofitability.The recent price rise has been steep and criticized by analysts,but the company's sales have been hardly affected.Questions have been raised on the fall in volume growth,but a significant portion of fall in volumes is due to change in gramage of various products.
    Posted byshreyat Tuesday 00:01

    Hi folks,

    Following is an insight into another FMCG company Colgate.Please have a look and help me dig deeper into the business.

    Colgate India Ltd.
    COLGATE-PALMOLIVE (INDIA) LTD. SALES EBITDA PAT EPA MKTCAP
    9 YR CAGR 14.07% 17.18% 19.41% 20.37% 27.52%
    5 YR CAGR 15.34% 20.29% 17.82% 18.21% 26.49%
    3 YR CAGR 15.50% 10.32% 2.71% 3.71% 26.41%
    1 YR GROWTH 17.66% 12.92% 10.90% 12.57% 20.64%
    COLGATE-PALMOLIVE (INDIA) LTD. FY 2012 FY2011 FY2010 FY2009 FY2008 FY2007 FY2006 FY2005 FY2004 FY2003
    Financial Leverage 1.00 1.00 1.01 1.02 1.03 1.02 1.02 1.02 1.01 1.01
    Total liability/Earning 1.49 1.55 1.31 2.00 2.41 2.68 2.60 2.85 2.80 3.79
    Debt/Equity 0.00 0.00 0.01 0.02 0.03 0.02 0.02 0.02 0.01 0.01
    Interest Coverage 390.05 60.64 64.60 49.96 194.59 49.87 45.58 41.01 N.A 47.93
    Working Capital/Sales 2.40% 3.42% 2.81% 0.23% -6.89% -3.05% -3.66% -6.01% 3.91% 1.37%
    Debtor Days 12 12 2 2 2 3 2 7 13 16
    Inventory Days 30 25 20 19 21 22 24 30 26 22
    Cash In/Cash Out Ratio 0.46 0.37 0.22 0.18 0.17 0.21 0.24 0.30 0.33 0.31
    Gross Margin 66.75% 61.83% 62.21% 61.11% 60.61% 57.01% 56.94% 51.00% 50.71% 49.06%
    EBITDA Margin 23.37% 24.35% 25.62% 21.34% 19.75% 20.50% 19.57% 21.69% 18.85% 17.31%
    Net Margin 16.61% 17.62% 21.01% 16.58% 15.26% 12.02% 11.99% 11.78% 11.52% 8.71%
    Capital Turns 8.43 6.86 6.64 9.84 17.51 10.48 9.73 43.80 7.42 5.99
    Fixed Asset Turns 10.57 8.96 8.16 10.07 7.94 7.94 7.17 12.06 10.44 6.52
    Total Asset Turns 6.17 5.95 6.09 7.92 9.10 4.68 4.17 3.79 3.80 3.67
    RoA 102.54% 104.81% 127.99% 131.33% 138.83% 56.24% 49.96% 44.65% 43.82% 31.99%
    RoE 102.54% 104.82% 129.79% 134.17% 142.85% 57.10% 50.76% 45.36% 44.21% 32.24%
    RoCE 135.27% 135.94% 144.75% 158.71% 167.89% 90.53% 70.17% 73.37% 61.86% 56.55%
    RoIC 140.08% 120.92% 137.12% 165.47% 253.18% 169.55% 120.21% 545.37% 85.31% 57.45%

    Sales (CAGR) : 1Yr>3Yr>5Yr>10 Yr.

    Profit(EBIDITA & PAT CAGR) : The growth rate hasdecelerated in the recent past.The3Yr and 1Yr CAGR is far lower than 10Yr and 5Yr.

    Solvency: the declining Financial Leverage,Total liability/earnings and Debt/Equity over the period indicate that the company has reduced the debt on its balance sheet and Reasonably high interest coverage ratio over the years indicate that the company is able to pay off its interests comfortably.

    Liquidity:In absolute terms the liquidity position of the company is great.But when we see the trend of Net WC/Sales and cash in/cash out ratio the liquidity position has relatively degraded.

    Efficiency: The company has reduced its debtor days over the years by 25% and the inventory days have increased over the years indicating the company now takes longer to convert raw material to sales.

    Margins: Gross,EBIDTA and PAT (3Yr>5Yr>10 Yr) : The gross margin has improved significantly and almost consistently over the 10 year period.The probable reasons are increasing price with inflation and change in revenue mix (even today the company generates ~85% of its revenue from tooothpastes which at firstglancedoesn't suggest change in revenue mix,but when we dig deeper we find that the company has come up with differentiated products with better price realization over the years and their contribution has increased significantly over the years).The improving EBIDTA & PAT Margin indicates that the efficiency has improved over the years.

    turnover and return ratios: All the turnover & return ratios have improved over the years.In the recent past the have declined probably due to the expansion in Gujrat and A.P that is yet to start production.

    types of business: The company's ~85% revenue contributors come undernecessity(Tooth pate).which is an amazing thing!These products have significant price elasticity as the form an insignificant portion of the consumer's budget.Its products demand reoccurs frequently, an average person uses 100 grams of Toothpaste in a month and the average price of paste is Rs.40 per 100 grams.So, the company makes a sale of Rs.40 toexistingcustomer.Toothpaste is something that most peoplerarelychange and Colgate being the market leader maintains its position with focus on quality,wide product range and wide distribution network(It is One of the most widely distributed brands, with a presence in 4.85 million retail outlets out of 5.72 million in the country (~85%)).The company has been able to increase prices to keep pace withinflation without loosing volume growth.This is surely a good thing!

    Posted byDonaldat Thursday 15:50

    Thanks Shrey for all your detailed work. It's great to see someone taking charge of dissecting familiar/respected Brand name companies diligently, systematically. This is good work. Please keep updating. I think we all can learn a few things from this ongoing exercise, as we go deeper.

