Sectoral Analysis || FMCG Sector || Report

 Sectoral Analysis || FMCG Sector || Report

Economic Overview

Fast Moving Consumer Goods sector is one of the fastest-growing sectors in the Indian economy. The FMCG sector is the fourth largest sector in India with household and personal care accounting for 50% of FMCG sales in India. The urban sector contributes about 55% of the total revenue generated by the FMCG sector. However, in the last few years, the trend has changed. FMCG has grown faster in rural areas as compared to urban areas.

In India, the retail market is estimated to reach US$1.1 Trillion by 2020 from US$840 Billion in 2017 with trade expected to grow at 20.25% per annum, which will boost the revenue of FMCG company’s risers in rural consumption will drive the growth in the FMCG sector. It contributes about 36% to the overall FMCG spending. 

This sector is stiffly influenced by multinational companies’ existence and a strong distribution channel. The trend for this sector is also changing as these products are also available online and in nearby departmental stores so the accessibility to goods is far easier as those are available under one roof. In this case, ctor there is severe competition among the organized and unorganized sectors relating to the low cost. 

The Government has allowed 100% Foreign Direct Investment (FDI) in food processing and single-brand retail and 51% in multi-brand retail. This would bolster employment, supply chain, and high visibility for FMCG brands across organized retail markets, bolstering consumer spending and encouraging more product launches. The sector witnessed healthy FDI inflows of US$ 18.03 billion from April 2000 to December 2020. Sectorial Analysis FMCG witnessed a growth slowdown in FY20

Sectorial Analysis

FMCG witnessed a growth slowdown in FY20, in line with nominal GDP moderation. The sector posted 5% revenue growth in 9MFY20 vs. 12% CAGR over the last 10 years. The macro recovery which was expected will now be delayed due to Covid-19. In the current slowdown e FMCG is performing better as compared to other sectors, however,r their growth is also tapered down. Staple consumption will see a moderation in FY21 with further weakness in the income for rural and urban poor households.

• Market share gain opportunities for category leaders

In turbulent times, cos with strong distribution, product diversification, on and superior execution, were expected to gain further market share. Bolt-on acquisitions are likely to gain pace as small players find it difficult to sustain themselves. Cos will focus on cost optimization, which along with lower input costs and A&P moderation will help mitigate the negative operating leverage. 

• Topline Recovery

Macro support for the growth has been lacking, as most indicators (negative real rural wage growth, agricultural growth, MSP rates, job creation, and Consumer Confidence Index) were not reflecting a meaningful recovery.Covid-19-induced slowdown will hurt income growth at bottom of the pyramid, which will hurt non-essential staples consumption with a lag.

• Category wise analysis  

In category-wise analysis, interestingly, even during the economic slowdown of the trailing 12 months, categories like F&B, QSR, Home Care, Cigarettes, Liquor, and OTC FMCG grew at 6- 8%. In contrast, laggards like Personal Care and Hair CaregreCare grew.

 

 

The above exhibit shows the revenue performance, YOY growth percentage, and average growth percentage. The expected growth for FY21 was 20% with YOY growth of 4.8%. Over the last few years, the revenue has been consistently increasing

The EBITDA has been increasing for the last few years indicating a positive trend. The expected EBITDA for the year 2020 was 23% and YOY growth was 10%.

Product Innovation

FMCG industry faced stagnation in growth over the last few years led by disruptions like GST and demonetization and the broader economic slowdown. Hence, companies have resorted to launching innovative products to drive growth. The pace of innovation saw a sharp increase in FY19 and FY20 as most FMCG companies expanded into new categories and broadened their portfolio in existing ones.

However, as far as innovation is concerned HUL tops the list with 112 relevant new launches over the last 7 years, followed by ITC at 83 launches, and Dabur at 80 launches. Despite ranking among the two most successful innovation companies, GCPL launched only 58 products (10% of the total), suggesting that management has focused on strategic launches and invested in its brands. HUL’s success rate of 28% is below the sector average, and the high number of launches by the company points to lower efficacy in innovation the company.

