Street valuation of Indian FMCG cos beats global peers

By agencies   |   Tuesday, 23 August 2005, 19:30 IST
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MUMBAI: A dramatic growth in domestic consumption is said to be the India story. If one considers the valuation premium that FMCG companies operating in India enjoy, it explains the extent of the bet that investors are taking on the story. For global consumer companies, the average price-earnings multiple for December 2005 expected earnings is 16-17 times. For most of their Indian subsidiaries, it currently stands well above 20 times their expected earnings for 2005-06. For example, Hindustan Lever trades at 27 times its expected earnings for 2005 against Unilever are 15 times. Nestle India trades at 26 times against Nestle SA’s valuation of 17 times. Colgate-Palmolive India trades at 22 times against its parent's valuation of 21 times. This is also because the expected earnings growth in Indian firms is likely to be 18-20 percent over the next two years. In case of global firms like Unilever, Nestle and Colgate, it will hover around 5-6 percent. Hence, the difference in valuation. Over the past one year, the BSE FMCG index has risen 65 percent versus the BSE sensex's gain of 53 percent. The sensex P/E is just over 14 times the expected growth, according to analysts. As a result of this rally in share prices, valuations of FMCG companies appear to be stretched in comparison to their global peers and the broader market. The valuations are also based on a growth based on a jump in rural demand. Till recently, urban demand was the primary growth driver. The fact that volumes grew sharply and several companies hiked prices of selective brands enabled value growth to catch up with volume growth after several quarters. Rough industry estimates peg the industry's growth currently at more than 6 percent, driven by lifestyle categories such as convenience foods, skin care, shampoos, deos, hair conditioners and colors. Since July '05, several industry majors have also begun reporting higher growth rates from rural markets. Industry watchers say segments such as beverages, including malt, personal care products and health and hygiene-related products, will record higher growth rates in the future. They argue that the premium currently enjoyed by Indian companies is largely due to a high growth rate that Indian subsidiaries or companies are expected to clock following a surge in rural consumption. But there is a catch here. Rural consumers, who account for nearly 70 percent of India's population, are proving to be tough nuts to crack for marketing honchos at large consumer companies. Several FMCG firms have reworked their marketing strategies for the smaller markets, launching small packs and beefing up their rural distribution networks.

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