    Some immediate suggestions/comments:

    1. Great that you have strated with dissecting FMCGs. These are easy to understand business models, touch and feel products/brands, details are easily available. But we must include a representative sample (including a couple of lower mortals to accentuate the Goods/Bads). I am sure you must be thinking of Including HUL. Do also consider including Dabur, Marico and Godrej Consumer Products.

    2. You have stressed on Demand side (daily consumption) being a good thing. Please include Supply side dissection in your matrix. For e.g HUL is reported to have tripled its rural network in 2011. Dabur wants to double its rural network by FY13 -Rural India, where 70% of the population resides but only 34% consume FMCG goods, presents the biggest market potential for the industry]

    3.Not sure if it make sense (or whethercan successfully include) for Trade dissection - General Trade vs Modern Retail Trade.General Trade - the ubiquitous kirana stores is the largest sales channel forming 95% of overall retail sales. But, growth of consumer goods retailed through Modern Trade channel is outpacing the growth of FMCG products in General Trade. In my experience some categories like packaged rice, breakfast cereals, air freshners, mosquito repellants have a higher penetration in Modern Retail trade.

    4. Your quantitative matrix is good. Revenue/Income statement/Profitability growth stands out. At the same time there are pointers to catch the basic drivers on the Balance sheet - whether that is improving at the same pace or not, and the underlying drivers of business value. Hope we can refine this somewhat better with help from other seniors.

    e.g. at a first glance, one one aspect Nestle seems to be standing taller than the rest - its ability to hold on to Cash is simply phenomenal (vis a vis even the stellar track records of others).

    Will be good to see a bigger sample including the Daburs and the HULs.

    -Donald

    PS: Appeal to Seniors to guide this discussion - what to look for/refinements/suggestions

    Posted byshreyat Thursday 15:51

    A small correction: I havemisspelledprice inelastcity in all the three posts as price elasticity,please bare with it!

    Posted bySubbuat Thursday 16:11

    This is an excellent discussion. The problem with blue chips is the valuation. Most of the superior business characteristics are captured in the valuation. So any minor short-term disappointments will not go unnoticed by the market. Since these stocks are analysed in great detail by analysts there is little chance of a significant undervaluation. I guess you have downside protection to a certain extent but meaningful upsides can only be catpured over a 3-5 year horizon.

    The best time to enter such stocks is when there is dip in profits due to some short-term effects or there is a market panic like in 2009.

    I guess as stock pickers we should try to unearth the future 'colgates' of India.

    Posted bySubbuat Thursday 16:22

    Overall, I like Colgate Palmolive - a great brand and a product that will be used forever!

    ITC - I'm not so sure about their tobacco business. As the literacy rate increases I think tobacco consumption will decrease. This is already happening in the West. So its only a matter of time (not in the short-term though).

    Posted byManish Gargat Thursday 17:53

    I agree with Subbu here.

    ITC, yes it is a great business, with majority of revenue coming from people's addiction to tobacco.

    But, I am not too comfortable with the future of tobacco products. The data of per capita cigarette consumtion in US shows a declining trend for a long period now.

    See the chart here...http://wholehealthsource.blogspot.in/2012/02/cigarette-smoking-another-factor-in.html

    With increasing awareness about harmful effects of tobacco products, people are distancing themselves from them.

    Besides this, Tobacco industry has always been a cash cow for tax imposers. It is considered to be a soft target whenever Governments look for means of additional revenue genertion. Agreed that because of large amount collected as tax from tobacco marketers, Governments will shy away to attack these businesses, but still the dynamics is complex and Governments are always under pressures for curbing these businesses.

    Recent bans on Gutkha industry in Uttar Pradesh is a case in point here.

    I do not feel comfortable enough to go with ITC, just because of them earning most of their revenue from tobacco products.

    Attachments
    Posted bykishor barhateat Thursday 18:05
    May be pidilite industry also can be considered due consistent growth orientated performance, Strong brand, moat of their business, well diversified product portfolio wrt to construction chemicals & adhesives

    (Donald Francis) #5
    Posted byshreyat Thursday 20:56

    Hi All,

    Acomparison of Nestle and ITC P/E over last 10 years and probable reasons.

    AVG. P/E
    AVERAGE P/E FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 avarage Total increase
    ITC 13.683 15.4888 17.5604 21.1725 29.0785 24.3503 22.112 26.2216 28.8895 30.6497 22.92063 124.00%
    NESTLE 29.1115 26.8635 21.3146 28.6407 33.3124 36.0431 35.9551 35.88 44.4404 47.3864 33.89477 62.78%

    *The nestle data is for year jan-dec. The data has not been adjusted as a roughapproximation is enough.

    Nestle is a better business than ITC the numbers say,so says the market.The market on an average has valued a rupee of Nestle's earning higher than ITC consistently over last 10 years.This is obviously due to the better quality of Nestle's balance sheet and cash flow.Another reason which i stronglybelieve has led to this is thatNestle Generates larger portion of its revenue from consumer monopolies than ITC. Nestle generates 85% of its Net Revenue from consumer monopolies: ~40%necessity(Baby food formula,Milk powder etc) and ~45%mildaddiction or habit(confectioneries,coffee,Noodles),where as ITC generates ~48% of its Net Revenue from consumer monopolyaddiction(cigarette).


    (Donald Francis) #6
    Posted byshreyat Friday 16:42

    Hey folks,

    The following is a snapshot of Dabur India Ltd.Please include this too in the discussion.

