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

(sarangg) #125

Hey Bheeshma,

I’m not completely convinced by the operating leverage play out in Colgate - RM costs as a % of sales have mostly gone down over time - while total manufacturing cost, is <25% of Gross Profit, so I’m not sure how much room it has to go lower (in order to increase your net profit) given its only 5% of sales. Additionally, with higher crude prices in the last couple quarters, I’m not sure if Colgate will be able to grow EPS in the short term. I think much of the recent margin improvement has been due to lower crude prices, a trend which has stalled. In order for colgate to return to its historical sales/FA ratio, colgate needs to grow sales to that point - for that to happen, it must sell more toothpastes? Given the maturity of the market, it would be dangerously simplistic to assume that revenues will tend to full capacity utilization.

So with no meaning full short term margin improvement, and slow near term EPS growth + moderate growth in the foreseeable future (volume growth can’t be much higher than population growth given penetration is already 75/90%+ in rural/urban areas), I really don’t understand why this stock is worth 40x earnings.

I am also wary of players like Patanjali/Dabur building their distribution networks as the major bottleneck to Patanjali’s growth has been its lack of distribution. If Colpal continues losing market share, a correction in its’ stock price is highly possible, especially with the stock trading at high multiples compared to the overall market and its own history. Even without market share losses, increasing competitive intensity should cap industry wide price increases and keep Colgate EPS muted.

As far as the consumption per capita thesis is concerned, I think it’ll play over several years. Even if its takes only 10 years for 30% of Colgate’s users to brush twice instead of once, it only adds ~2.6% CAGR to your total return, while the high upfront price paid (PE multiple) makes for a bumpy rides if there any potholes on the way up.

For me, Colgate is a short because it seems like the best way to play the FMCG overvaluation thesis due to 1) heightened competitive intensity 2) bullish crude view and 3) high valuations (40x+ trailing earnings) in spite of high penetration. It seems to like the FMCG sector is in a ‘Nifty 50’ like craze that took hold of the US in the 70/80s, and a great way to hedge a correction.

Disc. Short Colgate

(sarangg) #126

Just trying to see the other side of these results - maybe it was the low base effect that led to this?

Compared to December '15 results, Operating profit and PAT increased ~8.3% and 3.03% CAGR. I’m not sure if the long term volume/revenue/PAT growth rate of the stock is greater than ~3%/6%/8%. What do you think this company can grow its PAT at, over the long term?

(Bheeshma Sanghani, PhD) #127

Patanjali has done well but oral care is a small market b/w 8000-10000 crores. It can accomodate only a few players profitably. We already have dabur, hul and colgate and some other players. Patanjali has popularized the natural category which is fast growing and the market has responded by hul and colgate launching products in this category. We will have to wait and see how volume pans out. Colgate in 2016 commissioned its toothbrush plant in sricity at AP on the back of its sanand toothpaste plant. These are very large capacity investments and as a result depreciation exp has increased manifold - i think 3 times in 5 years. OPM margins have also increased significantly over the years. Over time 10k cr type markets cant have too many pan india players.

As far as penetration goes - there are still about 200mil ppl in india who dont brush their teeth so there is a lot of room to grow despite the high levels of penetration. India is a populous country.

Patanjali has definitely disrupted the market but colgate still has 53% share. Its an interesting story to track. A good thing is that the recent qtr net margins increased to 16%.

Hdfc securities recently came up with a good report on colgate which can be accessed if you google it.

The following table articulates the Sales & PAT growth consensus expectations

CAGR ( FY18-FY20) HDFC MOSL Nirmal Bang Reliance Securities Edelweiss Average
Sales CAGR 12.83% 14.07% 7.99% 13.76% 11.50% 12.03%
PAT CAGR 18.24% 18.82% 7.78% 16.81% 14.35% 15.20%

The average Sales growth expected is 12% and Average PAT growth is expected to be 15%. These are the expectations one should measure colgate with.


(Bheeshma Sanghani, PhD) #128

Strong numbers again from Colgate. Of particular interest is the strong expansion in gross margins which are at 65.4% now as also the volume growth of 4%. A nice way to end the year is the special dividend. FA turnover has also improved.

(Bheeshma Sanghani, PhD) #129

Good set of numbers from Colgate. Volume growth of 4% & Net Profit up by 39% . Expansion in margins as well - particularly net profit margins.

