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

(virajkhatavkar) #165

Adding my 2 cents - I am not really worried about someone else coming and disrupting Gillette. But I am worried about the total usage of shavers to come down. Also a shift to electronic shavers cannot be avoided. Gillette doesn’t have a significant market share in the electronic razors. Just to give an example, in my family I have a grown beard and I rarely shave. I just trim and shape it using Phillips electronic razor. Similar situation with some of my friends. Just to give a glimpse, 3 out of 7 of my close friends do not shave and just trim. And this was just one a couple of years back. Going forward this trend is simply going to spread not rapidly but at a slow pace. For these reasons I am really not keen on investing in Gillette or PGHH for that matter. Head & Shoulders, Olay aren’t brands that are sticky. I or my girlfriend do switch between Loreal, H&S and couple of local brands. So there isn’t any stickiness to brand per se.

As opposed if you see Colgate, it is more sticky. People may try other toothpastes, but they do prefer atleast one Colgate in their home. Just a thought :slight_smile:

(Dinesh Sairam) #166

From the POV of Valuation, FMCG companies are, in general, both easy and difficult.

Easy, because they have the most predictable business model, serve literally the largest market in any given geography and growth is almost a given. Difficult, because most of these FMCG firms have massive Competitive Advantage Periods. They can operate competitively for decades (If not centuries) put together with very little need by way of Capex or other external spending. In fact, I personally think that judging a FMCG’s CAP is key to identifying its value.

I have attempted to create a valuation template for FMCG firms: FMCG Valuation Template.xlsx (32.0 KB)

A brief about how the template works:

  1. Assumes that Net Profits are equivalent to Free Cash Flows (Which is quite true for many FMCGs, bar newer ones)
  2. Assumes that every decade, the growth in EPS will slow down by a pre-fixed rate (Say, 10% or 20% cut in growth). Also true for most firms, let alone FMCGs.
  3. The biggest ‘iffy’ input in the template is of course, the number of years the firm would continue to grow before becoming mature.
  4. The rest of the inputs are pretty easy to understand.

So clearly, this is only an attempt at explaining the FMCG valuation puzzle. It is NOT an attempt to create a theoretically accurate valuation model for a FMCG.

Comments are most welcome. FYI, I have used the example of Britannia Industries in the model, but the figures may not be very accurate.

(Shailesh) #167

Well said … FMCG can be disrupted when consumer habits change ( though this may happen over generations - ) .

Even in places where consumer habits change is not evident or high like Colgate – Gr rates are pathetic - 6% 5 Yrs Revenue & EPS CAGR for colgate ( PE > 40 ) and HUL ( PE > 60 ) …
Gr rates are worse than IT services companies while PE are 4X times… WHY becos people think IT services are losing market shares to innovative companies … But look @ this fact …

When Real GDP is growing > 7% and nominal inflation @ 4% – Nominal GDP Gr > 11% , so who is eating shares ( 5% to 6% annually ) of these FMCG companies … That is where S Curve is working … All these brands are getting eaten up slowly by niche & innovative categories … which these companies are ignoring – We had Indukela , Patanjali, Paperboat etc emerging in last few years … This could not happened so easily in past … Thoughts to ponder …

(shyamutty) #168

ITC is also into dairy sector now

ITC is also one of the cheapest in FMCG

(Shailesh) #169

ITC is not pure play FMCG but with unique strengths & weakness

  1. It asset rich because of large no of hotels owned by the company with zero mortgage . Replacement cost of hotels in Mumbai / Delhi / Bangalore /Chennai / Kolkatta will cost thousands of crores / each hotel ( if you get that kind of land )

  2. It’s Cig business - there are 3 entry barriers - By Govt Regulation FDI is not allowed in this industry - Other Local players have less than < 15% Mks and don’t have financial muscle to expand ( VST is owned by ITC ) , Marketing and promotion is not allowed so new brands cannot be created by any means … At the same time ITC carries huge Regulation Risk

  3. It is India centric and does not pay Royalty to any MNC Parent . It’s manpower are not shared with parent and they owe loyalty to ITC and ITC only .

  4. But new products are all over the place - Education , Food , Personal care etc … and have low Mks and margins as compared to Cig. IT needs to sharpen its focus to succeed.


Biggest strength of ITC is being built as we talk with 20 integrated food parks across India. Real farm to fork to play.

(shyamutty) #171

Another strength of ITC is distribution
There is a case study which discusses, how Sunfeast killed Priyagold biscuit even though the latter’s quality was better. Some info here:

(shyamutty) #172

Dairy industry could be a hard nut to crack for ITC, more details here:

(Aman Goklani) #173

@virajkhatavkar: Having used both an electronic razor (trimmer) and a blade for shaving, I can safely say there is a world of difference between the two. A trimmer just doesn’t give you the same feel / look as shaving with a blade. Also, an electric trimmer costs 10 times more than a razor + cartridge system. And being an electronic product it would last at best for 3-4 years. So the upfront investment on it is quite high (and Indians are price sensitive for sure beyond a certain point) and you’d eventually need to buy a new one after some years. I’d be happy if more Indians start using a Mach 3, even that I’m sure is a challenge for Gillette (for e.g. I still use the T blade for shaving wherein I put a simple open razor).

Regarding people having beards, more facial hair etc. I believe these are all trends. They keep changing from decade to decade. Now the bearded look is in, I won’t be surprised if it becomes passé in a few years from now.