    Dabur India Ltd.
    DABUR INDIA LTD. SALES EBITDA PAT EPA MKTCAP
    9 YR CAGR 19.64% 24.12% 25.24% 20.74% 33.02%
    5 YR CAGR 22.28% 21.46% 17.89% 9.28% 19.28%
    3 YR CAGR 24.84% 20.00% 13.42% 0.93% 23.03%
    1 YR GROWTH 29.71% 17.14% 13.42% 10.83% 7.53%
    DABUR INDIA LTD. 31-03-2012 31-03-2011 31-03-2010 31-03-2009 31-03-2008 31-03-2007 31-03-2006 31-03-2005 31-03-2004
    Financial Leverage 1.63 1.75 1.19 1.28 1.17 1.34 1.22 1.46 1.49
    Long Term Debt/Earnings 1.67 1.84 0.35 0.58 0.29 0.56 0.49 0.97 1.17
    current liability/earnings 3.25 3.06 2.78 3.25 3.08 2.83 2.70 3.56 4.53
    Total liability/Earning 4.91 4.90 3.13 3.83 3.37 3.39 3.19 4.53 5.70
    Debt/Equity 0.63 0.75 0.19 0.28 0.16 0.33 0.21 0.41 0.44
    Interest Coverage 15.68 24.60 49.33 19.56 23.75 21.59 16.79 15.04 N.A
    Working Capital/Sales 12.14% 9.07% 5.00% 4.79% 1.60% 7.99% 1.03% 11.42% 3.05%
    Debtor Days 31 9 6 5 12 10 10 3 6
    Inventory Days 32 32 13 23 27 25 15 18 21
    Cash In/Cash Out Ratio 0.43 0.26 0.12 0.17 0.24 0.25 0.21 0.16 0.19
    Gross Margin 47.05% 50.06% 53.74% 49.24% 52.46% 50.51% 56.63% 54.15% 56.00%
    EBITDA Margin 17.86% 19.78% 19.33% 17.69% 18.34% 17.87% 16.15% 14.36% 13.31%
    Net Margin 12.16% 13.90% 14.73% 13.87% 14.07% 13.81% 11.45% 10.41% 8.43%
    Capital Turns 2.32 2.19 4.17 4.44 5.17 3.83 3.61 3.28 4.38
    Fixed Asset Turns 3.23 2.73 5.26 5.64 5.64 5.51 3.75 5.25 5.06
    Total Asset Turns 1.90 1.68 3.06 2.69 3.29 3.19 3.08 2.83 2.97
    RoA 23.08% 23.29% 45.00% 37.27% 46.33% 43.99% 35.30% 29.40% 25.07%
    RoE 37.56% 40.87% 53.60% 47.78% 54.07% 59.02% 43.09% 42.81% 37.23%
    RoCE 30.25% 30.63% 54.75% 43.43% 55.72% 51.97% 45.77% 36.35% 34.91%
    RoIC 30.11% 31.97% 61.71% 62.44% 75.25% 54.54% 46.80% 36.48% 43.74%
    Tax Rate 18.52% 19.94% 17.04% 12.67% 13.47% 12.03% 11.79% 11.03% 11.95%

    Sales (CAGR) : 1Yr>3Yr>5Yr>10 Yr.

    Solvency: the Financial Leverage,long term debt/Earning and Debt/Equity has increased over time suggesting the company has become more leveraged over the period. With current level of earning it can pay off all its liabilities in little over 4 years and 9 months and long term debt in little over 1 and a half years.Interest coverage has remained above comfortable levels but the trend suggests a fall in interest coverage.

    Liquidity &Efficiency:In absolute terms the liquidity position of the company is decent.But the trend of Net WC/Sales and cash in/cash out ratio the liquidity position has degraded.The company's efficiency also has worsened.

    Gross Margins: The margins have declined over the yearssignificantly (a drop of 900 bps in last 9 years!).

    turnover and return ratios: All the turnover & return ratios have worsened over the years.The company has made many acquisitions in the last decade and a study of the various businesses that it has acquired will help us decipher the cause.As of now looking at the current picture the company seems to have become inefficient in utilizing its assets and the returns have fallen.

    At first sight the worsening solvency, liquidity, efficiency , declining gross margin, declining turnover and return ratios suggest that probably the company is loosing its competitive advantage.

    Some qualitative feature of the business worth noting are as follows:

    1. distribution network: It has a Wide and deep market penetration with 50 Carrying & Forwarding agents, more than 5000 distributors and over 3.4 million retail outlets all over India for its most widely distributed products and 5-5.5 million retail outlets all total.it has high penetration in both urban and rural markets. For its healthcare products, DIL has a reach of 200,000 chemists, ~12,000 vaidyas and 12,000 ayurvedic pharmacies. DIL operates a specialised beauty retail business under the brand âNew Uâ, held under its whollyâowned subsidiary H&B Stores Ltd. As of FY12, the company had 47 stores, with outlets spread across North India and South India.
    2. Types of businesses:The Company derives a significant portion of its revenue from products that have pricing power (products are natural and have the health preposition).These products with pricing power fall in two categories. The first category includes products that have a dominant market share like chavanprash, glucose, herbal digestives, digestive tablets, honey etc. These have built brand loyalty among customers through focus on quality, taste, advertising etc. These brands are synonymous to the products. The second category includes Products like Babur lal tooth paste, Miswak, Babool, Dabur honeitus etc. These due to their product differentiation are perceived to be a different product and this gives them pricing power in an industry which is either largely competitive or is not dominated by the companyâs products.. These products own a piece of the consumerâs mind in one way or the other and whenever the consumer has to buy these products it has to buy it from Dabur. Hence these products have consumer monopoly.
    3. Another point worth noting is the fact that the company derived 47% of its domestic revenue from rural India as compared to 45% last year.


    (Donald Francis) #7

    Five trends that will drive FMCG growth in 2013

    Extremely timely article :slight_smile: appearing in Mint Jan 31st, 2013 - has some details/pointers that should be useful - in our quest.

    Selected Excerpts:

    Rural and new consumer segments

    The consumer packaged goods market growth will be aided by a rise in government final consumption expenditure (GFCE), as was witnessed two years before the general election in 2009, and the likely roll-out of policies such as the food security Bill and the direct cash transfer of subsidies to about 40% households in India, said analysts.

    Emerging segments and trade channels

    Growth will come from the fringesacategories that are not among the mainstaysasuch as oats, conditioners, liquid fabric conditioners, and liquid soaps and face wash compared with staple soaps and deodorants.

