Top 5 FMCG Stocks Quantitative Analysis

Introduction:

The fast-moving consumer goods (FMCG) sector is India’s fourth-largest sector with household and personal care accounting for 50% of FMCG sales in India. Growing awareness, easier access, and changing lifestyles have been the key growth drivers for the sector.

The retail market in India is estimated to reach US$ 1.1 trillion by 2020 from US$ 840 billion in 2017, with modern trade expected to grow at 20 25% per annum, which is likely to boost the revenue of FMCG companies. Revenue of FMCG sector reached Rs. 3.4 lakh crore (US$ 52.75 billion) in FY18 and is estimated to reach US$ 103.7 billion in 2020. 

Please Note

we have done this analysis with the only purpose of screening 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. We suggest that one should perform a qualitative analysis of top-scoring companies in this analysis and take investment decisions based on risk profile.

FMCG Sector Quantitative Analysis

Companies selected for Analysis:

We have selected the following five FMCG companies for our Quantitative Analysis.

• HUL
• ITC
• Nestle India
• Dabur
• Godrej Consumer Products

Market Capitalization of 5 FMCG Stocks (Rs. Cr):

• HUL- Rs. 5.84 Lakh Cr
• ITC- Rs. 2.57 Lakh Cr
• Nestle India- Rs. 1.82 Lakh Cr
• Dabur- Rs. 1.05 Lakh Cr
• Godrej Consumer Products- Rs. 1.02 Lakh Cr

The procedure of Analysis and its Interpretation

• These 5 Companies are analyzed on the following 16 parameters and ranked and scored accordingly. For example, a company with a higher PE ratio is provided with a lower rank, hence has scored lesser points. Similarly, if a company has higher RoE, it has a higher rank and has scored higher points.
• Here, 1 means that the company has scored the lowest points and 5 means the company has scored the highest points.

Parameters of Quantitative Analysis:

1. PE Ratio:

• PE of a company means that how much investors should pay for the stock based on their current earnings. A company with a lower PE Ratio is considered to be undervalued and has a huge potential to unlock its value. Hence, full points will be rewarded to that company.
• With the lowest PE Ratio of 18.47, ITC gets the first position and 5 points.

2. EV/EBITDA:

• EV/EBITDA ratio measures Enterprise Value (EV) to the Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA). This ratio assesses the overall financial performance of the firm.
• EV/EBITDA of value below 10 is considered healthy.
• Here also, ITC bags the first position among the Top 5 Companies with the lowest EV/EBITDA ratio of 12.23. Nestle India with the highest EV/EBITDA ratio of 50.69 receives the last position and one point only.

3. Stock Returns % Since Last Quantitative Analysis:

• Since the last quantitative analysis, Godrej Consumer Products has delivered the highest return of 23.15% among all other stocks and hence ranked 1^st rank.
• In the same period, ITC is the only company that has delivered a negative return of 0.52% therefore given 1 point only.

4. Return on Capital Employed (ROCE):

• ROCE signifies that how the company is using its capital to generate a return for the company and investors. The high ROCE, the better it is for the company.
• In this parameter, Nestle India outperforms other peers by scoring the highest ROCE of 147.88% and hence obtains the 1^st position as well as 5 points.
• The ROCE of HUL has fallen from 114.7% to 38.4% in the March quarter due to a rise in the reserve balance. Currently, it is at 38.36%.
• Godrej Consumer Products get the last position and 5^th rank due to the lowest ROCE of 19.61%.

5. Return on Equity (ROE):

• RoE signifies how well the company generates the return on shareholders’ investment
• In this parameter, Nestle India again beat other peers by scoring the highest ROE of 103.89% and hence obtains the 1^st position as well as 5 points.
• Godrej Consumer Products with the lowest RoE of 19.87% receives the last rank.
• The ROE of HUL has fallen from 84.2% to 28.6% in the March quarter due to a rise in the reserve balance. Currently, it is at 28.63%.

