4-factor analysis of India's FMCG Sector (Ratio Based Quantitative Analysis of top 10 FMCG companies)

This analysis is done with the only purpose of screening out good companies. Analysis done is completely on a quantitative basis. No suggestions are being made to directly go and invest in the top-scoring companies of this analysis.

Let’s study some FMCG companies, we have selected the following companies for study and analysis (the companies are selected on the basis of market cap, the top 10 companies of that sector according to market cap):

The top 100 companies according to the New Market Cap Classification are called the large-cap companies. Companies from 101 to 250 (based on market capitalization) are the mid-cap companies and the rest, that is above 250 are the small-cap companies. The risk associated with small-cap companies is more as compared to large-cap and mid-cap companies. All the top 10 FMCG companies are large-cap companies.

The analysis of these companies is going to be based on the following parameters. They are as follows: –

What is PE Ratio?, What is the Ideal pe ratio in India?
What is ROCE (Return on Capital Employed)
What is ROE (Return on Equity)
Debt to Equity Ratio (DE Ratio)

These parameters play an important role in the analysis of any company. This does not mean that one should be dependent only on these, but these parameters are crucial for initial screening.

First, we have given the companies their ranks and then accordingly we have assigned scores to those companies from 1 to 10, where 1 is the least and 10 is the highest score. (total number of companies taken here are 10, that’s why the mentioned scoring card)

What is the FMCG Sector PE ratio?

PE ratio is nothing but what price an investor is paying for 1 rupee of earning. The company which has the lowest PE ratio ranks 1st and scores the highest that is 10. And the company which has the highest PE ratio ranks 10th and scores the lowest that is 1.

P&G has the highest PE ratio and thus got number 10 rank and scored 1. ITC has the lowest PE ratio and thus scored number 1 rank and a score of 10.

What is ROCE (Return on Capital Employed)

The company which has the highest ROCE has the highest rank and has also been given the highest points. And the company which has the lowest ROCE has the lowest rank and has also been given the lowest score. HUL has the number 1 rank and scored 10 points. And Godrej Consumer has the lowest rank (10th) and scored 1 point.

It can be observed that the companies which have high PE ratios also have higher ROCE.

What is ROE (Return on Equity)

ROE has been analyzed on the same basis as ROCE. The company which has the highest ROE has the highest rank and has also been given the highest points. And the company which has the lowest ROE has the lowest rank and has also been given the lowest score.

Here too, HUL ranked 1st as it had the highest ROE and thus scored 10. But here, GSK Consumer ranked 10th as it had the lowest ROE and thus scored 1.

Debt to Equity Ratio (DE Ratio)

A lower DE ratio means that the company doesn’t require debt for its growth or for its working capital. That is the debt component of that company is very low and it can run its operations smoothly using the existing equity or reserves & surplus. The company which has the highest DE ratio has the least score and the company with the lowest DE ratio has the highest score.

In the FMCG sector, very few companies take on debt, particularly large-cap companies. The reason is that the reserves & surplus of these companies become very huge. The margin of the company increases as the expenses of the company keep reducing and the raw material cost decreases, as there are no large investments required and the margins of the company keep increasing.

After an FMCG company has branded itself, the company’s production costs decrease and it does not incur any debt. It’s not like all the FMCG companies are debt-free, just that the debt even required by some of the FMCG companies is very low. HUL, ITC, Colgate, GSK Consumer, and P&G being a 0-debt company scored 10. Godrej Consumer has the highest DE ratio and has thus scored 5. Here, Godrej Consumer has the highest DE ratio, but when u look at the broader market this number is still very low.

Final Standings

Colgate is in 1st position with 34 points, HUL is in 2nd with 33 points, P&G is in 3rd with 29 points and Godrej Consumer is in the last position, that is 10th with just 16 points. In this case, we should consider the company’s fundamentals. According to their current fundamentals, we have analyzed the company here. In addition, qualitative analyses of these companies will provide a more complete understanding of their advantages and disadvantages

In addition, quantitative and qualitative analysis will assist in determining which companies are worth investing in from this point forward.

Note: –

We are not, in any case, suggesting buying stocks of any of the companies mentioned above. We have just provided a study on these companies.
All the data used is of Trailing Twelve Month (TTM)