5 good stocks in the Consumer Durables (FMCG)

The Consumer Play
Between 2000 and 2005, nearly a third of the incremental expenditure came from the middle class. Their non-food expenditure rose height: 119px;" src="http://business.in.com/media/images/2009/Ju70 percent, while expenditure on education doubled. In these years, as per capita income rose 80 percent, Indians also increased their expenses by nearly the same degree. The same theme will play out in the coming years. The five broad areas to look for companies are: food, essential non-food, education, healthcare (lifestyle) and discretionary expenditure that will include consumer durables and automobiles.

Strategy: Buy it, stash it and have a good night’s sleep.

Page Industries: A small company that makes a small product with big margins: male underwear. This Rs. 200-crore company makes the Jockey brand and has a net margin of 12 percent and ROCE of 36 percent. The company has effectively positioned its brand in a largely unbranded and unorganised Rs. 900 crore innerwear market. The company is worth a little over $100 million — cheap to even buy as an ongoing business for global competitors.

Pidilite Industries: Pidilite has brands like Fevicol, M-Seal, car polish Motomax and other assorted consumer art materials and specialised home paints. The three brands are also clear market leaders in their category. The company is available at a market capitalisation of 1.6 times its sales. With a sales growth rate of more than 22 percent for the last five years, there is a lot of steam left as its brands touch fast-growing areas like education, home décor and automobiles.

Dabur: This company has focus. Five years ago, Dabur got out of the pharmaceutical business and put all its effort, like the best brand companies, behind five of its brands. Since then, its ROCE has consistently remained above 50 percent. It touched 80 percent in 2008. Dabur strategy of focussing on health foods like fruit juices sold under its Real brand is starting to pay dividends.

Procter and Gamble Hygiene: Over the last three years, the money that P&G invested did not translate into market cap gains. The worm has now turned. Its feminine hygiene line, Whisper, grew at 21 percent and is also the category leader in value terms. Its ROCE, which started dipping since 2006, has again picked up indicating that its new investments are now paying dividends. The stock is trading at its three years highs but is still priced 20 percent below its peers.

Marico: Till 2008-09 came by, the company’s sales and profits had grown for 30 consecutive quarters, indicating a stable track record. Over the last five years, the company averaged a 20 percent growth in sales and profits. It recently launched its Saffola range of food products, which is expected to give the company its next round of growth. The stock looks fully priced but its international business and Kaya Skin Clinics have started to deliver returns. Analysts expect these businesses to expand rapidly in the coming years.
Risk: People love this sector when the chips are down. But when bulls are roaming the streets, returns from this sector fall. These stocks have higher valuations than the general market, making them look expensive.


Sourec : Forbes India

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Marico: Buy

Marico’s stock has been an underperformer in the FMCG pack despite the market preference for defensive stocks over the past year.

The better growth rates managed by larger FMCG rivals over the past three quarters and muted performance from Marico, due to higher raw material prices, have weighed on the stock. But with price hikes in the FMCG space tapering off and input prices for the company correcting from their peaks, Marico may deliver better growth in the year ahead.

An expanding international business, a promising new product pipeline and brands positioned strongly on the beauty and wellness plank, suggest that the business is well placed to weather any moderation in consumer spending. Investors can buy the stock, currently trading at a PE of about 16 times its estimated 2009-10 earnings; at a discount to larger rivals such as Hindustan Unilever, Nestle and Dabur India.

Marico delivered a strong 27 per cent sales growth in the first nine months of 2008-09, driven by healthy growth in the Parachute and hair oils business, an expanding contribution from new products (now 15 per cent of sales) and strong growth in the international business.

Though Marico’s coconut oil brands saw spiralling raw material prices (copra), significant price increases taken over the year (thanks to a dominant market share) and a volume growth of 7-9 per cent, helped the business register reasonable growth. The edible oil brands faced substitution by cheaper rivals, but this was more than made up by a strong show from Marico’s overseas operations in Bangladesh, West Asia, Egypt and South Africa.

The strong sales, however, failed to trickle down to profits (12.5 per cent growth) due to the upward spiral in the prices of safflower seed and copra.

Signs of relief on input costs are now evident, with copra prices correcting by about 13 per cent and safflower prices by about 20 per cent from their levels in December. While the former promises to expand hair oil margins, the latter allows room to revive volume growth in the Saffola brand through price offs.

Re-launch of brands in the South African business and a favourable currency equation suggests that overseas operations may continue to chip in with good growth. The company’s presence in nascent product categories such as male grooming, hair creams and styling gels, as also new product prototypes – Saffola Zest – a healthy snack and low glycemic rice – hold considerable scope for scaling up in size. HBL

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