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


(Akbar Khan) #41

Hi Donald,

What makes you say they are hoarding cash? Cash on BS does not seem to have increased much. Dividend payout has reduced, but capex has increased.

Regards,

Akbar


(shrey) #42

Hey folks,

Some points worth noting about the expansion plans undertaken over last 3 years:

1.Nestl© plans to expand the production capacity of its existing factory in Ponda, Goa state, India, as part of its Rs7bn ($126m) investment in the state over the last three years.The factory extension will boost the production of Nestl©’s confectionery brands such as Kit Kat and Munch.

2.In 2011, the company opened a Rs3.6bn ($64.90m) factory in Nanjangud, Karnataka, for the production of Maggi sauces, noodles, bouillons and seasoning.

3). For the ninth plant as part of its aggressive business expansion policy in the western and eastern States by doubling capacities,Nestlehad acquired about 50 acres of land at Sanand, nearly 30 kilometres from Ahmedabadto produce confectionery products and Maggie noodles(However, the company has clarified that it has no plans, for now, to enter the dairy sector in Gujarat where Amul is in a commanding position.).The proposed investment was estimated to be about Rs 400 crore. The company had bought land at the Gujarat Industrial Development Corporation (GIDC) estate by paying Rs 1.3 crore per acre.

4.In 2012, it opened a Rs2.5bn ($45.07m) factory at Tahliwal, Himachal Pradesh state, for the production of Maggi noodles as well as chocolate and confectionery products.

5.The company is expected to launch new products this year, and according to market expectations, the Switzerland-headquartered FMCG major may launch breakfast cereals in the Indian market. This is a category where Nestle has a strong presence worldwide.

(Conclusion:The conclusion we can draw from the above facts and figures is that the company isaggressively expanding the production capacity of Food and confectionery businesses and hence is bullish on the future of these segments and probably wants to reduce its revenuedependency from Milk and Milk products.The plans of introducing its established product breakfast cereal has a highprobability of being successful because of its brand name and established distribution network.)

The facts and figures have been picked from the following articles:

Regards,

Shrey.


(shrey) #43

Hey Folks,

Doing a timeseriesanalysis of Nestle’s solvency ratios one gets a feeling that the company has become moreleveraged in the last 1 year.It has indeed, but the loan has come from Papa(its parent company Nestle S.A.):D.following are the details of the loan.

The company has drawn US$157 mn from Nestle SA for five years under the ECB approval route to fund its capex plans.it has not hedged the outstanding ECB repayment of US$157 mn.

Having an unhedged position seems logical as the Indian Currency which is now near all time high and as the economy grows the currency will most probably strengthen(highprobabilitythat the rate per dollar will be less than 54-55 per dollar).Infact the naked position has higher chances of generating profit.

Following is the source of this fact:

http://articles.economictimes.indiatimes.com/2012-05-03/news/31559120_1_nestle-india-mn-nestle-sa

Regards,

Shrey.


(shrey) #44

Hey Folks,

Here is a snapshot of distribution network and revenue split up of the above discussed companies. These might help us in assessing business potential/strategies adopted going forward.

Please have a good look and help us take these forward.

Distribution and Revenue split-up
Companies DISTRIBUTION REACH DOMESTIC REVENUE SPLIT-UP
DIRECT TOTAL RURAL URBAN
HUL >2.0 7.5 50% 50%
GSK Consumer 0.7 1.3 26-27% 73-74%
Nestle 0.8 3.7 25% 75%
Dabur 0.8 5.4 47% 53%
Marico 0.8 3.5 30% 70%
Colgate 1 4.6 35% 65%
Godrej Consumer 0.7 3 30% 70%
EMAMI N.A 3 45% 55%
ITC N.A 6-6.5 40-45% 55-60%
P&GHygiene& Healthcare 1.3 N.A N.A N.A

Source(s):HDFC Securities Report 21 Dec 2012, I-Sec Report 12 Dec 2012, Company AR and Investor Presentations

Some inference of the above data and additional information:

HUL: It has the largest distribution network and the highest rural revenue contribution among the FMCG players.It has tripled its distribution network in last 3 years.Working on further increasing the rural reach.

