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Equity investors have been a worried lot. Mixed signals from the US Federal Reserve regarding the bond buying programme, economic data from major economies across the globe such as China, coupled with deteriorating macros back home, have made most nervous and re-align their investment strategy.
As a result, investors have been flocking to defensive stocks such as fast moving consumer goods (FMCG). These were on a roll this Wednesday, with most frontline stocks hitting a record high on the BSE exchange.
Buying frenzy took the S&P BSE FMCG index, also the top gainer among sectoral indices on Wednesday, 3.4 per cent higher in trade as compared to the 0.5 per cent rise in the benchmark index, the S&P BSE Sensex and the 0.3 per cent rise in the CNX Nifty of the National Stock Exchange. In the process, the BSE FMCG index also hit its lifetime high of 7,437 in intra-day trade.
Among individual stocks, Hindustan Unilever (HUL), ITC, Dabur India and Nestle India hit their respective lifetime highs, up 10 per cent by close of trade. Colgate-Palmolive (India), Gillette India, Procter and Gamble Hygiene & Healthcare and Britannia Industries were up three per cent each on the BSE.
“The rise in the FMCG stocks can partly be attributed to the sell-off in the banking pack. A reallocation is happening and the money is flowing into defensive stocks. I think FMCG stocks will be in flavour for some time. Pharma and information technology stocks, too, can find flavour with investors, going ahead. So, there will be a round-robin between these three sectors,” said Dhananjay Sinha, head, institutional research, Emkay Global Financial Services.
HUL powers rally
HUL rallied 12 per cent in intra-day trade to Rs 699, also its record high, and finally settled 10 per cent higher at Rs 685 on the BSE. A combined 20.48 million shares representing 1.51 per cent of total free-float equity had changed hands at the bourses.
The rise, according to analysts, came on the back of rebalancing in FTSE's All-World and All-Emerging indices, coupled with the company raising prices of select products in the personal care segment. On the other hand, reports suggest HUL’s share in the MSCI India Index has been reduced from 40 per cent to 30 per cent from Wednesday.
“From July 22, its float in FTSE's All-World and All-Emerging indices will increase to 33 per cent from 24 per cent. HUL has also hiked prices of some of its best selling products in the soap category by up to 15 per cent, said Amar Ambani, head of research, India Infoline.
Points out A K Prabhakar, senior VP (retail research), Anand Rathi Financial Services: “A lot of investors had short positions in the stock, hoping prices would come down post the open offer. This did not happen and the investors were trapped.” Adding: “A rub-off effect of the price hike is being felt on the other stocks from this sector, with most counters, including Colgate-Palmolive, ITC, Britannia and Bajaj Corp rallying at the bourses. Even Emami looks strong at the current juncture.”
Outlook
Despite the surge, analysts suggest there are investment-worthy pockets in this basket. “At the current levels, FMCG stocks are safe haven bets. We like Asian Paints, Berger Paints and Colgate-Palmolive at the current levels,” adds Sinha of Emkay.
As compared to HUL, Prabhakar feels other stocks are likely to offer better returns. However, he does not expect any major correction in HUL till the futures and options expiry is over. “One can book partial profit in HUL and switch to the other counters. HUL and ITC can appreciate six to eight per cent till expiry, while Bajaj Corp and Emami can gain 10–15 per cent from the current levels over the next three to six months,” he says.
Caution
G Chokkalingam, managing director and chief investment officer of Centrum Wealth Management, has a cautious view on this space, given the rise seen in most of these stocks over recent months.
“We have seen a new theme play out every couple of years and valuation multiple for stocks go up manifold. I am sure FMCG stocks will not fizzle out like the others. But one has to be cautious given their steep valuation. However, if foreign players are willing to go in for an open offer, then this pack could be a different ball game altogether,” he says.
Adding: “One can exit stocks where valuation is high, say HUL or ITC, and buy Britannia and Tata Coffee, where the fundamentals and the valuations are supportive. These stocks can appreciate 20–40 per cent in the next one year.”