Hindustan Unilever (HUL)

• HUL launched 100 plus stock-keeping units (SKUs) focusing mainly on the hygiene category.
• Expansion of products like Domex to pan-India saw a strong response and the company was able to capitalize on the hygiene trend considering the pandemic.
• Lifebuoy sanitizer helped drive penetration for the brand.

Nestle

• Nestle has focused its launches on packaged foods, which saw a surge in demand during the lockdown
• Co is also entering fried rice seasoning in 2HFY21 and it has now extended Poha and Upma into the meals-in-a-bowl category to strengthen its presence in the travel segment.

ITC

• ITC saw strong growth during 2QFY21 within 75% of its FMCG portfolio comprising foods, healthcare, and hygiene (up 25% YoY)
• Growth was supported by 70+ new launches made by co during 1HFY21, primarily in the hygiene category.
• Co also made several new launches within its food portfolio to capitalize on the increased demand for packaged food during the lockdown. - Value-added variants ofAashirwaad atta helped to consolidate its market share in the segment. 

Dabur

•  Dabur focused its launches on the healthcare and hygiene category with a strong expansion in health supplements. Increased awareness around health led to a rise in demand for immunity-boosting accessories.
• Co also expanded its Foods portfolio as demand for in-home consumption returned to growth in 2QFY21. 

Britannia

• Britannia focused on scaling its product offering in the market and the company made limited new launches during this period.

Colgate

• Colgate continued its innovation during 1HFY21 with the launch of Colgate VedshaktiMouthspray in a pocket-sized pack.
• Co continued expanding its toothpaste portfolio with Colgate Visible White Instant'slaunch in the teeth whitening toothpaste category.
• The company also launched a new Colgate Gentle range of toothbrushes along with a relaunch of Colgate ZigZag. 
• Earlier in 1QFY21, Colgate entered hand sanitizers under the Palmolive brand. 

Godrej Consumer Products 

• GCPL sustained its focus on innovation and expanded its presence in the hygiene range at a high pace. It scaled the Protekt brand across all hygiene products in 1HFY21.
• In 1QFY21 itself, the company launched 45 new products in response to the surge in  Lindemann demand for sanitizers, hand washes, soaps, and other hygiene products
• Brands such as Aer and Ezee were also expanded to include sanitizing variants.

Marico

• Marico strengthened its healthcare and hygiene portfolio during 1HFY21 with several innovative launches in the categories.
• The company entered two major segments with the launch of Saffola Honey and SaffolaArogyam Chyawan Amrut (Chyawanprash) which saw a strong response.
• Saffola Honey captured an 8% share in MT. It also launched Ayurvedic recipes in the Saffold ImmuniVeda range. 

Emami

• Emami launched an entire range of Hygiene products under the BoroPlus brand.
• Co also scaled up Ayurveda offerings under Zandu to capitalize on the increased focus on health.
• Additionally, Emami also made some exclusive launches on e-comm to drive growth from the channel.

Distribution Reach  

FMCG companies have focused on distribution expansion over the last five years. Most of the distribution has happened in semi-urban and rural markets. The main focus was on increasing the efficiency in the operations of the companies focusing on appropriate control of supply chain and inventory management.

The above figure indicates the direct reach expansion of companies in the last 3 years. Leads with 2.5 million direct reaches and it has been consistently increasing followed by ITC with 2.2 million direct reaches Figure 2Fig 4.4 Direct Reach Expansion (Source: HDFC Sec Research Report) in the year 2020. Nestle’s figures were estimated based on 25% of the total reach. After Covid-19 has impacted the FMCG companies in the last 10 months, the stock of the rics seen steep volatility. In the initial stage of the pandemic, the fall in prices was sharp for most of the companies but less than that in Nifty-50. However, in later months, the Nifty has outscored FMCG sector, by 31% while the FMCG was up by 10%.

Increasing Online FMCG Sales

The increasing digital penetration in India and developed infrastructure have boosted online transactions. It is expected that 72% of Indian Consumers are most likely to shop online for premium products. The Indian online grocery market was expected to exceed the sales of Rs.22500 crore in 2020, with a significant increase of 76% over the previous year. Many FMCG brands partner with e-commerce platforms such as Dunzo, Flipkart, Grofers, and BigBasket to deliver products to the doorstep of consumers during the COVID- 19 pandemic.

