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

[Donald]

Posted byshreyat Monday 00:25

Hi Folks,

The following is a compilation of quantitative and qualitative picture of ITC Ltd.Please help me takeforward the discussion about the conglomerate through active participation.

ITC Ltd.
ITC LTD. SALES EBITDA PAT EPA MKTCAP 9 YR CAGR 18.31% 17.97% 18.44% 19.19% 28.46% 5 YR CAGR 15.83% 18.68% 18.65% 24.75% 23.24% 3 YR CAGR 16.31% 20.56% 22.53% 25.34% 35.35% 1 YR GROWTH 19.03% 27.07% 24.72% 38.45% 28.82%
ITC LTD. FY 2012 FY2011 FY2010 FY2009 FY2008 FY2007 FY2006 FY2005 FY2004 Financial Leverage 1.01 1.02 1.02 1.03 1.03 1.03 1.03 1.05 1.04 Total liability/Earning 0.95 1.11 1.11 1.28 1.27 1.26 1.29 1.27 2.00 Debt/Equity 0.00 0.01 0.01 0.01 0.02 0.02 0.02 0.03 0.02 Interest Coverage 114.89 342.69 84.74 97.21 169.38 234.42 148.39 51.22 N.A Working Capital/Sales 7.99% 6.00% -0.57% 16.98% 12.05% 17.27% 14.82% 5.47% -1.29% Debtor Days 17 18 19 18 22 21 22 28 15 Inventory Days 89 94 95 110 106 113 111 117 91 Cash In/Cash Out Ratio 1.30 1.25 1.35 1.37 1.35 1.42 1.32 1.21 0.65
Gross Margin 70.47% 67.88% 64.34% 62.68% 59.80% 58.45% 60.60% 64.68% 65.02% EBITDA Margin 37.79% 35.40% 35.17% 33.91% 34.30% 35.07% 36.96% 38.89% 38.68% Net Margin 23.66% 22.58% 21.32% 20.88% 21.50% 21.69% 22.50% 28.47% 23.46%
Capital Turns 2.18 2.15 2.28 1.52 1.76 1.78 1.74 1.74 1.92 Fixed Asset Turns 2.64 2.47 2.25 2.05 2.24 2.58 2.35 1.93 1.88 Total Asset Turns 1.34 1.34 1.33 1.11 1.17 1.17 1.09 0.96 1.03 RoA 31.73% 30.16% 28.46% 23.25% 25.11% 25.43% 24.57% 27.32% 24.05% RoE 32.16% 30.71% 28.98% 23.84% 25.88% 26.25% 25.32% 28.62% 25.04% RoCE 47.33% 43.52% 43.00% 34.09% 36.78% 38.01% 37.09% 33.79% 36.22% RoIC 52.59% 46.47% 48.50% 30.28% 36.38% 38.58% 40.06% 38.92% 45.77%

some important notes andinterpretations about the ratio:

Total liability/Earning:The ratio has almosthalvedin last 10 years and with its current earnings it can retire all its liabilities with just one year's earning.which is exceptional!

Working Capital/Sales - dramatically reduced.

Debtor days: Taking into account the fact that the sales have grown more than 4 folds in last 10 years,the company has done a great job inmaintaining 2 weeks as collection period.

Inventory days:*calculated using sales instead of COGS.By taking COGS probably a better picture can be obtained.

cash in/cash out(defined as debtors+inventory/current liabilities): Has reduced over the years.The low ratio indicates that thecompany holds on to cash for longer period.

PAT(CAGR): 3YR>5Yr>10Yr. The picture may improve going forward, when the food business breaks even.

Margins(Gross,EBIDTA & Net)Average Gross Margin 3YR>5Yr>10Yr).The company has improved its gross margin probably by following a mix of the following three strategies: Increasing price above inflation, changing revenue mix over the years and sourcing raw material from a unique source.A clearer picture can be obtained byassessing the individual contribution of the three strategies. EBIDTA &Net Marginshave remained within a thin range over the years.(Indicatingmaintenanceof efficiency)

Asset turnover:all the asset turnover ratios have improved over the year indicating the company is using its assets more efficiently to generate sales with passage of time.

Return ratios:All the return ratios have improved consistently over the years.

