FMCG Sector Analysis Using Magic Formula

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Hope you did not find the title repelling as our blog does not feature “PC Sorcar” or any Voodoo artist from the hinterland.

But yes my attempt is to showcase to you the Best of the Investment Techniques to a sector which we all love – the FMCG Sector!

The article intends to take you to follow pieces and eventually covering the entire landscape of the FMCG sector:

  • Typical Business Model of FMCG co
  • Growth Driver of the sector
  • Suggested allocation to FMCG ( for retail Investor like you)
  • Magic Formula
  • 2 Stock Picks using Magic Formula
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What is the FMCG Sector?

Fast Moving Consumer Goods (FMCG) are products that are sold quickly and at relatively low cost.

The term was coined by Neil h. Borden in 1965. According to ISI classification, an FMCG can be the following:

What is FMCG Sector
What is the FMCG Sector

Classifications of FMCG Sector

Classification of FMCG Sector

Market share distribution segment-wise

Typical Business Model

FMCG Company Business Model
FMCG Company Business Model

Some traits of FMCG are summarized here for your reference:

  • Huge investments in establishing brand identity and setting up distribution networks
  • The major recurring expense is Advertising expense
  • Demand is less impacted by the slowdown
  • Suppliers being small and fragmented have limited bargaining power and Customer pays in cash so less intensive working capital cycle hence efficient cash flow
  • Huge investments in establishing Brand identity and setting up Distribution Networks

Growth Drivers of FMCG Sector

FMCG Sector Growth Prospects
FMCG Sector Growth Prospects

Suggested Allocation to FMCG

Nifty 50 Weightage
Nifty 50 Weightage

 

FMCG being a defensive sector should be given a good allocation in a retail investor’s portfolio

 

Time for Magic Formula to Analyse the FMCG Sector

Magic Formula to Analyse FMCG Sector
Magic Formula to Analyse FMCG Sector

 

Mr. P.C. Sorcar is here ..

The person in the frame is Mr. Joel Greenblatt. He has written this small book (76 pages if I am not wrong) named “The Little Book That Beats the Market” and had propagated the idea /framework he calls “Magic Formula Investing”.

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The performance of this portfolio has been stellar as shown below:

Performance of Magic Formula
Performance of Magic Formula
The Value of $10,000 invested using the Magic Formula after 20 year shows the magic

 

What is Magic Formula?

What is Magic Formula?
What is Magic Formula?

So what we have done is: we took the leading FMCG sector companies as a sample space and applied this approach.

We have broken down this framework into 5 steps:

 

Steps 1 & 2 weed out BAD Companies. So you are left with Good Companies Only.

 

Steps 3 & 4 weed out overvalued Companies. So, you are left with companies that are fairly valued or undervalued.

 

The Final Step

 

Conclusion

Final Ranking of FMCG Sector Companies using Magic Formula
Final Ranking of FMCG Sector Companies using Magic Formula

So, the endgame is finding those two winners and selling those 2 losers if it is in your portfolio and calibrate the portfolio after 1 year by repeating all 5 steps again. Period.

The Magic Formula can be applied to any set of stocks.

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Amitabh Vatsya
Amitabh Vatsya is an active Investment Vlogger (http://youtube.com/c/Sadhansimplified) | Loves to share his ideas at http://wealthsutra.wordpress.com | Follow him @amitabhvatsya
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