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Last Updated : Sep 08, 2018 10:02 AM IST | Source:

D-Street’s outperformer for 10 years, is India’s FMCG story overvalued currently?

Nifty FMCG index has been the second-largest sectoral gainer, up 16% YTD against 10% in Nifty50. Major FMCG stocks have rallied between 10-60% YTD.

Sunil Shankar Matkar
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Not only has it been an outperformer in the past three quarters, the fast-moving consumer goods (FMCG) segment — one of the major consumption-based sectors — has been a shining star for about a decade now.

The sector took a hit from demonetisation and the implementation of GST but managed to get back on growth path towards end of 2017. The subsequent pick up in rural demand, monsoon progress and a favourable base translated into a good earnings growth in last couple quarters.

"Indian FMCG sector has seen strong growth on the back of factors like strong demographics, post-demonetisation demand pick-up particularly from urban India, positive impact of GST rate cut and expected pick up in rural demand mainly due to good monsoon and upcoming election year etc," Astha Jain, Senior Research Analyst, Hem Securities told Moneycontrol.


Top Indian FMCG businesses were witnessing perpetual volume growth around 5-7 percent prior to the two major disruptions — demonetisation and GST rollout. Volume growth at FMCG companies on an average fell 2 percent with some firms even posting a 4-5 percent degrowth.

Beginning the third quarter of FY18, FMCG companies have been on an average reporting double-digit volume growth. For Q1FY19, the average volume growth of the top 13 companies was around 13 percent. The growth has come in with sustained margin.

Nifty FMCG index has been the second-largest sectoral gainer, up 16 percent YTD against 10 percent in Nifty50. Major FMCG stocks have rallied between 10-60 percent YTD.

Drivers behind the FMCG rally

a) Rural consumption has increased, led by a combination of increasing incomes and higher aspiration levels, which has lead an increase demand for branded products in rural India.

b) Growing youth population & Brand consciousness has also aided demand growth.

c) Greater quality awareness and changing lifestyles have been the key growth drivers for the sector.

In fact, the rally in July-August was also partly because of FMCG stocks like ITC and HUL which both are part of Nifty50, led by stable to better-than-expected earnings growth in Q1FY19.

The FMCG index climbed 13.6 percent in last two months against 9 percent upside in Nifty50.

After such a smart rally, a correction is always expected and so it happened, experts said, adding investors preferred to take some money off the table. The FMCG index lost 4.7 percent in September so far compared to 0.8 percent correction in Nifty50.

That does not mean fundamentals are in trouble, or that the economic growth is tapering off or consumption story is coming to an end. In fact, it is just a valuation game that is playing out, experts said.

Experts believe FMCG is a long term story, and any fall in quality stocks is always an opportunity to buy.

"We are still positive on consumption story and believe that uptrend will continue in long term. Hence we suggest that valuation correction from current level will provide a strong opportunity to buy," Jain said.

Vineeta Sharma, Head of Research, Narnolia Financial Advisors said given the light balance sheet, as asset turnover improves for the FMCG companies, the already-high return ratios may get further impetus. "This may help companies sustain the current rally in the sector."

She feels the FMCG companies have always traded at higher valuations and this has been in talks for several years. "Only once the growth tapers, the high valuations will be an issue."

Prashanth Tapse (AVP Research at Mehta Equities) who is always bullish on FMCG, believes the sector has always performed consistent irrespective of economic situation because of consumption based sectors.

"On valuation parse, sector stocks are trading high and we consider premium valuations will be sustained on expectations of better earnings growth and a defensive bias in an uncertain environment. However, we believe opportunity is still on table at current valuations for ONLY LONG STRATEGY," he said.

Outlook and Picks

Prashanth Tapse, AVP Research, Mehta Equities

We assume FMCG market in India is expected to grow at a CAGR of 20-22 percent and this growth will come from Tier II/III cities, which is witnessing fastest growth in modern trade.

In the long run, with the system becoming more transparent and easily compliable, greater awareness of products, brands, evolving consumer lifestyle and growth of modern trade is expected to benefit organised players in the FMCG industry.

In this space we like Godrej Consumer Products and HUL.

One can buy Godrej Consumer with a stop loss at Rs 1,275 and target of Rs 1,400/1,460 and accumulate HUL with a stop loss at Rs 1,550 and target of Rs 1,800/1,950.

Vineeta Sharma, Head of Research, Narnolia Financial Advisors

Rural wage inflation which was falling from 2013 to 2016 has started rising again. Increase in MSP (minimum support price) and good monsoon has led to increased rural demand. Companies have witnessed signs of recovery in urban demand too.

There has been continued emphasis on increasing/optimising distribution channels by companies and that most management is of the view that supply related disruptions are behind. This implies volume growth to continue going forward.

Most companies have been able to maintain margins along with growth. These all imply continued outperformance by FMCG stocks going ahead.

Astha Jain, Senior Research Analyst, Hem Securities

We are still positive on FMCG sector and recommend buy on dip strategy with focus on stocks like ITC and Dabur.

Kaustubh Pawaskar, FMCG analyst, Sharekhan by BNP Paribas

FMCG companies are likely to increase prices by 5-8 percent by Q3FY19 in the backdrop of rising input prices (including increase in the crude oil prices, higher MSPs for agri products and rupee depreciating against dollar); focus of consumer goods companies will be on balancing the volume and value growth coupled with less stress on profitability.

It is sentimentally negative but unlikely to have any significant impact on business fundamentals of consumer goods companies as improving rural demand and stable demand in urban India will continue to drive revenue growth.

We prefer ITC, Dabur and Godrej Consumer in the FMCG space.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.

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First Published on Sep 8, 2018 09:57 am
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