Though ITC is a very well known business a few points worth highlighting are as follows:

1. unique raw material source:The company has made an effort to create unique raw material source for most of its products.E-choupal present across 10 majoragricultural states gives it the added advantage to source quality raw material at cheaper cost by bypassing the middle man and improving its margin even after sharing a part of the cost saving with farmers(supplies raw material for food and agri business). It sources more than 50% of the tobacco produced in India and hence has the advantage of accessing cheap and quality raw material(raw material for Cigarettes). It has also provided support to farmers for growing trees that yield more pulp(this ensures cheap and quality raw material for its paper business).
2. types of business:The company's ~64% revenue contributors come under addiction(cigarette).which is an amazing thing!Cigarettes have significant price elasticity as the form an insignificant portion of the consumer's budget and the cannot go with out it.A smoker smokes at least 5 cigarettes a day making its demand reoccur 5 times a day(which means at least Rs25 Revenue is fixed from an exsisting customer daily,amazing!) .Moreover cigarette brands command significant brand loyalty(Eg: a smoker who smokes Glold Flake Kings will smoke a Malboro or any other brand in extreme cases(non-availabilityof the brand) and such emergencies rarely arises as ITC cigarettes are among the most widely distributed products in India).However the revenue contribution of food business has been increasing over the years,it currently stands at 15% of total revenue(which is a pricecompetitive business!).

Posted byshreyat Monday 13:24

Hi folks,

The following is a crisp picture of Nestle India.Mostly the numbers speak for themselves.However,i have given explanationsfor some ratios that i feel have strayed away from depicting the actual picture.Please help me take this forward through active participation.

Nestle India Ltd.
NESTLE INDIA LTD. SALES EBITDA PAT EPA MKTCAP 9 YR CAGR 16.82% 17.11% 17.59% 18.62% 27.68% 5 YR CAGR 20.94% 22.30% 23.46% 24.06% 35.15% 3 YR CAGR 20.70% 23.24% 21.16% 20.42% 42.25% 1 YR GROWTH 19.66% 23.46% 17.45% 16.89% 32.57%
NESTLE INDIA LTD. FY 2011 FY2010 FY2009 FY2008 FY2007 FY2006 FY2005 FY2004 FY2003 FY2002 Financial Leverage 1.76 1.00 1.00 1.00 1.01 1.04 1.04 1.02 1.02 1.22 Total liability/Earning 4.79 3.83 3.75 4.01 4.24 4.29 3.69 4.16 3.63 4.42 Debt/Equity 0.76 0.00 0.00 0.00 0.01 0.04 0.04 0.02 0.02 0.22 Interest Coverage 157.93 1079.81 665.54 474.09 745.13 1105.11 2231.38 500.19 N.A 57.15 Working Capital/Sales -11.80% -10.49% -11.63% -9.77% -9.96% -8.96% -9.40% -11.61% -6.43% -3.82% Debtor Days 1 1 2 1 2 1 1 2 1 1 Inventory Days 6 4 5 4 6 7 5 4 5 4 Cash In/Cash Out Ratio 0.04 0.03 0.04 0.03 0.04 0.05 0.03 0.03 0.04 0.03
Gross Margin 51.44% 49.87% 52.22% 50.59% 49.95% 52.59% 54.42% 53.32% 56.04% 56.32% EBITDA Margin 21.15% 20.50% 20.28% 20.10% 20.23% 19.60% 21.23% 19.70% 20.72% 20.34% Net Margin 12.84% 13.08% 12.74% 12.34% 11.82% 11.18% 12.51% 11.30% 12.18% 10.62%
Capital Turns 10.83 17.59 17.23 13.11 13.83 9.75 10.26 16.11 8.55 6.46 Fixed Asset Turns 4.75 6.18 5.74 5.75 5.82 5.20 5.22 5.61 5.52 5.18 Total Asset Turns 3.34 7.32 8.85 9.13 8.31 6.96 6.72 6.81 6.35 5.53 RoA 42.83% 95.70% 112.68% 112.63% 98.22% 77.77% 84.02% 76.96% 77.35% 58.78% RoE 75.48% 95.70% 112.68% 112.83% 98.90% 81.03% 87.41% 78.87% 78.53% 71.52% RoCE 63.74% 135.07% 160.30% 163.97% 150.33% 120.01% 127.18% 119.20% 118.02% 98.55% RoIC 144.80% 232.88% 224.34% 163.06% 165.19% 110.90% 128.13% 184.52% 104.82% 77.29%

some important notes andinterpretations about the ratio:

Sales (CAGR) : The sales CAGR has decelerated marginally probably because of price rise and Increased competition in coffee,noodles etc.

profit (CAGR) : EBIDTA (1Yr>3Yr>5Yr>10 Yr) Indicating that thecompany has been ableaccelerate itsEBIDTA growth consistently, while taking care of its operating cost.PAT hasdeclaredmarginally probably because of the same reasons that have led to deceleration in sales and increased Interest cost(due to loan from the parent company).

