In this article, we will understand the revenue source of Fast-Moving Consumer Goods (FMCG) Companies, what are the parameters to analyze this sector, and how can an investor analyze this sector. So, let’s get started!
General Business Model of the FMCG Business:
- Fast-Moving Consumer Goods (FMCG) sector can be broadly categorized into 2 types- FMCG-Food Business, which is involved in manufacturing, innovations, & marketing of food products like Biscuits, etc. and FMCG-Non-Food Business which is involved in manufacturing, innovations, marketing & distribution of non-food products like Soap, Shampoo, etc.
- Personal Care, Oral Care, Home Care, and Foods & Beverages are the key segments in Fast-Moving Consumer Goods (FMCG) or Consumer Goods Industry. FMCG Companies generally have thin margins but higher sales volume.
- Besides any other factors, the Distribution factor of FMCG Companies plays a pivotal role in the revenue, brand, and presence of any particular FMCG Company in the market. The Current Traditional Distribution Model in FMCG Industry mainly involves manufacturers, distributors, wholesalers, and retailers. But post-covid-19 things are changing and now emerging modes of distribution like D2C (Direct-to-Consumer), and Online-to-Offline (O2O) Channels are being adopted by the companies to establish direct contact with customers and also to help companies financially.
Key Characteristics of FMCG Sector Business:
- High Sales Volume
- Extensive Distribution
- Low-Profit Margins
- Rapid Consumption
- Brand name plays a crucial role
- Regulated business
- Consumer Behavior Changes
- High Competitiveness
Important Parameters for FMCG Sector:
1) Volume Growth (%):
- This stands for the growth in the physical volume of the sales
- The Volume Growth of FMCG Companies should hover at least between higher single digits and double digits figures of around 12%-15% at max.
- For Example, as of Q2FY23, HUL is having 4% Volume growth which is being affected by the rural demand slowdown amid inflationary conditions.
2) Revenue Mix (%):
- This metric signifies the revenue generated by the company from its segments.
- Generally, FMCG Companies have fragmented segments like personal care, home care, etc.
- For Example, as of Q2FY23, HUL is having following revenue mix: Home Care- 34%, Beauty & Personal Care- 36.9%, Foods & Refreshment- 24.8%, and Others- 4.3%
3) E-Commerce Contribution to Sales (%)
- This is the revenue mix of the company from the Digital Channel or E-Commerce Channels and the traditional channels.
- The general mix of the FMCG industry in India is as under –~8% – E-Commerce and ~92% – Traditional.
- For HUL, as of Q2FY23, the revenue contribution of e-commerce is under 10%.
4) EBITDA Margin:
- This is the ratio of earnings before interest, depreciation, and taxes compared to the revenue for the period
- Higher the better as it shows how efficiently a company is managing its recurring cost. Ideally, the EBITDA margin should be higher than the double-digit figure.
- The Operating Profit Margin of HUL stands at 23% as of Q2FY23.
5) Return on Capital Employed (ROCE):
- This is calculated by dividing net operating profit by the capital employed in the business
- ROCE above 20% is considered to be good. For HUL it is 24.77% for FY22.
6) Debt-to-Equity Ratio:
- This is the ratio of debt undertaken by the company in comparison to the amount of equity on its balance sheet
- The D/E Ratio of the company increases when any new Capex is to be done for expansion which increases the risk of the company.
- The D/E Ratio for Hindustan Unilever Limited is Nil and is almost the same in the case of almost all other FMCG Companies
7) PE Ratio:
- The ratio of the price compared to the earnings per share
- For Example, The current P/E of HUL is 61.8, while the 5-year median PE for HUL is 67
Factors that are moats in the sector:
- Well-known brand name
- High Double-Digit EBITDA Margins
- Good geographical distribution all over the country
- Tapping Inorganic Growth Opportunities (through Mergers & Acquisitions)
- Deep-Pocket & Strong Balance Sheet
- Leading or Dominant Market Share
What Should Investors Do?
The above-discussed parameters of the FMCG Sector are some key factors that an investor should carefully consider before making an investment decision in any FMCG stock. Follow due diligence before making any investment decisions.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.