    Channels including modern trade (comprising hypermarkets and supermarkets) account for 5-7% of the overall retail market and are expected to double to 10-12% in the next three years, according to a_Mint_estimate based on forecasts from BCG,Ernst and Young Pvt. Ltd,DeloitteHaskins and Sells,KPMGAdvisory Services

    Pvt. Ltd,TechnopakAdvisors Pvt. LtdandBooz and Co.

    -Donald


    (Donald Francis) #8

    The Indian FMCG Industryby Dinodia Capital Advisors Sep 12

    Nothing new in terms of insights, but contains relevant details/sometimes good segment info for a quick update on the main players.


    (Ashwini Damani) #9

    I am not sure if everyone is aware of this, ITC is planning a foray into Dairy Business

    ITC with its scale and reach can definitely transform the sector and reduce its dependance on tobacco


    (shrey) #10

    Hey Folks,

    Here is another Mighty conglomerate's crisp picture for you.Please help me dig deeper intointricacies of the business and help meforecast its future.

    HUL Ltd.
    HINDUSTAN UNILEVER LTD. SALES EBITDA PAT EPA MKTCAP
    9 YR CAGR 10.12% 4.80% 5.36% 4.88% 9.52%
    5 YR CAGR 12.35% 11.49% 11.06% 8.65% 14.89%
    3 YR CAGR 11.57% 8.88% 10.55% 9.57% 17.78%
    1 YR GROWTH 12.33% 19.47% 16.71% 19.26% 30.37%
    HINDUSTAN UNILEVER LTD. 31-03-2012 31-03-2011 31-03-2010 31-03-2009 31-12-2007 31-12-2006 31-12-2005 31-12-2004 31-12-2003 31-12-2002
    Financial Leverage 1.00 1.00 1.00 1.20 1.06 1.03 1.02 1.70 1.80 1.02
    Long term debt/Earning 0.00 0.00 0.00 0.17 0.05 0.04 0.04 1.23 0.96 0.03
    Total liability/Earning 4.62 4.57 4.11 4.74 4.34 3.71 4.55 6.02 0.96 0.03
    Debt/Equity 0.00 0.00 0.00 0.20 0.06 0.03 0.02 0.70 0.80 0.02
    Interest Coverage 2636.53 11243.63 395.13 116.30 83.08 171.67 83.29 12.36 N.A 235.04
    Working Capital/Sales -5.85% -5.56% -6.28% 0.35% -11.68% -10.10% -11.34% -1.82% -0.99% 0.30%
    Debtor Days 9 5 5 4 5 5 4 5 N.A N.A
    Inventory Days 14 18 14 10 12 14 19 20 N.A N.A
    Cash In/Cash Out Ratio 0.11 0.12 0.10 0.07 0.09 0.10 0.11 0.12 N.A N.A
    Gross Margin 43.77% 46.46% 49.13% 44.23% 45.37% 44.39% 43.26% 43.01% N.A N.A
    EBITDA Margin 15.77% 14.83% 16.56% 15.31% 16.26% 16.11% 15.39% 17.18% 23.43% 22.78%
    Net Margin 12.17% 11.71% 12.39% 12.20% 12.74% 15.15% 12.58% 11.91% 17.32% 17.59%
    Capital Turns 25.63 18.34 17.01 12.22 -139.73 75.15 97.22 8.12 8.57 8.08
    Fixed Asset Turns 10.25 9.08 8.22 12.77 9.12 8.75 8.08 7.07 7.90 8.28
    Total Asset Turns 6.30 7.48 6.88 8.26 9.09 4.38 4.74 2.82 2.66 2.71
    RoA 76.63% 87.57% 85.26% 100.72% 115.84% 66.37% 59.62% 33.60% 46.11% 47.62%
    RoE 76.63% 87.57% 85.26% 121.34% 122.97% 68.14% 61.09% 57.23% 82.87% 48.38%
    RoCE 93.08% 102.48% 106.78% 118.60% 138.73% 65.90% 67.67% 45.09% 59.13% 58.06%
    RoIC 287.75% 197.91% 201.76% 141.03% -1707.54% 931.92% 1129.66% 101.49% 148.21% 134.61%

    Solvency:The company is virtually debt free and the little short term debt which it carries is very well taken care of by its strong earning power.

    liquidity:The company'sliquidity position is really strong.It operates with anegativeworking capital which is really good.It gets to hold on to cash for a longer period of time evident from the cash in/cash out ratio,the company hasmaintained this over the years even when its sales have grown more than 2 folds in the last 10 years(sale size of Rs.22000 Crs).This is phenomenal!

    Margins,Turnover and Return ratios: The company's PAT margin has declined by 10 percentage points over the last 10 years,but the increase in turnover has more than offset thisnegativeimpact and this is evident in the significant increase in return on equity over the years.

    A few qualitative aspects worth noting:

    • The company draws 50% of its domestic sales from rural India,the rural sale contribution is highest among all the major FMCG Companies like Nestle,ITC,Colgate,Marico,GSK Consumer,GCPL,Dabur and Emami.With Dabur(47%),Emami(45%) and ITC(40-45%).Rest all generate less than 40% revenue from rural India.
    • The company has tripled its retail network since 2010.The current retail reach is 6.5 million retail outlets,which is comparable to ITC's retail network,Followed by Dabur(5.5 Mn),GCPL(~5Mn) and Colgate(4.5 Mn).This is amazing as ITC's cigarette is one of the most widely distributed product.
    • Types of businesses: The company mostly manufactures products that come handy in daily use like soup,soap,washing powder,sanitary napkin etc.The company is a perfect example of jack of all trades and master of non,I mean the company is not the onlydominant player in any of the segment in which it operates,in most it is either the second or the third largest player,which is evident from not so high high margins.But because of its elaborate and deep distribution and sales network the company is able to maximize its return by selling more at lower price.The products like lifebouy ,Stayfee,Wheel,Vim bar etc provide a better value preposition than other competitors and hence its more widely sold in the rural parts.In the premium segment it enjoys pricing power through product differentiation(eg: Sunsilk,Dove,Pears etc).
    • Unique raw material Source: The company leverages its parent's capabilities in sourcing raw material at cheaper cost.
    • R&D:It leverages its parent's R&D capabilities in introducing innovative products which are of world class standards.
    • The skin care,fairness cream,cold cream,Utensil cleaner have a ruralpenetration less than 20% as per HDFC securities Institutional research and for other products with high penetration the per capita consumption is far lower than that of Chaina and Indonasia.The company with its deep distribution network is well positioned to capitalize on this lucrativeopportunity.

