Hindustan Unilever, Nestle India, Dabur India, Britannia Industries, Marico - 5 reasons why FMCG stocks considered defensive in equity markets
Kaushlendra Singh Sengar Founder and CEO at INVEST 19 highlights that If you are aware of the fact that FMCG stocks are considered as safest bets to invest when equity markets get deviated from the arithmetic mean, chances are investment in stock market is your cup of tea. Hindustan Unilever, Nestle India, Dabur India, Britannia Industries, Marico have been good defensive bets for many Investors.
Kaushlendra Singh Sengar Founder and CEO at INVEST 19 highlights that If you are aware of the fact that FMCG stocks are considered as safest bets to invest when equity markets get deviated from the arithmetic mean, chances are investment in stock market is your cup of tea. Hindustan Unilever, Nestle India, Dabur India, Britannia Industries, Marico have been good defensive bets for many Investors. No matter how aggressive or defensive investors you are whether you invest in large cap, midcap or small cap and who’s investing philosophy you follow, you will turn to FMCGs when markets get topsy-turvy.
Singh said that Fast-moving consumer goods are those products that cater the recurring needs of the people and are relatively lower in price such as cosmetics, white goods, soft-drinks, and other goods which have short shelf life. FMCG is the only sector which reaches every possible tier of cities in a country. Despite the lower growth rate in the volumes, the FMCG companies enjoy a decent premium in valuations and first choice for investors to buy when bears get settled on the driving seat.
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Reasons that derive high valuations and less standard deviation to FMCGs:
1. Short-lived Cash Conversion Cycle: Cash conversion cycle in any business is considered as a significant parameter to value their fundamentals. A quick conversion cycle restricts them from heavy investment as they do not raise funds heavily in order to cater their fixed and working capital requirement. Moreover, the cost of capital on which they acquire funds is less in comparison with other types of industries due to their higher ability to augment interest obligations and low exposure to bankruptcy.
2. Debt-free status: The acquisition channel of funds for augmenting the working capital requirements or investment for expansion in business has always been controversial as fund raising from debt market slices the earning per share but raises concerns for equity shareholders due to more exposure. There is no denying the fact that inculcation of the debt component into the capital mix brings tax benefits on interest obligations.
3. High Dividend Yield: It is worth-mentioning that FMCG companies don’t make much investment despite having stellar free cash flows and revenues from main operations as they have less room for expansion. So, they bank upon more distribution of earning per share rather than advancing their retention ratio. High dividend-distribution stocks help investors to hide behind safer returns in turbulent times.
4. High Entry Barriers: FMCG is the only sector where entry for any business corporate is easy due to no licensing fees and research associated capital outlay but higher cost on branding, advertising, patent rights and expansion of product line restricts other corporate to enter in FMCG mammoth.
5. Constant Demand in every business cycle: Each and every business goes through slippage in sales in times when the economy walks through turbulent times. In times, when the economy is in a boom phase, real estate market rockets high, automobile sales shoot up, steel production touches sky and loan distribution from banks and NBFCs touch ceilings while in recession and depression cycle, production and sales numbers get deteriorated.
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