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


(ranvir dehal) #243

New product launch from Nestle…

I personally feel that this is a timely launch. This market ( instant tea mix ) is virtually competition free ( only other player, I know of is Wagh Bakri instant tea mix )…and the market for this kind of product ( if it clicks ) can be huge.

Disc: invested in Nestle India


(Bheeshma Sanghani, PhD) #244

Colgate has done well over the past and prices recently broke out into a lifetime high. While i have articulated the thesis as best as i could, Patanjali is the best thing to have happened to colgate because it expanded a category that was nascent and required a lot of investments & know-how. These are things that colgate & others were struggling with and Pantanjali gave them a template.

Colgate also has a very effective “funding for growth” program running globally since the last 5-6 years which focuses on extracting efficiencies in the supply chain. One could google to find more about the program.

Best
Bheeshma
Disc - Invested in Colgate and no trades in the last 1 year.


(Kamal) #245

adding my 2 cents, in general, FMCG category --a business with general purpose products with mass consumption will rarely trade at comfortable PE multiples, and when that happens it is for a very short duration. These are certainly best buy from a long-term perspective.

MNCs in FMCG comes with a lot of experience in dealing with the Global consumer base and are very competitive, and can manage to fight a fierce battle to retain market share and to stay relevant.

Disclosure: Views may be biased; Invested in FMCG businesses; no trades in last 2 years.


#246

I, never looked at ITC seriously. Surprised to know it generates profits more than twice that of HUL and yet both are valued similar. Cash rich cigarette business funding other diversified lines of business is what is not liked by investors. But, plain vanilla numbers are staggering. At 29 PE this looks a value buy. Incase Hotel, paper or FMCG business shows a faster growth, then rerating can happen big time.


(Shailesh) #247

Unlike HUL , ITC believes in owning assets - Large sized factories ( with huge land parcels ) , Branch / Head Offices , employee housing , hotels etc. All these assets are @ historic valuation and if we try to assess their market value it will be very high may be several thousands of crores …

In period 2003 - 2013) when HUL was going through tough times - it shored up profits by selling its marquee properties in South Mumbai and other places … So the real estate component in HUL has reduced …It helped HUL to improve its ROCE…

That is big difference between two companies … Now is it good or bad only time will tell …

Currently ITC believes it gives them better return than liquid funds and reduces variable cost esp office space rent , employee housing ( HRA reimbursement ) in long run …

Now should ITC get higher multiple than HUL …

The answer is No becos of Regulatory Risk of tobacco

What can change the story –

  1. Faster growth in other FMCG business - Foods , Personal care etc ,
  2. Strategic partner/ Listing of Hotel Business - 30000 crores
  3. Listing of ITC Infotech Business - 15000 - 25000 crores
  4. Listing of Paper boards / Speciality paper + Paper packaging- 15000- 20000 crores
  5. Listing Agri Business ( one of largest exporter of coffee, wheat , tobacco , soyabean , rice ) etc + Diary , wheat , maida processor - Rs 30000 - 50000 crores or more …
  6. Listing Retail Wills Lifestyle stores -

That will leave ITC with

  1. Cig business - 14000/ 15000 crore profits valued at 18 PE - Rs 270000 crores
  2. Market leading & profitable Atta & spices & ready to eat Business - 10000 crores ( 2X Brand sales Turnover )
  3. Strong player in Biscuit / Snacks/ Noodles + profitable business - 20000 crores ( 3 X Brand sales turnover )
  4. Children centric business - Class mate etc - 3000 crores ( 3 X Turnover )
  5. Puja / Religious ceremonies related business - 1000 crores ( 2X Turnover )
  6. Strong player personal care - Engage deos - 500 crores

Finally loss making personal care brands like Vivel , Juices , Ghee , Fiama , Chocolates , Coffee and may other @ Zero crores …

If you account for all you will see ITC is @ fair valuation with current structure and valuation may increase by 25% to 30% with listing of some of non core business


#248

What analysis man… Just curious have you been an employee of ITC ever…

Now most of the positive triggers that you mentioned are demerger or listing of subsidiaries which we minority shareholders have no control. So doesnot it make a HOPE based investing…what should interest us is rather growth in these lines of business organically. Cig business commanding 80% revenue will not do any good for PE rerating… If it comes down to say 60% in next 5 odd years, then we can expect a 50 PE x 2EPS =3 times share price growth. Just my 2 cents.

I indeed feel sad that with so good free cash from cig business and massive distribution channel network, ITC should be able to wipe out other small Fmcg players like Patanjali or emami or Marico etc. No offence to the investors of these companies… Just putting myself in ITC management shoes.

Disc. Not invested in ITC. But interested esp valuations aspect.


(Shailesh) #249

Thanks

You are right we cannot go with Hope investing - hence current valuation is @ fair level .

Cig is @ 50% revenue contribution level and not 80% revenue , but profits still is primarily from Cig . This is becos other FMCG , hotels , paper board etc are in growth stage and hence @ different level of maturity.

ITC has two option from free cash flows - One to distribute as dividends and another is to build Indian Brands … It has chosen to follow Path No 2 … This may go on till 2030 as per management discussions in public …

Now wiping out other FMCG companies does not makes sense … as opportunity size of building products is huge …

ITC entered late in FMCG space post 2000 while most others were present right into 1990s and unfortunately ITC entered into many categories ( same mistake has been done by Patanjali ) . Now under new management it is zeroing on focus … Hope that works …

Discl … Invested in ITC since 2009 … Made my first big money through this stock …


(Investor_No_1) #250

It is one thing to use perennial cash flow of cigarette business & distribution to enter multiple categories in FMCG and other thing to use every penny generated by profits to grow distribution, enter categories slowly, innovate etc. Maybe the perennial cashflow is the reason why ITC is not able to prosper as much in FMCG as it should have. A rich parent may not always have the brightest and most successful son :slight_smile: Having said that I respect and use the products of both ITC, Marico etc.

Disc: Invested in ITC, Marico and few other FMCG Indian companies


(Investor_No_1) #251

Completely agree on above points. Good to see you are having long term conviction in ITC. Have you sold any percent since 2009? I hold ITC in small quantity since few years but evaluate from time to time if I should increase allocation. If ITC lists all its other business then holding company discount will come into picture. Also, in such cases, for minority investors, is a demerger better or IPO of its subsidiaries?


(Shailesh) #252

Actually l was too concentrated in FMCG stocks around 2012/13 so I reduced it in 2012/13 and invested in other sectors . I have put across why I did so in my thread BULL in BEAR Market.

But I still hold over 7% of PF in FMCG stocks and ITC forms chunk of it …