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Key Factors to look at when Investing in FMCG Companies

Here are the key parameters one must consider while investing in the fast-moving consumer goods (FMCG) companies.

Categories

The companies operate in which categories make a big difference in how you evaluate the company. The companies Nestle and Colgate are both FMCG and MNC; this is the only similarity between them. Some mature categories are the conversion of the population from using unbranded or local brands to the national brands and many people using these products leads to track the growth of product and population growth. Some categories on the other hand are relatively new and enjoy high growth rates. The mixture of these categories determines whether the company is able to sustain or not.

EBITDA margin

For a consumer company EBITDA Margin is very important. A variety of factors such as competition, commodity costs, advertising and sales promotion and employee costs can affect it. The choice between the higher sales growth and higher EBITDA growth, the former augurs well from a longer-term viewpoint. One can always find a way to improve profitability, only if the customer stays with you.

Rural/Urban Mix

We often see reports talking about a slowdown in the rural markets as compared to the urban markets. One must look at the exposure of content, before jumping to conclusions on hearing about a rural slowdown.

Competition

There is no way to measure how much competition exists in the market but a good metric to see is if a company has more pricing power than the others. There are very few categories in India where competitive intensity is low and the abundant of retail channels (e-commerce and retail stores) means consumers are spoilt for choices. Except for few big categories in India such as baby foods or some very niche product, the competition is very high and will remain so.

Advertising and Sales Promotion

Companies have to spend more on marketing their products because of high competition. It helps to refresh products through re-launch and push them out to customers. This metric gives an idea about the aggressiveness of the company in the market. Usually, it makes sense to view this as a percentage of sales, and then compare with past trends or with peers.

Volume Growth

The most important aspect of the company is its volume growth. A company’s volume growth can be maintained at its historical rate or above than that, and can also be higher than the market growth rate and that of its rival. But not only volume growth matters, but value growth also matters equally too.

Value Growth

Value Growth is the combination of volume growth, with changes in price and product mix. Similarly, this should also grow at its historical rate or above than that. If the difference in value and volume growth goes unusually higher compared to its historical trends, it can be a cause for concern. Sales growth might get affected as the consumers may stop buying or switch to the other competing products.

Company’s reach and rooted platforms

Here you need to exercise with caution, know the reach of the company. It’s really important for a company to be into the spotlight for a long run. Adhere to these key points which help you to avoid a deadweight loss.

  • Numbers of retail counters the company has touched.
  • company’s visibility on various  e – commerce platforms
  • How many retailers the company has.
  • Demand and supply of company’s product in various hotels and restaurants.
  • How much tie ups the company has in government sectors.

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