FMCG stocks decline after results on profit-booking

BSE's FMCG index was the biggest loser among sector indices, dropping 2.6 percent

Shares of consumer goods companies fell on Monday, weighing down the benchmark indices, as investors booked profits after July-September sales growth fell below expectations.

ITC shares fell 3.6 per cent to Rs 327.65 after cigarette volume growth disappointed. Hindustan Unilever (HUL) fell 0.8 per cent to close at Rs 589.35 after rising as much as 4.2 per cent earlier in the day, as sales grew in line with expectation.

The BSE FMCG (fast-moving consumer goods) index was the biggest loser among sector indices, dropping 2.6 per cent. The Sensex was down 113.24 points or 0.55 per cent at 20,570.28. “Investors were anticipating consumer companies’ results would exceed expectations in the September quarter but they ended up delivering results that were just in line. Since their shares were trading at steep valuations, investors chose to book profits,” said Rajesh Cheruvu, chief investment officer, India, The Royal Bank of Scotland NV.

Shares of consumer goods companies have outperformed the benchmark indices and most other sectors so far in 2013, on hope of consumption remaining strong despite economic slowdown. Since January, the FMCG index has returned about 13 per cent, against the Sensex gain of 5.9 per cent. The sector had comfortably outclassed all others in 2012, pushing valuations higher to what some fund managers termed “unsustainable”.

In July-September, HUL’s sales grew five per cent, in line with analysts’ estimates of roughly four-five per cent. But, the growth was slower than the seven per cent a year before. Analysts expect the company’s operating profit margin growth to be capped over the next year or so.

“With raw material prices’ impact to be visible in the second half of the current financial year and higher advertising spend induced by increasing competitive intensity, we believe HUL will not see Ebitda (earnings before interest, taxes, depreciation and amortisation or operating profit) margin expansion in the coming three-four quarters,” said ICICI Securities, which has maintained a ‘sell’ rating on the stock. Analysts recommend purchasing ITC shares on further declines. “We continue to like ITC for its earnings resilience and would recommend buying the stock on dips (of below Rs 325 levels),” said CIMB in a recent note.

Religare Securities recommends buying ITC shares around Rs 300-310, as it sees limited upsides from current prices, citing moderation in earnings growth and fair valuations.

Colgate-Palmolive shares fell almost four per cent after its net profit in the quarter fell about 25 per cent.