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Expensively Priced

Cooling down of input cost inflation benefits a number of companies in the FMCG sector as valuations continue to be prohibitive

The summer of 2014 was particularly hot for FMCG companies that were seeing input prices spike. Monsoons were no better as prices continued to hold up. It was not before October that input prices started cooling off. Some of the biggest falls were recorded in rice bran oil (down 11.4 per cent over the previous month), phtahlic anhydride (down 9.6 per cent), LLP (6.8 per cent) and copra (3.7 per cent). Consequently, some of the biggest gainers were Bajaj Corp, Dabur, Marico and Asian Paints. A number of other companies like Britannia, Hindustan Unilever and Nestle did not see their raw material prices cool down.

FMCG companies on aggregate saw sales up 12.47 per cent in the last 12 months. Operating profit growth stood lower at eight per cent - a reflection of higher input costs. The sector has been witnessing anaemic volume growth for many quarters now. That has not changed much. A decline palm oil price and a stable currency could allow detergent and shampoo manufacturers to cut prices in a bid to entice volumes. Other categories like butter, milk, tea and biscuits that are not seeing raw material prices cool-off have no such advantage. Britannia and Hindustan Unilever raised prices of products in these categories.

Outlook
The sector still has to see the strong volume growth of the past. Intense competition limits price hikes and necessitates promotions. The cooling down of raw material prices though promising needs to sustain for companies to offer more promotions.

The sector on aggregate trades at 42 times earnings. That makes it the most expensive sector available now. It also hides that some FMCG companies are trading at sky-high valuations - Ruchi Soya trades at 98 times its earnings, Jubilant Foodworks (81x), P&G Hygiene and Healthcare (60x) and Nestle India (53x) to name a few. Most sector companies are also trading at lifetime highs, including HUL, Nestle India, Dabur, Godrej Consumer Products, Colgate, etc. This leaves little for fresh investors. Avoid.

Star performer of the sector
Procter & Gamble Hygiene and Healthcare (P&GHH)
Procter & Gamble Hygiene and Healthcare (P&GHH) deals in two major categories: sanitary pads and Vicks. The feminine hygiene market is largely under-penetrated at only 15 per cent. This is a segment that doesn't have many large players although smaller regional players abound but none with the reach, resources and the branding that P&G's Whisper enjoys. That doesn't mean you go and buy P&G. Valuations at 59x are expensive. Keep an eye out for this one.

High valuations leave little on the table for fresh investors

Company NameSales Growth YOY PAT Growth YoYTTM EPS (G) YoYTTM Ebitda margin (%)D/EROCE
(%)
Hindustan Unilever10.62%10.80%10.77%18.720.01162.44
Dabur India13.87%15.25%14.43%18.160.3734.15
Marico14.18%17.26%17.26%16.490.529.79
Britannia Industries11.53%73.37%73.23%10.50.1961.26
P&GHH18.20%45.13%45.13%23.69051.51