Could this FMCG company be the next Dabur or Marico?

The audience was asked which one did they like?

Surprisingly more than half chose Pepsi. The surprise was that Coke has a much higher market share in the United States than Pepsi.

So why such a contradiction when it comes to taste?

A neuroscientist, Dr. Reed Montague, decided to solve it. They gathered the audience, recreated the experiment, and monitored their brain activity.

Their findings were in line with the advertising campaign. Pepsi produced a strong response in the reward center of their subjects’ brains.

But neuroscientists knew that a good product wasn’t the only factor in buying decisions.

So, he experimented again, but with a big difference. This time he told the people exactly what they were drinking…

what else? Coke won.

The subjects’ brain activity also changed. The areas associated with ‘cognition’ and ‘memory’ were illuminated in the test.

People were letting their memories and perception of Coke shape their choices. In other words, the power of the brand conquered the taste buds. So Pepsi was left behind.

R&D is for pharma companies what is workforce strength for IT companies, and what is advertising, marketing and brand building for FMCG companies.

As analysts, we run screeners as a starting point to identify stocks to invest in. These screeners give results which include Growth Stocks, Momentum Stocks, undervalued stock, dividend yield stockAnd so on.

While the markets are down hardly 15 per cent, some smallcaps and midcaps are down 30-40 per cent from their peak.

I believe this is the right time to run screeners and cherry pick of good quality, smallcaps and midcaps.

So, over the weekend, while running a screener I found an interesting stock in the FMCG sector. It is available in close to single digit P/E ratio. No, it is not ITC.

When you find an FMCG stock at such an attractive valuation, it can either be a value buy that will give you at least 2-3x returns or it is a value trap. In the second case, there is something wrong with the company that we need to find out.

So I immediately calculated the most important metric used in the FMCG sector, which is ad spend as a ratio of sales.

Previously dated analysis of the company showed two important trends.

The ratio of sales as well as advertising spend to total spend has been increasing over the past three quarters.

The advertising spend for this FMCG company is around 1.5 times that of its competitors.

There are two ways to look at this…

encouraging outlook

Higher advertising and marketing spend would mean higher brand visibility leading to higher sales.

I checked why advertising spends are increasing. I found that the company has launched 5 new products post covid.

The value picker in me took this point in the progress of the company.

I mean, you don’t come with FMCG companies high ROE and a ROCE of over 20%, a dividend yield of 3% and the cherry on top that’s valuation, and a nearly single point PE ratio.

cautious approach

Absolute numbers are of little importance in the stock markets. When numbers and company performance are viewed on a relative basis, only then does the bigger picture begin to make sense.

The question is, why does the company have to spend around 1.5-2x the money that its counterparts spend on advertising?

This clearly indicates that it is not the market leader. It also indicates that competition is intense.

Demand elasticity is very important in a competitive intensive industry like FMCG. By this I mean that price moves are usually done by market leaders. Other players are generally value followers.

In the battle between arch rival Pepsi vs Coke, we looked at how advertising built brand. It changed the perception of the product.

in conclusion…

Which Indian company am I talking about?

Bajaj Consumer.

It is seen as a single product company. But in the last one year, Bajaj Consumer has stepped up its game. It has launched new products in the hair category segment which it did not exist.

19% of revenue was spent on advertising in 4QFY22. It is expected to remain high. The company is clearly working hard to push its products in a market dominated by formidable players like Marico and Dabur.

Only time will tell whether the advertising budgets which are crucial in the FMCG industry work the magic for Bajaj Consumer.

Or perhaps the competition will dominate the market share as well as the mind space in the hair oil category.

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

(This article is syndicated from) equitymaster.com,

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