Russia-Ukraine crisis: NSE FMCG index hits 9-month low, metal firms soar

\Russia-Ukraine conflict could hurt FMCG firms' earnings, compress demand: Experts

The Russia-Ukraine crisis and the resulting rise in commodity prices has begun to weigh on consumer stocks while it has turned the fortunes of metals and mining stocks. The combined market capitalisation of NSE FMCG Index has slumped to a nine-month low, while the BSE Metal Index's market capitalisation is now at a six-month high.

The BSE Metal index, which tracks the share prices of the country’s top 10 metal and mining stocks – such as Tata Steel, JSW Steel, Hindalco, Vedanta, Coal India, NMDC, and Hindustan Zinc – closed Monday with market cap of Rs 9.53 trillion, up 7.3 per cent from Rs 8.88 trillion at the end of January.

In the same period, the combined market cap of fast-moving consumer goods stocks in the NSE FMCG Index have declined 2.8 per cent to Rs 16.07 trillion from Rs 16.53 trillion at the end of January. In fact, the index is now down 12.6 per cent from its peak market cap of Rs 18.4 trillion reached at the end of September, while the BSE Metal index has risen 10 per cent from its recent low market cap of Rs 8.69 trn in November. (See adjoining chart).

The NSE FMCG Index tracks the market cap of the top 15 stocks in the sector like Hindustan Unilever, ITC, Nestlé India, Britannia Industries, Dabur, Godrej Consumer, Tata Consumer, Colgate Palmolive, and United Spirits.

Analysts expect this divergence to continue. “I foresee a big downgrade in the corporate earnings for FY22 (financial year 2021-22) and FY23 due to the recent upheaval in the global economy. The rise in energy and metal prices could severely dent corporate margins, especially for consumer goods manufacturers in the forthcoming quarters,” said Dhananjay Sinha, managing director and chief Strategist of JM Institutional Equity.

In contrast, the rise in commodity prices due to the Russia-Ukraine conflict would translate into record high revenues and profits for metals and mining companies in the forthcoming quarters.

The London Metal Exchange Index (LMEX) has risen 4.6 per cent since the end of January, while the benchmark Brent crude is up 15.7 per cent since the end of January. The LMEX tracks the price of six most common base metals such as aluminum, copper, zinc, lead, tin and nickel.

The rise in commodity and energy prices will also raise costs for households, forcing many to cut back on expenses. This is expected to reduce consumer demand and weigh on the revenues and earnings of FMCG companies.

“The ramifications of the conflict on the Indian economy will be felt via higher global commodity prices as India is a net commodity importer. The immediate impact on the Indian economy will be felt through inflation, an increase in current account deficit and rupee depreciation,” write analysts at India Ratings & Research.

All these macroeconomic factors are headwinds for consumer demand and this explains investors’ bearish outlook on FMCG stocks. Analysts also say the conflict is likely to disrupt the global supply of agricultural commodities, pushing their prices up as well.

“Besides being major energy exporters, Russia and Ukraine are also major exporters of agriculture commodities such as wheat, corn, barley and sunflower oil, and industrial metals such as nickel, copper and platinum. Suspension in air or port movements are likely to add to the recent buoyancy in prices of these commodities,” writes Radhika Rao, senior economist at DBS Group Research.

This could hit the margins of processed food manufacturers such as Britannia, Nestlé, and ITC.