As partial lockdowns hit consumer confidence, market bets on consumer firms

Right product mix, softer input costs, probability of a good monsoon, and small-ticket nature of FMCG products may be the reason that stocks in this space are doing well

The second wave of coronavirus in India has brought with it a host of uncertainties on the economic front. The lockdowns this time are less severe than the nationwide lockdown of last year, suggesting that the economic impact will be milder.

In fact, Reserve Bank of India Governor Shaktikanta Das underlined the uncertainty in an unscheduled address on Wednesday, May 5. 

“The resurgence of the Covid-19 pandemic in India in recent weeks and the associated containment measures adopted at local/regional levels have created new uncertainties and impacted the nascent economic revival that was taking shape,” he said. He announced additional liquidity support for banks to lend at a favourable interest rate to vaccine makers, hospitals and the private healthcare industry in general.  

Uncertainties surrounding the ability of people to travel and spend on discretionary items, and concerns over when it will be back to business as usual, are on the rise. 

Data from the Centre for Monitoring of Indian Economy (CMIE) points in that direction. After rising towards the end of March despite an ascending Covid curve, the CMIE Consumer Sentiments Index had a free fall in April, when the gravity of the second wave became apparent. 

In fact, it seems that consumer confidence improved only for a brief while in spring. RBI data shows that from July 2020 till January 2021, more than half the people surveyed said their current spending on non-essential or discretionary goods and services reduced from two months ago.

In May 2020, when the nationwide lockdown was at its peak, the proportion of people saying so was, in fact, smaller.  

Even if we consider that this would have improved in February and March, it is highly likely that it has deteriorated further in April and May. 

Now, the phase that began during the lockdown last year puts essential items of consumption such as food products, health services, public transport, banks and insurance, on a favourable position as against non essential items such as automobiles, personal care products, restaurants and entertainment. 

But even for essential items, the proportion of people saying their spending has increased remained more than 15 percentage points lower than the pre-pandemic times in January 2021. More than one in ten respondents have actually maintained that their spending on essential items has consistently reduced from July 2020 to January 2021, despite the fact that the first Covid-19 wave receded in that period. 

With no end in sight yet to the second wave, the adverse status of consumer confidence may linger for some more time, till certainty makes a comeback. 

Meanwhile, fast-moving consumer goods companies are staring at more tangible uncertainty on how their sales would be, in a situation when lockdowns that allow essential items and prohibit non-essential items are growing geographically.   

An analysis by Nomura on the top listed FMCG companies shows that the impact would be more on those who earn a higher share of revenue from non-essential items. 

Food-focused FMCG cos such as Nestle and Britannia would lose the least among peers, as their product mix is more “essential” than “non-essential.” 

But companies like ITC, where close to half the revenue is from cigarettes, will likely get affected to a considerable extent. As much as 73 per cent of their product mix is non-essential, according to Nomura. 

Despite having a clear idea of the lockdown impact on companies, the FMCG sector seems to still be investors’ favourite. 

The current one-year forward price to earnings ratio for the leading FMCG company stocks is higher than the index average. This means that the stocks are more overpriced compared to the earnings of the underlying companies than the average pricing of top 100 stocks on the National Stock Exchange. 

The right product mix, favourable input costs, probability of a good monsoon and farming season ahead, and the small-ticket nature of FMCG products may be the reason that FMCG stocks are doing well.