 

Future Plans and Strategies

• Strengthen the Rural Market 

In February 2021, Nestle India announced plans to reach ~1.2 lakh villages (with each having population of over 5,000) over the next 2-3 years. Other players such as Maricois introducingg bottom-of-the-pyramid products to its portfolio of value-added hair oil, helping the business reach rural markets. Rural penetration will continue to be important for Godrej Consumer Goods Ltd. Over the next three years, the organization plans to extend its presence to 80,000 villages in key states.

• Direct to Customer Channels

Businesses such as Dabur India and Marico Ltd. have introduced retail telephone serviceservices and out a dedicated app that enables orders to be placed by kiranas. In January 2021, Tata Consumer Products announced that it is looking for ways to add more of its beverages’ portfolio onto a direct-to-consumer platform to capture the urban online market.

• New Market Entry

In January 2021, FMCG businesses in India are planning to expand their oral care portfolio by entering new and niche categories such as mouth sprays, ayurvedic mouth cleansers, and mouthwashes to meet the rising consumer demand for hygiene products DeDecember020, Godrej Consumer Products Limited (GCPL), under its Godrej ProClean brand, ventured into home cleaning products to meet the rising demand for cleaning and hygiene products among Indian consumers. The home cleaning products segment, which includes branded floor, toilet, and bathroom cleaners, is estimated to be ~ Rs. 2,600crores.

• Green Initiatives

FMCG companies are looking to invest in energy-efficient plants to benefit society and lower costs in the long term. Procter & Gamble (P&G) India has set up a Rs. 200 crorcrores$ 28 million) environmental sustainability fund in the country to offer sustainable solutions, such as plastic-free packaging and environment-friendly logisticsservices, in partnership with Indian businesses.  

 

Data Analysis 

Fundamental Analysis 

Fundamental analysis is the process by which an analyst measures the Intrinsic Value or the Real Value of a security by examining the Macro-Economic and Financial Factors related to the company and the stock. A Fundamental Analyst studies anything that can affect the company, from the Financial Factors, and state other f the Economy to internal factors such as the Performance of Management. The end goal is to determine a number that an investor can compare with a security's current price to see whether the security is undervalued or overvalued.

At the business level, there may be an examination of supply and demand forces for the products advertised. For the national economy, Fundamental analysis may concentrate on monetary information to survey the present and future development of the economy. To forecast future stock prices, Fundamental analysis consolidates the financial, industry, and company analysis to infer a stock's present fair value and figure out a future value. If fair value isn't equivalent to the present stock value, Fundamental analysts believe that the stock is either overvalued or undervalued and the market price will ultimately gravitate towards the fair value

Fundamental analysis is purely based on the analysis of the financial statement and ratios. If a particular company’s financial statements are healthy, the research analyst recommends investing in that stock for the o long-term. Fundamental analysis is not concerned with the upward or downward movement in the storices. By trusting that prices don't accurately reflect all accessible data, fundamental analysts look to capitalize on perceived price discrepancies.

Steps followed in Fundamental Analysis

Step 1: Select a sector for doing the analysis (for Ex- Banking, Cement, Automobile, telecom, etc.). We have selected FMCG Companies for our analysis. This sector is listed on the Stock Exchanger.

Step 2: As the investment in mutual funds is long-term, therefore take Large Cap. I.e.,companies having a market capitalization of Rs. 20000 Cr. Or more.

Step 3: Now we will move to the valuation of the selected companies. First we wi, ‘’’ll get the P/E value of every stock. We get all the required details from the company’s financial statements. P/E ratio or Price to Earnings Rati is the ratio of a company’s share price to a company’s earnings per share. The ratio also indicates the market expectations and the price needed for a unit of payments. The actual payments of the company are earnings per Share (EPS).