GSK Consumer: The company generates ~93% of its revenue from sale of Horlicks and Boost alone.These come under Health food drinkcategory,which is consumed on theconsumptiontheme of being healthy. So,its obvious that it is consumed more by people who live in urban areas. Still the company is focusing on expanding its distribution network in Rural areas.The company is targeting an incremental reach of ~10000 villages,this will take the total tally to ~50000 villages.The sachets of 18 grams (Rs.5/-) intended to make the productaccessible for low income stratum has grown at a robust ~45%,this initiative has contributed an incremental revenue of Rs.75 Cr to top line.The company has strong hold in south and east India and is planning to increase its presence in west and north India.

Nestle:The company's products Portfolio comprises of Beverages, Milk and Milk products(including infant food solutions),confectioneries and prepared food products.The company in its recent analyst meet presentation has made clear its strategy of premiumisation,which implies that it is more keen to sell products to urban crowd. However itsConfectionery and small SKUs of processed food generates decent revenue from the rural areas. It has areasonable distribution reach and it is growing it at 12% per annum.

Dabur: It has a good distribution reach and generates significant portion of its domestic revenue from rural India. It has recently taken steps to double its rural reach under a project called "project double".The company plans to increase its direct reach to 27000 villages with more than 3000 people this year.The company has made an effort to improve its marketing by separating products into 2categories 1.Those operating in large urban markets requiring exclusive focus and 2.Those meant for small towns and rural markets requiringintegratedsales force.

MARICO: It is focused on expanding its rural network and rural revenue contribution.The company claims that its products are used by 1 out of every 3 Indians.

Colgate: The company has a strong distribution network. A look at the penetration of toothpaste(`85% revenue contributor) in rural areas gives a strong indication that the company's rural revenue contribution is good.

GCPL:Integrationwith home care portfolio added distribution reach synergy for the company.

Emami: It has a decent distribution network (especially in East India) and generates a significant revenue from rural India. It initiated a project called "swadesh", targeting towns and villages with population less than 50000.The company claims to be selling 85 products every second!

ITC: The retail network is far stronger than it looks, as the company generates maximum revenue from unorganized retail. ITC not only sells cigarettes through the Beetel shops but alsoconfectioneries, biscuits, snacks, Match boxes, Agarbattis and a lot more. In factit has the most established distribution network.This gives it the additional freedom toaudaciouslyallocate capital.The company generates a significant portion of its revenue from rural India.

P&GHygiene & Healthcare: The company has a very basic distribution network,with the structure as follows manufacturer to marketing agents (state wise) to retailer/whole seller/distributorto chemist shops/retail outlets etc.Where HUL has multiple marketing agents in districts and even in Important cities, the company has 1 marketing agent per state. The company has to work a lot to strengthen/optimize its distribution network. Over the past couple of years, P&G has doubled its distribution network with a direct reach to 1.3 million outlets.


(Donald Francis) #45

Thanks Shrey. This is very good data you have pointed us to.

I think we can go further in our quest if we bring in additional data points for

1). Category Penetration - like for Soaps, Biscuits, Noodles, Health Food Drinks, Snacks, Hair Oil, etc

2). Category split - rural/urban - and Companies likely to benefit most

3). Growth Categories (showing CAGR of categories and food vs Non-food, etc)

4). Competition Intensity - map each category & consequently the company to the competition intensity level in its key product segments

5). Incremental capacity put up in recent years (Capex+Capital work in progress ~~Units capacity increase)

6). Other factors like category affinity for Modern trade, etc (may not be that significant a factor)

Historical Performance data (which we already have) already points us to sort of categorise these companies in a few slots. Similarly the above data points will point the way to next 2-3-5 years potential for growth. Together I am getting convinced we may have a good FMCG map finally!

That’s the beauty with Large Caps - you are never short of data points. Institutional research helps you come upto speed very very quickly. But our interpretation of the mix of these 2 things - Historical & Future Potential - is already pointing us to some conclusions - different from the Consensus:)

Thanks again for your sustained efforts. Good value-additive work.


(Hitesh Patel) #46

Thanks donald and shrey for all the efforts you have been putting up.

I think the most interesting company in this exercise comes out to be ITC with its range of products and distribution might. What I am most impressed about the company is that in the fmcg category, it has started invading the moats of other established players in a very serious manner and has started denting the moats.

e.g HUL – ITC has tackled the soaps and shampoos category very effectively through its vivel and fiama range of products and products extensions.

