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

biju_john · March 10, 2013, 4:11am

i was wondering what would be a right price/valuation to pay for these stocks,

these companies may be right for a DCF kind of valuation.Found this formulae in The inteliigent investor by Benjamin Graham.The formulae i think is dependent on the interest rates.

ideal p/e= 8.5+2g

g is the long term or 10 year growth rate

and so if we predict a 10 year growth rate of 10% cagr in eps,ideal p/e would be 28.5,i know that’s not correct for the indian situation,but there must be a way to simplify it for indian condition(with high int rate),without getting into complex dcf calculations.

Donald · March 14, 2013, 12:45pm

And finally the snapshot for GSK Consumer - sorry for the delay, tied up in a few things!

If anyone has any insights about the high levels of CASH, would like to be educated. Seems like this is in marked contrast to its own operating model even 5 years back (before CY07) and to those of its FMCG peers. Merits/De-merits of the same?

FMCG Decoding Part I: GSK Consumer & Healthcare

FMCG Decoding I	Historical Performance	Observation	Inferences
GSK Consumer & Healthcare	GSK Consumer is the largest player in the Indian health drink market, with a 65% plus market share. Limited competition from Cadbury (Bournvita) and Heinz (Complan). The Health drinks segment contributes 94% currently. Management intends to increase non-health drinks segment to 15% over next 3 years.
Income Statement & Cash Flows	Sales & Profits	10Yr CAGR: Sales 15.5% PAT 17%; 5Yr Sale 20.5% PAT 21.5%; Current yr Sales 14% PAT 23%
	Gross Margins	long term 60-66%; last 5 years 60-64% range; currently 61%
	Cash Flows	Long Term 11% CAGR; Cash Flows closely follow PAT
Balance Sheet	Debt	Consistently NIL	High levels of Cash (over 15% of WC) is what distinguishes GSK's operating model today, from other FMCG players. Incidentally this pattern is seen from last 5 years â ever since it has been on a higher growth trajectory (cagr 20% vs cagr 13% of earlier 5 years). Incremental Networth is driven only by higher Working Capital â is that preferable in a business?
	Plant & Machinery	Long term average 47% of Assets; currently 33% of Assets
	Working Capital	GSK does not have negative working capital like other FMCG peers. Working capital forms a very high percentage of Assets ~70% for last 4 years; long term average 44%; Working Cap/Sales is a hefty 28%; Surprisingly CASH accounts for over 15% of Working Capital
	Investments	NIL in last 4 years
	Addition to Networth	10Yr CAGR is just 10%; 5yr CAGR at 15%
Profitability	Invested Capital, RoIC, EPA	Fixed Assets haven't increased over the last 10 years (~390 Cr levels); Working Capital has gone up 9x in last 10 years. Consequently Invested Capital is up 2.5x from 10 years back levels at ~1100 Cr levels. RoIC at 32% while good, pales in comparison to other FMCG peers	Only a consequence of higher Working Capital â and in this case â CASH!
Profitability	Return on Incremental Networth	10Yr incremental return ~35% ; half of Nestle's levels
Market Returns	Dividend Payout	Long term average 40%; currently 37%
	Dividend growth	Long term at 19% CAGR; 5 yr CAGR at 30% plus; but reduced dividends in 2011
	Total Returns growth	10 yr CAGR at 23%; 5 yr at 40% plus
Key Variant	Cross-selling through GSK Pharma	Significant opportunity as Chemist Sales comprise 30% of Health Food Drinks industry
Capital Allocation		EBIT breakups or Capex breakups per product segments not provided by Company;
Predictability/ Longevity	Product Segments	Malted Foods (Health Drinks), Biscuits, Noodles, Oats; 94% from Malted Foods, 6% from others	Long Term growth drivers exist. Penetration of Health Drinks in India is less than 25%. Urban India is about 40% while rural India is less than 11%. Management seems focused on increasing share in North & West markets
	Product Choice/Indispensability	A dominant 75% market share in South and East India; 35% in North and 25% in West; overall 65% market share
	Competition Intensity	Currently faces limited competition from Cadbury (Kraft) and Heinz. Nestle, HUL & Dabur have tried but exited this segment (or are dormant).
Key Risks / Monitorables	Raw Material	Milk and milk products form more than 50% of the total raw material costs for the company and any steep increase in milk prices should impact company's margins directly

GlaxoSmithKline-Consumer-Healthcare.xlsx (74.1 KB)

Donald · March 14, 2013, 12:54pm

Shrey,

As discussed. If you can finish off PGHH in similar format, I think we would have done enough of historical performance analysis for this sector. We can quickly look at data for other homegrown contenders like Dabur & Emami and close this Part I and move to FMCG Decoding Part II -mapping future growth potential for next 2-3-5 years. Like we mentioned before, that should enable us to create a good workable model for - separating the Men from the FMCG Boys!