Market cap (CAGR) : (3Yr>5Yr>10 Yr) The market seems to have recognized the consistency and quality of the business.

debt/equity and financial leverage:Over the years the company has remained virtually debt free.The recent increase in these ratios is due to the debt ofUS$157 mn from Nestle SA for five years under the ECB approval route to fund its capex plans.

Totalliability/Earnings: The ratio has hovered around 4 in the period of study.It has recently risen to ~4.8 (due to the recent debt from its parent to fund its expansions).This means with the current level of earning it can payoff all its liabilities in less than 5 years,this is fairly good.

Working capital/sales: The company has had negative working capital for last 10 years and the ratio has declined over the period,that means that the company now operates more on credit with its suppliers and on near cash with its customers.This is also evident from current ratio (its has remained less than 1 for the whole period).This means that the company's earning power is so strong that itdoesn't have to tie loads of money in current assets to secure its current liabilities. (this is an exception to theconventional interpretation of this type ofliquidity position and has beenappreciated as a great quality for a business by "The oracle of Omaha")

Debtor days:has been 1 and at worst 2! exceptional credit policy and bargaining power with customers!

Inventory days: (*approximated by using sales instead of COGS) The trend has remained more or less stable over the years.

cash in/cash out(defined as debtors+inventory/current liabilities): Has hovered around .03 over the years.The low ratio indicates that thecompany holds on to cash for longer period.

Margins(Gross,EBIDTA & Net) The company has maintained its gross margin(remainedhigher than 50% in most of the years and has hovered in a thin range) probably by following a mix of the following three strategies: Increasing price above inflation, changing revenue mix over the years and sourcing raw material from a unique source.A clearer picture can be obtained byassessing the individual contribution of the three strategies. EBIDTA &Net Margins have remained within a thin range over the years(for both3Yr>5Yr>10 Yr).(Indicating improvement in efficiency)

Asset turnover:all the asset turnover ratios have improved over the year till FY10 and have declined recently most probably due to addition of new plants that are yet to start production. looking at the historical data we get an indication that the company has using its assets more efficiently to generate sales with passage of time.

Return ratios:All the return ratios also show improvement till 2010 and the reason for their decline most probably is expansion,where the production is yet to commence.Once the production starts the return ratios are expected to improve.Still in absolute terms the company's return ratios are exceptional even with the load ofassetsthat are yet to start production.

hough Nestle is a very well known business a few points worth highlighting are as follows:

1. unique raw material source:The company has made an effort to create unique raw material source for most of its products. Milk which is a majoringredient for most of its product issourced from over 100000 farmers in Monga district of Punjab. It collect 1.3 million liter per day from its strategically located quality collectioncenters. About 50000 farmer are on Nestleâs regular payroll. It has taken significant amount of time, effort and capital to build this unique and assured source of supply. This probably serves as one of its greatest competitive advantage and a significant barrier to entry.

2. types of business:The company's ~40% revenue contributors come undernecessity(Baby food formula,Milk powder etc),~45%(confectioneries,coffee,Noodles) undermildaddiction and habit.which is an amazing thing!These products have significant price elasticity as the form an insignificant portion of the consumer's budget.Its products demand reoccurs very frequently with Maggi, coffee and confectioneries being the fastest.Maggi and Nescafe command brand loyalty as isevidentfrom the fact thatit issynonymous to Noodles and coffee respectively,Kit-Kat and Munch arewafer basedconfectioneries(differentiated from Cadbury'sconfectioneries which are pure chocolate based) are the market leader in this sub-segment,Baby food formula this segment is driven by trust of customers and Nestle over the years has built a reputation for itself and hence leads the segment.The company has risen prices to counter inflation and has maintained itsprofitability.The recent price rise has been steep and criticized by analysts,but the company's sales have been hardly affected.Questions have been raised on the fall in volume growth,but a significant portion of fall in volumes is due to change in gramage of various products.

Posted byshreyat Tuesday 00:01

Hi folks,

Following is an insight into another FMCG company Colgate.Please have a look and help me dig deeper into the business.