Britannia – Here ITC is providing stiff competition to the established Britannia with its Sunfeast brand of biscuits. In fact the biscuits brand Sunfeast now is being extended to noodles with Sunfeast Yipee range – they also try to differentiate their products from Maggi brand trying to establish that their noodles can be eaten even after they are cold and dont stick together forming a goo like thing.

In the aata category, they have started establishing themselves with the aashirwad brand.

There might be more moats they might be invading which I might be forgetting.

And with their distribution might and cash flows from cigarette business, they can invade more moats to achieve the complete range of fmcg products.

The other company that comes out different and successful is emami – their strategy is to fill in gaps in products and establish their products in that range. They are quite innovative and seem to be quite successful at what they are doing.

Dabur with its project double seems to be interesting to watch. It also has an enviable range of products and good distribution reach.

Would be interesting to look at the picks that come out through the excellent scientific method you guys are following.


(shrey) #47

Hey Folks,

The following is the market size,penetration and growth rate data.This can serve as the first base of a top-down methodology and give us an idea about the potentialopportunity sizeand an estimate of the growth rates.The next step would befollowing this up with Companies most affected,having competition intensity, the capacityadditionmaps,well positioned to take advantage of the opportunity etc.Please help me take this work forward through active participation.Over to you guys. :)

Market size,Penetration and growth rates
MARKET SIZE PENETRATION CAGR (2005-2010)
Rural Urban India VOLUME VALUE
FMCG size (Rs Cr) Year 2010 119000 18%
Biscuits 9.50% 11305 50-65% 90% 65-70% 12-15% 25%
Toilet soaps 7.20% 8568 90% 95% 92% 12%
Refined edible oils 7.00% 8330
Washing powders/liquids 6.00% 7140 86% 92% 88% 15%
Packaged tea 5.20% 6188
Skin creams 4.00% 4760 20% 35% 28% 23%
Namkins 3.70% 4403
Detergent cakes/bars 3.60% 4284 85% 90% 87% 4% 15%
Tooth pastes 3.00% 3570 42% 77% 53% 10% 13%
Health food Drinks 2.52% 3000 11% 40% 25% 8% 17%
Hair oils Pktp 2.50% 2975 90% 95% 92% 22%
Shampoos 2.40% 2856 43% 62% 50% 18%
Beverages 2.20% 2618
Chocolate 2.10% 2499 10.5%
All Iodised salt 1.90% 2261
Noodles 1.34% 1600 11% 24%
Sanitary napkin 0.92% 1100 20% 24%
Source:HDFC Securities Report 21 Dec 2012, I-Sec Report 12 Dec 2012, Company AR and economic times articles

This is what I could collect so far from various reports and news articles for the top 16-17 categories. The penetration, volume and value growth figures are yet to be filled-in completely. We are looking for authentic sources. If anyone has access to Nielson data or other reports that cite such data kindly point to that/help.


(Manish Vachhani) #48

Excellent work! Thanks for all the efforts Shrey.


(Vimal Dixit) #49

Yes Shrey…just excellent work, thanks


(Supratik) #50

Excellent Shrey…you proved yourself the best again.

If anybody can add info as organized/unorganized in the data, that might be good. Let us assume that people might try unorganized local biscuit but might not take chance with unbranded hair oil or skin cream…kind or thought


(Ayush Mittal) #51

Fantastic value addition being done. Good to see work being done on the drivers of the business in these biggies. Lets try to focus on future and see if there are any mismatch in valuation vs expected growth in some of these top quality cos.

