Weak consumer sentiment dragging down FMCG stocks

Fall in FMCG indices in the last one month has been double the decline in Sensex, Nifty

There is an interesting trend currently playing out in the stock markets. Scrips of fast moving consumer goods (FMCG) companies, which are considered defensive when markets are in a bearish phase, don't seem to be playing that role right now.

In the last one month, the fall in the benchmark FMCG indices has been double that of the Sensex and Nifty. From December 8 to now, the BSE Sensex has fallen 2.35%, according to data compiled by BS Research, while the FMCG Index has dropped nearly 5%. The Nifty has declined 0.67% in the last one month, while the FMCG Index on NSE has fallen 4.2% in the same time.

Analysts say what has been dragging down the FMCG indices on the two exchanges are stocks of companies such as Dabur and ITC. 

"There are regulatory issues on the cigarettes side of the business that is pulling down ITC," says Amnish Aggarwal, FMCG analyst at Mumbai-based brokerage Prabhudas Lilladher. 

"Dabur also has been under pressure in recent quarters which is dragging down the stock," he says.

While stocks of companies such Hindustan Unilever have recovered in the last one week owing to earnings upgrades given by foreign brokerages such as Duesche Bank, analysts say it doesn't take away from the fundamentals story. The Rs 3 lakh crore FMCG market is yet to show signs of a strong recovery. 

"I expect the third-quarter results to be in line with second-quarter numbers," says Kaustubh Pawaskar, FMCG analyst at brokerage Sharekhan. "Revenue growth should be in low double digits, while profit after tax (PAT) should be 15% and above. Gross margins will expand in the third quarter owing to the commodity price correction seen in the December quarter. But I don't expect any big surprises," he says.

In a recent note, Abneesh Roy, associate director, research, institutional equities, Edelweiss said, "For Q3FY15, we expect our consumer goods universe to register revenue, EBITDA and PAT growth of 11.8%, 12.8% and 10.2% respectively. A delayed winter in Q3FY15 has contributed to the slight moderation in sales growth. While bigger benefits of lower commodity prices will reflect in Q4FY15, EBITDA growth is likely to outpace revenue growth due to benign commodity scenario."

Most analysts say that the gap between rural and urban sales growth is fast shrinking, implying that rural is no longer growing as fast as it used to a few quarters ago. 

“Dabur’s underperformance at the bourses is reflective of this trend,” Pawaskar says.

Dabur’s exposure to the rural markets remains high, with close to 50% of its sales coming from rural areas. This is ahead of the market. Companies in FMCG broadly get about 33-35% of their sales from rural areas. However, with rural growth now slowing, most companies have been shifting their attention to urban markets. The consensus is that the anticipated recovery in FMCG will be first visible in the cities followed by the rural areas. Companies are gearing up for that.