    (Abhishek Basumallick) #11

    FMCG is a great story for India, specially rural consumption. Standard stocks like Colgate, HUL, ITC, Marico, Brittania, Castrol, Titan,Timex,Pidilite,Linc,Godrej Consumer, GSK,Dabur,Amrutanjan etc are companies that are stalwarts in their own areas.

    I agree with Donald in a sense that it is important to understand this sector better and wait for opportunities to buy into such companies, specially as defensive bets in order to stabilize the portfolio. The best way, to my mind, is to slowly build up positions by SIPping. The valuations are unlikely to ever be low enough to buy in large chunks (because when FMCG stocks fall, the overall market must be in a tailspin).

    Amongst the stocks I have named above, I hold Titan & love Pidilite (one stock where I have made a lot of return previously and continue to love the company). Titan, I like, specifically because of their eyewear business, which I believe can be a game changer for the company. Probably as much as their foray into gold jewellery.


    (Lalit) #12

    I have another view on ITC. ITC has been a greatcompanyand will remain a great company.

    ITC current market cap is 45 billion and caneasilygrow 15% CAGR for next 10 years. That is 4x in 10 years. That will make ITC’s market cap as big as P&G worldwide and will be one of world’s largest FMCG companies.

    Other global FMCGcompanies with entire globe as the market has <200 billion as market cap. ITC with just India as the market will have similar valuation. Sosomewherethe law of gravity has to catch up.

    Also, I feel ITC’s FMCG business is a “me to” business. They do not have really differentiated product offerings compared to others. The money muscle power with Tobacco cash flows is making the FMCG click. But without much product differentiation it will not be easy to make long term wealth in FMCG portfolio.

    My final take on ITC from here on:

    )- Have very modest expectations from ITC. Law of gravity will have to catch up sometime. HUL was bluest of blue chips till 2000 with great returns.

    )- ITC’s cash flows mainly come fromTobaccoand will remain so in the future. FMCG with current mass-market “me too” portfolio isunlikelyto make big difference to it. Its fortunes will still remain tied to Tobacco.

    )- It still remains a very low risk business, but future returns has to moderate. Trees still can’t grow till skies.


    (Donald Francis) #13

    Hi Lalit,

    Very interesting perspective brought out by you. Thanks. I had never thought of comparing current market cap size to that of global biggies to see how much room there is to grow!!

    I will work on this a bit and revert. You have also raised other interesting points, which makes us think:). Really value your contribution to this thread, please keep guiding.

    My take on the ITC comment of me-too products - not entirely correct, or atleast not entirely fair. We have to see the speed with which coy’s products have reached no 2 or no 3 or even no 1 status in certain categories. The other biggies have been at it for generations. Yes cigarette money provides the muscle-power, but no one can deny its so far been put to very good use. Ashirwad Atta I believe is the market leader, Bingo is no 2, and Sunfeast biscuits are muscling its way to near the top. In foods business or personal care business, how many companies are able to really innovate - I have to think about it, and seek for evidence, before reaching conclusions.

    At the moment I think FMCG business is more about building BRANDS. And ITC has demonstrated that it can build brands in food business; personal care brands it still has a long way to go perhaps, has gained some foothold. Being no 2 or no 3 may keep working for ITC if it executes on its rural strategy well and leverages its distribution & sourcing strengths.


    (Donald Francis) #14

    Hi Shrey,

    Thanks for your continued detailed work, and capturing first-level essentials of these leading FMCG businesses. I think these will help a lot in bringing everyone on the same page - thats the first contribution. Second as 6-7 companies get covered, hopefully some patterns will emerge - and that will help us filter and go deeper into a chosen few.

    Please cover Godrej Consumer, Marico. Does it makes sense to include GSK consumer? Titan, Pidilite, Asian Paints, Castrol are great companies that Abhishek mentions again & again, we should get to covering, yes. But they are all different businesses, and perhaps we may like to tackle them once we are through with the FMCG exercise.

    HUL, we all know is a great company. People have made fortunes by staying with the company. We all also know it faltered badly in the last decade, so no surprises that numbers dont look that good and pale in comparison to others. But we need to understand if the revival in the last year is for real, and how key is its rural distribution strengthening strategy to its fortunes in coming years.

    Thanks for your efforts. Please keep it up.

    -Donald


    (Lalit) #15

    Thanks Donald for yourperspectiveas well. My views on “me too” were based on my personalexperience. They will grow FMCG business, no doubt about that, but it will dilute ROE/ROCE from Tobacco business. My point here is that every category they are in, there are already 2-3 established players and they have little pricing power. Some examples from from my experience.

    )- I hardly bought an ITC product which is priced higher andcompetitorprice is lower. This means the brands are not so strong that people won’t switchloyalties. Will people pay a higher price just to buy ITC products (as in case with Tobacco) ?

    )- Iswitchedloyaltyfrom Ashirvaad Atta after recent price increases. Now I buy a local Atta which is as good as Ashirvaad.

    )- They did not create new categories of product where they areunambiguousleaders. (like Maggi, Horlicks, Saffola)

    This is entirely my own experience and is not a conclusion. No doubt they are building brands very fast, and this is because of huge cash flows. Would like to see what is the ROE/ROCE of their FMCG business.

    If Tobacco does well ITC will do well. FMCG won’t reach 50% of PAT in years to come.

    think:)).