Ayush


(Donald Francis) #52
FMCG Decoding Part I: Hindustan Unilever Ltd.
FMCG Decoding I Historical Performance Observation Inferences
Hindustan Unilever Limited We all know that HUL lost its way in the last decade, but has started making somewhat of a recovery. We know it as a me-too FMCG player with no real dominance/pricing power; though it has some premium products, Competition intensity changed drastically since 2002/3 and currently very high
Income Statement & Cash Flows Sales & Profits 10 Yr CAGR: Sales 10% PAT 5%; Currently Sales growing 12%, PAT 17% Signs of turning around: hinges on rural growth?
Gross Margin 67-68% in 2002-2003; 2004 onwards GM has been in 43-46% range; possibly with the change in competition intensity
Cash Flows Decent; Cash Flows correlate with PAT closely
Balance Sheet Debt Long Term Debt zero/negligible over the years
Plant & Machinery Long term average 67% of Assets; Currently at 67%
Working Capital High negative working capital (~37% of Assets, 5% of Sales) Source of competitive advantage and super high RoIC
Investments Long term average 64% of Assets; Currently at 69% ?
Addition to Networth FY12 Networth 3512 Cr vs 3658 Cr 10 years back; negative net addition over the long term Business generates enough cash; Mgmt envisages no need to leverage balance sheet??
Profitability Invested Capital, RoIC, EPA High size of Invested Capital (1100 Cr) along with the highest RoIC (235%, usually over 110%). Consequently it generates the Highest Economic Profit Added (EPA) every year by far. A fact probably not so well-known about HUL?
Return on Incremental Networth 10 Yr Return on Incremental Networth is unflattering ~ 23% Due to very low PAT CAGR
Market Returns Dividend Payout Long term average highest at 76%; Currently at 60%;
Dividend growth 10 yr CAGR is a poor 3%; Currently at 15%; Signs of turning around: hinges on rural growth?
Total Returns growth 10 yr CAGR poor at 7%; Current growth 30% Signs of turning around: hinges on rural growth?
Key Variant Rural Distribution reach The largest reach among FMCG companies; emphasis on increasing rural distribution having tripled that in last 3 years India FMCG growth is currently fuelled by rural market growth; HUL is in a position to exploit its reach
Capital Allocation Soaps & Detergents OPM 12%, Rev share 48%, EBIT share 37%: Capex share 32%
Personal Care OPM 26%, Rev share 31%, EBIT share 52%: Capex share 28%
Beverages OPM 14%, Rev share 12%, EBIT share 11%: Capex share 15%
Packaged Foods OPM 2%, Rev share 6%, EBIT share 1%: Capex share 24%
Predictability/ Longevity Product Segments Soaps & Detergents, Personal Care, Beverages, Packaged Foods Earnings Longevity/Predictability over next 10 years is not unquestionable. Significant risks exist.
Product Choice/Indispensability Abundant choice; None of the products fall under âcant do without categoryâ
Competition Intensity Very High
Key Risks / Monitorables Margin Pressures Competition in coming years could intensify with P&G & ITC attacking more of HUL's home turf segments
Hindustan-Unilever.xlsx (77.8 KB)