Colgate India Ltd.
COLGATE-PALMOLIVE (INDIA) LTD. SALES EBITDA PAT EPA MKTCAP 9 YR CAGR 14.07% 17.18% 19.41% 20.37% 27.52% 5 YR CAGR 15.34% 20.29% 17.82% 18.21% 26.49% 3 YR CAGR 15.50% 10.32% 2.71% 3.71% 26.41% 1 YR GROWTH 17.66% 12.92% 10.90% 12.57% 20.64%
COLGATE-PALMOLIVE (INDIA) LTD. FY 2012 FY2011 FY2010 FY2009 FY2008 FY2007 FY2006 FY2005 FY2004 FY2003 Financial Leverage 1.00 1.00 1.01 1.02 1.03 1.02 1.02 1.02 1.01 1.01 Total liability/Earning 1.49 1.55 1.31 2.00 2.41 2.68 2.60 2.85 2.80 3.79 Debt/Equity 0.00 0.00 0.01 0.02 0.03 0.02 0.02 0.02 0.01 0.01 Interest Coverage 390.05 60.64 64.60 49.96 194.59 49.87 45.58 41.01 N.A 47.93 Working Capital/Sales 2.40% 3.42% 2.81% 0.23% -6.89% -3.05% -3.66% -6.01% 3.91% 1.37% Debtor Days 12 12 2 2 2 3 2 7 13 16 Inventory Days 30 25 20 19 21 22 24 30 26 22 Cash In/Cash Out Ratio 0.46 0.37 0.22 0.18 0.17 0.21 0.24 0.30 0.33 0.31
Gross Margin 66.75% 61.83% 62.21% 61.11% 60.61% 57.01% 56.94% 51.00% 50.71% 49.06% EBITDA Margin 23.37% 24.35% 25.62% 21.34% 19.75% 20.50% 19.57% 21.69% 18.85% 17.31% Net Margin 16.61% 17.62% 21.01% 16.58% 15.26% 12.02% 11.99% 11.78% 11.52% 8.71%
Capital Turns 8.43 6.86 6.64 9.84 17.51 10.48 9.73 43.80 7.42 5.99 Fixed Asset Turns 10.57 8.96 8.16 10.07 7.94 7.94 7.17 12.06 10.44 6.52 Total Asset Turns 6.17 5.95 6.09 7.92 9.10 4.68 4.17 3.79 3.80 3.67 RoA 102.54% 104.81% 127.99% 131.33% 138.83% 56.24% 49.96% 44.65% 43.82% 31.99% RoE 102.54% 104.82% 129.79% 134.17% 142.85% 57.10% 50.76% 45.36% 44.21% 32.24% RoCE 135.27% 135.94% 144.75% 158.71% 167.89% 90.53% 70.17% 73.37% 61.86% 56.55% RoIC 140.08% 120.92% 137.12% 165.47% 253.18% 169.55% 120.21% 545.37% 85.31% 57.45%

Sales (CAGR) : 1Yr>3Yr>5Yr>10 Yr.

Profit(EBIDITA & PAT CAGR) : The growth rate hasdecelerated in the recent past.The3Yr and 1Yr CAGR is far lower than 10Yr and 5Yr.

Solvency: the declining Financial Leverage,Total liability/earnings and Debt/Equity over the period indicate that the company has reduced the debt on its balance sheet and Reasonably high interest coverage ratio over the years indicate that the company is able to pay off its interests comfortably.

Liquidity:In absolute terms the liquidity position of the company is great.But when we see the trend of Net WC/Sales and cash in/cash out ratio the liquidity position has relatively degraded.

Efficiency: The company has reduced its debtor days over the years by 25% and the inventory days have increased over the years indicating the company now takes longer to convert raw material to sales.

Margins: Gross,EBIDTA and PAT (3Yr>5Yr>10 Yr) : The gross margin has improved significantly and almost consistently over the 10 year period.The probable reasons are increasing price with inflation and change in revenue mix (even today the company generates ~85% of its revenue from tooothpastes which at firstglancedoesn't suggest change in revenue mix,but when we dig deeper we find that the company has come up with differentiated products with better price realization over the years and their contribution has increased significantly over the years).The improving EBIDTA & PAT Margin indicates that the efficiency has improved over the years.

turnover and return ratios: All the turnover & return ratios have improved over the years.In the recent past the have declined probably due to the expansion in Gujrat and A.P that is yet to start production.

types of business: The company's ~85% revenue contributors come undernecessity(Tooth pate).which is an amazing thing!These products have significant price elasticity as the form an insignificant portion of the consumer's budget.Its products demand reoccurs frequently, an average person uses 100 grams of Toothpaste in a month and the average price of paste is Rs.40 per 100 grams.So, the company makes a sale of Rs.40 toexistingcustomer.Toothpaste is something that most peoplerarelychange and Colgate being the market leader maintains its position with focus on quality,wide product range and wide distribution network(It is One of the most widely distributed brands, with a presence in 4.85 million retail outlets out of 5.72 million in the country (~85%)).The company has been able to increase prices to keep pace withinflation without loosing volume growth.This is surely a good thing!

