#FMCGDiaries - What moved ITC today?

ITC was the highest Nifty gainer in today’s session after a long period of under-performance. A large part of the street believes, things for ITC are coming together and some pieces of this massive jigsaw are falling in place. Let’s try and take a look at a few of those pieces

1) The Good News 

An important piece of news that showered gains on the entire FMCG sector was IMD’s announcement of normal monsoons in 2018. If both IMD & Skymet’s predictions do come true, it would make for a hat-trick of normal monsoons and hopefully spur rural demand. It’s because of this belief that most FMCG Stocks, like, HUL, Godrej Consumer, Pidilite, Britannia and Nestle hit record highs despite trading at record high valuations too.

2) The Valuation Argument

ITC’s underperformance v/s HUL can be summarized in the following charts. While the latter narrowed it’s gap with ITC’s market cap, the valuation gap between the two only widened. Usually, it has been seen that ITC trades at a 40% discount to HUL’s valuation during an unfavorable tax regime, which narrows to 25% during stable times. But as of yesterday’s close, ITC traded at a 50% discount to HUL’s valuations, a discount which is arguably the widest ever, at a time when the optimism over Co’s Non-Tobacco Business is the highest ever. Something, somewhere, had to give.

HUL vs ITC

Market Cap Gap Narrowing

At Start of 2017

                                            Market Cap

HUL                                         1.78 Lk Cr

ITC                                           2.92 Lk Cr

Yesterday

                                            Market Cap

HUL                                         3.13 Lk Cr

ITC                                           3.23 Lk Cr

HUL vs ITC

Valuation Gap Widening   FY19e PE

HUL                                         52X

ITC                                           26X

#As On April 17, 2018

3) Hotels Check In 

This is where it gets all the more interesting. A part of ITC that we often overlook, their hotel business. ITC runs one of the largest and fastest‐growing hospitality chains in the country. Hotel Stocks have been on a tear this week owing to favorable demand-supply situation, optimism towards the industry’s pricing power & occupancy and premium valuations of the latest listing, Lemon Tree Hotels. Stocks like Taj GVK, Royal Orchid & EIH Associated Hotels gaining anywhere between 26-30% in the last two sessions. Earlier, analysts on the street would ascribe a valuation of 15X EV/EBITDA (`5/share) to ITC’s hotel business. But with the current lot trading above 30, 40 & even 50X EV/EBITDA, the case for a re-rating of ITC’s hotel biz only strengthens. 

Hotel Stock Valuations

EIH Ltd                   63X

Lemon Tree Hotels 51X 

Indian Hotels          34X

Royal Orchid          32X

EIH Assoc              30X

FY18e EV/EBITDA

Valuing ITC's Hotel Biz 

At Various Multiples Hotel Biz Value Per share –

18X  Rs. 6/sh

20X  Rs. 7/sh

24X  Rs. 8/sh

28X  Rs. 9/sh

30X   Rs. 10/sh

FY18e EV/EBITDA

4) The Big Question – Value or Value Trap?

After today’s move, ITC now trades at 48% discount to HUL, the highest in the last 10 years. However, The company’s earnings growth over FY15-18 has been ~5%, the lowest in the last 20yrs. Irrespective of the optimism around ITC’s Non-Tobacco business, the truth is, Cigarettes still account for nearly all of ITC’s operating profits and free cash flow. Only an annual tax-hike of less than 10% in 2018 to lead to a substantial growth in cigarette volumes and earnings. Earnings growth is the one ball needs to be kept a watchful eye on and that depends solely, on how the Tax Regime on Tobacco pans out in the very near future.

Much Love.

M

PS:Don't treat any of these as investment ideas; I personally Don't Invest/Trade.

Keep The feedback Coming.

#FMCGDiaries - TITAN TURNS THOUSAND

TITAN TURNS THOUSAND

Titan hit the 4-Digit mark on auspicious Akshaya Tritiya. At 1000 Rupees, the market cap of Titan crosses 88000 Cr, placing the company at the 33rd spot in the list of Indian companies with the highest Market Capitalization

REMEMBER THE TITAN

A trip down memory lane and one can see the massive power of compounding this company has displayed. From a Watch Co to a Jewellery Co, the Stock price of Titan has surged from Rs. 56/sh 10 years ago to 1000 now. If you stretch the time beyond 10 yrs, 15 yrs ago the adjusted price of Titan was Rs. 2.5/sh. A gold mine, for those who discovered it then and held on.

BIG BULL’s BIG BET

A notable name which associates itself with Titan is Big Bull Rakesh Jhunjhunwala. RJ and Family as of March 2018 hold 7.5 Cr shares in Co, that’s now worth 7500 Cr (just over a billion dollars). Again reinforces the old adage, “if you find a good co, back your truck, tank up and hold on.”

