Overpriced FMCG stocks leave fund managers a worried lot

Managers of fast moving consumer goods (FMCG) funds have a tough task at hand. The mutual fund category has outperformed all others thanks to the unprecedented investors’ interest in FMCG stocks. This means, stretched valuations and limited opportunities to buy fairly-priced stocks.

This also means that investors entering into FMCG stocks or funds at current valuations may end up paying a higher price and lose money in the short term.

This category, comprising 3 funds, has returned 20.86 per cent in the last one year. The second-best performing category, banking, has returned 17.01 per cent.
 

TOUGH ROAD AHEAD
Indices	Closing as on 5-Aug-08	Closing as on 5-Aug-09	Gain (%)
Auto	3819.17	5940.11	55.53
FMCG	2160.29	2702.29	25.09
Bankex	7217.98	8499.69	17.76
PSU	7138.57	8498.26	19.05
Power	2720.61	2994.40	10.06
Sensex	14961.07	15903.83	6.30

FMCG funds were able to post historic returns as investors started buying stocks in this sector last year amid the global economic uncertainty. “We saw investors’ interest for FMCG stocks in the second half of the last calendar year. There was still more buying when the government brought down the excise duty in its stimulus package,” said Prashant Kothari, fund manager, ICICI Prudential Mutual Fund. Kothari manages the biggest FMCG fund with assets under management (AUM) of Rs 58.26 crore.

Experts also credit the Union Budget for the interest in the sector that has continuously underperformed during the last bull run. Government reforms in the National Rural Employment Guarantee Act (NREGA), minimum support price (MSP) programme and increase in tax exemption further boosted the sector. “This gave rise to the domestic consumption story, which is considered as big as the infrastructure theme by the investor community,” said Navneet Munot, CIO, SBI Mutual Fund.

Fund managers said that FMCG companies were able to record growth in revenues as well as profits during the last financial year, when other sectors were stressed. Thanks to this, the FMCG index of the Bombay Stock Exchange has also been the second-best performing index (25.08 per cent returns) following auto (55.53 per cent) in the past one year.

But all this has also become a cause of worry for these fund managers. They said that the rush to buy FMCG stocks has made them overpriced. “The prices have started defying valuations,” said a fund manager.

In addition, as Indian economy revives, the Centre will roll back the sops as the government too needs to balance its books. “This will impact the sector and share prices,” said Kothari.

According to another fund manager, FMCG as a sector grows slowly but steadily. Unlike cyclical sectors that give over 50 per cent returns in the short term, FMCG companies have historically returned 10-15 per cent every year.

“Investors should get into this category for constant returns over a very long term, that is, over 8-10 years,” said Kothari.

If you are looking to add this defensive sector in your portfolio, investment advisors suggest taking an exposure through a fund that has much wider theme such as consumption. “Sector funds are very risky for lay investors. Investors need to know the time to exit,” said Mukesh Dedhia, director, Ghalla Bhansali StockBrokers, and a certified financial planner.