Will FMCG stocks continue to rally in 2012?

Moneycontrol Bureau

FMCG stocks have been long considered as a defensive investment bet when the overall markets are in turmoil. The sector played its role to perfection in 2011. While the broader Nifty index has slipped 24% from its close on Dec 31, 2010, the CNX FMCG index is up 9%.

Several FMCG stocks surged, while many other blue chip names slipped sharply. Hindustan Unilever, for instance, hit a 52-week high of Rs 414.40 on Dec 23. But, blindly investing in FMCG stocks on the premise of continued strong growth may not be a wise idea now.

Analysts say FMCG companies will maintain a good growth momentum, but advise selective buying as several of the sector stocks are now at expensive valuations following last year's run.

"FMCG companies are better placed for 15-20% earnings growth over next 2-3 years," Sharekhan analyst Kaustubh Pawaskar told moneycontrol.com.

There is little slow growth in premium products, and some discretionary spends are also lower. However, overall the companies have sustained volume growth and there is still no impact from the high inflation, he said.

But, concerns remain as commodity prices have been volatile and are expected to be over the next couple of quarters at least. The recent sharp depreciation in rupee will also add on to the cost of importing raw materials. These things will keep gross margins of consumer goods firms under pressure, Pawaskar warns.

Despite a weak macro environment and input cost inflation, most FMCG companies delivered as per expectations and so justify their higher multiples, said Nitin Mathur of Espirito Santo Securities.

But should investors continue investing in FMCG stocks?

"Very high valuation multiples imply limited possibility of re-rating from current levels. In the face of input cost inflation and in the absence of value accretive acquisitions, earnings upgrade opportunities in calendar 2012 look limited. Moreover, as the (interest) rate cycle turns and if the market shows signs of life, sector rotation could result in funds moving out of the consumer sector to other beaten down sectors," he said in a report.

Sharekhan's Pawaskar feels HUL, Nestle and Marico are at premium valuations right now and instead advises a "buy" on stocks like ITC, GlaxoSmithKline Consumer Healthcare and Bajaj Corp.

He puts forward three key reasons for a shift to ITC from HUL. HUL has a higher sensitivity to input cost pressures and there is limited pricing power due to fierce competition in spaps and detergents. Comparitively, ITC's cigarette segment is relatively price insensitive, he notes.

Further, ITC is expected to grow at a faster clip as its non-cigarette business' improve. Pawaskar expects ITC's earnings will grow at a compounded rate of 21% over FY2011-13. HUL's profit is seen growing at 17% over the same period.

Mathur of Espirito Santo has a totally contrary view. He recommends a "sell" on ITC and a "buy" on HUL.

He feels a sharp increase in excise duty in the union budget will prompt ITC to hike cigarette prices steeply to maintain over 15% EBIT (earnings before interest, taxes) growth, but that will hurt volume growth next fiscal.

Mathur expects HUL will be the one, which will maintain a sustained momentum going ahead on the back of seven consecutive quarters of over 8% volume growth.

Among key FMCG stocks, HUL is up 32% over the last one year, ITC gained 15% and Marico rose 22%, while Nestle and GlaxoSmithKline Consumer are up 8% and 7% respectively. Godrej Consumer Products and Dabur rose just around 1% during the period.

On Friday, while ITC was up about 0.5%, HUL, Marico, Nestle, GSK Consumer and Dabur were trading down 1-3%.

Nachiket Kelkar
nachiket.kelkar@network18online.com