Comparison of Top 5 FMCG Companies6 min read
Which are the best FMCG companies in India? Quantitative analysis of the Indian FMCG sector based on latest results? What is the FMCG sector? How do I choose the best FMCG companies to partner with? What are FMCG stocks? What is an FMCG company?
Quantitative FMCG Sector Analysis
This blog will quantitatively analyze India’s top FMCG companies in the FMCG sector. The FMCG organisation is the fourth largest sector in India, and household and personal care account for ~50% of FMCG sector sales as per the FMCG sector report. In India, demand from semi-urban and rural areas is growing faster. This sector was not that impacted due to COVID-19, as most of India’s highest-selling FMCG products come under the “essential items” category. Also, the online channel has augured well during the current pandemic, contributing ~40% of the overall sales. Despite growing rural demand, changing consumer behaviour, and internet penetration announcing online sales, all FMCG companies in India are expected to register strong gains in the upcoming years; we have done this analysis for top FMCG brands in India and FMCG share price for screening good companies and depicting FMCG growth in India. Research done is entirely on a quantitative basis on suggestions being made to invest directly in India’s FMCG stocks. Instead, we suggest performing a qualitative study of India’s best consumer goods stocks and making investment decisions based on risk profile.
FMCG Sector Quantitative Analysis
Biggest FMCG companies in India selected for analysis
We have selected the following top 5 FMCG companies for our quantitative analysis from the various FMCG companies:
· Hindustan Unilever Limited (HUL)
· Nestle India
· Britannia Industries
· Dabur India
The procedure of Analysis and its Interpretation for Best FMCG Companies
Comparison between two FMCG companies can be quickly made with the help of a few parameters. We will analyse India’s top FMCG sector stocks on the following 10 parameters and rank and score accordingly. For example, if a company has a higher PE ratio, it has a lower position and has scored lesser points. Similarly, if a company has higher RoE, it has a higher level and has achieved higher points. The company with the lowest score is represented by 1, and the company with the highest score is represented by 5. In the end, we have added all the facts together, ranking companies accordingly for top FMCG shares in India.
PE is basically how much an investor pays for each rupee of profit earned. We tried to study the working of the FMCG industry in India, and among the 5 FMCG companies, ITC has the lowest PE of 19.8 and hence ranked first and is rewarded with 5 points. In comparison, NESTLE is placed at 5th position with a PE ratio of 74.6, the highest, and received 1 point.
2. Enterprise Value (EV) /EBITDA
EV/EBITDA is another valuation metric to value the best FMCG stocks in India, based on the operating profit generated compared to their Enterprise Value. Enterprise value is the value of the entire company. Here, the market value of debt is taken into account in addition to the market valuation of equity. Hence, Enterprise Value determines the market value of the company’s assets.
As per EV/EBITDA, ITC appears to be the cheapest company, and HUL is the most expensive. Hence they are ranked and scored accordingly.
Return on Capital Employed (RoCE )is one of the return ratios commonly used in the fundamental analysis of FMCG companies in the stock market. RoCE is Earnings before Interest and Taxes (EBIT)/ Total Capital Employed (Debt+Equity). It gives us a perspective of how the company is earning profits by allocating its overall capital. So higher the RoCE, the more capital-intensive the FMCG sector; however, these companies already have well-established plants and do not incur much capital expenditure. This helps these companies to generate substantial return ratios. For example, in HUL vs. Britannia, it can be seen that with the highest ROCE of 114.7%, HUL acquired the first position and scored 5 points. Britannia Industries, however, scores the lowest marks and takes the final spot with a RoCE of 26.4%.
Another return ratio used widely in the fundamental analysis of FMCG multibagger stocks is Return on Equity (RoE), Net Income/ Total Shareholder’s equity (Equity share capital + Reserves/Surplus). It is another important parameter to analyse top consumer goods companies in India. HULRoE or the Hindustan Unilever RoE is 84.2%, which is the highest in industry, and hence it is ranked at no.1 position. On the other hand, Dabur has the lowest RoE; it’s ranked last.
5. Debt to Equity (D/E)
HUL and ITC are zero debt companies, whereas Dabur has the highest debt of 0.35 x.
6. Interest Coverage Ratio
Earnings before interest and taxes (EBIT) divided by interest expense is meant to indicate interest coverage.This ratio in the FMCG industry in India gives the ability of the company to pay interest from its operating profit. As HUL and ITC are zero debt companies, they have a higher interest coverage ratio. Overall, FMCG companies have a good interest coverage ratio. Usually, an interest coverage ratio above 2.5 x is healthy.
7. Operating Profit Margin (%)
It is calculated as Operating Profit / Total Revenue in the FMCG market in India. It is sometimes also called EBIT (Earning Before Interest and Tax) Margin. As seen for high OPM stocks, ITC has the highest operating margins. However, ITC being a conglomerate, its cigarette business contributes more to its margins than its FMCG business. FMCG margins are 3 to 4% in ITC’s business. Among the manufacturers ranked here, Dabur has the lowest operating profit margin.
8. 5 – Year Sales and Net Profit growth
Sales and Net Profit Growth based on 5 years’ CAGR present the situation of Peaks and Valleys for the leading FMCG companies in India. Several Factors like Demonetization, GST introduction, Covid-19 Pandemic, etc., have played a crucial role in this volatility. However, Dabur has recorded the highest sales growth in the last 5 years of 8.1%, and similarly, the firm has also witnessed the highest PAT growth of 15.3% CAGR and hence ranked and scored accordingly. Again, Britannia Industries has lacked among its 4 peers based on 5 years of CAGR growth of Sales and Net Profit.
9. 3- Year Sales and Net Profit growth
Nestle India has registered the highest 3 year Sales and PAT growth, whereas Britannia Industries is again lagging behind its peers. Hence, Nestle India has scored the highest, whereas Britannia Industries has the lowest.
10. Inventory Turnover Ratio
Inventory Turnover Ratio is Cost of Goods Sold/ Average Inventory. Average Inventory is (Starting Inventory + Ending Inventory)/2. It gives us an idea of how the company is stocking up its inventory and how many times it has sold its list in a given period. It is an essential parameter for calculating the FMCG market share in India. Usually, retailers and FMCG companies have a higher inventory turnover ratio. The higher the Inventory Turnover of FMCG companies in India, the better. HUL wins the race and gets the first position with full marks. On the other hand, ITC, a conglomerate, and an FMCG company have the lowest inventory turnover ratio.
11. Cash Conversion Cycle
CCC refers to the. Days a company takes to sell its inventories and collect its receivables. The shorter (even negative) the company’s cash conversion cycle is, the better it is considered and vice versa. In this context, HUL ranks first as it has the lowest Cash Conversion Cycle of -59.7 days. And, ITC has been rated and scored the lowest as it has the highest CCC of 37.7 days.
Quantitative Analysis of FMCG companies share price
Here, the HUL market share in FMCG is the best, and thus HUL has scored the highest points on the back of its solid fundamentals and bagged the best FMCG share, followed by Dabur, ITC market share in FMCG, Nestle India, and Britannia Industries.
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