FMCG stocks: MNC players beat domestic peers on returns front

FMCG stocks have been giving robust returns in the last decade with their market capitalisation (₹1,000 crore and above) jumping seven-fold, according to data provided by Capitaline. This has been led by MNC stocks, which have done better than domestic FMCG companies, with market-cap jumping 6.5 times and six times, respectively.

The outperformance by MNC stocks is mostly thanks to Hindustan Unilever, whose market cap has jumped 6.5 times. HUL has 63 per cent share in the MNC companies’ market capitalisation. Domestic companies’ market-cap has trailed due to ITC (54 per cent share), whose market-cap has only quadrupled.

Excluding HUL and ITC, the trend for MNC and domestic FMCG companies remains the same but not beyond one year. In other words, MNC stocks have underperformed domestic FMCG companies in the long term (a decade timeframe) if HUL and ITC are excluded from the analysis.

Diversified product portfolio

This is mainly because most of the domestic FMCG companies such as Emami, Godrej Consumer Products, Marico, Britannia Industries and Dabur India have diversified product portfolio in high-growth categories and are market leaders in their respective products or have less/no competition.

Also, ITC has pulled down the overall market capitalisation of domestic FMCG companies as it has been punished many times in the past in terms of higher incidence of tax on cigarettes. Also, ITC’s other businesses such as hotels and paper are cyclical in nature, while FMCG was incurring heavy losses initially.

The reason for underperformance of MNC (except HUL) stocks in the long term is because of the severe drubbing received by the second-most-influential stock, Nestle India, following the ‘Maggie’ controversy. Other MNC companies such as Colgate-Palmolive, Procter & Gamble Hygiene Healthcare, GlaxoSmithKline Consumer Healthcare and Gillette India have done immensely well over the last 10 years on buyback or delisting hopes (excluding Colgate). However, they are smaller in size to influence the entire MNC pack.

Trend to continue

The above trends — MNCs doing better than domestic FMCG and vice versa (excluding HUL and ITC) — are likely to continue. Firstly, HUL is on a secular growth trajectory due to premiumisation, demand recovery (especially rural), good monsoon and success in the naturals segment. On the other hand, outlook on ITC is grim and uncertain.

“Possible increase in GST rates in the subsequent GST Council meetings remains an overhang. If ad valorem duty is increased, it would sour the investment case further,” said an analyst of Motilal Oswal in a post result note.

The second trend of domestic FMCGs (except ITC) doing better than MNC stocks (except HUL) in the longer term is due to a lot of headroom in business growth, earnings and valuation over the longer term.“We are positive on the growth prospects with visible signs of demand shift from the unorganised to the organised market,” said ICICI Direct on Marico. HDFC Securities pointed out that leaders (HUL and Britannia) have outperformed their peers in terms of volume and EBITDA growth during turbulent periods.

“We believe the building blocks are in place in terms of innovation and new launches pipeline, which will bolster the company’s positioning and spur market share gains too. Going ahead, good performance by domestic business and growth in Africa are structural levers,” said Edelweiss on Godrej.

Emami has been going through some temporary challenges but the stock is one of the multi-baggers with a 13 times jump in market-cap on a 10-year basis.

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