Posted byDonaldat Thursday 15:50

Thanks Shrey for all your detailed work. It's great to see someone taking charge of dissecting familiar/respected Brand name companies diligently, systematically. This is good work. Please keep updating. I think we all can learn a few things from this ongoing exercise, as we go deeper.

Some immediate suggestions/comments:

1. Great that you have strated with dissecting FMCGs. These are easy to understand business models, touch and feel products/brands, details are easily available. But we must include a representative sample (including a couple of lower mortals to accentuate the Goods/Bads). I am sure you must be thinking of Including HUL. Do also consider including Dabur, Marico and Godrej Consumer Products.

2. You have stressed on Demand side (daily consumption) being a good thing. Please include Supply side dissection in your matrix. For e.g HUL is reported to have tripled its rural network in 2011. Dabur wants to double its rural network by FY13 -Rural India, where 70% of the population resides but only 34% consume FMCG goods, presents the biggest market potential for the industry]

3.Not sure if it make sense (or whethercan successfully include) for Trade dissection - General Trade vs Modern Retail Trade.General Trade - the ubiquitous kirana stores is the largest sales channel forming 95% of overall retail sales. But, growth of consumer goods retailed through Modern Trade channel is outpacing the growth of FMCG products in General Trade. In my experience some categories like packaged rice, breakfast cereals, air freshners, mosquito repellants have a higher penetration in Modern Retail trade.

4. Your quantitative matrix is good. Revenue/Income statement/Profitability growth stands out. At the same time there are pointers to catch the basic drivers on the Balance sheet - whether that is improving at the same pace or not, and the underlying drivers of business value. Hope we can refine this somewhat better with help from other seniors.

e.g. at a first glance, one one aspect Nestle seems to be standing taller than the rest - its ability to hold on to Cash is simply phenomenal (vis a vis even the stellar track records of others).

Will be good to see a bigger sample including the Daburs and the HULs.

-Donald

PS: Appeal to Seniors to guide this discussion - what to look for/refinements/suggestions

Posted byshreyat Thursday 15:51

A small correction: I havemisspelledprice inelastcity in all the three posts as price elasticity,please bare with it!

Posted bySubbuat Thursday 16:11

This is an excellent discussion. The problem with blue chips is the valuation. Most of the superior business characteristics are captured in the valuation. So any minor short-term disappointments will not go unnoticed by the market. Since these stocks are analysed in great detail by analysts there is little chance of a significant undervaluation. I guess you have downside protection to a certain extent but meaningful upsides can only be catpured over a 3-5 year horizon.

The best time to enter such stocks is when there is dip in profits due to some short-term effects or there is a market panic like in 2009.

I guess as stock pickers we should try to unearth the future 'colgates' of India.

Posted bySubbuat Thursday 16:22

Overall, I like Colgate Palmolive - a great brand and a product that will be used forever!

ITC - I'm not so sure about their tobacco business. As the literacy rate increases I think tobacco consumption will decrease. This is already happening in the West. So its only a matter of time (not in the short-term though).

Posted byManish Gargat Thursday 17:53

I agree with Subbu here.

ITC, yes it is a great business, with majority of revenue coming from people's addiction to tobacco.

But, I am not too comfortable with the future of tobacco products. The data of per capita cigarette consumtion in US shows a declining trend for a long period now.

See the chart here...http://wholehealthsource.blogspot.in/2012/02/cigarette-smoking-another-factor-in.html

With increasing awareness about harmful effects of tobacco products, people are distancing themselves from them.

Besides this, Tobacco industry has always been a cash cow for tax imposers. It is considered to be a soft target whenever Governments look for means of additional revenue genertion. Agreed that because of large amount collected as tax from tobacco marketers, Governments will shy away to attack these businesses, but still the dynamics is complex and Governments are always under pressures for curbing these businesses.

Recent bans on Gutkha industry in Uttar Pradesh is a case in point here.

I do not feel comfortable enough to go with ITC, just because of them earning most of their revenue from tobacco products.

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• Per-Capita-Cigarette-Consumption-in-US.gif(29.4 kB)

Posted bykishor barhateat Thursday 18:05

May be pidilite industry also can be considered due consistent growth orientated performance, Strong brand, moat of their business, well diversified product portfolio wrt to construction chemicals & adhesives