6. Debt-to-Equity Ratio:

• The debt-to-equity ratio is a leverage ratio that measures the debt of a company against its total shareholder’s equity.
• Accordingly, the lesser is the debt, the better it is for the company and vice-versa.
• HUL and ITC are debt-free companies and hence rewarded with full points and given the first position.
• Nestle India has a total D/E of 0.02 and it’s ranked 3^rd.
• Godrej Consumer Products has the highest D/E ratio of 0.19 and is hence given 5^th rank. Likely, Dabur India has the D/E ratio of 0.07 and is hence given 4^th rank.

7. Interest Coverage Ratio:

• The Interest Coverage ratio is in direct relation with the D/E ratio. It can be calculated by dividing EBIT from Interest Expenses.
• This ratio gives the ability of the company to pay interest from its operating profit.
• Since HUL and ITC are zero-debt companies, they maintain a good Interest Coverage Ratio. ITC, with an Interest Coverage Ratio of 310.56, highest among peers, gets the first rank.
• Due to the lowest Interest Coverage Ratio of 16.11, Godrej Consumer Products is ranked last and scored accordingly.

8. Pledged %:

• All the 4 companies in the list have not pledged their share and hence are rewarded with full points and first rank.
• Godrej Consumer Products have a pledge of 0.66%, hence, given 5^th rank and only 1 point.

9. Institutional Holding (FII + DII):

• Institutional Investors (FII + DII) as a % of Free Float has the highest stake in Dabur India, collectively of 77.4% and hence it is rewarded with full points and first rank.
• FIIs and DIIs also hold around 76.8% stake in Godrej Consumer Products and hence it secures the 2^nd position in this criterion and scores 4 marks.

10. Operating Profit Margin (%):

• Higher the Operating Profit Margin (%) of a company, better the operational efficiency of a company and vice-versa.
• ITC efficiently posts the OPM of 31.2% and secures 1^st position, due to the cigarette segment, the EBIT Margins are 63% and it contributes to 35% of the revenue.
• With the lowest OPM of 20.7%, Godrej Consumer Products scores last rank among its peers.

11. Sales and Net Profit Growth- 5 Year CAGR:

• In terms of Sales Growth, Nestle India has posted the highest figures with a 10.3% rise in sales and a 29.9% rise in PAT. Hence, it gets the full points and 1^st rank.
• Dabur has registered the lowest Profit after Tax (PAT) growth on 5 years CAGR basis of 6.2% as well as the lowest sales growth of 4.2%, hence, got the 5^th position.

12. Sales & Net Profit Growth: 3 Year CAGR:

• In terms of Sales Growth, Nestle India has posted the highest figures with a 10.1% rise in sales and a 19.3% rise in PAT. Hence, it gets the full points and 1^st rank.
• Here, Godrej Consumer Products has registered the lowest Profit after Tax (PAT) growth on 3 years CAGR basis of 1.7% as well as lowest sales growth of 3.9%, hence, got the 5^th position.

13. Operating Performance Ratios- Inventory Turnover Ratio (Higher the Better):

• Inventory turnover signifies a parameter that measures how fast the inventory is sold or consumed in the given period, the higher the better.
• Here HUL secured the 1^st rank with the highest Inventory turnover of 16.6 and get full 5 points.

14. Operating Performance Ratios- Cash Conversion Cycle (CCC):

• Again HUL secured the highest rank among its peers with the lowest CCC of negative (55.3) and get full 5 points.

15. Final Score:

• After analyzing and summing up all the marks scored by the Top 5 FMCG Companies, HUL, and Nestle India jointly shares the first position in our analysis. Both stocks score 59, the highest among all 5 companies.
• ITC and Dabur scored 47 points, and 46 points respectively, and hence secured 3^rd, and 4^th rank respectively.
• Due to poor performance in the majority of parameters, Godrej Consumer Products gets the lowest score of 36 points.
• On account of healthy scores, HUL and Nestle India appear to be strong FMCG Companies.