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

[Donald]

Hi Shrey,

Thanks for ITC voluminous segment data put up. I tried to create a simpler view by just taking 2007 & 2012, to quickly check what has changed in last 6 years, and how is the company allocating capital - the main poser asked by P Sharma.

ITC Segment Data/Trends

2012 Sales (%) EBIT (%) Assets (%) Capex (%) EBIT/Assets Segment Total 366174.5 100.00% 89440.2 100.00% 200292.6 100.00% 25341.4 100.00% FMCG â Cigarettes 232323.2 63.45% 71912.4 80.40% 58855.5 29.38% 6558 25.88% 122.18% FMCG -Others 55559.5 15.17% -2150.8 -2.40% 26536.8 13.25% 2765 10.91% -8.10% Agri Business 34124.6 9.32% 6431.5 7.19% 22117.1 11.04% 1592.6 6.28% 29.08% Paper 25253.2 6.90% 9367.8 10.47% 48086.4 24.01% 5937.7 23.43% 19.48% Hotels 10629.4 2.90% 2942.9 3.29% 36336.5 18.14% 7646.7 30.17% 8.10% Others 8284.6 2.26% 936.4 1.05% 8360.3 4.17% 841.4 3.32% 11.20% 2007 Sales (%) EBIT (%) Assets (%) Capex (%) EBIT/Assets Segment Total 202087.7 100.00% 40057.2 100.00% 114454.6 100.00% 15288 100.00% FMCG â Cigarettes 132070.1 65.35% 32416.7 80.93% 31062.6 27.14% 5586.4 36.54% 104.36% FMCG -Others 17103.5 8.46% -1960 -4.89% 12035.8 10.52% 2012.7 13.17% -16.28% Agri Business 26919.9 13.32% 1235.5 3.08% 17183.5 15.01% 1066.2 6.97% 7.19% Paper 12274 6.07% 4167.8 10.40% 28328.7 24.75% 4701.4 30.75% 14.71% Hotels 10531 5.21% 3860.3 9.64% 17080.2 14.92% 1730 11.32% 22.60% Others 3189.2 1.58% 336.9 0.84% 8763.8 7.66% 191.3 1.25% 3.84% What has changed over last 6 years Sales Growth EBIT Growth Assets Growth Capex Growth EBIT/Assets Change FMCG â Cigarettes 1.76 2.22 1.89 1.17 17.83% FMCG -Others 3.25 1.10 2.20 1.37 8.18% Agri Business 1.27 5.21 1.29 1.49 21.89% Paper 2.06 2.25 1.70 1.26 4.77% Hotels 1.01 0.76 2.13 4.42 -14.50% Others 2.60 2.78 0.95 4.40 7.36%

Some immediate observations/questions:

1. Agri Business has moved to a much higher gear. EBIT has gone up 5x while Sales is only marginally up, as is the case with Assets.

This is a much more profitable business today - 2nd most profitable after cigarettes. But, reasons for poor Agri Sales growth? What is the likelihood of higher uptick in sales for this segment?

2. Paper Segment is the next most profitable Segment. Capital allocation here looks to be in line. Roughly 24% of Assets and a similar alllocation for new Capex.

Sales & EBIT doubling over 5 years is not bad.

3. Hotels contribute only 3% of Sales and 3.2% EBIT in 2012 (5% and 10% respectively in 2007), but consumed 30% of total Capex allocations in 2012. In all other Segments Assets growth has more or less kept pace with Sales growth, but in Hotels assets growth is 2x.

Counterpoint -Unlike all other segments, Hotels is a cyclical segment. Next upturn in economy may present a better picture? AlsoAssets created have much higher longevity than plant/machinery?

How much of a drag is this on the overall business?

4. FMCG Business has already moved to 15% of Sales and is now the 2nd biggest segment after cigarettes. Losses are getting pared down progressively?

Will it start contributing to profitability form next fiscal?

[shrey]

Hi Folks,

The following is a snap short of Godrej Consumer Products Ltd.Please include this too in the discussion.

