If you are in the long term and are looking for some stable growth, then you probably ought to pay some attention to Identify Undervalued Stocks In The FMCG Sector of India, The FMCG companies dealing with perishable goods consumed every other day, beverages, personal care items, and household goods keeping the demand constant. But spotting undervalued stocks in this sector is not a piece of cake; rather, it requires a little bit of luck and strategy.
So how do you Identify Undervalued Stocks In The FMCG Sector of India? Let us go stepwise on this before we start investing in it!
An undervalued stock refers to that which is traded at a price that is lower than its intrinsic value. This may occur because of an assortment of reasons such as temporary market correction, market sentiment, or simply lack of publicity. To astute investors, this therefore means an opportunity to grasp quality stocks at cheap rates and profit when the stock self-corrects in the longer time frame.
FMCG in India is one of the most resilient and defensive industries. Unlike cyclical industries that witness booms and busts, FMCG keeps generating returns regardless of the phases of prosperity and recession. The most fundamental the middle class is now growing, with increased rural penetration and rising disposable income this gives a fair backing to growth shortly.
Now comes the procedure of identifying undervalued stocks in this sector.
The P/E ratio is one of the often-used yardsticks in deciding whether a stock is undervalued. It is calculated as:
> P/E Ratio = Current Market Price / Earnings per Share (EPS)
A lower P/E ratio compared to industry peers indicates that a stock may be undervalued. However, don’t rely on this metric alone. Some stocks have low P/E ratios due to poor business fundamentals, so cross-check with other indicators.
A P/B ratio is used to check whether a stock is trading below its book value.
A significantly lower value of the P/B ratio in comparison with its competitors and the average industry P/B ratio could imply an undervalued stock. Before investing, check to see if the company has fundamental problems or not.
A healthy dividend yield reflects a healthy company. It is calculated as:
> Dividend yield = (Dividends per share/market price) × 100
The stocks that are judged to be price undervalued generally yield above historical averages or those of the industry in general. Given that FMCG companies are reliable dividend payers, a firm paying an above-average dividend might be a candidate for undervaluation.
FMCG companies have a low debt profile due to their business model, which creates steady cash flows. Ratios that clear the view of financial structures between its constituents manifest.
A company will have a low debt-equity ratio if it has the financial soundness and scope for expansion (without much debt loading). If the company has a strong business model and is presently being marked down because of very short-term concerns, this could be an undervalued opportunity.
The hallmarks of a healthy company are constant revenue and profit increases. Check out the financial statements of the business and how the Compound Annual Growth Rate (CAGR) has moved in the past 5 or 10 years. Undervalued stock could be a good investment if there is a positive long-term growth view.
To see if its stock is underpriced, the financial ratios of that stock can be compared with other FMCG companies in India.
Some top names in the FMCG stock market in India include:
> Hindustan Unilever (HUL)
> ITC Limited
> Nestlé India
> Britannia Industries
> Dabur India
> Marico
> Godrej Consumer Products
If a company’s financials are strong but its stock price lags behind industry leaders, it might be an undervalued stock worth considering.
The market sentiment usually has a significant impact on the stock prices. With some negative news short comments or a temporary slow economy, stocks would be highly undervalued. Watch:
> Some understated news concerning the company and its industry
> Government policies whose changes concerning FMCG will affect consumer trends
> In the mood of consumer demand
Perhaps, if the market is exceedingly pessimistic about a fundamentally strong company, it might be an opportunity to invest before prices rebound.
Normally, high promoter holding indicates competitive trust in the future of the company. A similar scenario is when mutual funds and Foreign Institutional Investors (FIIs) are increasing their holding in a particular company, which denotes a positive outlook on the stock. On the contrary, if promoters or any large investors are even offloading their holdings, it may act as a red flag.
At times a stock is not valued properly due to just temporary setbacks such as:
> A recall of the product.
> A temporary decline in sales due to some market conditions
> Temporary disturbances in the supply chain
If all of these are resolvable and the record of business stands higher tests for resilience, it would make for a great buy low investment proposition.
DCF plays a phenomenal role in estimating a company's intrinsic value with the predictive analysis of future cash flows for that company discounted to present value terms. If the stock price is today far too low compared to this intrinsic value calculated by DCF, that stock belongs to the category of undervalued stocks.
You need to Identify Undervalued Stocks In The FMCG Sector of India before investing in undervalued stock in FMCG requires patient timing and extensive homework. Financial Ratios, industry comparison analysis, as well as general market sentiment could help in spotting great opportunities even much earlier than the larger market catching on to them.
If one remembers not only finding cheap stocks but good companies at discount but rather due diligence for the next bargain into the FMCG markets, employ these methods for your investments to have the right alignment. Cheers.
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Go and watch to avoid problems and learn about the stock market with exact logic and strategies!
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