FMCG shrs hit new high; Is a correction around the corner?
Staying true to their name, fast moving consumer goods stocks have really set a scorching pace on the stock markets in the last one year amid the overall volatility. But some analysts point out there could be a correction around the corner as concerns of slowing consumer demand rise due to a poor monsoon and slowing GDP among other reasons.
August 31, 2012 / 20:11 IST
Moneycontrol Bureau
Staying true to their name, fast moving consumer goods stocks have really set a scorching pace on the stock markets in the last one year amid the overall volatility. But some analysts point out there could be a correction around the corner as concerns of slowing consumer demand rise due to a poor monsoon and slowing GDP among other reasons.While Marico hit a new high of Rs 201.80 on Friday, India's largest consumer goods maker Hindustan Unilever and top cigarettes maker ITC, both hit a 52-week high of Rs 550.85 and Rs 273.25 respectively on NSE on Thursday. Rivals Godrej Consumer Products and Dabur were also at a high. The NSE FMCG index has gained 7% in August, and as much as 32% in the last one year, significantly outperforming the broader market. The NSE Nifty index has gained 1.6% in August, while it is down 3.7% since August last year.FMCG stocks continued to surge in the last few months, despite rising valuations. But some analysts now say this rally could be about to end."Slowing GDP growth, negative real wage inflation and lack of employment opportunities are creating structural risks to consumption; risks, which are much greater than high inflation or the poor monsoon. The current decoupling of consumption and the investment cycle won't last forever; initial stress in discretionary spending suggests that a breaking point is approaching," Nitin Mathur and Raj Kanodia, analysts at Portugest investment bank Espirito Santo said this week.Manish Jain and Anup Sudhendranath of Nomura Financial Advisory and Securities India say investors have continued to favour FMCG stocks due to their defensive nature and so expect valuations to remain at high levels at least for some more time."Currently, valuations across the sector have reached multi-year highs. The sector average is now 30.5 times one year forward price to equity (P/E), much higher than the long-term average of around 24 times one year forward earnings (based on Nomura estimates). We expect valuations to remain at current elevated levels in a risk-off environment, but over the medium term, we believe valuations will revert to the long-term average," they said.According to Jain and Sudhendranath, interactions with FMCG firms suggests underlying demand still remains strong and there are no signs of a slowdown yet. In the June quarter too, volumes were stable and gross margins surprised on the upside, helped by moderation in commodity prices, they note. While some of the benefits of the gross margins have been re-invested in advertising and promotions, the Nomura analysts expect gross margins to continue improving in the second quarter. Espirito Santo analysts Mathur and Kanodia say long-term growth drivers for FMCG growth in India are in place. Low penetration of branded consumer goods and aspiring nature of consumers will led to sustained growth for FMCG. However, in the near-term, there are a lot of speed bumps and the virtuous cycle of growth could turn around quickly. For instance, there could be spillover effect of the slowdown in the global markets, where decades of outsized spending is nearing an end, high consumer price inflation has resulted in negative real wage increase and there is a growing mismatch in the job market, where the increase in the number of jobs has lagged behind supply of qualified talent in the last two years.India's industrial production, for instance, contracted 1.8% in June.The Espirito Santo analysts warn deteriorating consumer sentiment is already getting reflected in sales of discretionary items. For instance, Titan's jewellery sales volumes declined 21% in April-June, Shoppers Stop's same-store sales fell 1% and Jubilant Foodworks too has seen tapering growth, they note.Espirito Santo still advises investors "buy" Marico shares, but downgraded HUL, Colgate-Palmolive to "neutral" and Nestle India to "sell". They already had a "neutral" rating on Godrej Consumer and Emami and a "sell" on ITC.Nomura still recommends a "buy" on several FMCG stocks including GlaxoSmithKline Consumer, Dabur, Godrej Consumer, ITC and Jubilant Foodworks. However, it advises investors "reduce" HUL, Marico and Colgate.Also Read: Stick to known FMCG names says HDFC Sec.Nachiket Kelkar
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