Godrej Consumer Products Ltd.
GODREJ CONSUMER PRODUCTS LTD. SALES EBITDA PAT EPA MKTCAP 5 YR CAGR 45.09% 41.41% 46.16% -17.75% 45.97% 3 YR CAGR 54.34% 41.83% 46.29% -48.93% 49.14% 1 YR GROWTH 33.49% 28.52% 41.19% -4.00% 21.14%
GODREJ CONSUMER PRODUCTS LTD. FY 2012 FY2011 FY2010 FY2009 FY2008 FY2007 FY2006 Financial Leverage 1.59 2.16 1.14 1.50 2.12 2.42 1.87 Total liability/Earning 4.30 5.61 1.47 3.50 3.24 3.09 2.18 Debt/Equity 0.56 1.16 0.04 0.49 1.08 1.42 0.87 Interest Coverage 12.80 12.64 39.58 12.34 16.26 17.57 20.27 Working Capital/Sales 15.17% 17.49% 12.18% 28.82% 1.94% 0.82% -3.40% Debtor Days 35 38 17 16 17 19 16 Inventory Days 59 44 40 43 63 52 53 Cash In/Cash Out Ratio 0.80 0.94 0.69 0.68 0.73 0.68 0.67
Gross Margin 67.71% 66.64% 71.48% 56.43% 60.22% 58.40% 54.13% EBITDA Margin 18.65% 19.37% 22.08% 18.00% 20.67% 19.25% 20.43% Net Margin 14.93% 14.12% 16.62% 12.44% 14.50% 15.12% 17.38%
Capital Turns 1.10 0.98 2.68 1.67 3.87 3.72 5.01 Fixed Asset Turns 1.32 1.18 3.98 3.21 4.18 3.84 4.28 Total Asset Turns 1.09 0.98 1.87 1.64 3.02 3.22 4.74 RoA 16.27% 13.80% 31.12% 20.34% 43.87% 48.72% 82.29% RoE 25.81% 29.84% 35.57% 30.57% 92.82% 118.07% 154.17% RoCE 19.25% 17.59% 43.11% 27.40% 58.36% 57.24% 88.97% RoIC 13.49% 13.86% 45.31% 22.92% 62.93% 56.06% 85.60% Tax Rate 29.09% 21.55% 19.28% 17.22% 14.43% 15.25% 9.05%

The company's has beenaggressively expanding inorganically.Over the past five years,GCPL has undertaken several acquisitions overseas â Keyline Brands in the UK, Rapidol and Kinky group in South Africa and Godrej Global Mideast FZE. It owns internationalbrands and trademarks in Europe, Australia, Canada, Africa and the Middle East and recently acquired the âTuraâ brand in Africa.During FY12, GCPL has entered into an agreement to acquire 60% stake in Cosmetica Nacional, Chile.Cosmetica Nacional enjoys ~30% market share in volume terms and is a leader in Chile, Panama andCosta Rica in the hair colourants market. Further, GCPL acquired 51% stake in Darling Group Holdings,which has operations in South Africa, Nigeria and Mozambique.Its salesand PAThave grown ~7 times and ~6 times respectively of FY06 numbers!Over the same period assets have grown to 30 timestheirvalue of FY06!

Solvency: Considering its size and pace of growth,the company has done a fair job in keeping debt within comfortable levels and ensuring that theInterest cost is fairly covered by earnings under normal circumstances.Though inadversescenarios thecompanymay face trouble retiring debt.

Liquidity:Seen in isolation the liquidity position seems to have worsened,but taking into account the Acquisitions the picture looks decent.Going forward as the company yieldsbenefitsof synergy there is a highprobability that the picture will improve.

Efficiency: The debtor days has more than doubled over the period.This probably is a red flag.

Margins,Turnover and Return:The gross margin has improved over the years.But The EBIDTA and PAT Margins have declined. This is probably due to the fact that the company is yet to yield economies of scale & scope in its operating costs and almostconsistentlyIncreasing Interest cost and effective tax rate(Reasons for Decline in PAT margin).The turnover ratios and return ratios have declined over the years.Hopefully they will Improve with time as the companyintegrates its business.

Types of businesses:The company owns brands like Good night,Hit,jet etc in India that are synonymous to the productcategory.(though Motin and a few others have entered the segment as competitors,the company's deep distribution network ensures itsdominant position).In International markets, in Indonesia,it is the market leader in airfresheners and wet tissue products,in South Africa,it is leader in ethnic hair colour products.Thecompany holds the second position in the hair colour market in Argentina, the home insecticidesmarket in Indonesia, the medicated soaps segment in Nigeria and the hair extension products segment.Thedominant or neardominant position in these segments of various market, thecharacteristicof the product that it forms an insignificant portion of consumer budget and the fact that most of the products are either essential(mosquito repellent,home insecticides etc) or appearance or beauty related(eg: Hair colour etc) gives it significant pricing power.The fact that theyget used up within a month or two ensures the recurring customers.Hence quality of earning is good as it is reliable and can be adjusted with increase in price of raw materials.The company derives 60% revenue from such products.

GCPL is the second largest player in the domestic toilet soap market. In this segment it sells commodity like product(low margin),but its deep distribution network ensures high turnover.The high turnover more than compensates the return for low margin.The company derives ~20% revenue from this segment.

Distribution Network:It has a distribution network of 4.8-4.9 million retail outlets,which is lower than that of ITC,HUL and Dabur only.

The penetration ofmosquito repellent and home insecticide is pretty low in India,specially in the rural areas.The company is well placed to capitalize on this opportunity.Whereas the penetration of toilet soap is very high(one of the highest in India).

[ronak]

Hello Shrey,

What you have done for ITC is an excellent dissection of Numbers and ratios to understand the business quantitatively. I was keen to understand the computation of these ratios as they can well be applied to other businesses. Pls be kind enough to post an excel sheet for ITC giving the ratio calculations. It would help all of us toundertakea similar analysis on other businesses.

[shrey]

Hi Krishna,

Sure a company like Emami is worth including in this study.Its PAT trend is upward sloping baring a minimal decline in FY09. Following is the snap short of Emami Ltd.

