 "FMCG, consumer, sales, consumption, goods, shopping, spending")
Once the most loved stocks on the bourses, the country’s top fast-moving consumer goods (FMCG) companies such as Hindustan Unilever, ITC, Nestle, Britannia, and Dabur have received little interest from equity investors off late.
The combined market capitalisation of the 10 biggest FMCG companies has risen just 11 per cent over the past 12 months, against a 42 per cent rally in the benchmark NSE Nifty50.
The recent rally in the broader market has also created a performance gap for FMCG stocks over the last two-and-a-half years. The FMCG stocks in Business Standard’s sample are up 22 per cent on average since January 2019, against a 45 per cent rise in the Nifty50 index. (See the adjoining chart).
Among the firms, Hindustan Unilever’s market cap has risen just 6.5 per cent since the end of July 2020, while ITC, Nestle India, and Dabur India have risen 10.1 per cent, 5.8 per cent, and 8.3 per cent, respectively. Britannia Industries, on the other hand, has declined 6 per cent.
Tata Consumer is an outlier as it has risen 66 per cent over the period, beating the index. Many analysts expect the trend to continue as FMCG companies are expected to remain laggards in the near term.
“FMCG companies face multiple headwinds on growth and margins fronts in the forthcoming quarters and they may be laggards for at least a few quarters more,” says Dhananjay Sinha, managing director and chief strategist at JM Financial Institutional Securities.
According to him, FMCG firms are expected to see a decline in their margins because of a steady rise in commodity and energy prices over the past year, while the companies’ sales volume and revenue would come under pressure from the disruptions caused by the second wave of Covid-19. In the worst case scenario, FMCG companies could even see volume and revenue decline.
Other analysts see better growth prospects in the cyclical and high beta sectors such as metal, mining, infrastructure, real estate, and banks and financial companies. “The growth delta right now is bigger is cyclicals and commodity producers compared to FMCG companies. It was the other way around before the pandemic. This has led to investors’ money moving to cyclical stocks and away from FMCG,” says Shailendra Kumar, chief investment officer at Narnolia Securities.
Unsurprisingly, metal producers such as Tata Steel, JSW Steel, Steel Authority of India, and Hindalco, among others, have been the top performers on the bourses.
Analysts also blame the recent poor show by FMCG companies on their record high valuation. Most FMCG companies are trading at a price-to-earnings multiple of 60-80X, which is about twice that of benchmark indices Nifty50 and Sensex. In contrast, till a few months back, even the top stocks in cyclical sectors were at multi-year low valuations.
“But there is now justification to pay valuation premium to FMCG stocks given an expected decline in their earnings growth, even as profitability picks up in cyclical sectors,” says Kumar.
Analysts also say FMCG stocks’ recent underperformance should be seen in the backdrop of their outperformance earlier. “As recently as six months ago, most FMCG stocks were outperformers and the rally has now spread to high-beta sectors, and defensive sectors look like laggards relatively. This is part of the market cycle and classic sector rotation by equity investors,” says G Chokkalingam, founder and MD of Equinomics Research & Advisory Services.
He sees the recent underperformance as an opportunity to buy for long-term investors, especially those looking for downside protection in their portfolio at the peak of the valuation in the broader market.
Others are asking investors to wait for a few quarters before taking a call on FMCG stocks. “We will wait for the earnings results for the December 2021 quarter (Q3FY22) before revisiting our underweight stance on FMCG,” says Sinha.