TITAN V/S GOLD

Talking about old adages, Gold is pretty dear to us Indians and we’ve heard about the wealth creating properties of the Yellow Metal. A quick look at the data suggests the same, but it also suggests that in the last 15 yrs, Titan has returned more bling for the buck as compared to Gold. 10 Yrs Ago, Gold was available at 12500/10 gms and the same was available at 5600/10 gms 15 Yrs ago. Today the price of gold quotes around `32000/10 gms. So if you look at the Compounded Annual Returns over the last 10 or 15 Yrs, Titan has outshone Gold by a fair margin. This is not to suggest that this outperformance may continue. But, if the company continues to post strong earnings growth and gain market share, it may very well do.

TITAN Stock Returns

                             CAGR

10 yr                       33%

15 Yr                       49%

GOLD Returns

                             CAGR

10 yr                       6%

15 Yr                       19%

TOO MUCH PRICE FOR GOLD? OR DIAMOND FOR THE PRICE OF GOLD?

At 1000 Rupees a piece, one may argue that the valuations are stretched. Titan Trades at 55X FY19e & 40X FY20e. Morgan Stanley this morning has actually downgraded their outlook on the stock. They find themselves “reluctant to push multiples beyond current levels.” However, they add “the company remains one of our favorite plays on urban discretionary consumption growth in India, with huge untapped growth potential.” While, multiples cannot be pushed beyond a certain limit, one must keep a close eye on the earnings of Titan.

Much Love.

M

PS:Don't treat any of these as investment ideas; I personally Don't Invest/Trade.

Keep The feedback Coming.

FRIDAY THE THIRTEENTH

TRISKAIDEKAPHOBIA & PARASKEVIDEKATRIAPHOBIA

You read that right. I know you’re squinting at the multi-syllabic Greek words and wondering what they mean. Triskaidekaphobia means Fear of the number 13 while Paraskevidekatriaphobia takes it a step further and suggests Fear of Friday the 13^th

We have a great set up for trade today, 6 days of gains, FIIs buying in Index Futures and World Markets looking good, thanks to Donald Trump’s tweets. The superstitious argue it’s Friday, the Thirteenth. So let’s turn the calendar and see what previous 13 “Friday the Thirteenths” have meant for our market.

NIFTY ON FRIDAY THE 13TH

Date                       Move

13-Oct-2017        +0.7%    

13-Jan-2017        -0.1%

13-May-2016       -1.1%

13-Nov-2015        -0.8%   

13-March-2015    -1.5%

13-Feb -2015       +1.1%

13- June-14          -1.4%

13-Dec-2013        -1.1%

13-Sep-13             0.0%

13-Jul-12               -0.2%

13-Apr-12              -1.3%

13-Jan-12             +0.7%

13-May-11             +1.1%

In the last 13 Such Fridays:

The Nifty has ended lower on 8 occasions, higher on 4 occasions and unchanged on one

The Average Move over last 13 sessions has been -0.3%

-0.94% has been the average loss on a down day, while a good day added 0.9%

The last time 13^th April fell on a Friday was way back in 2012, that day the Nifty ended lower by 1.5%

Again, this data ain’t to suggest what may happen today, but it’s perfect fodder for geeks just like the words Triskaidekaphobia & Paraskevidekatriaphobia.

FMCG Q4FY18e: The Hope Of Sustained Recovery

FMCG Q4FY18: Sector Expectations 
The Hope Of Sustained Recovery 

It’s that time of the year again, analysts making calls to companies, distribution agents, sharpening pencils, updating excels and tweaking estimates to prepare for the quarterly earnings. For companies in the FMCG Sector, the task a little more difficult than the others because comparison of performance with prior quarters would be iffy due to the various distortions in the base variable.

FMCG sector earnings were most impacted by Demonetization & GST Related hiccups last year. Demonetization took place in Q3FY17 & the GST Impact was felt in the latter half of Q4FY17 & all of Q1FY18. 

If that isn’t enough, GST rates for a large swathe of daily consumption items were revised lower in Nov 2017, so Q4FY18 will have the first full qtr impact of lowered prices and expectedly higher offtake. 

Q3FY18 was the quarter where things started to look up. Almost every consumer company reported better than expected results; coming off a very favorable DeMo base. Margins improved due to benign raw material costs, rationalized spends and the GST related dip in H1FY18 saw some sequential respite. 

Most importantly, there was a heightened sense of optimism in the Management commentary post earnings. For instance, Hindustan Unilever, in their Q3 earnings statement said “Expect Gradual Recovery in Demand to Continue” vs “In a challenging business environment, we delivered strong overall performance” just a quarter ago. Hence, the key expectation from the FMCG sector this qtr is sustained recovery and positive management commentary. 

Volume Growth Trend & Expectations

As for the numbers, the sector, as a whole, is likely to see mid-single digit volume growth in Q4FY18. Additional GST rate cuts in Nov-17 led to price cuts across products may further increase offtake and aid volume growth. The business environment looks favorable now than ever before. Post DeMo and GST drubbing, the distribution channels seem to have recovered, especially Wholesale & Army Canteen Stores. 