Emami Ltd.
EMAMI LTD. SALES EBITDA PAT EPA MKTCAP 9 YR CAGR 26.19% 37.42% 36.18% 30.32% 52.07% 5 YR CAGR 24.22% 31.06% 29.00% 9.87% 41.71% 3 YR CAGR 18.45% 10.89% 24.61% 242.79% 44.93% 1 YR GROWTH 15.59% 20.77% 12.89% 504.86% 3.75%
EMAMI LTD. FY 2012 FY2011 FY2010 FY2009 FY2008 FY2007 FY2006 FY2005 FY2004 FY2003 Financial Leverage 1.15 1.33 1.41 2.49 1.12 1.10 1.33 1.43 2.02 2.21 Total liability/Earning 1.83 1.82 2.63 7.27 1.90 1.41 1.54 1.87 1.91 2.48 Debt/Equity 0.15 0.33 0.41 1.49 0.12 0.10 0.33 0.43 1.02 1.21 Interest Coverage 22.05 10.86 2.95 4.24 20.08 70.26 36.01 16.79 N.A 2.36 Working Capital/Sales 17.41% 34.17% 24.72% 6.50% 22.26% 18.06% 25.63% 35.76% 37.32% 39.24% Debtor Days 72 3 11 6 4 3 7 1 0 0 Inventory Days 26 33 28 36 24 32 45 59 0 0 Cash In/Cash Out Ratio 1.04 0.62 0.58 0.42 0.32 0.72 0.96 1.70 N.A N.A
Gross Margin 56.38% 53.98% 61.35% 69.41% 57.46% 56.13% 42.12% 40.58% N.A N.A EBITDA Margin 24.69% 23.63% 28.18% 21.02% 19.93% 15.61% 19.10% 16.70% 12.49% 13.32% Net Margin 18.48% 18.92% 16.70% 12.12% 15.89% 12.78% 16.41% 13.45% 10.04% 9.28%
Capital Turns 2.16 1.35 1.23 1.10 2.81 3.69 9.49 4.03 2.94 2.71 Fixed Asset Turns 3.47 2.49 1.77 1.18 7.50 11.02 -6.63 -9.12 -29.89 -43.63 Total Asset Turns 1.73 1.33 1.13 0.98 1.80 2.04 2.35 1.95 2.64 2.38 RoA 31.93% 25.08% 18.92% 11.89% 28.61% 26.10% 38.54% 26.23% 26.51% 22.08% RoE 36.86% 33.31% 26.64% 29.63% 32.09% 28.76% 51.08% 37.62% 53.64% 48.77% RoCE 27.66% 18.54% 18.49% 18.22% 33.64% 30.06% 39.64% 29.92% 29.89% 8.86% RoIC 28.16% 13.92% 13.10% 17.44% 46.32% 48.01% 156.98% 57.78% 29.01% 7.52% Tax Rate 18.61% 26.03% 34.70% 14.16% 11.75% 11.46% 1.92% 6.62% 12.98% 25.41%

Solvency:The company has reduced its debt level over the years.The company has been borrowing short term funds for financing its working capital.Theinterest coverage was at very uncomfortable levels in FY09 and FY10,But the picture has improved over last 2 years.

Liquidity: Its liquidity position has degraded and the company does not get to hold on to cash looking at the current cash in/cash out ratio.Though the trend of net WC/ sales shows a decline,comparison with the peers hints that the company deploys much more of funds in working capital than others.

Efficiency: The company takes half the days it took to convert Inventory to sales 10 years ago and collects credit to customer in half the time it took 10 years ago.This suggests phenomenal improvement in efficiency over the period.Domestic sales is done on cash basis.

Margins,Turnover and return:The company has improved its margins significantly over the years(EBIDTA & PAT Margins have almost doubled over the period),the company has not been able to generate adequate sales to maintain or improve turnover.However the impact of margin isdominant,which reflects an improvement in ROA(sharp decline in FY09 due toacquisition of Zandu). All other return ratios have improved over the decade barring ROE(Due to declined financialleverage ie:increased equity base due to fund rasing in 2004 and 2009).

The effective tax rate is low and has had a favorable history too.During FY12, about 80% of the companyâs production came from tax exempt zones.This indicates the fact that the company is utilizing the taxbenefitto maximum use!

Distribution Network:Emami hasIt has five regional sales offices and 32 depots as on March 31, 2012,a panâIndia distribution network of 3,500 distributors, 160 superâstockists, 4,000 subdistributors ,2,500 frontline sales force and five mother warehouses with cumulative storage capacityof 278,000 square feet. The companyâs direct retail coverage increased to 500,000 outlets in FY12 from450,000 outlets in FY11.It has total retail reach of 3.5 million retail outlets.Emamihas launched schemes to increase penetration in rural FMCG market.