(Donald Francis) #53
FMCG Decoding Part I: Nestle India
FMCG Decoding I Historical Performance Observation Inferences
Nestle India Nestl© enjoys leadership position in its core categories like baby foods, instant noodles, and instant coffee. Backed by strong parent support Nestle India (Nestle) is probably the best play on Indian processed food industry, which is on a high growth trajectory with multiple growth drivers in place, including low penetration levels, rising income levels, urbanisation, and changing lifestyle.
Income Statement & Cash Flows Sales & Profits 10Yr CAGR: Sales 16%, PAT 19%; 5Yr : Sales 21%, PAT 23%; Current Yr: Sales 11%, PAT 6% Growth in last 2 years led by price hikes; Volume growth expected to kick in from CY13 with enhanced capacities
Gross Margins long term 50-56%; last 5 years 50-52% range; currently 51%
Cash Flows long term 15% CAGR; Cash Flows closely follow PAT
Balance Sheet Debt Generally Long term debt zero/negligible; current year d/e at 0.76
Plant & Machinery Long term average 125% of Assets; currently 133% of Assets financed partly by negative working capital?
Working Capital Hugely negative & improving working capital situation; long term average -65% of Assets; currently -39% (looks lower because of the sizeable debt in 2011) One big source of competitive advantage and sustainability of high RoIC
Investments Long term average 21% of Assets; currently 6% of Assets
Addition to Networth 10 Yr CAGR at 18%; 5 Yr 32%; pace has increased in last 2-3 years at 48% for financing accelerated Capex in last 3 years
Profitability Invested Capital, RoIC, EPA Invested Capital has gone up several folds in last 5 years; from ~320 Cr to over 2500 Cr currently; Net Fixed Assets have jumped over 3x in last 2 yrs at ~3500 Cr; With bulk of Capex over, RoIC should gradually revert to long term averages ~112%; With higher levels of Invested Capital, EPA generated will be higher Clearly Nestle India is investing for the future; Opening of a global R&D centre in India is another indicator of commitment & confidence of tapping India's huge consumer base
Return on Incremental Networth Impressive 10Yr incremental Return ~74% Taken together with Networth CAGR, Indicative of ability to use higher capital at high returns
Market Returns Dividend Payout Long term average 74%; currently 49% Dividend Payouts expected to revert to normal levels with bulk Capex getting over; this should enhance Total Returns
Dividend growth 10 yr CAGR at 12%; has been flat last 3 years â in line with financing needs of higher Capex
Total Returns growth 10 Yr CAGR: Market Cap 25%, Total Returns 25%; much improved in last 3 years
Key Variant Moga Milk District 1+ million litres/day; ~50000 farmers; Better quality & better price for both the farmer & Nestl© Another huge source of competitive advantage for the dominant Milk products division, as demand for milk outstrips its supply by a wide margin.
Capital Allocation Milk Products and Nutrition EBIT breakups or Capex breakups per product segments not provided by Company; Considered as Food Segment overall. AR 2012 capacity data is awaited; but as per media reports bulk of the Capex additions in 2011 & 2012 have been in expanding Noodles & Confectioneries
Prepared dishes and cooking aids
Beverages
Chocolate and confectioneries
Predictability/ Longevity Product Segments Milk Products and Nutrition (44%), Prepared dishes and cooking aids (28%), Beverages (14%), Chocolates & Confectioneries (14%) of Sales High pricing power on account of strong brand equity aids Nestle in fighting margin pressure; Undisputed leader (market share in excess of 70%) in baby food market. Further, entry of new players in this space has been restricted by ban on
advertisement of baby food products (which makes it difficult for new entrants to market their products).
Product Choice/Indispensability No. 1 in Dairy Whitener, No. 1 in Baby Food, No. 1 in Infant Formula; No. 1 in Instant Noodles, Sauces & Pasta, No. 2 in Soups; No 1 in Instant Coffee
Competition Intensity Dominance in Noodles, Sauces & Pasta under threat. GSK Consumer, ITC and HUL entered the noodles category in select markets and this could increase the ad spend for Nestl©. ITC Sunfeast Yippee! Reportedly has garnered 10% plus market share in the instant noodles business.
Key Risks / Monitorables Increasing Competition Intensity; RM prices The 2nd biggest and the fastest growing segment - Prepared dishes â last 5 years CAGR 29%(Noodles constitutes 75% of this segment), Sauce, Pasta) is proving vulnerable to competition; Also Sharp rise in the prices of its key inputs such as milk, wheat flour, edible oils, and sugar could impact margins adversely Competitors like ITC may have better RM sourcing capabilities in this segment; Segment is expected to grow fast â changing lifestyle+new launches; Competition may remain rational?
Nestle-India.xlsx (80.4 KB)

(Manish Vachhani) #54

Donald,

For HUL, the royalty to the parent Unilever-UK is going to be hiked in staggered manner in the next three years. Thecurrent royalty is 2.5% of sales which is going to be hiked to 4%(please do re-check the exact figures).


(Donald Francis) #55

Hi Manish,

Thanks for the pointer.

Please note for our purposes, we always use Consolidated figures. Royalty outgo for HUL in 2012 at 307 Cr is 1.39 % of Sales (same as in 2011) and double that of 2010.

Even as this goes up, it is not that significant when you compare with MNC peers. Nestle 3.44%, and I would argue that is justified considering strong parent portfolio & support. Colgate at 5.24% and GSK at 3.37% of Sales. HUL may be is only catching up:)

Please keep questioning the data thrown up. It helps us look more closely and refine the thinking process.

-Donald


(Manish Vachhani) #56

Donald,

It was not included in the table anywhere so I thought of pointing to this increase in royatly(although I do not remember the exact increase in %age of sales). It may not be significant but still it has to be included in the calculations for future projections.


(Donald Francis) #57

The calculations are there in the HUL spreadsheet attached with the table (in the same post). The Cost Analysis sheet has all the heads and common size expenses including Royalty fees. Please download and have a look at the details.

