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


(Aman Goklani) #145

As I mentioned these companies help me diversify into another sector - i.e. FMCG and I don’t know of any FMCG company at a PE of 17 :slight_smile:

And even if there was another company that I’d be tempted to look at, I’d need to be supremely confident of it and it’s products existing for decades to come. In my family and my existence on earth, I’ve seen P&G products being used for decades. So as a customer I’m very happy with their products. I’m sure so are other Indians. That to me gives me much more confidence in holding onto a company than any damned PE ratio in all honesty.


(Anupam) #146

Lets keep PE aside for a while. Lets look at valuation. I think there are few aspects to FMCG & FMCG-MNCs.

  1. Steady 10-12-15% growth rate
  2. Huge FCF
  3. Future sustainibility- May be next 3 decades
  4. High Certainty /Accuracy of future cash flows

These factors can /may positively influence DCF based valuation, thus commanding high valuation and high PE


(Amit Jain) #147

Anupam… my singular contention is that when a company has a very high PE it tends to consolidate, if its a stock as good as Gillette. If it is just plain vanilla good then it may even crash. Either way, the chances of making money off of a highly priced stock is very slim.

HuL, Infy, and several other stocks have not given any decent returns for as long as a decade in the past.


#148

HUL has been 6 bagger and Infy a 5 bagger in last 10 years. Nestle has doubled in last less than 4 years if one bought in Maggi issue correction.

There have been phases when they have consolidated sideways but you have to take them in stride.

These are not 100 bagger types for sure but decent compounder.


(svasa13) #149

Godrej consumer is in similar situation.It has corrected 35% but its net profits are raising QoQ.Forward fy19 pe approx 35


#150

I guess people who are investing in these super-large caps are investing not in anticipation of anything but for the stability and decent compounding for years if not decades. Perhaps when a crash happens, these too will fall substantially and then would be the time to buy more, until then I think once can allocate some portion to them.


(Amit Jain) #151

That is the point. Now, that the large caps have run up so much, what does one expect in the next decade…

They are compounders, not steady ones… but in bursts. And definitely not from high valuations.

Buy when cheap, hold till expensive. Because in a portfolio of thirty stocks, one can find very many reliable compounding stocks to fill the criteria.

Unless one must keep invested in fmcg… Come what may.


#152

No one built wealth getting off the train with every overvaluation. In long run RoCE matters and not PE if industry is growing. FMCG has atleast 2-3 decades of growth. Those looking for 15 PE are likely to be disappointed unless global economic system melts down.


(gautham1) #153

@amangoklani. Thanks for the reply. I understand about the moat, free cash flow, longevity, ROCE etc. (I should have mentioned it my post so that others wont repeat the same) . As for return expectation, forget about 25% or 18%, even 12% is not bad. Because as you rightly pointed out, they provide stability to the portfolio. Also, I am not expecting them to trade at 20 or even 30 times earnings. My point was about huge divergence from the historical valuation.
Since you specifically mentioned PG&G and Gillette:
P&G PE range was 26 to 42 from 2010 Jan to 2013 December. Gillette was at 29 in Jan 2010. It went to as high as 209. ( I think PE is not useful for Gillette since their earning has been very erratic. This is another thing I dont get. Despite being a consumer company, their performance is like a cyclical company). Their sales CAGR since 2014 is a shocker. ( Especially for Gillette which is in single digits) .
Prior to 2014, most of the FMCG companies had good sales and profit growth and a PE of 30-40. Now hardly any growth and PE doubled. In some of the other high PE stocks like Page, DMart there is at least good sales growth.
My post was not to criticize these companies but to understand how the market is valuing them. Market knows more than we do. My sense is that market is not valuing them based on conventional parameters. Over the last few years, we have seen so many fraud companies. The number of investment worthy companies is very small. (May be less than 50). So people are chasing such companies. Views welcome.

@svasa13 I think the recent PE for Godrej consumer is misleading. It may not be as cheap as it looks. They have had several quarters of poor sales growth and very high eps growth.


#154

Gillette imports most of the high end razors. That introduces too much randomness. They don’t manage to make bottom line smooth.

It is right that market has moved beyond traditional valuation parameters for high quality FMCG. Reason is that only India provides growth visibility for 20 years due to demographics. Second is that except for high quality FMCG and financials every business is up for disruption in next 10 years Energy, Power , Auto or Pharma.

Good to read Nick Train and Terry Smith on these lines.

Difficult times for investors but no easy answers


#155

Nick Train view on brands


(Shailesh) #156

Can FMCG / Brands be challenged and disrupted . Pretty much now than before …

Lets take example of Gillette — Read this https://www.cnbc.com/2015/04/08/s-pit-tech-start-ups-against-gillette.html

Coca Cola losing Fizz : http://fortune.com/2017/01/05/coca-cola-sued-soda-marketing/

Same are issues with Food companies like Kraft …

The issue is while disruption is common for all industries … the risk increases when you Pay upwards of 40 PE for a stock Growing less than @ 10% annually . That means you tend assume 10% Gr for very long time to come when it has problem of growing at that pace now …

FMCG Brands are still important part of portfolio becos of lower volatility , one can say they are like US dollar vs other stocks which are like EM currencies .