Types of businesses:The company draws significant revenue from products likeBoroplus Antiseptic Cream, Navratna Oil and Zandu Balmwhich are strong marketleaders in their respective segments.These products are synonymous to their respective productcategoryand hence have a consumer monopoly.This gives them a decent pricing power(evident from the fact that the company has raised the price of the products by 5-6%,with growth in volumes intact).It also has popular products in other segments like men fairness cream,healthsupplements,herbal medicine,cold cream etc.Here too it follows the strategy of product differentiation,which ensures loyal customers even without market leadership and shields it from price competition.The herbal quotient(product differentiation)helps it shield competition from MNCs.The company in its annual report says every second the comapny sell 85 products,this is staggering! :D

[shrey]

Hey Folks,

The following is the snap short of Procter & GambleHygiene & Healthcare Ltd.Please Include this too in the discussion.

Procter & GambleHygiene & Healthcare Ltd.
PROCTER & GAMBLE HYGIENE & HEALTHCARE LTD. SALES EBITDA PAT EPA MKTCAP 9 YR CAGR 10.71% 6.78% 8.82% 4.31% 22.04% 6 YR CAGR 19.27% 10.14% 15.08% 7.62% 19.16% 5 YR CAGR 19.14% 6.48% 8.37% 1.83% 28.30% 3 YR CAGR 19.98% -2.80% 0.42% -12.05% 12.33% 1 YR GROWTH 29.58% 23.79% 20.16% 20.88% 3.26%
PROCTER & GAMBLE HYGIENE & HEALTHCARE LTD. FY 2012 FY2011 FY2010 FY2009 FY2008 FY2007 FY2006 FY2005 FY2004 FY2003 Financial Leverage 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Total liability/Earning 2.21 1.89 1.67 1.22 1.71 1.92 1.26 2.18 2.52 2.96 Debt/Equity 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Interest Coverage 7435.00 6023.33 8026.67 N.A 9163.50 14595.00 1282.36 2808.00 351.23 183.29 Working Capital/Sales 36.21% 40.21% 37.48% 36.65% 32.72% 30.45% 31.48% 20.04% 29.14% 35.21% Debtor Days 14 11 12 11 8 10 6 23 31 35 Inventory Days 26 24 22 25 26 21 18 29 28 31 Cash In/Cash Out Ratio 0.35 0.34 0.28 0.35 0.27 0.27 0.21 0.36 0.40 0.39
Gross Margin 57.83% 60.53% 68.64% 68.99% 70.37% 71.62% 67.68% 51.27% 54.50% 57.66% EBITDA Margin 19.36% 20.26% 29.50% 31.24% 30.34% 28.82% 26.33% 22.40% 25.84% 26.06% Net Margin 13.97% 15.07% 19.95% 23.14% 20.41% 16.71% 24.66% 18.27% 16.04% 15.57%
Capital Turns 1.94 1.69 1.92 1.86 1.93 2.09 2.32 3.16 2.32 1.92 Fixed Asset Turns 6.54 5.26 6.91 5.84 5.23 5.72 8.65 8.63 7.17 5.88 Total Asset Turns 1.86 1.67 1.69 1.76 1.86 1.85 2.08 3.02 2.31 1.90 RoA 26.01% 25.12% 33.62% 40.64% 37.91% 30.85% 51.17% 55.22% 37.00% 29.54% RoE 26.01% 25.12% 33.62% 40.64% 37.91% 30.85% 51.17% 55.22% 37.00% 29.54% RoCE 32.00% 30.09% 45.04% 51.60% 52.87% 50.12% 51.73% 62.21% 54.99% 43.76% RoIC 27.14% 26.11% 39.93% 41.94% 40.18% 39.19% 35.81% 42.63% 41.13% 33.34%

*There was a significant change in the business in FY07 due to the termination of substantialcontract based manufacturing activity for the detergents category of P&G HomeProducts.The detergent business accounted for 18.5% of net revenue in FY06 and ~45% in FY05.So,we consider the period from FY07 to FY12 in our study.

Growth: The sales growth has been in line with the long term growth rate and has accelerated in last 1 year,but the profit growth hasdeceleratedover the years(most probably due to increaseddepreciation).But the last year growth seems good.The vital question is how sustainable is it?

Solvency: The company's solvency position is excellent in absolute as well as relative terms.

Liquidity & efficiency:Its liquidity and efficiency position hasdeteriorationover the years,even across-sectionalanalysis with peers like HUL etc suggests the same.

Margins,Turnover & Return Ratios:Gross margin has significantly declined(due to reduction in prices in select SKU's(economy products) of Sanitary napkins,a move intended to encourage more and more female to switch to the product from traditional solutions).The EBIDTA has fallen (most probably due to highdepreciation charge).PAT Margins have fallen less rapidly over the years(due to minimal interest cost and declining effective tax rate).The fixed & capital asset turnover have improved marginally,whereas the capital turnover has declined marginally(most probably due to increased working capital requirement).The return ratios have declined indicating the fall in margins have dominated the minimal rise in turnover and increased working capital requirement.