Item Jun-18 Jun-17 Jun-16 Jun-15 Growth ( Q1-19 vs Q1-18 )
Revenue from Operations 1034 969 1013 930 6.61%
Other Income 9 12 10 8 .
Total 1043 981 1023 938 .
Gross Margin 66.0% 63.5% 62.3% 60.9% .
PAT 190 136 126 115 38.96%
PATM 18.2% 13.9% 12.3% 12.3% .

(scr) #130

Negative would be loss in market share

The company continued to lose market share in both toothpaste and toothbrush categories. Volume market share for toothpaste stood at 52.4% against 53.4% at the end of Q4FY18. Further, for toothbrush, it stood at 44.6% against 44.8% in Q4FY18.

See :

Also, toothpaste market share was around 55% year back.

(Bheeshma Sanghani, PhD) #131

Hi @scr

The thesis for colgate is return ratios improving in future from the current levels which could possibly upgrade the PE multiple. If it is able to maintain its 18% net margin - it is possible for it to close fy19 with a 52-53% ROE, in which case we should see an upgrade. That coupled with earnings growth which is happening makes it a good risk adjusted bet in my view. I have valued it at 46 times fwd assuming an earnings growth of 8% over the next 3 years giving me a valuation of ~ Rs 1500 per share at this point. Lets see how this plays out.


(mahesh1980) #132

Can anyone throw some light on what’s GSK consumer healthcare would be left with after it sells Horlicks brand? one of the reasons for investing in GSK consumer was the brand Horlicks. Now I’m feeling should I rethink investment strategy on the company.

(AP2692) #133

Malted Food Drinks (Boost + Horlicks) comprises of ~95% of the business for GSKCH. The rest 5% comes from royalties that they receive from GSK Asia for distributing Sensodyne etc.

(mahesh1980) #134

@AP2692 Thanks for the reply!

(Bheeshma Sanghani, PhD) #135

Interesting to see the Gross Margin movements in Colgate compared to its major expense heads i.e Advertising, Royalty, Employee Expenses, Freight etc

Patanjali has expanded and popularized a sub-category that has a lot of pricing power i.e Herbal/Natural. The costs of creating a new subcategory are pretty high and generally its the domain of the category leader to innovate here. However, Patanjali bore all the costs of creating the category and expanding it - something that is reflected in the Colgate ad costs over time - which have remained flat as a % of revenue between 11%-13% of revenue.

This article ( somewhat dated ) , gives some good thoughts about category creation.

The outcome is that we have a new category where one can charge higher prices and an incumbent market leader which has recently entered. This is reflected in the rising gross margins which i guess indicate that it has been able to charge higher prices over time in this new category. However, the costs have remained remarkably stable, they have barely budged in the last 4-5 years.

Gross Margin Expansion in Colgate over time


Item 2018 2017 2016 2015 2014 2013
Gross Margin 65% 63% 62% 61% 59% 59%
Exp/Rev 41% 42% 40% 40% 39% 38%
EBT Margin 24% 21% 22% 21% 20% 22%
. . . . . . .
Ad exp 12% 13% 11% 11% 13% 12%
Freight 3% 4% 4% 4% 4% 3%
Royalty 5% 5% 6% 6% 6% 5%
Outside Services 3% 3% 3% 3% 3% 2%
Misc 2% 2% 2% 2% 2% 2%
Employee 7% 7% 7% 7% 6% 8%
Rest 9% 8% 8% 7% 5% 5%
Exp/Rev 41% 42% 40% 40% 39% 38%

(A. King) #136

Is GCPL cheapest FMCG stock on the market?


(Bheeshma Sanghani, PhD) #137

(Bheeshma Sanghani, PhD) #138

Good results from Colgate in terms of volume growth in the wake of increased ad spends. Stable Margins. However, half yearly ad spends are stable at ~13%. Half Yearly earnings growth of 24% and Quarterly earnings growth of ~11%.


(UD) #139

Hi guys,

I am new to investing (have done some on and off trades) and have a question about few stocks like Britannia and Asian paints where I am trying to understand reasons for their high valuation but could not figure out anything. If I look at Britannia, it is currently trading at a P/E ratio of above 60 even though 3 year revenue growth is under 10% and 3 yr NP growth has been under 15%. So can anyone give me an idea as to why would this stock trade at such high level. I understand that the company is getting into premium product lines and level of income in India is increasing, but I believe these factors should have already led to higher growth in last 3 years.

