FMCG, consumer stocks rally loses steam as experts reassess Budget boost

The Nifty FMCG index gained up to 4 percent on the Union Budget presentation day.

In a sea of green, the Nifty FMCG pack emerged as the sole sectoral laggard after seeing sharp gains over the past week. The relief offered in the Union Budget, essentially making income of up to Rs 12.75 lakh tax free, was aimed to boost the burden on the middle class, while spurring lagging consumption.

The markets cheered this move, sending consumption-driven stocks and sectors soaring. The FMCG index soared four percent, while the Consumer Durables index recorded sharp gains too. However, as the markets digest the Budget, the cheer for the consumer stocks turns more muted.

At 12 noon, after falling nearly one percent intraday, the Nifty FMCG index recouped its losses to quote 57,338.55, down -0.2 percent. United Breweries, Godrej Consumer Products, and ITC Hotels were among the key laggards, down up to 3 percent.

In a note, Kotak Institutional Equities wrote, "We struggle to justify the valuations of Hindustan Unilever or other consumer staple companies in the context of its muted volume, revenue and profit growth."

The brokerage added that the Budget did little to alleviate demand challenges of low-income households, and the cut in tax rates for taxpaying households is unlikely to spur them to consume more staple items. At best, there could be some premiumization impact.

"We find current valuations across most consumption and investment stocks to be quite ‘rich’

compared to their history, with hopes of varying degrees of recovery in volumes and/or an  increase in profitability embedded in their present value," noted Kotak. The brokerage also excluded FMCG giant Hindustan Unilever from its recommended large-cap portfolio.

Also Read | Rally in FMCG stocks on Budget sops will be short term, says Vikas Khemani of Carnelian Asset Advisors

Not just Kotak, but other experts questioned the benefit towards consumption through tax cuts. “I’m quite surprised by how the market seems to be interpreting it (the impact of the budget proposals including tax breaks) all across the consumption sectors,” Neelkanth Mishra, Chief Economist, Axis Bank said, suggesting that sectors like staples would not see an uptick as a result of these measures.

Mishra suggested that while tax cuts will likely benefit certain high-income segments, their impact on broader consumption may not be as significant as the market expects. “The market didn’t interpret this correctly,” Mishra remarked.

FMCG stocks may well have rallied on Saturday, February 1, riding high on Budget announcements but Vikas Khemani, Founder, Carnelian Asset Advisors believes that the gains are short term in nature.

Currently, most consumer stocks continue to trade at high valuations. Khemani noted that when it comes to investing in the sector they continue to follow selective investments. "Most consumer stocks are quite expensive and hence we don't want many, but we have select stocks which we like. The idea is to kind of look at stories with respect to volume favour," he explained.

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