Some qualitative aspects worth noting:

• R&D:The company leverages its parent P&G's capabilities.The parent is theworldâs largest FMCG company.This remains a strong competitive advantagefor the company.
• Unique advertising: When Jonson & Johnson has selected to advertise its product by providing samples in Ladies washrooms of Malls with high footfalls in major cities,targeting affluent and middle class population. PGHH has gone to school in rural areas to give a feel of its product and educate girls who have attained puberty.Its Whisper school programme has now reacheda total of 2.5mn girls across private and government schools. The companyhas also invested heavily on advertising to build the brandâs equity.Advertising expenditure as a percentage-of-sales has consistently been over10%.Thisstrategy is expected to yield loyal customersover an extended period as females rarely switch brands in thiscategoryonce they are satisfied with the product.
• Types of Businesses: The company has a very focused product portfolio Vicks and Whisper.Both are market leader in their respective segments with 30% and 50% market share respectively. Vicks has a consumer monopoly and Irrespective of where the economy goes people are going to catch cold and hence to fix the disorder quickly they are going to buy vicks that too without consulting a doctor as it is an OTC Drug.This gives it significant pricing power.Historically this segment has been growing at 10%.Whisper definitely has a consumer monopoly and a strong one as it provides solution to a recurring issue.The brand has a number of products permuting and combining the three basic requirements of a sanitary napkin. 1. comfort 2. Durability 3. Leak proofing.Once a customer is satisfied with a product she will come back to buy again and again 10-12 times in one year generating at least Rs.700 in revenue for the company per year.The company has significant pricing power here as for customers satisfaction is more important than price.The customer has insignificant price elasticity as the customer has to use it or go without it and it also form an insignificant portion of consumer's budget.
• Penetration: With penetration levels of ~12%, the feminine hygiene category has, in fact,one of the lowest penetration levels among all consumer categories in India.The 12% product penetration level in India is not only low compared todeveloped markets like the US and Europe, where the products reach over75% of the target market, but also much lower than comparable emergingmarkets like China (~64%) and Indonesia (~85%). The lower purchasingpower of a vast majority of women population and traditional use of cloth hadlimited the consumption base in India. At 25%, category reach is low even inthe urban areas, indicating the huge growth potential in this category.The company being the market leader is well placed to capitalize on this opportunity.
• It has improved its distribution network over the years and is expected to grow and optimize it further to drive volume growth.
  

[shrey]

Hey folks,

The following is a snap short of GSK Consumer healthcare Ltd.Please include this too in the discussion.

GSK Consumer Healthcare Ltd.
GLAXOSMITHKLINE CONSUMER HEALTHCARE LTD. SALES EBITDA PAT EPA MKTCAP CFO 9 YR CAGR 16.72% 18.34% 21.19% 32.78% 29.65% 10.93% 5 YR CAGR 20.54% 19.46% 21.56% 19.28% 40.11% 19.79% 3 YR CAGR 18.19% 22.03% 23.53% 40.20% 56.19% -1.64% 1 YR GROWTH 17.04% 19.68% 18.46% 24.98% 31.21% 18.71%
GLAXOSMITHKLINE CONSUMER HEALTHCARE LTD. 31-12-2011 31-12-2010 31-12-2009 31-12-2008 31-12-2007 31-12-2006 31-12-2005 31-12-2004 31-12-2003 31-12-2002 Financial Leverage 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Total liability/Earning 5.21 5.14 4.57 1.76 1.68 1.87 2.01 2.96 2.78 2.56 Debt/Equity 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Interest Coverage 158.77 176.56 84.03 41.23 54.13 54.65 39.30 23.84 21.96 19.70 Working Capital/Sales 27.97% 27.53% 34.03% 33.73% 8.04% 5.72% 19.71% 25.58% 19.62% 10.66% Debtor Days 13 8 6 10 8 9 9 11 8 21 Inventory Days 49 48 49 64 54 47 49 36 42 42 Cash In/Cash Out Ratio 0.25 0.24 0.28 0.97 0.81 0.73 0.72 0.51 0.52 0.60 CFO/PAT 1.09 1.09 1.72 0.69 1.16 1.09 0.92 1.76 1.91 1.79
Gross Margin 61.30% 62.00% 63.09% 60.02% 63.94% 65.98% 63.67% 64.65% 63.10% 64.39% EBITDA Margin 21.62% 21.14% 20.27% 20.79% 22.41% 20.68% 21.39% 19.21% 19.35% 24.25% Net Margin 12.86% 12.71% 11.77% 11.89% 12.44% 11.14% 11.04% 8.43% 9.52% 11.25%
Capital Turns 2.84 2.77 2.28 2.13 3.95 3.60 2.09 1.66 1.67 1.61 Fixed Asset Turns 13.76 11.67 10.17 7.54 5.79 4.53 3.56 2.89 2.48 1.94 Total Asset Turns 2.41 2.46 2.18 2.08 2.02 2.10 2.04 1.64 1.63 1.56 RoA 31.04% 31.23% 25.72% 24.75% 25.17% 23.39% 22.55% 13.82% 15.51% 17.59% RoE 31.04% 31.23% 25.72% 24.75% 25.17% 23.39% 22.55% 13.82% 15.51% 17.59% RoCE 48.15% 47.82% 39.64% 37.77% 38.61% 35.55% 34.90% 23.65% 22.27% 30.57% RoIC 38.17% 35.92% 26.94% 25.42% 49.98% 40.47% 22.73% 15.08% 17.48% 20.89%

Solvency: The company's solvency has improved over the years.But the current liability has risen significantly over the years evident from increase in Total Liability/Earnings while the long term debt has remained zero.