-Donald

shrey · March 14, 2013, 7:21pm

FMCG Decoding Part I:Procter & Gamble Hygiene and Health Care Limited

FMCG Decoding	P&G Hygiene & Healthcare Ltd.	Observation	Inferences
	P&G owns 69% of the company.Procter & Gamble Hygiene and Health Care Limited is engaged in the manufacturing and selling of branded packaged fast moving consumer goods in the femcare and healthcare businesses and is the market leader in both.
Income Statement & Cash Flows	Sales & Profits	Sale CAGR 5 yr: 19.14%;3 yr: 20% & currently: 29.6%;PAT CAGR 5 yr: 8.37%;3 yr: 0.42% & currently: 20.16%.There has been decline in profit margins and growth in profits in the last 3 years.In June 10 the profit barely increased from last year due to increase in advertising & sales promotion cost, unexpected levy of excise duty(1.53% of gross sales as compared to .13% last year)(only last quarter) and start up expense of a new manufacturing line.In June 11 the profit declined by 16% due to increased raw material cost(jump of 8% poins),unexpected levy of excise duty(3.57% of gross sales)(for 9 months) and increased advertising and sales promotional cost.In june 12 the senario improved but the raw matirial cost increased by 3% points.	Sales have accelerated,but profits have not followed the trend.The reasons are price reduction to boost sales in rural areas,high raw material cost(which is manily because of introduction of Whisper Choice Ultra(has gel locking technology) in feb10,it was introduced at a price of Rs.30 for a pack of 6),high excise duty in FY10,high promotion expense in promoting mainly Whisper Choice Ultra and set up cost for new manufacturing lines in Goa factory.The gross margin has declined over the years because of price reduction done to boost sales and large increase in raw material cost as compared to increase in sales,due to strategic low pricing of Whisper Choice Ultra.
	Cash Flows	5 yr CAGR 8.04% in line with PAT growth rate.The cash flow has not followed PAT Trend and has varied widely in last 3 years,but it has remained historically close to PAT and the current picture also is no different.
	Gross Margin	Has followed a persistant declining trend,it has declined from 71.62% in June 07 to 57.83% in June 07.
Balance Sheet	Debt	Has no long term debt and very little short term debt
	Plant & Machinery	Long term average 30% of Assets; currently 28.46% of Assets.	The company has a realtively small % of assets as fixed assets.
	Working Capital	Long term average 64.55% of Assets; currently 67.4% of Assets.The company has always maintained a current ratio above 2 in last 5 years.	The working capital is really high as a % of assets in absolute terms and it has increased as % of assets over the years.The day to day operations of the company is highly capital intensive.
	Investments	The company has no investments.
	Addition to Networth	5 Yr CAGR at 19.08%; 3 Yr 14.18%; pace has decreased in last 3 years.	The pace at which the company has added to its reserves has declined due to worsening of the profit picture in last 3 years.
Profitability	Invested Capital, RoIC, EPA	Invested capital has more than doubled in last 5 years.Net fixed assets is 1.6 times what it was 5 years ago.ROIC has declined from 38.6% in June08 to 26% in June12.	The historical picture looks to have detoriated because of the company's decline in profits in recent years.But when we look at it from the strategic point of view the company has forgone the gain over short-term to increase the size of the pie (market) and create a brand loyalty through significant investment in marketing and price reduction to encourage the purchase of its product.These factors when seen along with the opportunity size give an impression that the company's financial performance will probably improve going forward and ROIC picture will probably improve.
Profitability	Return on Incremental Networth	ordinary 5Yr incremental Return ~14.3%	This again has been ordinary due to recent profit picture.
Market Returns	Dividend Payout	5Yr average 44%, 3 Yr average 43% and currently at 40.3%.	The company has maintained a flat divident payout policy in last 4 years.so,as to have enough funds to invest in the new manufacturing facility in Goa.The stock has given below average return in last 3 years and has barely moved in last one year.This should probably improve with improvement in business scenario,but looking at the high P/E ratio it currently commands outstanding return expectation would probably not be logical.
	Dividend growth	5Yr average 3%,it has followed flat dividend payout policy in last 4 years.
	Total Returns growth	5 Yr CAGR at 27.8%; 3 Yr 12.17%; in last 1 yr 3.22%
Predictability/ Longevity	Product Segments	derives ~62% of revenue from Female Hyigine and 38% from Health care segment.
	Product Choice/Indispensability	It is the market leader in Sanitary Napkin segment (54.1%)and in cold & cough cure segment(~30%).	The napkin is something which is a necessity and once a consumer is satisfied with the product,price does not remain the deciding factor(atleast for customers that belong to middle class and above).It is a recurring need,the product gets used up in less than a month and it forms an insignificant portion of the consumer budget.Thus giving it price inelasticity.All in all it owns a consumer monopoly.In cold & cough cure segment it is the most popular brand and any one looking for instant relief generally opts for vicks as it is easily available and because of the fact that it forms a small portion of consumer's budget it has got a decent price inelasicity.The sales however are heavily dependent on weather and advertising.
