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After demonetisation, a sharp fall in PE valuation offers an attractive entry point into some quality names and these 3 FMCG companies are expected to see the fastest growth in earnings, with at least 15 per cent upside potential, reports Sheetal Agarwal.
In the aftermath of demonetisation, fast moving consumer goods (FMCG) stocks have fallen sharply. Leading scrips in the segment are down by four to 13 per cent since November 8 (when the government banned Rs 500 and Rs 1,000 notes) as against a 6.6 per cent fall in the benchmark S&P BSE Sensex.
The sector is likely to face supply chain issues; coupled with the cash crunch, this could hamper demand. However, the impact is likely to be short-term, say analysts. Experts also believe some FMCG pockets will see less impact and a faster revival.
“Discretionary consumption in urban areas is much more impacted by demonetisation, compared to basic consumption in staples. Also, the staples' impact is transient, and there could be an uptick if the government chooses to stimulate lower-income consumption,” says Arnab Mitra, consumer analyst at Credit Suisse. Staples will see a slowing over three months, due to lack of liquidity in the channel, he adds.
Abneesh Roy, FMCG analyst at Edelweiss Securities, seconds this view. “Though short-term demand will see a significant impact, things will change structurally over the long term in terms of making the industry more organised. We see that stocks where the penetration levels are lower and where the unorganised (segment’s) share is higher will tend to benefit over the longer term,” he says.
However, after November 8, most companies’ expectation of a recovery in the second half of this financial year is unlikely to materialise. To factor in the demonetisation pain and the earnings cut thereof, most FMCG stocks’ price to equity (PE) ratios have fallen meaningfully.
These stocks have been resilient to a lot of macro concerns, such as slowing consumption demand. They’ve maintained their volume growth in a decent range, with some companies even seeing an improvement in this metric.
Now, however, after the share price correction (S&P BSE FMCG index alone is down nine per cent in two weeks), the FY18 estimated PE ratio of most top FMCG companies has fallen meaningfully.
This fall offers long-term investors an opportunity to enter quality names at reasonable valuations, say experts.
Here are three of the top 15 FMCG companies which are expected to see the fastest growth in earnings over FY16-18 (18-plus per cent), with at least 15 per cent upside potential, based on Bloomberg data after the demonetisation move. Additionally, these are expected to see less impact on account of demonetisation.
Britannia: Theirs is a play on premium biscuits/cookies (it is market leader here), growing at a rapid pace in recent times. The company's focus on increasing the penetration in rural markets, with continued innovation, will drive its growth. Competitive intensity in this category is high (ITC, Parle).
However, Britannia is also unlikely to be impacted significantly by Patanjali, as the latter is focusing on the mass segment. Despite stiff competition, the company has gained ground in recent years.
Britannia’s presence in the high-growth dairy segment will be another engine of growth in the future. Though the company is expected to deliver a compounded annual earnings growth of 18 per cent over FY16-18, its estimated FY18 PE has contracted from 34 before demonetisation to about 31.
Emami: Product launches, with strong traction in its Kesh King brand, are key growth drivers. The management's aim to pay off its debt will further aid earnings. With increasing consumer preference for natural products, Emami’s Zandu portfolio stands it in good stead.
More, the success of entities such as Patanjali will lead to expansion of this market, and benefit entities like Emami. The company enjoys dominant market share in niche segments such as light hair oil and winter creams. Expansion of its distribution network will be another factor driving volumes.
These positives are likely to offset relatively slower growth in international markets, believe analysts.
Bajaj Corp: Strong volume growth in its flagship product, Bajaj Almond Drops, will remain a key driver for the company. Bajaj Corp’s strategy to convert coconut oil users to more expensive and margin-accretive light hair oils is a key positive.
The company’s plan to scale up the international business by entering new regions will aid growth. While dependence on Bajaj Almond Drops hair oil is a risk, it seems well captured in the current PE valuation, 37 per cent lower than the sector average FY18 ratio of 31 times.
Photograph: Sahil Salvi.
