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| FMCG: Value for money | |
| Shobhana Subramanian & Varun Sharma / Mumbai January 8, 2009, 0:56 IST | |
It’s not really surprising that the FMCG sector has done well over the past year or so — after all we have been in a bear market. But it’s not just a weak market that’s responsible for the sector’s outperformance — the companies within the space have posted some good numbers over the past few quarters despite the high cost of raw materials. That’s why these stocks are trading at P/E (price-earnings) multiples that are at a premium to the market multiple — PEs range between 16-22 times forwards compared with a Sensex P/E of just under 10 times for 2009-10.
 The Rs 13,718 crore Hindustan Unilever, for instance, is trading at around 22 times estimated 2009 earnings. For many of these companies, the valuations could continue to be at these levels. While the growth in earnings may be somewhat muted in the December 2008 quarter, companies are expected to turn in a better performance at the net profit level in subsequent quarters as raw material costs come off.
Indeed, the economy may be slowing down but these firms should continue to do reasonably well because there are few signs to suggest that consumers are trimming their expenses on essentials just yet. For the December 2008 quarter FMCG companies are expected to turn in a top line growth of anywhere between 14-25 per cent driven both by better volumes and price increases — the average growth in the last four quarters has been around 15 per cent and that trend should sustain unless the environment deteriorates substantially.
With prices of commodities easing, firms such as HUL , Colgate and Nestle should have a better handle on costs which would push up operating margins by about 50-100 basis points. For the December quarter, however, operating margins are expected to remain flat as a result of which the growth in the net profit is estimated to be a muted 11-26 per cent; raw materials bought at higher costs will hurt operating margins. HUL’s operating margin for the September 2008 quarter was 12 per cent, for ITC it was 31 per cent while for Dabur it was 19 per cent.
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