Quantitative Analysis of FMCG Sector
In this blog, we will do a quantitative analysis of FMCG sector. It is the fourth largest sector in India and household and personal care account for ~50% FMCG sector sales. In India, demand from semi-urban and rural is growing at a faster pace. This is one sector which was not much impacted due to COVID-19 as most of the products come under “essential items” category. Also , the online channel has augured well during the current pandemic , contributing ~40% of the overall sales. FMCG sector is expected to register a strong growth in the upcoming times on the back of increasing rural demand, changing consumer behavior and increasing internet penetration auguring online sales.
Please note that we have done this analysis with the only purpose of screening good companies. Analysis done is completely on quantitative basis. No suggestions are being made to directly go and invest in the top scoring companies of this analysis. We suggest that one should perform a qualitative analysis of top scoring companies in this analysis and take investment decision based on risk profile.
FMCG Sector Quantitative Analysis
Companies selected for analysis
We have selected the following five FMCG companies for our quantitative analysis.
Procedure of Analysis and its Interpretation
- These 5 companies are analysed on following 10 parameters and ranked and scored accordingly. For example, if a company has higher PE ratio, it has a lower rank , hence has scored lesser points. Similarly, if a company has higher RoE, it has higher rank and has scored higher points.
- Here , 1 means that the company has scored lowest points and 5 means the company has scored highest points.
- At the end, we have added all the points together and companies are ranked accordingly.
- PE is basically how much an investor pays for each rupee of profit earned.
- Among the 5 FMCG companies, ITC has the lowest PE of 19.8 and hence ranked first and is rewarded with 5 points. Whereas, NESTLE is placed at 5th position with PE ratio of 74.6, the highest among all and hence received 1 point.
2. Enterprise Value (EV) /EBITDA
- EV/EBITDA is another valuation metric to value companies, based on the operating profit generated as compared to their Enterprise Value.
- Enterprise value is basically the value of total company. Here, market value of debt is also considered in addition to the market valuation of equity.
- Thus, Enterprise Value gives the valuation of total assets of the company in market.
- As per EV/EBITDA, ITC appears to be the cheapest company and HUL is the most expensive company. Hence they are ranked and scored accordingly.
- Return on Capital Employed (RoCE )is one of the return ratios commonly used in fundamental analysis. 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 better.
- FMCG sector is capital intensive, however these companies already have well established plants and hence not incur much capital expenditure. This helps these companies to generate strong return ratios.
- With highest ROCE of 114.7%, HUL acquires the first position and hence scored 5 points. On the other hand, Britannia Industries scores the lowest marks and the last position with RoCE of 26.4%.
- Another return ratio that is used widely in fundamental analysis is Return on Equity (RoE) which is Net Income/ Total Shareholder’s equity (Equity share capital + Reserves/Surplus).
- HUL has RoE of 84.2% which is the highest in industry and hence it is ranked at no.1 position.
- On the other hand, Dabur has lowest RoE and hence it is ranked at last position.
5. Debt to Equity (D/E)
- As seen, HUL and ITC are zero debt companies, whereas Dabur has highest debt of 0.35 x.
6. Interest Coverage Ratio
- Interest coverage ratio is Earnings before Interest and Taxes (EBIT)/ Interest expense.
- This ratio gives the ability of the company to pay interest from its operating profit.
- As HUL and ITC are zero debt companies, they have higher interest coverage ratio.
- Overall, FMCG companies have good interest coverage ratio. Usually interest coverage ratio above 2.5 x is healthy.
7. Operating Profit Margin (%)
- It is calculated as Operating Profit / Total Revenue. It is sometimes also called as EBIT (Earning before Interest and Tax) Margin.
- As seen, ITC has highest operating margins. However, ITC being a conglomerate , majority of margins are contributed by its cigarette business rather than FMCG business. ITC’s FMCG business has very low margins ~3-4%.
- Here, Dabur has lowest operating profit margins and hence it is ranked accordingly.
8. 5 – Year Sales and Net Profit growth
- Sales and Net Profit Growth on the basis of 5 years CAGR presents the situation of Peaks and Valleys. Several Factors like Demonetization, GST introduction and Covid-19 Pandemic, etc. has played crucial role in this volatility.
- However, Dabur has recorded the highest sales growth in last 5 year of 8.1% and similarly the firm has also witnessed highest PAT growth of 15.3% CAGR and hence ranked and scored accordingly.
- Here, again Britannia Industries has lacked among its 4 peers on the basis of 5 years CAGR growth of Sales and Net Profit.
9. 3- Year Sales and Net Profit growth
- Nestle India has registered highest 3 year Sales and PAT growth, whereas Britannia Industries is again lagging behind its peers.
- Hence, Nestle India has scored highest points , whereas Britannia Industries has scored lowest points.
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 about how the company is stocking up its inventory as well as how many times the company has sold its inventory in a given period.
- Usually retailers and FMCG companies have a higher inventory turnover ratio. Higher the Inventory Turnover Ratio, better it is for the company.
- HUL wins the race and gets the first position with full marks.
- On the other hand, ITC being a conglomerate and not only a FMCG company has lowest inventory turnover ratio .
11. Cash Conversion Cycle
- CCC refers to no. of days company takes to sell its inventories and collect its receivables.
- The shorter (even negative) the cash conversion cycle of a company is, the better it is considered and vice versa.
- In this context, HUL ranks the first position as it has the lowest Cash Conversion Cycle of -59.7 days. And, ITC has been ranked and scored the lowest as it has the highest CCC of 37.7 days.
- Here, clearly HUL has scored highest points on the back of its strong fundamentals, followed by Dabur, ITC, Nestle India and Britannia Industries.