Liquidity: The company needs more working capital to generate sales currently than it needed 10 years ago (suggests deterioration in liquidity),whereas the declining cash in/cash out ratio indicates the cash holding period has risen over the years (a good thing!).

cash backing: The company's earnings are significantly backed by cash.

Margins,Turnover and Return ratios:Baring EBDITA Margin,all the margins have improved. Infact the company has the highest gross margin in the FMCG Pack,this probably indicates significant pricing power.The return ratios and turnover ratios have improved significantly.

• distribution network: The company has a total reach of 1.5 million retail outlets.The company has increased its rural coverage by 10000 villages(total being 50000 villages).The company has launched small SKU's(INR 5) to capture strong footing in rural markets.It derives ~25% of domestic revenue from rural areas and rest from urban.
• Types of Businesses: The company own generic brands like Horlicks and Boost.It is the market leader in malted food segment with 66% market share.The brand loyalty,nutrition related product and high barriers to entry(which even giants like Nestle,Dabur and HUL failed to overcome) makes it a consumer monopoly and lends it significant pricing power.The Product being a milk additive gets used up in quick time(say a month) ensures recurring customers.The company has increased the share of its premium products in the portfolio from 16% in FY07 to 23%,this has boosted has boosted margins.The moststaggering fact is that the company derives ~93% of its revenue from this segment(probably the highest contribution of revenue by brands with consumer monopoly).The company is also into products like biscuits and oats.The fast growing oat market is a mouth watering opportunity,it could yield huge profits if the company issuccessful in establishing itself in this market (could be the future growth engine).
• Thepenetration levels are low for Malted food ~40% in urban,~10%in rural and an overall penetration of ~22%.The company is well positioned to capitalize on this lucrative opportunity.

[piy_sharma]

Hi Shrey and Donald,

Thanks for the excellent work on the ITC numbers. Here are my observations.

1). I continue to be biased against hotels business in general as it is a high capex and cyclical. A perfect recipe for disaster. As i had mentioned earlier, this business has a management bias and will continue to expand with generous capital allocation.

2). Agri Business- We must note that ITC is quite a vertically integrated business. The inputs from the agri business feed into the foods business. Wheat for atta, masalas etc. The trigger for the agri business is directly related to the growth in the foods business. Also the e-choupal business hasn’t been as much of a success as touted in the media. This has impacted the procurement process.

3). The paper division has three components. The classmate brand of stationary products is doing well. It has crossed the Rs 1000 crore mark if my info is correct. The remaining part of the business is the packaging and printing division and Tribeni tissues which manufactures cigarette paper. A large part of the output of these divisions is fed into the cigarette division.Another example of vertical integration. The growth in the last few years has come from value addition than volume growth. You might have noticed the changed packaging of cigarette packs in the last few years. Again this business is not very competitive when it comes to selling to external clients except the classmate brand ofcourse. Again the cigarette division driving profitability here.

4). The foods business should be profitable next year operationally. The entire manufacturing in the foods business is outsourced so the retuns on this business when it turns around will be great.The soaps, bath gel business is struggling and no immediate signs of a turn around.

Regards

[shrey]

HelloRonak,

First of all thank you.I will be more than happy to help you.I have attached the ITC file with the comment.

Just to make things easier for you and many others, you can get the same data with your own customization fromhttp://www.screener.in/.You need to follow the following steps to download data of any company from the site.

Step 1:Register yourself on the site (free service) and Login.http://www.screener.in/login/

Step 2:Go to the desired company’s data sheet by typing its name in the “company name” search box.(for eg: if you want to go to ITC,type ITC and the companies with similar names will appear in a drop down menu,click on ITC and the page that comes up ishttp://www.screener.in/company/?q=500875

Step 3:On the right hand top corner there is a button that reads “Export to Excel” click on it to download the data.

Step 4:Make the necessary customization as per your requirement in the customization sheet and save it.(Please do not make any changes in the data sheet)

Step 5: Upload the file back tohttp://www.screener.in/excel/

The best part of this is after thisexercise for whichever company you export the data to excel the customization sheet will automatically adjust as per the new numbers of the company.This is a unique tool in this site that takes care of number crunching without anyhassle.

Regards,

Shrey:D

ITC_Consolidated.xlsx (44.9 KB)

[shrey]

Hey Folks,

As all of us know most of these companies have a durable competitive advantage and most of them generate a significant amount of revenue and hence profits from businesses with consumer monopoly(some cases all of their revenue).To maintain the consumer monopoly which these companies enjoy they have to spend capital,the less they spend the better it is.There are two ways that have been mentioned they are as follows:

1.Total CAPEX/Total PAT over a business cycle(ideally 10 years).The lower the figure the better it is.An important point to be noted here is the CAPEX should only be used to maintain theexisting consumer monopoly,any acquisition,expansion etc should not be counted.Determining this can be a relatively tough job.(Method mentioned in The interpretation of financial statements by Marry Buffet and David Clark)

2. Increase in PAT over the period/Sum on profit added each year to Retained Earnings(PAT-dividend).This is a reverse method, ie: the higher the total return due to increase in earning power the lower is the company spending to maintain its consumer monopoly.

assumptions:

1.The PAT earned for the 1st year under study is solely due to reinvested earnings before thebeginning of the period and the increase in PAT is due to the retained portion of PAT in the period.