	Competition Intensity	1 major,1 minor and few new entrant trying to establish their footing in Sanitary Napkin Market.In health care market the competitive intensity is very high.	In Sanitary Napkin segment the competitive landscape is changing with new players like she comping in and Johanson & Johanson's Stayfree is giving a tough fight in both the urban and rural markets.In urban markets it is targeting the affluent and upper middle class by providing samples in ladies washrooms and in rural market its low priced (Rs.22),well distributed stayfree cotton pads are giving good competition.In healthcare market the competitive intensity is very high and the retailer(who is the druggist in most cases) plays an important role and he suggest the vacine that provides him highest margin.
Capital Allocation		Between 2007-09 spent on building new health care facility;New manufacturing line in 2010 in Goa.	The capital allocation seems rational as Vicks being one of the most trusted brand,the Healthcare market being underpenetrated,the tax incentive of having a drug factory in Baddi and the price cuts required to induce the sale of Sanitary napkins, the Baddi plant would have been the highest NPV project then.The recent 2010 extention of Goa manufacturing unit is for production of Sanitary Napkins.Given the fact that company has undertaken several powerful marketing initiatives to drive sales of Napkins and cut prices these efforts are highly probable to increase sales and hence yeild increased return for the company in years to come,Huge opportunity size and the changing demographics give an impression that the capital allocation here too was rational.
Capital Intensity	Capex/Net profits	5 yr 28.52%	This is after taking into account the two manufacturing facilities it has come up with.It is fairly low and the mantainance figure is even better.
Efficiency	Working capital efficiency	The working capital as a percentage of sale currently is 36.21%,slightly higher than the average of 35.62%.The cash as a % of total assets has been 26.16% compared to the average of 31%.The inventory days has declined in the last 5 years and currently is 71 as compared to average of 80.The debtor days is currently 11 slightly higher than average of 9.	The company's day to day operation is highly capital intensive.The company has mantained a current ratio close to 2 in last 5 years.Historically company has held significant cash.Even with its parent's reputation of being the largest FMCG company & having high quality earnings the high working capital requirement and having so much of idle cash is questionable.The inventory days and debtor days are in line with peers and the time series does not indicate determent.
Efficiency	Fixed asset efficiency	The fixed asset turns have gone up in last 5 years from 5.23 in June 07 to 6.54 in June 12.In the same period capital turns have gone no where,it declined initially and then rose to the previous figure.	The fixed asset turns has followed a wave like pattern in last 5 years.The capital turns are far lower and has barely been what it was 5 years back,it infact declined,even when the fixed asset turns peaked and has improved recently.This again points towards the high working capital issue.The average as well as the current figures are far lower than peers like colgate and GSK Consumer.
Key Variant	Marketing Strategy & Strong R&D Support	Its innovative marketing strategies(which includes Point of Market Entry (POME) stage i.e. when girls start menstruation for years now every year increasing the number it reaches,door to door marketing,change when you want in 2009,Dr.Vicks,'The Blanket of Warmth etc.) and the strong R&D support have been the key varients.	With POME it has gone to schools in both rural as well as urban areas and distributed the strategically fit product depending on the locality.With its door to door marketing initiative the company has been able to penetrate the barriers for lower middle class customers and is educating them about the importance of sanitary napkin.Since in Sanitary napkins once tried comfort takes the priority over price the company adds significant number of loyal customers every year,who through increased consumption and word of mouth publicity are going to further drive growth.In healthcare market where the sale is highly correlated with the amount of rainfall and the severity of winter the company has been able to dirve sales at far higher rate than the industry average due to innovative advertising and advertising mediums that target the maximum number of right customers like Billboards and radios,which target the travelling population who are more inclined to buy OTC products rather than consulting the doctor to get short term relief.The strong R&D support of parent is always there to introduce innovative products and to provide efficient ways to produce products.
Key Risks / Monitorables	Increasing Competition Intensity; RM prices;huge advertising needs	The competitive intensity is very high in the cold & cough cure segment.The raw material prices have gone up significantly as a percentage of sale in last 2 years.	The competition is a major threat in the healthcare market and the competitive intensity seems to be building up in sanitary napkin segment too.The raw material cost is a major concern as the company has launched a few high quality products at economic price.It is also vulnerable to cotton and menthol price volatility.The High advertising is required in both the sengments, in sanitary napkins because it is very underpenetrated and in Vicks less because of underpenetration and more because of increased competition.