And PGHH doesn’t sell Olay, H&S etc. that is sold by the pvt. arm of P&G :slight_smile: . PGHH sells whisper, vicks and old spice. Whisper is the biggest revenue driver for PGHH (~65-70% of revenues) (and also the #1 sanitary napkins brand in India). I’m actually quite bullish about PGHH purely because of Whisper and the abysmal penetration of sanitary napkins in India (due to various perceived taboos). The penetration is quite low even in urban areas and I think this makes it one of the best bets in the FMCG space (in my opinion).

(Bharat) #174

This is a Positive Point from an Investor Point of view and negative from a consumer point of view. For say , if a Razor + Cartridge System lasts for more than 4 Years , how would the company would grow its Sales from repeat customer.

Also the products caters majorly to the Male Population and i do not think that Female Razors have any great impact or demand in the market so almost half of the consumers does not even use their products.
One gets a decent Trimmer at around 3-4 Times cost of a Shaving System , further there are other costs associated like of Shaving Foam / Cream and After shave cream so overall , the costs factor does not matter much from a customer point of view. The handling of a trimmer is more easier than of a Shaving System. I personally prefer a Trimmer over Shaving system.

PGHH again caters mostly to Female customers as 70% of revenues as you say comes from Whisper. Though still market size is very big and as you say there is very low penetration of sanitary napkins , it can be a good bet provided no big competition comes from other players.

I personally prefer FMCG companies which caters to almost all the population. ITC , Dabur , HUL are the companies which have vast consumer demand and they will remain great business with increasing rural consumption.
DIsc: Invested in none of the above mentioned companies and waiting for decent corrections !


Terry Smith is raising his holding in Fundsmith Emerging Equities trust which is heavily invested in Indian FMCG
So, he sees values at current level

(Bheeshma Sanghani, PhD) #176

The main reason that gives large fmcg cos their high valuations ( on a PE basis ) , is they require very little capital to grow. Ofc their growth rates over a long period are not very high but yoy they keep do keep growing earnings consistently.

Due to their large size and huge volumes, fmcg cos have very low costs of production. They can lower prices to match a rivals cost of production and put it out of business. Unless the basic need the product satisfies itself changes, going head to head with them is a painful experience.

(Shailesh) #177

The only reason why FMCG companies are earning high cash flows are because they are harvesting past investments . Very few FMCG are building new brands and categories. Even commodities company like hindalco can earn huge cash if it is not investing for future plants .

Now the issue is how long you can operate of maintainence capex and not be aggressive on growth . Already brand loyalty in many brands are declining
People are comparing prices on online sites across brands and are buying soaps shampoos detergent which offer greater value . This is unlike in past wherein shelf space in stores could give you an edge.

(Anupam) #178

Bit off topic, moderators pls delete if it doesn’t add value to the fmcg thread.

I have seen fmcg being known for FCF… That’s clearly one of the reason for 50 PE ratings. Why are then IT cos available for 15 to 25 PE??

E. G… TCS doesnot need any factory, contract manufacturing, distribution channels, warehouse, even not significant R&D etc. It can throw free cash flow like a machine. Why aren’t we then valuing IT Co. FCF in the same way as page, hul.

(Dinesh Sairam) #179

Prof. Aswath Damodaran once said that Tech companies age like Cheese and Manufacturing companies age like wine.

IT/ITES companies have to constantly reinvent themselves / upskill their employees every decade or so. In fact, if you think about it, IT/ITES companies don’t “invest” in Physical Assets like Plant, because their real productivity comes from Human Capital. If you Capitalise Employee Expenditure and Amortize it over a given period, it’d the equivalent of Manufacturing firms spending on CapEx and Depreciating it over a period.

(IsaacAsimov) #181

Probably because most investors see FMCG cash flows as more reliable. Also the business is less affected by recessions or economic downturns compared to India’s IT companies who derive a major chunk of revenues catering to big businesses who cut down on expenses during slow downs. Another reason could be India’s unpenetrated market potential and the hyped up consumption story. Also probably the business is way more easier to understand and keep a tab on for most investors (Peter lynch’s teachings to blame)

And the PE figures you used are pretty recent ones. Maybe investors are being too optimistic about FMCG and 50 is not really justified?

(Anupam) #183

Thanks Dinesh and Issac,

At one hand Infosys with 70000 cr FCF in last 10 years, 25% return ratios and 10 % kind of growth is at 17 PE. Probably Market sees future growth of 5 years at max then zero growth.Other hand Fmcg cos commanding 50 to 80 PE, and yet people trying to find value buys. Indeed puzzling but clearly market knows better.

(ASPN) #184

Dear @dumboinvestor, Why such unnecessary aggression? This is not a Moneycontrol type message board. Humbly suggest you to use parliamentary language.

(Anupam) #186

Nothing to get annoyed. If at all then you may kindly ignore. Please understand there can be newbies investors, non finance guys. More importantly market is too dynamic. There are more than 1 way of making money and N no of strategies which are counter intuitive. I know momentum guys who care a damn of ROCEs and FCFs and can beat the market and value guys with staggering alpha… I suggest calm down and be polite.

Otherwise you are quite resourceful and with superb writing skills.

(phreak) #187

@dumboinvestor - Request you to please check the tone of your posts. They stick out like a sore thumb and don’t belong in a community like this. Listening to multiple viewpoints and seeing their merits/demerits is very important.

As for FMCG, while I am invested in Page, I don’t think FMCG will be the only game in town. There are big risks here for the FMCG valuations if infra/capital goods etc. start performing (there are early signs in L&T and ABB numbers). Remember there is limited money that wants the best value, so it might be better to watch the weather cautiously and not believe things very staunchly and be a one-note samba. Market has a way of putting such viewpoints in its place.