Jyothy Labs

Small obsessions look to be adding up to big gains. After the big Budget disappointment, most things 'consumer' look bright and beautiful and along with them so do the fortunes of the fast moving consumer goods (FMCG) sector. And what adds to the supplying businesses' lustre is their classic 'cash flow positive' character and relatively low capital hungriness.

In the current market scenario, companies making chips, beverages, detergents, razors, soaps, toothpaste and creams, promise much. Every man woman and child needs these products and demand is constant. Juxtaposed against the uncertainty in all other sectors, FMCG looks set to dominate.

We enumerate here the overall factors that impinge on the sector and what makes buying into FMCG stocks worthwhile.

FMCG Overview

The sector is the fourth-largest in the economy and had a market size, despite the slowdown, of $25 billion (Rs 120,000 crore) in retail sales in 2008, having grown consistently over the last 3 years — compounded annual growth rate (CAGR) was 20 per cent (6% between 2001-05). What is more, the sector is poised to grow at a 10-12 per cent rate for the next 10 years. It’s set to reach $43 billion (Rs 206,000 crore) by 2013 and $74 billion (Rs 355,000 crore) by 2018, a study by FICCI-Technopak stated.

The power-packed figures, however, are not expected to add wings to FMCG companies. AC Nielsen data shows that the sector grew 16.2 per cent year-on-year (YoY) during April-May 2009, which is lower than the 19 per cent reported for last year.

WHY FMCG

Sure, on the stock markets, FMCG companies' shares are not the most popular, even though they will never fall as sharply as those from other sectors. Simply stated, FMCG stocks are not the stock of choice in a bull run because they don’t generate superlative profits for investors.
But, in a volatile world, what FMCG stocks have become is a bulwark against uncertainty. Albeit its heyday may be over — in the 1990s it was one of the biggest wealth creators — yet they still must form a good chunk of any investor's portfolio.

Here's why: BSE FMCG index fell from 2,319 points on December 31, 2007 to 1,987.38 on December 31, 2008, a fall of 14 per cent. In the same period, Sensex fell by 52 per cent from 20,286.99 to 9,647.31 points — this was the time of the slowdown squeeze.

In fact, during the global meltdown, the sector showed resolve, with Hindustan Unilever (HUL) delivering a gain of 17 per cent — when everyone else was down by 50 per cent or more. Companies like Marico, Dabur, Godrej and HUL logged double-digit growth over the last three years — the first three by about 20 per cent and the last by 14 per cent.

This kind of guarding of capital and generating of gains during a downfall, caught the eye of the mutual fund industry, with all 12 companies on FMCG index between December 2007 and March 2009, except Colgate-Palmolive, Tata Tea and Ruchi Soya, seeing a rise in funds' holdings — funds’ stake in HUL rose 85 per cent, Dabur 143 per cent and United Spirits 337 per cent.
The first of the 5 stock selections is highlighted here. Over the next few days we will reveal the rest one by one.

The numbers are eye-catching, but the same can be said of real estate and pharma, but are they really so scintillating for stocks?

LKP Shares on Plastiblends India, BASF India, Jyothy Labs

Plastiblends India -Target Rs 200

LKP Shares has recommended a buy rating on Plastiblends India with an 18-month price target of Rs 200 in its research report. "Despite being a small cap company with a market capitalization of only Rs 650 million, Plastiblends has not tapped the capital markets since its IPO in the early nineties and given its strong balance sheet and robust cash flows we do not expect any equity dilution going forward as it would be able to fund its expansion plans comfortably through internal accruals. Given the scalability of the business and the ROI we believe that PIL is well placed to achieve critical mass in masterbatches during the next three years and the stock trading at 3xFY'10E with a dividend yield of 7% is an exciting small cap pick. We recommend a BUY on the stock with an 18-month price target of Rs 200," says LKP Shares' research report.

BASF India - Target Rs 300

LKP Shares has recommended a buy rating on BASF India with an 18-month price target of Rs 300 in its research report. "Post second quarter results we believe that BASF should be able to report a 37% CAGR growth in net profits over the next two years on the back of a 34% CAGR growth in revenues over the same period. BASF India with an ROCE of 35% having the ability to grow its profits at 35% over the next two years trades at 5xFY'10E earnings with a dividend yield of 3% with the possibility of another open offer going forward remains a defensive investment bet in the present uncertain markets. Any dips below Rs 200 are a good buying opportunity and we recommend a BUY on the stock with an 18-month price target of Rs 300," says LKP Shares' research report.

Jyothy Labs - Target Rs 300

LKP Shares has recommended a buy rating on Jyothy Laboratories with a one-year price target of Rs 300 in its October 29, 2008 research report. "With the Sensex itself trading at 10x we believe that there is a compelling reason to buy JLL which is trading at 6x with a dividend yield of 4% and above all it is a debt free company (cash per share of Rs 65) which came out with its IPO a year back in November 2007 at Rs 690 (Rs 5 paid up) purely to provide an exit to private equity investors and did not collect any funds for itself. JLL has corrected to Rs 215 now from its peak of Rs 965 in early January 2008 and at CMP of Rs 215 we believe that it is an attractive investment bet for investors with a one-year price target of Rs 300, which is a 40% upside from current levels," says LKP Shares' research report.