2.The earning has to be from consumer monopoly only(numerator). :)

Drawbacks:

1.this is not a return measure.

2.thisdoesn't take into account the time value of money.

3.It is not a precise measure.

(Method mentioned in The new Buffetology by Marry Buffet and David Clark)

I have explained the calculation for one of the company elaborately and for the rest just the figures are mentioned.However,I have beenliberal here and considered the total PAT of the company in calculations.

calculation for ITC Ltd.

ITC Ltd.

ITC 31-03-12 31-03-11 31-03-10 31-03-09 31-03-08 31-03-07 31-03-06 31-03-05 31-03-04 PAT 6258.14 5017.93 4168.18 3324.59 3157.76 2755.26 2295.38 2245.42 1616.01 Dividends 3518.29 2166.68 3818.18 1396.53 1319.01 1166.29 995.12 773.25 495.36 profit for addition to retained earnings 2739.85 2851.25 350 1928.06 1838.75 1588.97 1300.26 1472.17 1120.65 increase in profit 4642.13 total profit 15189.96 return on total retained part of PAT 30.56%

The following table gives the return on total retained part of PAT for each company.

return on total retained part of PAT
Names Return on retained PAT ITC 30.56% NESTLE 50.00% COLGATE 55.54% DABUR 27.89% HUL 18.16% MARICO 21.69% EMAMI 34.70% P&GHH 19.03% GSK 27.30% AVERAGE 31.65%

Looking at the above out put the inference one should draw is that among the 10 companies it is Colgate which spends the least,Nestle sells little more and so on.

But when we take into account the fact that all the products of these companies do not have a consumer monopoly we need to multiply the profit(PAT) break up of the respective years to the obtainedfigure(only in the numerator).Since it is difficult to get such accurate data we can extrapolate the operating profit split up and in case that too is notavailable we can come up with a profit mix with the help of Revenue break up(easily available) and expectations about the margins.

For eg: ITC derives 80% of its operating profit from cigarettes.Assuming that the PAT split up remains the same.So,the company derives ~85% of its net profit from Cigarettes and Classmate notebooks (both have a consumer monopoly).Hence,the return on total retained part of PAT when multiplied to 85% is .85*30.56% = 25.97%.Which is very close to GSK Consumer Products & Healthcare Ltd(93% from Horlicks and boost)(25.4%).

I request the seniors to guide me to make this metric better and come up with some other usefulmetrics to scale sales effectiveness etc.

[datta_6745]

This can probably be calculated as profit for nth yr/cumulative retained earnings and see the efficiency (read efficiency of retained capital re utilization) trend.

Taking the 10th and 1st year might be misleading if the company is coming out of low base.

~Supratik

[shrey]

Hi Supratik,

kindly explain what do you mean by a low base.

Regards,

Shrey.

[datta_6745]

Shrey, I was trying to say that a company which had a lower PAT basket in 2001-2006 and higher profit in 2006-2013, the comparison between 2001 and 2013 might look little misleading. So I was suggesting if the same theorem could be looked as a smaller window for comparison (say every 3 years) and then checking on efficiency of retained capital for yr1-3 compared with yr4-6 compared with yr7-9 and see the trend of improvement/unimprovement.

(I dont mean ITC as a case but in general)

~Supratik

[shrey]

Hello Supratik,

Thanks for the clarification.The periods which you are suggesting will give us more number of figures on which we can do a trend analysis.But the intention behind thisexerciseis to measure how much the company is spending to maintain its consumer monopoly and for this we need to consider a period long enough(Business cycle).If we take a smaller period the company may make very little investment in some years and very high in others so we’ll not be able to get the intended picture.Here we assume that the company is reinvesting all the money it is retaining(which ideally it should be doing).

[datta_6745]

‘how much the company is spending to maintain its consumer monopoly and for this we need to consider a period long enough(Business cycle)’

Ok Shrey, your point is taken. Got it now.

~Supratik

[ayushmit]

Great work, Shrey!

[shrey]

Thank you Ayush!

[Donald]

Shrey/others familiar with nestle

While the overall numbers look good, this is what I notice when I look at Return on Incremental Equity over 1 year and 3 year periods (over the last 10 years). I have used this measure to try and find out if the company is continuing to deploy its increasing networth at the same level of efficiency as before or there are changes. I am most interested in recent 1 year and 3 year periods!

