FMCG companies score on balance sheets

But return on equity deteriorated for 7 of the 12 firms analysed

An IIFL Institutional Equities analysis of the FY14 reports of 12 fast-moving consumer goods companies, including ITC, Hindustan Unilever Ltd (HUL), Nestle, Marico, Godrej Consumer and Jyothy Labs (which account for nearly all the top listed firms in this sector) shows some interesting details.

While it is known sales of the entire sector declined in FY14, the balance sheets of these companies have shown a marked improvement, as net working capital fell for nine of the 12 companies and net debt declined for seven. Most companies saw a decline in capital expenditure, while free cash generation largely remained stable for the sector.

However, return on equity (RoE) declined for seven companies, which partly explains the disenchantment of investors with the sector. For HUL, Marico, Britannia and Emami, the RoE increased; these are companies that have fared better than the rest in this sector. This possibly explains the high valuation multiple HUL continues to command, despite weak sales.

IIFL's note says: "The highest RoE in the sector is HUL's, at 113.6 per cent, due to low fixed capital intensity and negative working capital." HUL's RoE jumped due to lower cash balances after it paid a special dividend in FY13. By contrast, at 12.5 per cent, Jyothy Labs had the lowest RoE in the sector, owing to higher working capital and capital base. Colgate saw its RoE decline sharply in FY14 on a lower dividend payout and a rise in net worth.

Though sales growth declined to 11 per cent in FY14 from 17 per cent in FY13, analysts believe growth will eventually pick up, as the economy revives. On the bright side, gross margins expanded for the sector in FY14 on lower input prices. Leading the sector on this front was ITC, with gross margins at 63.1 per cent of sales. Close on its heels were GSK Consumer and Emami.