FMCG is one of the most desirable & strongest business. This is because these are businesses that are driven by brands, they have pricing power, end demand is resilient & sticky and profitability & return ratios are strong.
But we believe that all FMCG businesses are not alike and cannot be painted with the same brush. There are two important qualities that we believe are needed for a business to be truly termed as an FMCG business-
Some of the FMCG categories like pulses, flour, edible oils, milk and most staples for that matter don’t augur well in the above two qualities.
These products are bought as a commodity and sold as a commodity without substantial value addition (except for primary processing) and are bought & sold in same measure of unit.
This reflects in the end profitability & returns that some edible oil and staples companies generate-
And the reasons why the profitability & return ratios are lower is because-
1. If you are selling a commodity derived from a commodity (without much value addition or differentiation), then there is surely going to be a lot of unbranded products in that category, simply because it is easier to produce the product.
2. If the end consumer is buying something in terms of quantities (kgs, liters), they are informed & conscious about the price per kg or liter that they are paying and with easy availability of unbranded products, it becomes very difficult to charge a premium for the product, over & above the underlying cost of commodity itself.
Thus, FMCG companies operating in these categories do not have that strong a business model as they do not have that kind of pricing power that normally one would expect from an FMCG company.
The only good aspect about these categories is that the end market is quite huge as these are daily essentials and there is a lot of room for an organized player to grow due to large share of end market still being driven by unbranded & unorganized players
The above framework was a part of our research report on a recent stock initiation wherein the company is transitioning from this inferior FMCG business to a true FMCG business, resulting in improved growth and profitability.
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Link to our previous blog-
Disclosure: www.surgecapital.in (here in referred to as Surge Capital) is a domain owned by Ankush Agrawal. Ankush Agrawal offers independent equity research services under SEBI (Research Analyst) Regulations 2014. SEBI Registration No: INH000008941.
The above blog and examples given are in no means a recommendation in any manner and should be used for educational purposes only. We may or may not have vested interest in the examples above.