When there is market crisis … Use FMCG stocks( typically 6 months into crisis ) to buy other stocks cheap . Then in bull run when other stocks multiply 5X … sell them and buy FMCG stocks … It will be great for PF returns


(Aman Goklani) #157

@jamit05: You’ve mentioned moving your funds around a pf of 30 stocks. I plan to hold no more than 10-12 stocks (currently own 10) that constitute 38% of my overall pf (remaining 62% is spread around debt and equity MF holdings). Considering the same, I need to be extremely sure of the stocks that I buy and the sectors that I invest in. Gillette and PGHH are my FMCG picks and I intend to hold them irrespective of how they behave…go up in bursts, sideways or down (both these scenarios present excellent opportunities to buy more).

@gautham1: Gillette earlier also had Duracell batteries as part of their business. That may have impacted their overall metrics. Also in 2013/14 they consciously decided to introduce a low cost razor and cartridge system to capture market share. They did so buy launching ‘Gillette Guard’ - this was done after doing a lot of research about the shaving habits of Indians etc. They pushed this product real hard and thereby saw their margins and profits compress. However, they’ve turned around since those days. Let’s now see what the next decade holds for the company. As I said, I think they are a solid brand and will exist for years to come so I’m happy to ride along.

And yes you are right about companies showing phenomenal growth, building great brands - only for them to turn out to be fraudulent. So one needs to try their best to pick companies that they believe will last the distance.

@nav_1996: Thanks for sharing the article, its a nice read. And I agree with you on most of your thoughts.

@kb_snn: Though I haven’t read the articles you’ve shared, I’m sure those are studies from the US / western markets. These markets maybe saturated and hence these companies grow at anaemic rates in that part of the world. India today is where these markets were in the 70s/80s and there is a lot of room to grow - just look around you, do you think the carpenter, mason, the delivery boy are using a Gillette Mach 3? I don’t think so. Can they use it in the future - maybe yes, as their standard of living improves!


#158

Don’t go by these articles unless applicable to India. Most of the time articles are hyped to prove a point. Ask yourself what brands you use and which one are sticky and which one is not. You will get your answers.

e.g. I don’t even know of razors other than Gillette which I have been using for 30 years. I have seen Colgate competing with fierce threat from Pepsodent, Anchor, Orab-b Patanjali etc since last 20 years, but managed to survive.

So same logic does not apply for all FMCG.

There is no magic risk free investment formula. Your need to figure out what you are comfortable with and allows you to sleep well. For me bigger risk is business model and corp governance rather than valuation.


(Shailesh) #159

The discussion was on FMCG cannot be disrupted … My reasoning is Yes it can be and hence paying anything more than 30 PE is not worth it

The examples are nothing to do with DEMAND … or Demographic profiles of particular geography … The issues are structural which has changed in last few years

Large FMCG companies had 3 strong Moats which enabled themt create huge entry barriers and enjoy high margins …

  1. Advertising : Share of Voice esp on Television
  2. Distribution : Buying shelf space & ability to blackout competition ( Prevent access to customers)
  3. Multiple Product Flanks – Create so many versions of products that competition had few niches to attack

All these new age brands have shown how to break these moats through new technology , distribution innovation , product service combos …

Now it is up to you if want to learn developments on industry or be blind to the same …


(Mandeepk) #160

Thanks Aman for your thoughts and conviction, I was researching Gillette sometime back and the only thing that held me back was the high PE. I still have a lot to learn so will not dwell on that.
The plus that I found was that this is monopoly in an item that is basic. My one worry was around shareholding pattern, very less for general public.


(Deepen) #161

There were couple of posts raising points on disruption risk. I tend to agree on those points. Its hard to anticipate which industries will be impacted and what would be the size of the impact, but India has a tendency of leap frogging cycles (for better or for worse) couple of examples on top of my mind, 2G - 4G, Taxi to Uber/Ola, Antenna - Cable - Dish - Streaming. If we think 5-10 years back, we would have shrugged it off thinking it’ll take time before this is applicable to India. Not anymore.

Trends in developed countries are actually useful to consider as a good probability in near future. I haven’t researched much but Dollar Shave Club has disrupted men’s grooming / razor industry. Robinhood has disrupted online broking and these are just on top of my mind, there will be lots of non-fintech examples too.

In my opinion, the role of brands is going to change a lot in years to come. So products might enjoy crazy high brand loyalty, others might not. Sure FMCG has core competency around distribution but how much of that should be factored in valuation is something that every one will decide for themselves.

As the saying goes, we always overestimate the changes of next 2 years and underestimate the changes of next 10 years.


(Deepen) #162

Going off topic for a bit :

I am new to investing so I am still trying to learn the basics.
If you’ve been investing since 5+ years, how has your approach of holding 30 stocks worked for you ?
Any insights that you’d like to share ?


(Mandeepk) #163

Dollar Shave Club was acquired by Unilever - that is what happens when you have deep pockets. I asked a couple of friends to try the online options and none of them were happy (in India). How many men would opt for the subscription model for shaving in India - not sure.


(Lokesh) #164

Prospects for a replica of dollar shave might be low in India. But, something which caters to local needs can’t be ruled out. While it is true big companies acquire smaller ones, they do end up paying a lot of premium in the process.