One of the most misunderstood investment spaces in the Indian Stock Markets is the FMCG / CONSUMPTION goods space. How often have we heard Analysts, Anchors and others of their ilk refer to the Stocks in this space as 'defensives'. Nothing could be farther from the truth. In fact if one were to analyse Scrip performace over say the last 8 years one would observe that the maximim, almost embarrasingly humungous returns have been given by Scrips belonging to this space such as TITAN, ITC, GODREJ IND, GODREJ CONSUMER, ASIAN PAINTS, PIDILITE, PAGE INDUSTRIES, HAWKINS COOKER, TTK PRESTIGE, NESTLE, EMAMI, BATA, P&G, BRITANNIA, JUBILANT FOODWORKS etc with the possible exception of HUL (whose performance has been tepid ,to say the least). This space has been 'discovered' so to speak by FIIs and DIs who very correctly and very early recognised that the one fail-safe area for investment in India would be the scrips benefitting directly or indirectly from the country's growing population, both in numbers as well as aspirations.
The problem for Indian retail investors is that they woke up to the real potential of this space much much later by which time most of the scrips mentioned above had already run up hugely thus making entry seem risky. This was compounded by the fact that most analysts were behind the curve and would nor recommend entry citing 'high valuations'. For example Analysts have been giving Sell or Reduce calls on NESTLE ever since it was at 2500 (P/E 23) but it has gone from strength to strength and is now at 4300 approx (P/E 46 TTM). The same is the case with a lot of other scrips mentioned above and I have seen a lot of retail investors ruing the fact that they did not enter these stocks earlier.
So what is the way out now?
Firstly we must identify the correct Scrip from this space to enter. In my opinion this can be done keeping in mind mainly two factors : GROWTH POTENTIAL of the target market and the PRICING POWER that the brand enjoys. eg NESTLE continues to grow and margins continue to be buoyant because one, the consuming population is growing and two, its Brands enjoy immense Brand-pull and therefore pricing power. This is of great significance in high inflation periods such as now where only the Companies with relative pricing power will be able to deliver both volume as well Margin growth. Similarly let us take the case of ITC which has always delivered great numbers despite naysayers talking about excise duty hikes in the Cigarettes business as being a threat but in fact the Cigarettes segment of ITCs business has constantly delivered both on volume as well as Margins and thus ITC has been an outperformer on the bourses. To elaborate the GROWTH point a little more let us take the example of JUBILANT FOODWORKS where the phenomenal growth trajectory is partly due to the fact that the Urban population is growing and more importantly the changing tastes af the urban middle class assure its products of a perennial catchment area. If we look at scrips like PAGE INDUSTRIES or LOVABLE LINGERIE or TTK PRESTIGE we will observe that their products have a definite ASPIRATIONAL VALUE which too assures exponential demand growth.
Secondly we must know at what price to enter these scrips. Now this is easier said than done since these have been well and truly discovered by the Markets and finding entry at cheap valuations will be next to impossible. Take the case of TITAN which despite Analysts downgrades as well as the Managements heads-up regarding possible pressures in the coming quarters , has not seen a meaningful correction except perhaps in the past few days where it went below 200 but the dip was rapidly bought into. So the only way out is to carefully analyse the Scrip and arrive at an optimum entry P/E and then make a staggered entry about 10-15% above this optimim level and then average out on all 5-10% dips as per ones appetite and available Capital. eg if we analyse TITAN we see that it currently trades at 38 PE (TTM) and we feel that 30 PE is an optimum entry level (corresponding price level 170 approx) then we make our first entry at about 10-15% higher than 170 ie in the range 185-195 and then average out downwards on dips or on particularly bad days for the Scrip.
This my friends is the ONLY reasonably safe way of entering these Market favourites such as TITAN, NESTLE, JUBILANT FOODWORKS etc etc.
The problem for Indian retail investors is that they woke up to the real potential of this space much much later by which time most of the scrips mentioned above had already run up hugely thus making entry seem risky. This was compounded by the fact that most analysts were behind the curve and would nor recommend entry citing 'high valuations'. For example Analysts have been giving Sell or Reduce calls on NESTLE ever since it was at 2500 (P/E 23) but it has gone from strength to strength and is now at 4300 approx (P/E 46 TTM). The same is the case with a lot of other scrips mentioned above and I have seen a lot of retail investors ruing the fact that they did not enter these stocks earlier.
So what is the way out now?
Firstly we must identify the correct Scrip from this space to enter. In my opinion this can be done keeping in mind mainly two factors : GROWTH POTENTIAL of the target market and the PRICING POWER that the brand enjoys. eg NESTLE continues to grow and margins continue to be buoyant because one, the consuming population is growing and two, its Brands enjoy immense Brand-pull and therefore pricing power. This is of great significance in high inflation periods such as now where only the Companies with relative pricing power will be able to deliver both volume as well Margin growth. Similarly let us take the case of ITC which has always delivered great numbers despite naysayers talking about excise duty hikes in the Cigarettes business as being a threat but in fact the Cigarettes segment of ITCs business has constantly delivered both on volume as well as Margins and thus ITC has been an outperformer on the bourses. To elaborate the GROWTH point a little more let us take the example of JUBILANT FOODWORKS where the phenomenal growth trajectory is partly due to the fact that the Urban population is growing and more importantly the changing tastes af the urban middle class assure its products of a perennial catchment area. If we look at scrips like PAGE INDUSTRIES or LOVABLE LINGERIE or TTK PRESTIGE we will observe that their products have a definite ASPIRATIONAL VALUE which too assures exponential demand growth.
Secondly we must know at what price to enter these scrips. Now this is easier said than done since these have been well and truly discovered by the Markets and finding entry at cheap valuations will be next to impossible. Take the case of TITAN which despite Analysts downgrades as well as the Managements heads-up regarding possible pressures in the coming quarters , has not seen a meaningful correction except perhaps in the past few days where it went below 200 but the dip was rapidly bought into. So the only way out is to carefully analyse the Scrip and arrive at an optimum entry P/E and then make a staggered entry about 10-15% above this optimim level and then average out on all 5-10% dips as per ones appetite and available Capital. eg if we analyse TITAN we see that it currently trades at 38 PE (TTM) and we feel that 30 PE is an optimum entry level (corresponding price level 170 approx) then we make our first entry at about 10-15% higher than 170 ie in the range 185-195 and then average out downwards on dips or on particularly bad days for the Scrip.
This my friends is the ONLY reasonably safe way of entering these Market favourites such as TITAN, NESTLE, JUBILANT FOODWORKS etc etc.
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