FMCG scrips on a slow burn

Monsoon plays spoilsport

Fast moving consumer goods (FMCG) counters seem to be wilting as the delay in monsoon is expected to hit rural demand hard. FMCG majors such as Hindustan Lever, Nestle India, Britannia, Colgate and many more depend heavily on rural demand as more than 30 per cent of their total revenues come from the rural sector. With no signs of an adequately distributed monsoon, FMCG stocks are showing signs of fatigue.

Amitabh Chakravorty, head of research at Kotak Securities, said, "We have downgraded the FMGC sector due to the delayed monsoon. Even if the monsoon turns out to be normal in the next few weeks, the damage is already done as the bulk of sowing is done in early July when there was a shortfall of rains. Hence, the bottomline of most companies is expected to take a hit."

"The success or failure of monsoons will be clear only around end-July. Hence, the exact impact of this year's monsoon can only be assessed around that point of time," said the head of research of a domestic mutual fund.

Among the major losers since the beginning of the month are GlaxoSmithKline Consumer Healthcare which is down 2.10 per cent from Rs 238.40 on July 1 to Rs 233.40, Britannia down 0.84 per cent to Rs 617.50, Hindustan Lever down 3.85 per cent to Rs 122.50 and Nestle India down 4.82 per cent to Rs 520.45 as against Rs 546.79 on July 1.

A few exceptions which have gained in the last few days are ITC, Dabur and Colgate.

Deepak Chhabria, chief operating officer in charge of institutional equity at IL&FS Investmart, said, "The monsoon is the biggest concern for this sector as most other negatives have already been factored in. Quarterly results will give a fair indication of how the companies have fared, specially as the price war which had led to price cuts in products did not result in a surge in sales as was expected."

The fortunes of the FMCG sector are largely tied to the fortunes of the agriculture sector. For instance, HLL and Colgate derive nearly 45 per cent of revenues from rural India, analysts said.

The monsoon so far has been patchy. Rainfall for the week ended July 7 was 34.7 per cent below normal. Three consecutive weeks of poor rainfall have resulted in the cumulative rainfall received this season to deteriorate to 13.2 per cent below normal.

Though the meteorological department indicated on July 12 a revival of the monsoon around July 16, there has been no fresh prediction with the next 48 hours considered crucial for a clear indication, said market analysts.

Over the past few months, the FMCG sector had entered into a slow lane on account of intense competition from smaller regional brands which have grabbed significant market share and the price war among multinational players in most segments has eaten into already thin margins.

The FMCG industry's growth rate has slowed to 1.5 per cent year-on-year in value terms and 4 per cent in volume terms in 2003-04.