    (P Sharma) #16

    ITC is strictly not a FMCG business. The biggest weight around its neck in the hotels business which is a cash guzzler. This is one of YCD’s favourite businesses as he was heading this division before he became the group CEO. He is heavily biased towards this business and the capital allocation to this business is dis-propotionate to the returns of this business. The latest example of this is the Chola hotel in Chennai. I believe around 500 crs was spent on this hotel.

    Other than that the foods business is doing very well and will be operationally profitable this year. This is a great achievement of having created a business from scratch and making it profitable in the last 13 yrs. The biscuits division is doing very well with Britannia the leader in this category having named ITC as their main rival in the market.

    Cigarettes will continue to generate a large amount of cash. Please note that cigarette consumption is only 18% of India’s tobacco consumption. As wealth rises in a country, people switch from other forms of tobacco like beedis to cigarettes. India’s consumption of cigarettes at 100 billion sticks per annum is a small fraction of China’s 2 trillion sticks per annum. The comparison with America on cigarette consumption is wrong as cigarettes is the main form of consumption and in a mature educated society, it is coming down marginally. Gutka ban will veer people towards cigarettes.

    The questions is , how much of this has already been baked into the stock price and what could be the upside from here?


    (Donald Francis) #17

    Good food for thought discussions. Thanks for bringing in added perspectives Lalit & P Sharma.

    @ Lalit - Agree about Maggi, Horlicks, Saffola being undisputed leaders. But contend that it takes a few decades in the business for these innovations to come about. Also how important is undisputed category leadership to be a winner?? Need to think about it, case in counter-point, HUL.

    @ P Sharma - Thanks for the direction. Segment break-ups on Sales/Profitability, and also increasing capital allocation over the years will throw more light on this. Yes expectations are always built into ITC’s price, Lalit has also raised this before (huge MktCap). We will do more work here and revert. I agree with you the steam in Cigarettes business is far from slackening, I can’t see ROE dilution in years to come, it should only improve as the FMCG business starts adding to profitability.

    @Shrey - Request you to put the segment data - Sales, Profitability, Capital allocation, Returns data on the table, for scrutiny. We may then like to take a shot at projecting forward.


    (shrey) #18

    Hey Folks,

    The following is the segment wise data for gross revenue,operating profit,totalassetsand capital expenditure for last 6 years of ITC.Please take this too into consideration whileanalyzing.All data in Million Rupees.

    ITC Ltd. Segment wise
    2007 % 2008 % 2009 % 2010 % 2011 % 2012 %
    Revenue 128737.3 100 146591 100 165561.4 100 191358.7 100 222736.6 100 261795.2 100
    FMCG - Cigarattes 132070.1 65.35 143263.9 64.22 157546.8 64.66 181118.3 65.54 207212.7 64.6 232323.2 63.45
    FMCG - Others (Snack Food Manufacturing) 17103.5 8.46 25236.9 11.31 30312.5 12.44 36573.7 13.23 44950.6 14.01 55559.5 15.17
    Agri Business 26919.9 13.32 24699.6 11.07 22395.5 9.19 23042.7 8.34 28151.6 8.78 34124.6 9.32
    Paperboards, Paper and Packaging 12274 6.07 13659 6.12 16677.5 6.85 19935.1 7.21 22641.2 7.06 25253.2 6.9
    Hotels 10531 5.21 11668.9 5.23 10866.4 4.46 9713.8 3.52 11392.7 3.55 10629.4 2.9
    Others - Information Technology Services 3189.2 1.58 4557.1 2.04 5838.4 2.4 5965.9 2.16 6438.6 2.01 8284.6 2.26
    Operating Income 39752.1 100 45144.8 100 48768.7 100 61607.5 100 73243.1 100 87655.8 100
    FMCG - Cigarattes 32416.7 80.93 37208.7 81.77 43281.9 86.93 51067.1 82.48 60009.2 81.14 71912.4 80.4
    FMCG - Others (Snack Food Manufacturing) -1960 -4.89 -2589.6 -5.69 -4896 -9.83 -3803.4 -6.14 -3315.2 -4.48 -2150.8 -2.4
    Agri Business 1235.5 3.08 1291.9 2.84 2561.8 5.15 4477.5 7.23 5662.9 7.66 6431.5 7.19
    Paperboards, Paper and Packaging 4167.8 10.4 4531.4 9.96 5086.3 10.22 6842.6 11.05 8192.4 11.08 9367.8 10.47
    Hotels 3860.3 9.64 4361.1 9.58 3346.2 6.72 2313.8 3.74 2833 3.83 2942.9 3.29
    Others - Information Technology Services 336.9 0.84 699.7 1.54 409.7 0.82 1020.6 1.65 576.5 0.78 936.4 1.05
    Assets 154169.7 100 177615.6 100 201439.4 100 238145.9 100 263553.9 100 300797.7 100
    Unallocated Corporate -2974.5 -3058.7 76279.1 87774.6 104765.9
    FMCG - Cigarettes 31062.6 34078.4 24.34 44656.7 28.43 45224 27.37 49690.5 27.63 58855.5 29.38
    FMCG - Others (Snack Food Manufacturing) 12035.8 10.52 23277.5 16.63 25857.5 16.46 22480.8 13.6 25203.1 14.01 26536.8 13.25
    Agri Business 17183.5 15.01 17711.3 12.65 12776.2 8.13 19075.3 11.54 21498.1 11.95 22117.1 11.04
    Paperboards, Paper and Packaging 28328.7 24.75 36455.6 26.04 41763.2 26.59 40450.5 24.48 42320.2 23.53 48086.4 24.01
    Hotels 17080.2 14.92 21334.2 15.24 24639.2 15.69 27435.9 16.6 30661.6 17.05 36336.5 18.14
    Others - Information Technology Services 8763.8 7.66 7153.3 5.11 7388.1 4.7 10578.1 6.4 10501.3 5.84 8360.3 4.17
    Capital Expenditures -15288 100 -21546.7 100 -17309 100 -13082.4 100 -12195.9 100 -25341.4 100
    FMCG - Cigarettes -5586.4 36.54 -4616.8 21.43 -4325.9 24.99 -4557.1 34.83 -3701.8 30.35 -6558 25.88
    FMCG - Others (Snack Food Manufacturing) -2012.7 13.17 -3175.9 14.74 -2105.1 12.16 -1695.3 12.96 -1134 9.3 -2765 10.91
    Agri Business -1066.2 6.97 -1142.9 5.3 -368.1 2.13 -115.8 0.89 -910.7 7.47 -1592.6 6.28
    Paperboards, Paper and Packaging -4701.4 30.75 -8863.2 41.13 -5787.8 33.44 -2080.8 15.91 -2495.3 20.46 -5937.7 23.43
    Hotels -1730 11.32 -3215.2 14.92 -3743.6 21.63 -4213.6 32.21 -3691.5 30.27 -7646.7 30.17
    Others - Information Technology Services -191.3 1.25 -532.7 2.47 -978.5 5.65 -419.8 3.21 -262.6 2.15 -841.4 3.32