Nestle India
NESTLE INDIA LTD. FY 2012 FY2011 FY2010 FY2009 FY2008 FY2007 FY2006 FY2005 FY2004 FY2003
PAT 961.55 818.66 655 534.08 413.81 315.1 309.57 251.92 263.08 206.91
Equity 96.42 96.42 96.42 96.42 96.42 96.42 96.42 96.42 96.42 96.42 Reserves & Surplus 1177.54 759 484.85 376.93 322.01 292.47 257.72 222.99 238.58 192.88
RoIncE(1yr) 34.14% 59.70% 112.05% 218.99% 334.16% 15.91% 165.99% 71.58% 122.91% 71.52% RoIncE(3yr) 53.39% 92.65% 176.68% 188.33% 163.49% 96.53% 158.33%

The big declines in Return on Incremental Equity (RoINcE) in last 3 years raised some questions.

a) In last 4 years Nestle has kept doubling its addition to Reserves - from ~50 to 100, 250, 400 Crs. Earlier year additions to Reserves used to be just 30-50 Crs

b) However, In the last 3 years Dividends have remained constant - years before that there used to be roughly 10% CAGR in dividends

c) We can see Nestle is continuing to grow at its historical rate ~19-20%, but what has changed in last 4 years that it has started hoarding up on Reserves?

They don't need capital for running the business. They could have distributed much more dividends. Dividend payouts have come down to under 50% from historical 70-80% dividends. They could have done share buybacks.

Can we check the reasons for the same? Is some big acquisition in the offing why? One would assume parent Nestle has all the brands they want to be seen offering in India. They wouldn't want to be diluting their "brand" quality with Indian acquisitions.

So what's the game plan?

-Donald

[Donald]

Some more food for thought

Impact â Every Rupee retained/invested adds xx.yy in incremental market value?

NESTLE INDIA LTD. Delta Networth Delta MarketCap Impact Delta Invested capital Delta MarketCap Impact 10 YR 984.66 33556.9 34.08 390.43 33556.9 85.95 7 yr 919.82 31427.21 34.17 450.64 31427.21 69.74 5 Yr 855.53 27048.96 31.62 438.62 27048.96 61.67 3 Yr 692.69 19537.95 28.21 393.44 19537.95 49.66 1 Yr 418.54 9489.29 22.67 335.99 9489.29 28.24 * Impact â Every Rupee retained/invested adds xx.yy in incremental market value

[atulgarg]

[quote="Donald, post:37, topic:531558273"] Reserves & Surplus | | | | | | | | | | | | | | | | > b) However, In the last 3 years Dividends have remained constant - years before that there used to be roughly 10% CAGR in dividends > > c) We can see Nestle is continuing to grow at its historical rate ~19-20%, but what has changed in last 4 years that it has started hoarding up on Reserves? > > They don't need capital for running the business. They could have distributed much more dividends. Dividend payouts have come down to under 50% from historical 70-80% dividends. They could have done share buybacks. > > Can we check the reasons for the same? Is some big acquisition in the offing why? One would assume parent Nestle has all the brands they want to be seen offering in India. They wouldn't want to be diluting their "brand" quality with Indian acquisitions. > > So what's the game plan? > > -Donald [/quote]

Donald,

I didnât get a chance to go through the whole thread and am sure, you must have looked at this before. I see a lot of capex. am I missing something ?

Period	31/3/2011	31/3/2010	31/3/2009	31/3/2008	31/3/2007	31/3/2006	31/3/2005	31/3/2004	31/3/2003	31/3/2002
Sales	7490.82	6260.21	5141.90	4328.65	3500.96	2819.16	2475.09	2229.42	2160.21	1948.06
Net Profit	961.55	818.66	655.00	534.08	413.81	315.10	309.57	251.92	263.08	206.91
equity	96.42	96.42	96.42	96.42	96.42	96.42	96.42	96.42	96.42	96.42

1177.54	759.00	484.85	376.93	322.01	292.47	257.72	222.99	238.58	192.88
Reserves & Surplus Change	55.14%	56.54%	28.63%	17.06%	10.10%	13.48%	15.57%	-6.53%	23.69%
capex	1555.23	445.89	255.22	251.92	168.71	121.73	130.36	65.04	40.89	54.24
capex growth	248.79%	74.71%	1.31%	49.32%	38.59%	-6.62%	100.43%	59.06%	-24.61%
Donaldwrote:

[Donald]

Some added perspectives on why Nestle may be hoarding CASH.

1. It was wrong to say Nestle doesn’t need capital to run its business. For existing dominant brands like Kitkat, Nescafe, Maggi may be. But for introducing new brands from parent Nestle SA portfolio into Indian market and strengthening marginal and not so strong brands it will need big chunks of capital. Even investments in existing dominant brands, expanding distribution network, et al may be significant.

2. Like Atul has shown, last 2 years has seen big incremental capex being put in by the company. Where these are directed can perhaps be easily found out from the ARs and other reports I guess.

3. So the Hoarding of Cash plus the huge incremental capex being put in over last 2-3 years only points to big plans for the Indian market.

Its good to see signs of aggression in Nestle’s plans forward in the immediate near to medium term.

Shrey - We could look for the presence or absence of the same pattern in other leading players?

-Donald