P/E Ratio = [Market Price/EPS (Earnings Per Share)]

Step 4: First we Calculated the sector P/E. Sector P/E helps in understanding whether the company is undervalued or overvalued. Sector P/E is calculated by taking the average P/E of the stocks in the list. 

 

 

 

The above table shows the P/E ratios of all the large Cap. Companies selected and the sectorP/E ratio.

Step 5: We compared the P/E Ratio of the companies with the sector P/E ratio to determine whether the stock is Undervalued or Overvalued.

• Overvalued companies are those, for which people have positive sentiments and the market participants are ready to invest in the share even at a high price, as they expect its future earnings to grow. The list of Overvalued companies is as below: 

•  Undervalued companies are those, that are performing well, but not according to the aspirations of the investors, thus they overlook these stocks. The list of Undervaluedcompanies is as below:

Step 6: Once we segregated the undervalued and overvalued companies, we further analyzed them to have a clear picture of the company.

• Analysis of Overvalued Companies

The Overvalued companies will be analyzed on basis of the PEG ratio. Price-Earnings- Growth ratio (PEG) denotes the value while considering the future growth in the earning earnings ofmpany.

[PEG ratio = (P/E Ratio) / (EPS Growth rate)]

• PEG ratio is considered a more accurate measure of the value of the company as compared to the standard P/E ratio, as it takes into consideration the future growth in earnings of the company, while the P/E ratio gives the value of the company only for that particular period. PEG ratio can also be analyzed for historical data. For this report, historical data has been considered for analysis. In the table below it can see that the EPS of HDFC has fallen as compared to the previous year. Thus, for negative growth in EPS, the PEG ratio is 0 and is rejected.

 

 

 

Step 7: Based on the above figures, we have decided on the companies or stocks whichwill comprise our fund. However, further analysis was needed to determine how much amount will be invested in the company. This analysis is termed a Ratio Analysis. 

Ratio Analysis

All the data related to the calculation of the ratios have been obtained from the Annual Reports of all the mentioned companies. 

One of ththeethodsmpanyy valuation methodsalysis of Financial Ratios’. Each ratio depicts an aspect of the items in the financial statements of the company. Various ratios are in existence or can be created to satisfy a certain purpose. But, all the ratios are not required to be calculated for every company and sector. Every sector has a unique set of ratios that are used by analysts to get a clear picture of the sector or the company. 

• Return on Capital Employed (ROCE)

Return on Capital Employed (ROCE) is a measure used to assess the profitability and capital efficiency of the company. So, this ratio helps us to understand howwell the company is generating profits from the capital employed in the business. So, the higher the ROCE, the better. [Return on Capital Employed = EBIT/Capital Employed] In the case of the FMCG sector, the business is capital intensive. However, the companies in thissector are wthisthisorished and have big plans to carry out their operations. Hence, the companies may incur less capital expenditure.

 

 

Return on Capital Employed (ROCE) is a measure used to assess the profitability and capital efficiency of the company. So, this ratio helps us to understand how well the company is generating profits from the capital employed in the business. So, the higher the ROCE, the better. [Return on Capital Employed = EBIT/Capital Employed] The business is capital intensive in the FMCG sector. However, the companies in this sector are well established and have big plans to carry out their operations. Hence, the companies may incur less capital expenditure.

• Return on Equity (ROE)

Return on Equity (ROE) is a measure of a company’s profitability about shareholder’s equity. Higher returns to Equity holders attract prospective investors. The s  Itsshowse capaThis bility of the management to use the shareholder’s funds to create the maximum returns for them. It is calculated using the following formula:

[Return on Equity (ROE) = Net Income/Shareholders Equity]

It is a very useful ratio from the shareholder’s point of view to analyze and compare the returns while investing. It is obtained by dividing the net profits (after int. and taxes) by the shareholder’s funds.

 

 

 

 

A higher ratio shows better efficiency of the management. The efficiency of the management decides the future of the business. It is the management that takes all important decisions relating to capital structure, earnings, and assets of the business based on their risk perception. Nestle has the best ROE among its peers and Tata Consumer Products has the worst ROE.