    The company's revenue mix has changed over the years and the contribution of Cigarette as apercentageof gross revenue has come down.But when we look at the net revenue picture the contribution of cigarette to net revenue is ~47% due to the heavy taxation ontobacco.But when we look at operating profit the picture has remained very much the same even today the contribution of cigarette to operating profit is 80%!

    The company has been allocating significant amount of capital to two of its highest ROE Businesses Cigarettes and Paper board,Paper and Packaging.This is an indication that the company is employing capital in the most productive and profitable means.The company has been allocating significant capital to the pricecompetitive food business but this as a percentage of total CAPEX is pretty low and as mentioned earlier it is able to bet big on Food business because of the strong and reliable cash flow from Cigarettes business.

    In the following table i have tried to approximate the PAT Margin of each segment and their asset turnover.I have used gross sales instead of net sales. I have assumed that the company pays no Interest (actually it carries very little debt) and the tax rate is the effective tax rate for the year.Theseassumptions will overestimate the ratios marginally,but a good understanding can be gained by doing so. :D

    Margins,Turnover and ROE
    operating Margins 2007 2008 2009 2010 2011 2012
    FMCG - Cigarattes 24.55% 25.97% 27.47% 28.20% 28.96% 30.95%
    FMCG - Others (Snack Food Manufacturing) -1.52% -1.77% -2.96% -1.99% -1.49% -0.82%
    Agri Business 4.59% 5.23% 11.44% 19.43% 20.12% 18.85%
    Paperboards, Paper and Packaging 33.96% 33.18% 30.50% 34.32% 36.18% 37.10%
    Hotels 36.66% 37.37% 30.79% 23.82% 24.87% 27.69%
    Others - Information Technology Services 10.56% 15.35% 7.02% 17.11% 8.95% 11.30%
    PAT Margin 2007 2008 2009 2010 2011 2012
    FMCG - Cigarattes 16.59% 17.24% 18.11% 18.84% 19.37% 21.35%
    FMCG - Others (Snack Food Manufacturing) -1.03% -1.17% -1.95% -1.33% -1.00% -0.57%
    Agri Business 3.10% 3.47% 7.54% 12.98% 13.46% 13.00%
    Paperboards, Paper and Packaging 22.96% 22.02% 20.10% 22.93% 24.20% 25.58%
    Hotels 24.78% 24.81% 20.30% 15.92% 16.63% 19.09%
    Others - Information Technology Services 7.14% 10.19% 4.63% 11.43% 5.99% 7.79%
    Total asset turnover 2007 2008 2009 2010 2011 2012
    FMCG - Cigarattes 1.04 4.30 3.53 4.00 4.17 3.95
    FMCG - Others (Snack Food Manufacturing) -0.16 6.15 1.17 1.63 1.78 2.09
    Agri Business 0.07 1.42 1.75 1.21 1.31 1.54
    Paperboards, Paper and Packaging 0.43 0.37 0.40 0.49 0.53 0.53
    Hotels 0.15 0.68 0.40 0.49 0.53 0.53
    Others - Information Technology Services 0.23 0.64 0.44 0.35 0.37 0.29
    ROE 2007 2008 2009 2010 2011 2012
    FMCG - Cigarattes 17.32% 74.15% 63.88% 75.45% 80.78% 84.26%
    FMCG - Others (Snack Food Manufacturing) 0.17% -7.22% -2.28% -2.16% -1.78% -1.19%
    Agri Business 0.22% 4.95% 13.22% 15.68% 17.62% 20.05%
    Paperboards, Paper and Packaging 9.95% 8.25% 8.03% 11.30% 12.95% 13.43%
    Hotels 3.65% 16.81% 8.11% 7.84% 8.90% 10.03%
    Others - Information Technology Services 1.61% 6.52% 2.04% 4.05% 2.23% 2.28%

    Margins: for all segments have improved barring Hotels and Food.The Cigarette segment PAT Margin for current year is 21.35% as compared to 8% of Godfrey Philips India Ltd.The Paper board segment's PAT Margin for current year is 25.6% as compared to 14% of Navneet Publication(India) Ltd.The food business increasingnegativemargin suggests that the company is loosing less money for each rupee of sales and the current figure is really slow and one can expect that this segment will soonbreak even.

    Turnover:all segment's turnover ratios have improved.The cigarette's turnover for current year is 3.95 compared to 1.61 of Godfrey Philip India Ltd(even after paying of excise duty the turnover ratio will besignificantly higher).The paper board segment turnover for current year is .52 compared to 1.2 of Navneet Publication (India) Ltd.The food segment's turnover for current year is 2.1(increased over last 4 years) as compared to 3.34 of Nestle.This gives a strong indication that the company is utilizing its assets judiciously and the increasing turnover ratio with relatively stable asset base also points that the company will soon be as efficient as Nestle and other peers in utilizing assets.It is very important to note that the company dose not have adominant position in any food segment and hence its return in thisparticularsegment will depend a great deal on its judicious use of assets and sales effort(it has 6-6.5 million retail outlet reach!).A significant portion of the food sales is also generated from Beetle shops(unorganized retail),one can find bingo,sunfeast,candyman etc in beetle shop these days.

