👉Recently in this market correction FMCG sector was one of the worst hit sector.
👉There are messages rolling in investors community that FMCG sector is commanding Very Rich Price to Earnings Multiple(PE) and is priced very richly.
👉Why Markets are Valuing Such companies very High?
👉India’s Top FMCG and Consumer Healthcare Companies include:
We had already reco Nestle@8981 in 10th May 2018 and stock already hit 52week High of 11700.Giving almost 31% in Just 3 months
👉If we dig in to cash flow and Balance sheet of these companies what were there balcnce sheet saying 10 years back and what does they say now ,there is a huge considerable difference.
Reasons for premium Valuation
1) Consumer based Companies
2) Able to capitalise Rural demand where other sectorial companies failed.
3) Gross Margins of companies expanded.
4) Profits growth accelerated then sales growth .
5) Introduction of Premium products which contributed higher margin and was able to capture descretionary expenditure despite being FMCG companies.
6) Working Capital Cycle dramatically improved.
7) Return On Equity is constantly Growing.
8) Return on Capital Employed Is Very High compared to Other business
9) Negative Working Capital Cycle.i.e Company on paper does not require any capital to do business meaning company is running virtually running on customers advances.This is one of the major factors to decide the PE valuations of company.
10) Self Sustainable Growth rate(SSGR) which is very powerful tool to analyse the company which is used by Institutional Investors and Fund managers to Gauze the Sustainability of company growth in down cycles. SSGR for reputed FMCG brands is very high meaning they can even grow without debt in down cycle.Worst SSGR is of companies such as Jai Prakash power, JP Group, Pratibha Industries, RCom and many more. This is very important metric.
11) Free Cash Flows of FMCG is considerably very good .
👉While in Long term many of these factors will exits even though technology changes, these business models are Hard to challenge .
KEY CHALLENGE HERE IS TO CHOOSE THE COMPANY WITH ATTRACTIVE VALUATION WHICH COMMANDS REASONABLE PE MULTIPLE AND HAS ALL THE ABOVE MOATS AND TRAITS.
We expect few companies one or two company from above to give 15-20% CAGR returns for next 5 to 10 years and can even outperform in downtrend also.
Disc – All views are for study & Educational purpose only.Consult your financial advisor before investing.