The idea of the table is to summarise the significant things that help to separate one player from another - the Men from the Boys.When convinced at the high level, one can go into as much details as one wants, or is needed.


(HG) #58

Not sure how this plays in to the HUL analysis but HUL seems to be selling a lot of their residential properties in South/Central Mumbai. I must have counted about 20 odd flats till now. Maybe they are buying in the suburbs. Also saw an ad today about the sale of HUL land near Hyderabad.


(Donald Francis) #59

Yes HG.

I have also noticed that HUL has been disposing of non-core prime properties. There was a sizeable property in Bangalore, erstwhile Brook Bond (acquired by HUL) Corp HQ I think, which they disposed of 4 years back.

Dunno, if these are of any significance, as you say:)

-Donald


(shrey) #60
FMCG Decoding Part I: Colgate Palmolive Ltd.
FMCG Decoding Colgate Observation Inferences
Colgate enjoys leadership position in Oral care segment.Toothpaste(~55%),Toothpowder(~38%) & Tooth Brush(~36%).Its parent Colgate-Palmolive which holds 51% stake is world market leader in oral care.The company not only provides itâs the technical know-how but also provides able and efficient mangers to guide the company,when ever the need arises.
Income Statement & Cash Flows Sales & Profits 10Yr CAGR:Sales 11.4%, EBIT 15.85%, PAT 19.7%; 3Yr CAGR: Sales 15.5%,EBIT 11%,PAT 3%; Current Sales 17.66%, EBIT 12.8%, PAT 10.9%.The probable reasons for the decline in recent profits are higher effective tax rate which doubled in FY11 to 28% and again increased marginally in FY12 to 32% as the major tax incentive in Baddi plant has perished,Significant increase in freight and distribution expense at 21% CAGR,it has gone up from 1.61% in FY03 of sales to 3.3% in FY12 and significant increase in royalty at a CAGR of 33.5%,it has gone up from 1.03% of sales to 5.24% over the sale period. The significant increase in taxes was due to lower deduction under income tax regulation on profit from plant in H.P.The underlying economies of the business have not changed much and as the company derives synergy from its newly acquired factories and as the new facilities become functional the picture too is expected to improve.The company has almost consistently improved its gross margin over the years,this can probably be attributed to the premumisation,pricing power and backward intigration in manufacturing of Dicalcium Phosphate.
Cash Flows long term 9.65% CAGR; Cash flow growth rate approx. half of PAT growth.
Gross Margin long term average ~58%;has followed an uptrend;currently 66.75%
Balance Sheet Debt Has no long term debt and very little short term debt
Plant & Machinery Long term average 63.41% of Assets; currently 58.43% of Assets;~16% in CWIP suppose to be in operating condition from 2013 beginning A significant portion of assets are to be operational in this year as the two plants become functional.
Working Capital The working capital position has worsened over the years.Long term average -4.1% and currently 14.81% The working capital condition has marginally detoriated,the company has increased its inventory and debtors far faster than increase in sales and creditors in the recent years.
Investments Long term average 33.71% of Assets; currently 10.82% of Assets
Addition to Networth 10 Yr CAGR at 5.24%; 3 Yr 15%; pace has increased in last 3 years The company has not increased its Net Worth at a very high rate over the long haul because of its high payout ratio. This is a positive indication that the company's underlying economies are such that it needs very little capital to run the business and keep growing significantly.
Profitability Invested Capital, RoIC, EPA Invested capital has nearly doubled in last 10 years;Net Fixed assets has gone up 1.6 times in last 10 years. A significant amount of assets are in CWIP,Which are supoosed to become functional in 2013 (Two plants in Gujrat and Sri City A.P). With most of the CAPEX already done,the company's ROIC which is already showing signs of improvement may further improve.
Return on Incremental Networth Impressive 10Yr incremental Return ~55.54% This taken along with growth rate in net worth implies that the company has the ability to grow its earning power with minimal retention and the fact that the company is generating above average incremental returns with the retained funds.
Market Returns Dividend Payout 10Yr average 76.31%, 3 Yr average 62% and currently at 60.23% The company's management has shown willing to share the profits when ever it didn't have profitable investment opportunities.In the recent past dividend growth has decelerated as the company has been retaining higher amounts to fund CAPEX. The most important thing to note is the fact that it has financed its expansions through internal funds. In the years to come the company is expected to have high dividend pay out as most of the CAPEX is done. This will boost the Total Return.