The industry seems to have sized up the scale & limitations of its fiercest competitor in recent times, Patanjali. That’s visible in HUL, GCPL & Dabur’s improvement performance in the areas they were most affected, viz, Soaps, Honey & Toothpastes.

Q4FY18 Expected Growth

Keep an eye on the margins for the FMCG sector this quarter. There may be come divergence b/w food and Home and Personal Care companies. While prices of Crude, TiO2, VAM and Copra have seen a sharp increase while that of Flour, Sugar, Maida and Milk have seen flat/negative inflation. The Paint & Bldg Pdt Cos have taken price hikes of 5.5-6% to account for the increase in Crude to protect margins. 

For companies like Dabur, Emami, Marico and Britannia who do have small exposure to the MENA region, the street expects some improvement in reported results from the international business given a favorable base. 

FMCG Sector Valuations

However, the big question that begets answering is, what price are investors paying for this increased optimism? At 45X FY19e; the sector does trade at elevated valuations, but if these companies meet the street’s expectations with a hope for some more in the future, there’s no reason for investors to worry about the top dollar they’re paying for growth, opportunity and quality of management.  

A WEEK WHEN MILK SPILLED

The recent scams in the gems & jewellery and the banking world did quash a few popular sayings that stood for credibility, earlier. Out went “Safe as Banks,” “Gem of a Person,” and “Gold Standard” after Nirav Modi & Co took with them the terms Safe, Gem & Standard along with the many billions of Rupees.

Just the way stock market money seeks safe haven in the FMCG space during uncertainty, all the Honest-To-God patrons too, sought safety in the pristine dairy term - Doodh ka dhula (washed pure, with milk).  However, last week saw some events that put this term to risk too. The happenings in the Milky-Way suggest that some of the dairy doyens themselves may not be “dhula hua” with “doodh” after-all. Two instances caused some churn in our glass of milk.

First, the share price of Kwality Ltd (not to be confused with Kwality Walls Ice Cream that’s owned by Hindustan Unilever) tumbled 28% last week, extending its 2018 loss to 48%. 2 consecutive lower circuit hits on the stock caught the shareholders in, yet another tizzy.

Kwality Ltd promptly joined us on CNBC-TV18 and stated:

-          Appears Negative forces At Play Impacting the Stock Price

-          Nothing Fundamentally Wrong With the Company

-          Investigating the activity of these negative forces

-          None of the pledged shares are being sold in the market

For those familiar/invested in this stock, it was painfully reminiscent of what took place last September. In the first four days of September 2017, Kwality Ltd lost a quarter of its market capitalization in quick succession. Similar statements were made by the company then as well with no further disclosures.

However, this time, the company did go ahead and inform the exchanges. Kwality Ltd, in a notice to the BSE & NSE said they’ve received communication from Mr. Sidhant Gupta (an investor) who alleges that his broker, F6 Finserve Private Limited, has fraudulently sold some of his shares in the company and is now absconding. Mr Gupta has initiated legal & police action against the aforementioned too.

While, this disclosure is an attempt to explain the sudden decline in the company’s stock price, there is definitely more that needs some answering. Between December 2016 and December 2017, Kwality’s promoter stake has reduced from 64.24% to 63.94% and the pledge on promoters’ stake has increased from 44.07% to 61.91%. The current decline in stock price increases the risk of these pledged shares being sold in the open market. What also needs to be known is what proportion of Mr. Gupta’s holding was sold in the market by the said broker. This may give an indication of how much more remains. For the record, Mr. Gupta held 1.35% stake in Kwality as of December 2017, down from 2.18% in June 2017.

             

I will be watching what happens next very closely to test the quality of Kwality’s performance. If the share price is any indication of the street’s verdict on the company’s commentary and actions, Kwality Ltd has lost 61% since start of September 2017 till date.

The second big event was, for the lack of a better term, utterly-butterly surprising. A scam of Rs. 450 Cr discovered in our most beloved brand Amul. Turns out, the company had allegedly purchased cheese at higher price from a dairy in Kerala.  Amul has immediately swung into action and the board has called for an emergency meeting and heads have rolled as MD K Rathnam resigns. However, this does come as a shock to everyone because Amul was considered “Shuddh” (pure). Amul was definitely last bastion of Trust, Purity and All Things Good. Turns out, may be, this is, “The Real Taste of India”

No matter what the outcomes of these stray incidents are (and I do sincerely hope they’re just stray incidents), the prospects for Indian Dairy are very promising. We have a burgeoning nutrition-seeking vegetarian population, increasing shift from unorganized produce to branded milk and an insatiable appetite for value added products like Butter, Cheese, Lassi, Flavored & Fortified Milk etc. Let’s hope all the companies continue to focus on the best interest of the consumer and prevent their bright prospects from curdling before the glass is even half-full.

PS – I’ll be watching Amul’s next few ads very closely. Let’s see if they can use their famous wit to win back the love of customers.

Much Love.

M

PPS:

Don't treat any of these as investment ideas; I personally Don't Invest/Trade.

Keep The feedback Coming.