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Shares of Godrej Consumer Products Ltd rose 21% on the National Stock Exchange in a single trading session last week. The company’s market capitalization increased by more than 15,000 crore. That’s higher than the value of more than half the firms in the Nifty 500 index.

The reason for the steep rise in the stock was an announcement of a change in leadership. Godrej Consumer said it had hired Sudhir Sitapati as managing director and chief executive officer (MD and CEO) for five years, starting 18 October.

But should a mere announcement of leadership change usher in so much euphoria? Is it another case of investors putting the cart before the horse? There are two major reasons investors are celebrating the appointment of Sitapati, who will take five months even to join the firm. First, management changes in the consumer goods industry have had a material positive influence on the financial performance of many firms in recent years. Second, Godrej Consumer shares had underperformed peers in recent years, partly because of concerns about the promoter group occupying the managing director’s office. After the jump in the shares last week, the firm’s valuations are now on par with domestic peers in the fast-moving consumer goods (FMCG) industry.

“Typically, in non-consumer facing industries, the Street tends to be cautious on CEO changes from a short-term perspective. Investors worry about how new strategies would play out and, accordingly, the impact on profits under new leadership. However, in the Indian FMCG industry, investors have reason to view leadership changes positively. In the past decade, leadership changes in the sector have yielded lucrative results for business and stocks," said Manoj Menon, head of research at ICICI Securities.

Analysts from Jefferies India Pvt. Ltd said in a report on 11 May, “History of CEO changes at Britannia Industries, Jubilant Foodworks, Hindustan Unilever Ltd (HUL), Dabur India suggests that a new leader could bring about a paradigm shift, driving significant shareholder value."

Indeed, share prices of Britannia, Tata Consumer Products, Nestle India and Dabur reflect a positive influence of management changes on valuations.

Britannia’s Varun Berry took on the role of managing director in April 2014. Among other things, Berry’s focus has been on cost-savings and improving market share. Jefferies’ analysts point out, “Earnings before interest, taxes, depreciation and amortization (Ebitda) margin expanded 14 percentage points from 6% in FY12 to 20% in FY21 (adjusted for Ind-AS and GST)." They added, “Britannia saw substantial re-rating over the first five years of Berry’s tenure, and the stock returned 47% CAGR over CY14-18." CAGR stands for the compound annual growth rate.

Another success story in the Indian consumer space is the appointment of Suresh Narayanan as managing director of Nestlé India in August 2015. Narayanan took on the role when the company was going through the Maggi crisis. The Nestlé India stock has risen at an average annual rate of 26% over 2016-20.

As far as industry leader HUL goes, analysts from JM Financial Institutional Securities Ltd said in a report last year that “one tends not to mention Sanjiv Mehta right away, since HUL as a company was already doing well even before he joined as its managing director, but the WiMi (winning in many Indias) framework that he provided, likely a learning from his Africa experience, has been quite a priceless one".

In the case of Godrej Consumer, there is the additional aspect of promoter-led versus professional management, “(Broadly) the Street appears to follow a simple template of ‘immediate de-rating’ if it perceives a reversal of professionalism (exit of professional CEO and a family member taking over) and vice-versa. It’s likely that investors didn’t want to miss out when Godrej Consumer announced Sitapati’s announcement," said Menon of ICICI Securities.

Investors are optimistic about Sitapati’s credibility and rich experience of more than two decades at HUL.

To be sure, some analysts reckon the sharp rally in Godrej Consumer’s shares last week was overdone, considering Sitapati would assume office only in October. Needless to say, investors would closely track how execution pans once Sitapati joins.

Varun Singh, an analyst at IDBI Capital Markets and Securities Ltd, said: “For now, Godrej Consumer has seen a hope-driven rally in its shares. Last year, a similar thing happened in the case of Tata Consumer shares as well."

Tata Consumer’s shares have appreciated as much as 140% since Sunil D’Souza took charge as managing director and CEO in April 2020. But note that the stock was trading at lower levels in end March and early April last year. Plus, the firm benefitted from a rise in at-home consumption last year, which eventually boosted sentiments for the stock.

“But Tata Consumer and Dabur India are now lagging behind, compared to the initial assessment on growth. Sooner or later, valuations of companies are bound to follow fundamentals, and that could also turn out to be a reality check in some cases," added Singh.

Leadership changes in FMCG firms yielded lucrative results for both business and stocks, said analysts.
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Leadership changes in FMCG firms yielded lucrative results for both business and stocks, said analysts.
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