Dividend growth 10 Yr CAGR at 21.8%,has decelerated in last 3 years with lower PAT growth and higher retention to fund recent expansions.
Total Returns growth 10 Yr CAGR:Market Cap 24.90%, Total Return 24.81%; Last 1 year 20%
Predictability/ Longevity Product Segments 90% of revenue from oral care,out of which ~85% comes from Sales of Toothpaste.
Product Choice/Indispensability It is the market leader with a market share of ~55% in Toothpaste,~38% in Toothpowder & ~36% Tooth Brush. It has been among the most trusted brands for a long time,is price inelastic,the product developes a habit and then becomes a necessity over time,demand reoccurs in nearly a month (assuming 100grams pack for toothpaste & toothpowder).In short it owns a consumers monopoly.
Competition Intensity The Oral care segment though dominated by 3-4 major players has become increasingly competitive because of product differentiation/premiumisation attempts by leading players. Niche sub segments have been built like herbal, gel, sensitive etc. The threat of P&G entering with its brand Crest has been the talk of the town of late. But looking at other markets where both the brands co-exist one can say that Colgate has successfully managed to retain market leadership. Moreover in a country like India it has the first movers advantage. Another significant aspect is the nature of competition - all the leading players compete with each other on basis of uniqueness not price. As long as the competition is based on any other factor than price, it is beneficial for the industry as it does not drain away profits.
Capital Allocation EBIT breakups or Capex breakups per product segments not provided by Company; Considered as oral care segment.However,the company has focused on its core business of oral care and has come up with three new facility in last 10 years,has expanded exsisting capacity,has gone for backward integration, has acquired 4 Oral care companies. The company is investing back in its core business,which forms 90% of the revenue.The above average return ratios are an indication that the core business is highly profitable.This coupled with underpenetration,very low per capital usage,construction of new factories in tax hevens and strategic location of factories give an impression that the company's capital allocation is highly rational.
Capital Intensity Capex/Net profits The company has barely spent 18.5% of its PAT as CAPEX in the last 10 years and if we remove the expansion and acquisition CAPEX it has spent 13%. What makes it stand out is the fact that over this period it has built 3 new facilities and acquired 4 local companies. The maintenance figure is even more staggering, the company barely needs Capital to run the existing business.
Efficiency Working capital efficiency The inventory days have gone up significantly to 76 compared to an average of 54 and even the debtor days have increased to 11 compared to an average of 6,debtor days remained 2 days between FY07 and FY10.The creditor days is in line with the average,but has declined by almost a month to 153 days from FY09 level. reasons??
Fixed asset efficiency The fixed asset turover has improved from 6.52 in FY03 to 10.57 in FY12.In the same period capital turns has improved from 5.92 to 6.92. The company has taken significant steps to improve operational efficiency,most important of which is promptly shutting down factories that either had excess capacity or produced products in which the company didn't see much potential.(has shut down 4 in the last decade).
Key Variant Dicalcium Phosphate manufacturing It has a dicalcium phosphate manufacturing facility in Aurangabad. a key ingredient in toothpaste, this reduces its cost of production by 20% and Long term packaging agreement with Essel Propack Ltd near its Goa plant in 2011 and its immidiate effect is evedent in roughly 5 percentage points decline in raw material cost. This advantage is clearly evident as in the last 10 year the Raw material price has increased by barely 6.24%, when other operating expenses have increased by 15.47%.The raw material cost as a percentage of sales has come down from 51% in FY03 to 33.25% in FY12.This serves as necessary if not sufficient proof of the raw material competitive advantage.
Key Risks / Monitorables Increasing Competition Intensity; RM prices Domestic competition from HUL, Dabur, GSK and expected entry of P&G'S Crest. Rise in Sorbitol price. The existing competitors especially HUL succeeded in garnering significant portion of Colgate's market share in the beginning of the decade through product differentiation. The company realized this and introduced differentiated products and has gained a portion of its lost market share. Meanwhile, Dabur, Vicco etc. have been successful in making niche segments. The entry of P&G is a potential risk, which most probably will cause short term blips. The price volatility of Sorbitol which is another major raw material for toothpaste is a key risk too.