Date: June 7, 2012

The comparison of four leading FMCG / Consumer stocks, ITC, HUL, Godrej Consumer and Asian Paints throws up some interesting insights. ITC is keeping up excellent margins while investing in 4-5 newer areas beyond cigarettes. HUL has the best brands, but is seeing growth constraints. Asian Paints is a dominator in Paints and has good international presence. But the surprise packet is from the smallest player. Godrej Consumer is growing through acquisitions and international business, and has the best financials. 

Introduction

This research looks at four firms from the FMCG sector and finds out the best for the long-term investor. In this report, we research two blue chips, Hindustan Unilever, the FMCG bellwether, and ITC, which is a conglomerate, but mostly a cigarette firm. And also two large caps, Godrej Consumer and Asian Paints.  (They will be referred to as HUL, ITC, GC and AP).

Five Year Snapshot of Key Financials

Let us first look at a 5-year snapshot of financials of the firms. This can give us good visual feel of the relative and absolute financials of the firms.

Financial Snapshot

• Revenues, EBITDA and PAT have gained by 8%, 26% and 7% CAGR over 5 years.
• P/E has moved in a range of 17-33 times. Current P/E is at 32.4 times.
• Operating margins are excellent at 27%. Profit margins are flat at 12%.
• Dividend has been increased to 750%, or Rs 7.5, indicating a dividend yield of 1.8%.
• PEG is at 4.1 – indicates clearly overvalued status.

ITC Ltd

Business Snapshot:

• The firm is owned by Indian Institutions, who hold 52% of the firm.
• Business segments in ’11 were Cigarettes 44%, FMCG 18%, Agri 20%, Paper/ Packaging 14% and hotels 4%.
• Dominates Indian Cigarettes market, with a reach of 2 million outlets.
• Attempting to diversify from cigarettes into other segments.

Financial Snapshot

• Revenues, EBITDA and PAT have gained by 15%, 22% and 19% CAGR over 5 years.
• P/E has moved in a range of 15-31 times. Current P/E is at 29 times.
• Operating margins and Profit margins are superior at 43% and 23%.
• Dividend has been increased to 450%, or Rs 4.5, indicating a dividend yield of 1.9%.
• PEG is at 1.54 – indicates somewhat overvalued status.

Godrej Consumer 

Business Snapshot:

• The promoter group Godrej owns 64% of GC.
• It has Household and Personal Care Products brands like Good Knight, Cinthol, Godrej No1, etc.
• The revenues by categories are Personal Wash 22%, Hair Care 19%, Home care 47% and Others 12%.
• Growth has been organic, as well as by acquisition, in India as well as Internationally. GC has international operations in Europe, Australia, Canada, Africa and the Middle East.

Financial Snapshot

• Revenues, EBITDA and PAT have gained by 45%, 55% and 47% CAGR over 5 years.
• P/E has moved in a range of 20-27 times. Current P/E is at 26 times.
• Operating margins and Profit margins are good at 26% and 15%.
• Dividend has been increased to 475%, or Rs 4.75, indicating a dividend yield of 0.82%.
• PEG is at 0.55 – indicates attractive undervalued status.

Business Snapshot:

• The promoter group of Choksi, Dani, etc. own 53% of AP.
• Group operations are in 17 countries with consumers in 65, through JVs and subsidiaries.
• Major Product Segments are Automotive, Home, Industrial and Paint related Services.

Detailed Comparison

Next we will look at a detailed comparison of the firms in terms of valuation, growth characteristics, debt, shareholding pattern, etc.

We can see from this analysis that on 5 important parameters:

• Valuation – ITC is the cheapest, AP the most expensive
• Growth – GC leads on Sales and Profits
• Management effectiveness – HUL leads
• Solvency and Margins – ITC clearly leads, as debt is low across the sector.
• Market performance – AP and GC split the honors

Conclusions:

1.       Among Large Caps, ITC is better

• ITC leads HUL, as ITC has superior Operating and profit margins. In terms of valuation, ITC is cheaper. Also on margins, it is better. HUL is superior on Management effectiveness.
• ITC leads on the 5-year growth on financials.
• ITC dominates cigarettes and commands great margins here. It has been using this to invest in an array of new growth sectors, this is bearing fruit and will drive future performance.

2.       Among the mid-large caps Godrej Consumer is better

• GC leads over AP because: While GC and AP share honors for market performance, but on all other parameters, GC leads AP – Operating & Profit Margins, Lower valuations and Revenue, EBITDA, PAT & EPS growth.
• GC has a smaller market cap than AP, about half. GC is present in many more product categories, and has far more room to grow.

JainMatrix Knowledge Base:

See other useful reports

• Hanung Toys & Textiles – https://jainmatrix.com/2011/10/25/hanungtoys/
• Titan Industries – https://jainmatrix.com/2011/06/18/titan/
• IPO of Tribhovandas Bhimji Zaveri – https://jainmatrix.com/2012/04/25/tbz/
• Hindustan Unilever – Too much euphoria? – https://jainmatrix.com/2012/05/22/hul/