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.
- ITC has much lower PE as compared to its peers and hence it has higher rank, where as HUL is the most expensive stock according to PE and hence it has lower rank.
- 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.
- Here, HUL has a very strong RoCE of 117%, probably the highest in large cap stocks listed on Indian exchange. This might justify the higher valuation (PE) it is currently trading at.
- Dabur has the lowest RoCE among the lot and hence is ranked and scored accordingly.
- 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 85.6% 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.
4. Debt to Equity (D/E)
- As seen, HUL and ITC are zero debt companies, whereas Britannia Industries has highest debt of 0.35 x.
5. 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.
6. Operating Profit 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, Britannia Industries has lowest operating profit margins and hence it is ranked accordingly.
7. 5 – Year Sale and Net Profit growth
- Demonetization and GST introduction impacted GST on a greater extent. Hence, there is sluggishness in the 5-Year Sales and PAT growth.
- However over 5 years, Britannia Industries has highest growth, whereas Dabur is lagging behind its peers. These companies are ranked and scored accordingly.
8. 3- Year Sales and Net Profit growth
- Nestle India has registered highest 3 year Sales and PAT growth, whereas Dabur is again lagging behind its peers.
- Hence, Nestle India has scored highest points , whereas Dabur has scored lowest points.
9. 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 basically gives the valuation of total assets of the company in market.
- As per EV/EBITDA, ITC appears to be the cheapest company and Nestle India is the most expensive company. Hence they are ranked and scored accordingly.
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.
- Since , Britannia Industries has majority of its product portfolio concentrated in food products, its inventory turnover ratio is highest.
- On the other hand, ITC being a conglomerate and not only a FMCG company has lowest inventory turnover ratio .
- Here, clearly HUL has scored highest points on the back of its strong fundamentals, followed by Britannia Industries, ITC, Nestle India and Dabur.