Procter-Gamble-Hygiene-Healthcare.xlsx (75.7 KB)

Donald · April 16, 2013, 7:57am

Shrey is busy with his CFA Level III exams till June.

So let me try and take forward his work on modeling. Which are the FMCG companies best placed for the next 3-5 years??

While historical performance will give us some perspective, to form a picture of the immediate 2-3-5 years, we had decided to model in a few things such as:

1). Category Penetration - Rural, & Urban

2). Rural & Urban segment contribution - for a company

(Most of the FMCG growth in India today, is coming from rural segment)

3). Distribution Reach - Urban & Rural

(how prepared is the company to exploit the growth potential from Rural)

4). Capacity expansions/completed/under-way

(again a measure for the preparedness)

5). Competition Intensity

(how much more predictable is one business than the other - think HUL & think GSK)

And we might include a Score on Fundamentals. Basically if one is a better business than the other - capable of investing higher capital at higher rate of returns - generating more Economic profits - than another, say.

These were always my top-of-mind criteria to model in. We have enough data thrown up by Shrey on most of the leading FMCG buisnesses - Colgate, GSK, Nestle, PGHH, HUL, ITC, Dabur, Marico, Emami, et al. We recently made some friends - professionals from FMCG sector - on the lookout for more.

Let’s try and take things to a logical conclusion. Lalit, P Sharma, Nishant, others interested? Will revery back with a base excel model, soon.

-Donald

anil · May 4, 2013, 6:21am

Hi All,

Really appreciate the quality of discussion happening here. Just wanted to share a video, which re enforces the belief that such companies have a great future ahead.The guy speaking is Fund manager of Arisaig partners Asia Fund (fund invests only in FMCG kind items…stuff people eat, drink, wear, wash, shop as they describe it…) Interesting to note how these Buy side analyst see India and other Asian countries…

cool_aksh · May 4, 2013, 2:26pm

Did he say at 22:30 that It doesn’t mean that India is guaranteed to be there?

ahead.The Link: http://youtu.be/06I68XnOocs

nishant1103 · May 4, 2013, 5:44pm

Hi Donald,

I think we should also assess the companies’dependenceon power brands and the growth rates of those brands. For example Marico has 47% EBITDAdependenceon Parachute, which is growing at a 3 yr CAGR of 9% Vs Nestle’s 35% EBITDAdependenceon Maggi which has grown at 3 yr CAGR of 25%.

Risk exposure would be higher in those companies where volume growth of powerbrand is slowing down.

Nishant.

Donald · May 4, 2013, 7:53pm

Hi Nishant,

Thanks. That’s a very pertinent input. Lets try and gather data on that front as well.

I couldn’t take up the modeling before proceeding on vacation last week. Let me see if I can steal a couple of hours and reproduce the base model to take forward.

Rgds

Donald

shanid · May 5, 2013, 7:42am

Dear friends,

Having worked at Marico for more than 5 years…i can provide some informations, may be useful for you guys.