Debt Equity Ratio 

The debt-equity ratio helps in determining the amount of debt in the company as compared to its owner’s funds. This ratio is important as it helps us to understand the degree to which the company finances its operations through debt as compared to shareholders’ equity

[Debt Equity Ratio = Total Debt/Shareholders Equity]

Higher Debt to Equity ratio indicates that the company is taking too much risk. This may further hamper the intentions of the management to borrow more for future activities. This may also affect investor confidence.

The above data indicates that the FMCG companies are almost debt-free and financing more through their equity operations. Proctor & Gamble Health and Hygiene, Hindustan UnileverTata Consumer Products, Godrej Consumer Products, and Colgate Palmolive are debt-free companies. Companies such as Nestle, Emami, Dabur, and Marico have paid most of their debt and have very less debts.

 Debtors Turnover Ratio

Debtors Turnover Ratio is a measure used to quantify the company’s effectiveness in collecting the money owed by the customers and clients. This ratio measures the efficiency of the company and how it manages the credit it extends to its customers. A firm which is efficient at collecting on its payments due will have a higher accounts receivable turnover ratio. 

[Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivable]

 

A high receivables turnover ratio may indicate that a company’s collection of accounts receivable is efficient and that the company has a high proportion of quality customers that pay their debts quickly.

From the above data, we can say that Nestle has the best Debtors Turnover Ratio of 92.30which means the company is efficient in managing its credit extended to its customers.

Marico has the lowest debtors turnover ratio which can pose a threat to the company in case debtors failing to make payments on time.

After doing the entire fundamental analysis we have ranked the companies based on their performance. Nestle is ranked best among its peers based on fundamentanalysifundanalysis andssandd less. However, it needs to be noticed that each company has performed in one or the other parameters. The FMCG sector is expected to grow more once the pandemic is over. This sector has been the growth driver for the stock market for the last decade and continues to be the one.

Technical Analysis

Dabur Ltd.

 

On 16th June 2021, Dabur Ltd. was trading bullish on the market. The Relative Strength Index (RSI) was 75.48 which was in the overbought zone. Hence there was a scope for market correction with the initial resistance being 582.40 and initial support being 575.20. If it broke the resistance level of 582.40 then a long bullish pattern was expected.

On 30th July 2021, the share price of Dabur stood at 601.85.

Godrej Consumer Products

On 16th June 2021, the Relative Strength Index (RSI) of Godrej Consumer Products was above 70 indicating the overbought zone and the share price was 917. On the previous day it was above 75 and as a result the very next day it started coming down. However, the Bollinger bands show that stock prices are above the upper Bollinger bands which indicates a bullish run in the future. Since the candlestick crossed the Bollinger bands outside market correction was expected.

On 30th July 2021, the stock price stood at 992.25

 

Standard Deviation

Standard Deviation is a measure of market volatility. It indicates how widely prices are dispersed from the average price. Hence, a higher standard deviation means more volatility. Emami has the highest standard deviation of 1.57 followed by Marico at 1.51 and Godrej Consumer at 1.45.

Recommendations

• Although the Covid-19 Pandemic has affected the FMCG sector the companies in this sector have fared well and overcome the barriers. More growth is expected in rural areas for essentials which will boost the sales of FMCG products.
• The FMCG sector has a combination of both Growth and Value Stocks, making this sector the best investment. The companies in this sector are almost debt-free which is very important from an investor’s point of view.
• However, these companies can borrow little debt to expand their business operations and take the advantage of leverage
• Companies like Hindustan Unilever are best for growth investing since the company is an FMCG giant with the largest market capitalization and strong fundamentals and established business with different product lines and segments. 
• Marico and Dabur will be the leading players in the long run with their aggressive business style and operations and a valuable investment for the investors.
•  These stocks can be used to create a portfolio for investors or can be used by Asset Management Company to create a Large Cap Mutual Fund.
• The rationale of this mutual fund of FMCG large-cap fund will be long-term capital appreciation. This fund can be further compared with the Nifty FMCG Benchmark Index to track its performance. 
• Since it’s an equity-based fund, the risk would be very high. Hence, this fund is recommended for working professionals and long-term investors and not old-aged people