In the last part the three part interview; Sohini Andani, fund manager at SBI Mutual Fund discusses on what goes in when selecting an FMCG stock Sanjay Kumar Singh
What about the Indian players? What moves have you seen from them?
Indian MNC companies are in a much better position than some of the home-grown mid-sized FMCG companies. The latter may not have to strength to fight the competition that is coming.
But it will take time for the competition to build up its distribution network. So the Indian companies have the scope over the next four-five years to build on what they have already done.
Seeing the competition in the Indian market, many mid-sized Indian companies are acquiring companies outside India in order to diversify their base. We are not sure whether that is the best strategy. They are trying to de-risk their overall business. Examples include Godrej and Dabur. And the MNCs anyway have a global presence already.
Whom would you bet on?
We are more positive about the MNC companies in India that are expanding their portfolios. We have been very positive about Glaxo Consumer for some time. From a single-product company it now sells a basket of products. Some of these products succeed and some don’t, so they will have to experiment. But we feel that such companies have more scope to grow.
Many Indian companies have done well with their acquisitions. Wipro has been acquiring consumer companies globally and doing well. So companies may do well with their overseas acquisitions. But we prefer to concentrate on the players who are focused on the domestic markets.
Valuations are quite high within the FMCG sector. This makes investors wary of investing even in the stocks that they like. How do investors minimise the risk arising from high valuations?
Yes, valuations are not cheap. On an average the sector is trading at 25 times earnings. The sector has offered good returns over the last one year. Relative to the market, the premium enjoyed by this sector still doesn’t seem to be very high. The growth visibility remains good, so the sector should perform well over the next one year. Nonetheless, we would recommend spreading investments over a period of time rather than investing it all at one go. Investors could choose to go for systematic investment plans or split their investments into at least two-three tranches to get the advantage of movements within the market. But we are very positive about the sector over the long run.
Are you suggesting that investors should watch stock prices closely and buy on falls?
In reality this doesn’t work out. Most investors don’t buy stocks when prices are falling. They feel more confident about purchasing stocks when they see prices moving up. Instead of trying to time the market, investors should put in money at regular intervals. That’s the best way to go about taking advantage of market volatility.
Why is it difficult to buy when prices fall?
It’s very difficult to predict whether the stock is going to correct, and if so, how much, or whether the stock price will just move sideways and consolidate. All this makes it difficult to guess whether the bottom has been reached. You also don’t know when the recovery will come.
Since we are anyway structurally positive about the market, the best way to take advantage would be to just spread your investments across one year. You may split it into two-three instalments and thus reduce the valuation risk.
Tell us what qualitative factors one should look for when buying FMCG stocks.
Invest in categories where the level of penetration is currently low, the size of the potential market is big, and where penetration is likely to increase significantly. In categories like toothpaste and detergent the level of penetration is already high. But in case of personal care products and packaged food, penetration is low.
You could also invest in companies that are into categories where there is less competition. One such category is sanitary napkins. Growing female income will drive this category. The level of penetration is low and there are only a couple of key players in the market. This is a segment where players have both pricing power and high growth potential.
Next, you could invest in a category where there is scope for consumers to graduate to higher value-added products. Personal products is a category where a company that has products positioned at different price points can graduate its customers from lower-end products to higher-end ones as the latter’s income levels grow. For instance, Lever has products at price points targeted at low, mid-income and premium customers. In soaps it has Lifebuoy, Lux and then Dove. Since it has products at different price points, it is able to catch a much wider range of customers.
Distribution strength across India will also be a key determinant since it will help you sell your products throughout India. The ability to price your products right is also important. In the past one year we have seen a lot of growth happen at price points of Rs5 and Rs10. Companies that moved to offer products at these price points were able to expand their markets and garner higher growth. Hence, the ability to identify these kinds of gaps in the market and tap them to gain market share matters.
As mentioned earlier, the capacity to spend in order to maintain market share will be very important. For instance, it is widely expected that P&G will launch products in the toothpaste category in India, something that it has not done so far. A company like Colgate has the ability to spend in order to maintain its market share. Smaller mid-sized players may not be able to do the same and may lose market share. The ability to spend will matter quite a lot in maintaining, retaining and growing market share. These are some of the factors, I would say, which those investing in the FMCG sector should take into account.
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