Latest FMCG Listings Remain Good Bets In Medium To Long Term

Three out of the five fast moving consumer goods companies that listed in 2015 on bourses have given investors better returns than the Nifty FMCG index, and despite the recent run-up in these stocks analysts continue to remain bullish in the medium to long term as the consumption story remains intact.

Out of the five fast moving consumer goods newbies, three have given investors returns in the range of 34-147 percent. The remaining two – Coffee Day Enterprises Ltd., which owns Cafe Coffee Day, and Prabhat Dairy Ltd. – lagged peers. The Nifty FMCG index has gained 11.2 percent since January 1, 2015 till Friday.

Manpasand Beverages Ltd., SH Kelkar and Company Ltd., and Parag Milk Foods Ltd. saw shares rise since they debuted on the stock exchanges on the back of strong fundamentals of these companies and the sector, analysts say. Barring Coffee Day Enterprises, analysts see the four other 2015 listings as good medium-to-long-term buys despite being overvalued at current levels.

The Leader Of The Pack

Despite opening lower on the bourses on listing day (July 8, 2015) against its issue price of Rs 320, Manpasand Beverages has gained over 2 times so far, closing Friday's trade at Rs 742.25 per share. The company recently entered the health drink market with Coco Sip and expanded into newer domestic regions. The health drink market in India is currently dominated by the unorganised sector.

“In the beverage space, companies have started to focus on fruit-based carbonated drinks to drive next level of revenue growth which bodes well for these stocks in the medium to long term,” added Sanjay Manyal, senior research analyst at ICICIdirect.com.

Adding Flavour

SH Kelkar and Company, which is an FMCG-ancillary stock, is also overvalued at current levels though investors can hold on to the stock if they plan to stay invested over the next two to three years, analysts say.

“SH Kelkar is overvalued at current levels and investors should wait for a correction before entering the stock for the medium to long term,” said Sageraj Bariya, an analyst with East India Securities.

The flavour and fragrance major's stock listed on the exchange at a premium to its issue price of Rs 180 and has run up 34.5 percent since then.

Bucking the trend is Coffee Day Enterprises, the holding company of Cafe Coffee Day, which had a weak debut on the stock exchanges and has lost 28 percent since then.

Since the holding company is the listed entity here, it becomes difficult to gauge the actual value of the company, Ruchita Maheshwari, senior research analyst at IIFL Wealth Management said. The return on capital employed of the coffee business – the company's dominant business driver – is in low single digit of 4 percent for financial year 2016, she added.

At the end of the financial year 2015-16, Coffee Day Enterprises had debt on its books to the tune of Rs 755 crore, which Maheshwari said, will continue to weigh on the company's balance sheet.

Cream Of The Crop

Of the two IPOs in the dairy sector in 2015 – Prabhat Dairy and Parag Milk Foods – the former had a weak debut on September 21, 2015 and has been trading weak for some time. The stock closed Friday's trade at Rs 113.30, roughly the same level as its listing price. Despite the underperformance, the stock has room to move on the upside with the dairy major planning to shift its focus to retail.

“Dairy stocks, which see more of their revenues coming from the business-to-consumer segment will gain in the long term as margins are higher compared to companies which are more dependent on institutional sales,” said Sanjay Manyal.

In the dairy business, the value-added segment contributes better margins compared to pure milk play.

Currently, Prabhat Dairy sees a chunk of its revenue come from business-to-business or institutional sales. Since the company plans to shift its focus to retail and value-added products, there is room for margins to grow, making the stock attractive at current levels, Maheshwari of IIFL said.

Parag Milk Foods which has run up 39.7 percent since its launch is also expected to give good returns over the medium term. The company plans to increase its share of revenue from the value-added segment, which will again boost revenue.