Are domestic FMCG stocks better bets than MNCs?

Stocks of multinational companies (MNC) are a big draw for Indian investors. Professional and clean management backed by access to advanced technologies and deep pockets make them good bets.

A consistent dividend paying track record is an added plus. Some latch on in the hope of making a quick buck from potential delisting of the shares. With only a few home-grown firms boasting strong growth prospects married to good corporate governance, MNC stocks enjoy a ‘scarcity premium’ thanks to the low free float or shares available for public trading.

And FMCG companies account for a chunk of MNC presence here. However, in recent years, some indigenous FMCG firms have outpaced MNC rivals in revenue and earnings growth. So can the lopsided valuation differentials sustain? Should you be placing bets on Dabur and Emami instead of Colgate Palmolive and HUL? Domestic juggernaut A recent report from Anand Rathi Institutional Research says revenues of domestic FMCG companies have registered a 21% compounded annualised growth rate (CAGR) between 2005-06 and 2014-15, while their profits have clocked a 24% CAGR.

In the same period, MNC FMCGs have registered a 13% CAGR in revenue, while profits have seen a modest 14% CAGR. Dabur, Emami, Godrej Consumer Products and Marico have also clocked higher earnings growth than their MNC rivals over the past 5 years, except Britannia Industries (see chart). Besides, in the past 5-10 years, domestic FMCG firms’ margins have grown faster than those of MNCs.

Despite this, MNC stock premiums have widened during the period. The valuation differential between home-grown companies and multinational ones listed in India has doubled in the past five years, says domestic brokerage firm Ambit.

P&G Hygiene and Britannia Industries now trade at multiples of 52 and 49 times trailing 12-month earnings. Desi FMCGs like Dabur India and Marico trade at 40 times trailing earnings. Experts say such differential cannot sustain much longer.

Ritwik Rai, Vice President, Kotak Securities, says, "There is no reason for the premium to be so high when domestic firms have performed better." He adds that domestic firms have displayed far more agility than MNCs and are also open to more new ideas. The latter are not always positioned to take advantage of emerging opportunities.

"Domestic companies have grown from single-product to multi-product, multi-category firms," says the Anand Rathi report, adding that these firms have grown their product portfolios from niche to mainstream offerings. "Better Indiaconsumer connect, innovation, inorganic growth and international forays have been the prime growth drivers. Barring innovation, most domestic firms have been able to leverage the other three ‘I’s far better than MNCs," adds the report.

Some feel MNCs will continue to find favour over domestic rivals. Vikas Gupta, EVP—Traded Markets and Investment Research, Arthveda Fund Management, says the predictability of MNC businesses will attract investors.

"In domestic firms, there is a possibility of management diversifying into newer lines of businesses. But the business model of MNCs is cast in stone." However, Rai feels the time is ripe for local FMCG firms to outshine foreign-owned peers.

"These firms have gone through the learning curve and have grown big enough to seek a bigger share of the pie," he says. He is positive on Marico, Godrej Consumer Products and ITC, but Dabur India is his top pick given its presence in niche areas where its pricing ability is superior to peers.

Another dampener for MNC loyalists is the rise in royalty paid by these firms to foreign parents. Parent companies charge fees for technological know-how, access to global best practices and leveraging the international brand. However, higher royalty dilutes the earnings of the Indian subsidiary.