Too fast moving?

FMCG stocks are catching up, but is the rise justified?

Sector funds tracking the FMCG sector have been the best performers in the mutual fund category lately, with a return of around 22 per cent in the past three months.

To start with, FMCG stocks were left way behind in the rally which began in mid-May, 2003 and so are merely catching up. Till three months ago, BSE's FMCG index had returns of about 19 per cent from the rally, compared to gains of around 80 per cent for the Sensex.

With the Sensex now comfortably above the 6000-mark, it seems like FMCG stocks are joining the party. Incidentally, the major rise in the FMCG index started in the last week of November, around the time the Sensex breached the 6000-mark.

But apart from the technical factors, there have been signs of improvement in the fundamentals of the sector. Volume growth has been better since March this year.

Besides, commodity prices have come off from their highs, which would come as a relief as far as pressure on profitability goes. Most FMCG companies have also commissioned new plants in areas such as Himachal Pradesh and Uttaranchal, which offer tax breaks.

Yet, it's not that these factors have come into play recently, and so it's largely a case of FMCG stocks catching up with the rest of the pack. In the process, however, some stocks like HLL and Colgate now seem overvalued at 22 times estimated CY05 earnings and 17 times estimated FY06 earnings respectively.

HLL simply hasn't shown any major signs of improvement yet, while in the case of Colgate although there has been growth in volumes, much of its is on account of the lower-margin Cibaca portfolio.

Learning from Lenovo

Lenovo's purchase of IBM's personal computer business is much more than a reshuffling of the players on the global PC stage "" it is also a potent signal of the ambition of Chinese companies to become global brands.

China's image has so far been firmly that of a low-cost manufacturer, and multinationals from the developed countries have made the most of that advantage, by setting up factories to export goods from China.

True, a handful of Chinese companies have tried to build a global presence""-Lenovo, Haier, Huawei are shining examples. But for the most part, they have had to fight a stiff battle with MNC brands even in China.

Japan and South Korea now have their own brands competing with the best all over the world. But no brands have come out of Southeast Asia.

Pessimists point to the fact that Japanese and Korean companies developed under a very different environment where they were allowed to grow under strong protective barriers at home and a less competitive world market.

Replicating that success will be much more difficult now. Lenovo, (which is partially owned by the Chinese government) has had the advantage of having a solid base in China, but it is now battling MNCs at home in the high-end market and unbranded players in the low-price category.

Chinese companies are advertising heavily and raising their R&D expenditure in an effort to create world-class products.

Indian brands have so far lagged behind even the Chinese. But if they are not to remain mere sub-contractors on the global stage, they have no alternative to building global brands.

That's why Lenovo's triumph is also a victory for Chinese capital over metropolitan capital, and a source of hope for other companies from the developing world.

Textile stocks

The attention of the stock markets has been riveted to the upcoming post quota regime and the emerging business opportunities for the larger players in the textile industry.

A recent report by Fitch Ratings corroborates this view, saying that the Indian textile industry is expected to be one of the biggest winners thanks to its low wage costs and access to domestically produced fabrics.

But things may not be as rosy if there is a sharp correction in prices once the quotas are lifted. Especially so, since industry majors have already seen a sharp increase in their stock prices. 
 

Weaving a turnaround
(Rs crore)	Market Cap		%  Change
	Apr 1, 2003	Dec 8, 2004
Arvind Mills	36241.14	220572.73	508.63
Raymond	55242.00	183648.96	232.44
LMW	11071.15	101458.74	816.42
Bombay Dyeing	17314.74	86284.80	398.33
Alok Inds	11098.50	77961.30	602.45
Mahavir Spinning Mills	15308.38	68894.13	350.04
Welspun India	18299.52	67352.40	268.06
Abhishek Ind	11749.10	64377.30	447.93
Vardhman Spinning	7975.00	41828.88	424.50
Nahar Spinning	10333.26	37471.62	262.63

The Fitch report adds there is a possibility of price realisations coming under pressure, at least in the short run, as companies try to gain market share. According to the report, this is because there are large overcapacities, if world-wide demand and supply are aggregated.

While the overcapacity is a result of rapid capacity build-up in China, garment prices are further under threat because of the weak consumer confidence data coming out of the US recently.

Another reason is simply that raw material prices have been on the decline. Some analysts point out that garment prices have fallen only about 6-8 per cent year-on-year, which is a comforting sign.

But current price trends may be no indication of what could happen post January 2005, since the distortion caused by the quota system makes it difficult to assess the impact of international competition.

Moreover, Indian garment exporters have to contend with a depreciating dollar, while its key competitors in China and Malaysia are better off as these countries have a fixed exchange rate vis-a-vis the dollar.

Although Indian garment manufacturers are expected to benefit on the whole, price competition could take some of the sheen away.

With contributions from Mobis Philipose and Amriteshwar Mathur