Investors cash out of FMCG stocks ahead of results

Disturbed by lack of pick-up in consumption, especially rural, and likelihood of lack of good news on corporate earnings

Softening rural consumption and the likelihood of weak corporate earnings in the March quarter saw investors dump stocks from the fast moving consumer goods (FMCG) sector. On the BSE exchange, the S&P BSE FMCG index slipped three per cent, as compared to around a two per cent fall, or 556 points in the benchmark S&P BSE Sensex index, to 27,886.

On the National Stock Exchange, the CNX FMCG index also lost around three per cent, with Marico and Britannia Industries closing a little over six per cent lower. Dabur India, Jubilant FoodWorks, Hindustan Unilever, ITC, Colgate-Palmolive (India) and United Breweries lost two to five per cent. In comparison, the benchmark CNX Nifty slipped 1.8 per cent or 158 points, to end at 8,448.

Analysts do not attribute Monday’s sharp fall to a specific news trigger but feel risk-averse investors are exiting these counters owing to the steep valuations most of these stocks command ahead of the March quarter earnings announcements, amid slowing rural consumption.

“I think there has been selling from large institutional investors, which are booking profits ahead of the corporate earnings (announcements) for the recently concluded quarter that are likely to be weak, especially for large-cap companies. Also weighing on sentiment is the impending monsoon forecast by India Metrological Department, which will have a bearing on the financial performance for the companies in this sector,” said G. Chokkalingam, founder & managing director, Equinomics Research & Advisory.

Adds Amnish Agarwal, an analyst tracking the sector for brokerage Prabhudas Lilladher: “There is no specific news pertaining to the sector that has led to these stocks correcting sharply. I feel the valuation in most cases, except ITC, has been stretched since quite some time.”

Subdued performance
On performance in the recently concluded quarter, analysts do not expect any material improvement in industry consumption trends sequentially.

“Moderation in inflation trends, improvement in urban consumer confidence and sentiment boost, post the (general) election outcome, are yet to materially benefit urban consumption-oriented companies. On the contrary, rural consumption trends are incrementally softening. Unseasonal rains have further dampened the sentiment in rural markets. We expect clear trends in rural to emerge only after the monsoon and a possible pick-up in government spending,” said Gautam Duggad and Manish Poddar of Motilal Oswal, in a results preview report for the consumer sector.

Analysts at Karvy Stock Broking also maintain a cautious view on the consumer sector and suggest the rural fundamentals are not in place for a consumer growth story. “We also believe that the competition in select categories would increase, which is most likely to compel consumer companies to pass on price benefits to consumers and restrict the operating margin expansion,” said Sachin Bobade, an analyst at Karvy.

Stock strategy

 

Given the rich premium the sector is commanding, analysts at Motilal Oswal prefer niche plays with strong pricing power and greater visibility on volume growth like Britannia, United Spirits, Emami and Colgate Palmolive (India).

Since the rural consumption theme is likely to remain weak, Dhananjay Sinha, head of institutional research at Emkay Global prefers companies with revenues and product portfolios skewed towards urban markets that are expected to see the first signs of growth revival. According to a recent report, his top picks in this sector include Britannia, Colgate, GSK Consumer, Nestle and Godrej Consumer.

Agarwal of Prabhudas Lilladher is positive on Britannia, Pidilite Industries and Colgate Palmolive (India).