Bought few shares during the time of demonitization and after looking at PE of 60, wondering if i should sell them off


(gautham1) #140

Here are the companies in FMCG sector which are trading over 50 multiples.
Gillette 93, P&G 78, Britannia 64, Nestle 63, HUL 61, Marico 50 ( We can ignore Emami 60 since earnings are depressed due to the amortization) .
I am wondering if they are not as overvalued as they look or if the market is wrong?. If the market is right, how do we value these companies?. I understand about the quality of the business/management, return ratios etc. But the valuation is way above the historical range which is 30 to 40. Would love to hear the experts views. These are the kind of companies everyone wants to have in their portfolio.
(Btw Gillette Q2 came in after the market hours. Sales growth of 12.5% and Profit growth of 1.6% . I wont be surprised if nothing happens to the stock on Monday)

(Aman Goklani) #141

I’m invested in P&G Hygiene (PGHH) and Gillette and here is my rationale for investing in these two companies.

Firstly, I treat both these businesses as one as they are effectively from P&G. India is the only country in the world where Gillette is listed separately (I think). If I’m investing a lakh - I’d put 65-70% of my money in PGHH and the remaining in Gillette. I’d do so because I’m more excited by the prospects of PGHH (some details on it below) viz-a-viz Gillette.

Why these two companies?

  • I believe the products offered by these two companies address some things that are basic to human beings. With PGHH their products include - Whisper (~65% of their top line), Vicks (~30 of their top line) and Old Spice (~5% of their top line). With Gillette, male grooming contributes (~80% to their top line) and Oral-B (~20% to their top line).

  • Now if you’d notice between these two companies the biggest brands and money contributors are Whisper and Gillette. The products offered under these brands materially move the top line for both these businesses.

  • Of what I’ve read - the penetration of sanitary napkins is not great even in urban areas. This I believe presents a great opportunity for Whisper (and thereby PGHH) to grow for decades to come. Furthermore, they are the #1 company in this space with a massive market share (~65-70%) in the sanitary napkins space.

  • Regarding Gillette, again they are the #1 company in male grooming space in India. If I remember this correctly of every 3 blades sold in India 2 are from Gillette. Thus they are virtually a monopoly in India. One may counter by saying there is Super Max. I will counter that by asking you to ask your friends, colleagues, relatives etc. to see how many of them know Super Max? And If they do, how many think that their products are really good? All other players like ustra, let’s shave etc. are marginal and they don’t make any difference in the larger scheme of things.

  • Coming to their other brands - Oral B is # 2 in the oral care space (and again is addressing a basic human need of brushing). Old Spice is a strong and well know brand but will not materially make any difference to the two entities as its sales won’t move the needle. This only leaves us with only Vicks (#1 in its space) whose sales are dictated by the weather - so the only brand where sales won’t be consistent.

  • Their products address some need or the other of 130 crore (and growing) Indians!

  • In case of both P&G’s publicly listed companies, I don’t believe there is too much information available. You’d find only a few broker reports and some other research online. Try googling and you’ll see what I mean. The management doesn’t do any con-calls, nor do they give too many interviews. This I believe presents a great opportunity to anyone willing to go the extra mile in finding more about the prospects of these companies as I think everything is not priced in.

Brand strength and existing distribution (and future potential)

  • P&G has built the reputation of all these brands spanning decades. So each and every quarter they are spending hundreds of crores in keeping these brands relevant to the changing times and generations. No new upstart will be able to replace them by entering tomorrow. These brands have had years and years and years of advertising money that has been pumped into them. These are household names. If I ask my my mum or my wife to order shaving blades, after shave or shaving cream - I can bet they’d order for either Gillette or Old Spice.

  • Ditto with their distribution, this has been built over decades. In fact, in case of P&G, despite it being one of the oldest FMCG companies in India, their distribution strength pales in comparison to HUL (who to me are the real big daddies in the FMCG space). This itself presents all FMCG companies the opportunity to aspire to improve and increase their distribution to the level of HUL. So huge room to grow.