Marico is targetting a revenue of 5000 crore by 2015
Company management is honest & very transparent
At present, business is depends upon Parachute (10 % volume growth only can expect from parachute coconut oil segment), Parachute can growth at CAGR of 10 - 9% for another 5 - 7 years in company’s own assumption. (Recent expansions plan at Perundurai,Coimbatoreindicate this fact).
Copra raw material price is controlled by Marico in south india, two years back when copra price shoot up company found their parachute volume also shoot up due to local players vanished from market, so eventually copra raw material price benefited marico by volume growth.
Company has a serious business in Bangladesh & Egypt, which needs to be scrutinised for future gowth.(they are able to develop parachute as a brand in Bangladesh)
Company is trying to diversify in terms of products.

Pls give me some time and i will try to come out with more detailed or meaningful work…

**
**

Disclosure : Never bought the stock thinking it is over priced…

regards,

Shanid V H

constantseeker_ · May 5, 2013, 8:13am

Hi Nishant,

Very good point. Any idea where can we get these data points from?

regards,

saurabh

nishant1103 · May 5, 2013, 11:30am

Hi Saurabh/Donald,

The growth rates for Brand as well as the Category will give a full picture. These data points are captured in research reports, we can try to get those published by IMRB/Nielson (have friends there who can help).

Following are some which we can immediately refer-

Co.	Brand	EBITDA Dep	CAGR	Cat CAGR
HUL	Wheel	9%	15%	8%
Nestle	Maggi	35%	25%	30%
Marico	Parachute	47%	9%	15%
Jyothi	Ujala	55%	16%	15%
Emami	Zandu+Navratan+Boroplus	75%	16%	15%
Colgate	Colgate Dental Cream	18%	5%	13%

Cos withover dependenceon a brand or few power brands can face challenges in long run if the brand/category itself is showing exhaustion.

Nishant.

nishant1103 · May 8, 2013, 7:27pm

Add to this list Bajaj Corp’s Bajaj Almond Hair oil- 94% revenue dependance with volume growth of last 5 yr CAGR @ 28%.

Donald · May 12, 2013, 5:10pm

FMCG Scoring Model

Weights	10.00%	15.00%	10.00%	15.00%	30.00%	10.00%	10.00%
	Volume Growth	Pricing Power	Distribution	Opportunity Size	Fundamentals	Management	Exports	Score
Nestle	7	8	5	8	8	8	1	6.9
ITC								0
HUL								0
Colgate								0
Dabur								0
Emami								0
GSK								0
PGHH								0

Model Notes:

1. Volume Growth is a crucial determinant. Great if we can find data for volume growth, else we substitute Value Growth

2. Pricing power is probably a bigger determinant. Debate was on whether to take the broader âCompetitive Intensityâ or Pricing Power; we chose the former for better objectivity

3. Distribution strength is considered important

4. Opportunity Size should take into account factors such as base effect, rural urban penetration, etc

5. Fundamentals at 30% weights should be okay â as long as we are comparing quality illustrious companies â and not throw a rabbit company into the ring

6. Finally some weights are due to Management Quality. This could include demonstrated minority shareholder friendliness, as also differentiation for Branding & Advertising strategies, e.g.

7. Other things being equal, in mature businesses like FMCG, we may like to prefer exporting companies over domestic ones, by their mandate

8. Valuation Comfort is not part of this scoring; None of them offer much comfort for the type of growth prospects exhibited

9. Scores to be allotted â on a 10 point scale â some like Pricing power will be based on qualitative factors, while some others will be based on quantitative data

10. We are ending up comparing pretty different, diverse companies â on pretty specific parameters. But as they say, no model is perfect!

Attached Worksheet has industry/category details collated, and detailed company sheets for Nestle, GSK, HUL, Colgate, PGHH; Will find time fill in for Dabur, Emami, ITC

FMCG-Decoded.xls (78.5 KB)

Donald · May 12, 2013, 5:25pm

FMCG Scoring Model

Weights	10.00%	15.00%	10.00%	15.00%	30.00%	10.00%	10.00%
	Volume Growth	Pricing Power	Distribution	Opportunity Size	Fundamentals	Management	Exports	Score
Nestle	7	8	5	8	8	8	1	6.9
ITC								0
HUL								0
Colgate								0
Dabur								0
Emami								0
GSK								0
PGHH								0