    ROE:The numbers and trends are staggering and speak for themselves.


    (Krishna Agrawal) #19

    Hi All,

    I think Emami Ltd has been ignore/missed by everyone here :wink:

    Like peers, atleast it deserve attention and worth discussion.


    (shrey) #20

    Hey Folk,

    The following is the snap short of Marico Ltd.Please include this too in the discussion.

    Marico Ltd.
    MARICO LTD. SALES EBITDA PAT EPA MKTCAP
    9 YR CAGR 20.72% 26.78% 23.40% 20.97% 41.51%
    5 YR CAGR 20.41% 19.57% 17.03% 11.14% 25.86%
    3 YR CAGR 23.42% 14.12% 17.00% 1.94% 32.11%
    1 YR GROWTH 27.86% 15.95% 10.71% 76.75% 24.79%
    MARICO LTD. 31-03-2012 31-03-2011 31-03-2010 31-03-2009 31-03-2008 31-03-2007 31-03-2006 31-03-2005 31-03-2004
    Financial Leverage 1.69 1.87 1.68 1.83 2.14 2.30 1.92 1.30 1.07
    Long Term Debt/Earnings 2.40 2.69 1.92 1.99 2.12 2.22 2.67 0.94 0.19
    current liability/earnings 7.00 6.20 5.69 7.18 6.09 7.66 6.89 9.00 9.76
    Total liability/Earning 9.41 8.90 7.62 9.16 8.21 9.88 9.56 9.93 9.95
    Debt/Equity 0.67 0.84 0.68 0.83 1.14 1.30 0.92 0.30 0.06
    Interest Coverage 10.48 9.40 13.11 7.85 8.04 7.57 20.29 37.40 N.A
    Working Capital/Sales 18.39% 23.38% 20.23% 17.59% 17.37% 15.20% 8.71% 12.07% 9.45%
    Debtor Days 14 8 3 4 4 7 10 6 14
    Inventory Days 17 22 21 17 17 15 16 18 14
    Cash In/Cash Out Ratio 0.15 0.14 0.13 0.10 0.10 0.11 0.13 0.11 0.12
    Gross Margin 44.60% 43.31% 49.90% 43.29% 45.97% 44.48% 45.89% 37.69% 35.24%
    EBITDA Margin 12.90% 14.22% 15.08% 13.24% 13.26% 13.36% 12.86% 8.85% 8.72%
    Net Margin 7.91% 9.14% 8.80% 7.90% 8.87% 7.25% 7.86% 6.93% 6.64%
    Capital Turns 2.51 2.02 2.91 3.15 3.14 3.71 2.55 4.03 4.76
    Fixed Asset Turns 4.68 3.81 7.08 7.06 6.89 8.49 3.28 7.84 8.65
    Total Asset Turns 2.08 1.83 2.39 2.88 2.83 3.51 2.28 3.58 4.50
    RoA 16.43% 16.76% 21.06% 22.78% 25.13% 25.46% 17.93% 24.82% 29.87%
    RoE 27.74% 31.29% 35.43% 41.62% 53.74% 58.68% 34.37% 32.33% 32.00%
    RoCE 23.33% 22.23% 30.63% 33.85% 33.03% 35.18% 20.44% 26.46% 33.09%
    RoIC 22.34% 18.00% 29.55% 30.78% 29.78% 28.62% 20.77% 27.21% 31.27%
    Tax Rate 19.85% 25.35% 20.68% 16.73% 18.49% 22.92% 9.09% 8.53% 9.67%
    • Sales and PAT growth rate: The sales growth has been very good as compared to peers and the trend too has been encouraging.But the PAT growth has decelerated probably due to operational inefficiency and increased interest cost.
    • Leverage:The company has become more leveraged(uncomfortable levels,lot of short term borrowing) over the years and the declined interest coverage ratio serves as a warning sign that the company may face problems in meeting its interest obligation in adverse conditions.
    • Liquidity:The company'sliquidity position hasdeterioratedsignificantly.It needs twice the working capital it needed 9 years ago to generate a Rupee of sales.
    • Margins,turnover and returns:The company has been able to expand its gross margin probably mainly due to increase in prices.All the margins have improved significantly.But the turnover ratios have almosthalvedover the 9 year period.The probable reasons are its asset intensive skin care business which failed to generate significant sales and other asset growth out paced sales growth by a huge margin.The return ratios have gone down significantly and probably suggest that the company is loosing its competitive advantage.The company's margins are also low by 150-200 bps due to losses in skin care business.
    • Distribution network:Marico procures one out of every 13 coconuts produced in India. Marico sells over 70 mn packs to around 130 mn people every month. Maricoâs products reach around 23 mn households through over 3.3 mn retail outlets serviced by its nation-wide distribution network comprising 4 Regional offices, 32 carrying & forwarding agents and about 3600 distributors and stockists. Maricoâs distribution network covers almost every Indian town with population over 20,000. The figures are staggering and speak for themselves!
    • The company derives ~32% of its revenue from rural India.
    • Types of Businesses: The company is mainly into the consumer products business.Though it has a few brands like Parachute,Nihar,Saffola etc that enjoy consumer monopoly and hence have considerable pricing power,it generates asignificantportion of its revenue from price competitive business and is hence vulnerable to volatility in its earnings.One of company's major segment the Hair oil (from which it draws 35-40% of total revenue) has the highest penetration of 90% in India. So,the sources of growth left for the company is through increase in per capita consumption and making rural population switch from loose oil to branded oil,these seems to be relatively tough sources of growth.The safola Oats has quickly picked up ~14% market share in the fastest growing oats market that has attained Rs 200 Crs size in just 2 years.If the company is able to become a significant market player in this segment, fortunes may smile on it.
    • The company has decided to demergeits skin care business and list it as a separate entity.This most probably will Improve its margins,turnovers and returns.