Some other reasons for me to invest in these two companies

  • They ideally would not get impacted much by government regulations. How exactly is the government going to mess with shaving blades, tooth brushes, sanitary napkins etc. If they tax them too heavily - the public will butcher them during the elections. So they ideally are not worth going after.

  • As a customer, I seldom check how much I’m paying for these products. As a % of my monthly expenses, they hardly matter. As more and more Indians become middle class, they’d feel the same - I’m sure. And even if I had a problem with the price of these products increasing every year, what can I really do? These are the best products / brands in their respective categories.

  • Each and every year they spit lots of free cash. Most FMCG companies use this cash in buying equally strong brands or giving this cash back to minority share holders. P&G being an MNC - they have certain standards that they set for themselves globally as a company and this I believe this includes treating minority shareholders fairly (I’m assuming this as I haven’t researched on how they may have screwed minority shareholders in the past!)

  • Their products address basic human needs and potentially the products themselves may not be disrupted by technology (at least I can’t think how these products will get disrupted) and hence maybe used for decades to come. For e.g. people say razors & cartridges will get replaced by electric trimmers. Well (a) If that is the case, why wouldn’t Gillette make such trimmers (btw they already do so in association with Braun)? (b) Shaving using a blade and trimmer is just not the same - there is a world of a difference, so to begin with it may not even be a correct comparison.

  • R&D: The parent is spending crores in bettering their products all the time. So if there is any innovation in shaving blades or sanitary napkins world wide, there is a high chance it will come from the likes of P&G.

My expectations from these investments

  • I believe one should have realistic expectations of one’s investments in FMCG companies. If you are looking at 25%+ CAGR kind of returns from these companies - I think your expectations are not aligned to begin with. These companies at best are going to give you returns that will at best mimic their earnings. So a ~12-18% CAGR kind of returns (including dividends) is what I find to be realistic.

  • Regarding valuations: They are always relatively expensive to the market in all scenarios. Bull market they will be expensive, bear market they will be expensive and in a crash they will be expensive. As an investor in these companies my strategy is simple - when they fall below their historical PE averages or if DCF shows they are fairly valued, I accumulate. Gillette for instance was quoting at a PE in the range of 60s for a while in 2017 (historical PEs are in their 90s), even by DCF it was fairly valued. I started accumulating. If it would have dropped further, I would have accumulated more. I really don’t know how else to get into these stories otherwise.

  • They only form ~5-6% of my overall pf. These companies essentially let me diversify into a sector and this is not the only sector I’m invested in. So as an investor, to me this is just a way of diversifying within an asset class.

I’m not sure, if my thoughts have helped address the query on why these companies are always expensive but the simple truth is that they may exist for decades to come and their products may continue to stay relevant for decades to come. Hence, paying a high multiple today may not really matter if these companies actually survive for decades to come (I know a lot of boarders on VP are going to butcher me for saying this :slight_smile: )

And btw, the share price of these two companies have been rock solid during the falling stock prices we’ve witnessed over the last couple of months and may potentially witness going forward. These two have held a part of my portfolio steady and thereby have reduced the volatility in a falling market.

These are my 2 (amazingly long) cents!


(Amit Jain) #142

I read the whole thing. Not lying.

I found this bit most important

In corollary, currently Gillette is at 93 PE. Would you use this opportunity to book profit?

(Aman Goklani) #143

Thanks for reading buddy. I appreciate it.

The only time I will book any profits is when either of these companies go really out of whack with the allocation I have set for them in my pf. So, if I have assigned ~5% to them in my pf and if they end up being 10-12%, I’d consider paring my exposure.

Otherwise, I’ll continue monitoring them and hold them for as long as I need to if there is nothing materially wrong with them. I’m in no rush to get out of them. They offer great stability to my portfolio and I see them as great companies to hold and furthermore they act as steady compounders.

(Amit Jain) #144

That is a point of view I agree with. However, just staging a view from the other side…

Surely, there are a handful companies out there which are great managements, which offer good value and near terms prospects. What if one such company has a PE of 17 and is poised to grow at 15%, just like Gillette. Would you book profit out of Gillette, which has a PE of 92 and buy this company.


Gillette PE 92, growth prospect 15%, another company… PE 17 growth 15%… would you change hands.