Emerging markets are becoming the main drivers for growth of large FMCG companies. Companies like Colgate-Palmolive (NYSE:CL), Unilever (NYSE:UL) and Procter & Gamble (NYSE:PG) have been increasingly allocating more resources towards expansion in emerging markets as growth slows down in developed markets.
Colgate Palmolive derives nearly 25% of its revenues from Latin America, while Asia Pacific accounts for 19% of its revenues. The company is reporting steady sales growth in emerging markets including Africa, Eurasia and Latin America, while sales in developed markets including Europe and North America have declined. In a recent note by Bernstein, a research firm, they highlighted the growing opportunity for Colgate Palmolive in emerging markets, especially China & India, the world’s most populated countries.
In an investors note, a Bernstein analyst stated, “This implies plenty of opportunity for companies like Colgate-Palmolive to continue to drive category growth in the form of volume if they can educate and instill improved oral hygiene habits in consumers, increasing brushing to two times or more per day.”
However, they also highlighted the growing threats from domestic players. The analyst mentioned:
This makes us worried about the safety of Colgate-Palmolive’s organic topline annuity stream going forward, as homegrown players have differentiated themselves around historically and culturally significant offerings that are difficult for Colgate-Palmolive to replicate (at least at the same level of authenticity and without acquisitions).
Unilever generates 60% of its sales from emerging markets, much higher than its peers, and is heavily dependent on them for its growth. India and Brazil are Unilever’s second and third largest markets, contributing to 14% of the company’s revenues.
Procter & Gamble currently extracts only 35% of its revenues from emerging markets. The company generates 8% of its sales from Latin America, 9% from Asia Pacific (China accounts for 8%) and 8% from India, Middle East and African countries.
The key effects of exposure to emerging markets on margins of FMCG companies are determined by two major factors.
- Uncertainty in emerging markets related to consumer inflation and adverse currency movements negatively affect the margins of these companies. While FMCG companies can benefit from high growth rates in emerging markets, hyperinflation is a risk to these companies resulting in high cost of production. Latin American countries including Argentina and Venezuela have inflation rates of 40% and 180%, respectively, and with these Latin American countries making up more than 20% of Unilever and Colgate-Palmolive’s sales, it is difficult to sustain profitability.
- Competition from local homegrown players is perhaps the biggest growing risk for companies operating in emerging markets. In India, Patanjali is challenging the market share of Colgate-Palmolive, P&G and Unilever. In China and Brazil, domestic players are more nimble in differentiating themselves to adapt to local tastes and preferences, which becomes difficult for large multinationals to replicate.
5 of the largest emerging market based FMCG stocks
Multinational FMCG companies are facing major competition from local players in emerging markets. Since 2010, the MSCI Emerging Markets Consumer Staples Index has surged 59% while the MSCI Emerging Markets Consumer Discretionary Index has gained 65%. Comparatively, the MSCI Emerging Markets Index has seen gains of 6%.
Large FMCG companies including Colgate Palmolive, Unilever and Procter & Gamble are fixated on seizing opportunities for growth in emerging markets given high rates of economic expansion, rising consumption expenditure, and disposable income.
The 5 largest FMCG companies by sales in emerging markets are Hindustan Unilever (HINDUNILVR), Unilever Indonesia (OTCPK:UNLRY), Hengan International Group (OTCPK:HEGIY), Natura Cosmeticos (OTC:NUACF) And Kimberly-Clark De Mexico (OTCPK:KCDMY). Year to date, shares of these companies have returned 40.7%, 25.7%, 5.0%, 3.4% and 1.7% respectively.
Hindustan Unilever, India’s largest FMCG player, is the Indian arm of the British multinational company Unilever. In 2016, the company recorded sales of $4.8 billion, the highest among the FMCG companies operating in emerging markets. The company, better known as HUL has witnessed average sales growth of 2% in the past five years. YTD, shares of the company have gained 40%. In comparison, the Indian benchmark index- Nifty (NSE) has gained 20% while the iShares MSCI Emerging Markets ETF (EEM) has returned 23.4%.
Unilever Indonesia is the Indonesian subsidiary of Unilever Ltd. In 2016, the company recorded sales of $3 billion. Between 2010 and 2016, Unilever has posted annual sales growth of 6%. Analysts expect a recovery in Indonesia’s domestic economy and estimate GDP growth of 5.2%. Further, government stimulus packages will boost consumer confidence that could benefit Unilever’s Indonesian operations. Publicly listed on the Jakarta Stock Exchange (JKSE), shares of the company have gained 24.2% YTD.
Hengan International Group is the largest producer of personal hygiene products in China. The company, founded in 1985, has a market capitalization of $9.2 billion. Last year the company generated sales worth $2.9 billion. Shares of the company are listed on the Hong Kong Stock Exchange and have returned 5.5% YTD.
Natura Cosmeticos (OTC:NUACF) is the largest Brazilian cosmetics company by revenues. In 2016, the company recorded sales of $3.3 billion. Shares of the company were listed on the Sao Paulo Exchange in 2004 and have returned 3.4% YTD.
Kimberley Clark De Mexico is the Mexican arm of the US company Kimberley Clark. Last year, the company generated sales of $1.9 billion. Since 2010, Kimberley Clark’s sales in Mexico have decelerated at an average rate of 1.2% as the economy has been in crisis. Shares of the company however still have returned 2.6% YTD.
Sell side analysts remain bullish on FMCG stocks in emerging markets as they gain from high growth and rising consumption spending. Hindustan Unilever has received 24 buy ratings, 3 sell and 19 hold ratings, while Unilever Indonesia has 5 buy ratings and 3 sell and 18 hold ratings. Hengan International Group has received 10 buy ratings, 6 sell ratings and 11 hold ratings. Sell-side analysts are relatively bearish on Kimberley Clark De Mexico and Natura Cosmeticos as they have received 6 and 8 sell ratings each. Kimberley Clark De Mexico has received just 1 buy rating and 9 hold ratings while Natura Cosmeticos has 1 buy rating and 6 hold ratings.
Valuations within the FMCG sector in emerging markets are stretched with average one-year forward PE ratio of 46x.
Bombril (OTCPK:BMBPY), Imbalie Beauty (ILE) and Shineco (NASDAQ:TYHT) are the most attractive stocks based on their inexpensive valuations. These stocks have one year forward PEs of 2.9x, 3.9x and 5.9x and are trading at the steepest discount to their peers. Meanwhile, Lykis (LYKISLTD), Lafine Chemical Industry and Lonkey Industrial (000523.SZ) are the most expensive FMCG stocks in emerging markets with PEs of 326x, 179x and 114.7x respectively.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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