Shares of fast-moving consumer goods companies saw hefty buying on June 24 on the perception that ongoing decline in global commodity prices could improve profitability of these companies going ahead.
FMCG companies had come under pressure earlier this year as rising prices of commodities, such as wheat, crude palm oil and others, led to fears of continued decline in margins of these companies. In the quarter ended March, most FMCG companies reported a year-on-year decline in their margins due to high input price inflation.
However, recent decline in global commodity prices due to rising concerns over demand in the West and the government’s efforts to contain prices of key imports like edible oils have helped ease concerns around margins of these companies.
The Nifty FMCG index as a result has risen more than 4 percent this week, one of its best weekly performances this year.
Crude palm oil, a key raw material for most FMCG companies, has fallen from highs of $1,800 per tonne earlier to $1,200 per tonne now. “We are enthused by this deflation but need to see its sustainability; but recent sharp rate hikes, drying up of liquidity and risk off bodes well for commodity deflation,” said brokerage firm Edelweiss Securities in a note.
Edelweiss Securities believes that if the current downtrend in crude oil prices continue then margins of FMCG companies could start expanding from September onwards. “H2FY23 could potentially be a sharp expansion as huge price hikes have been already taken,” Edelweiss Securities said.
Further, market participants remain optimistic over revival in rural demand as inflation concerns ease and a normal monsoon boosts farm income in the second half of the current financial year.
The rural market accounts more than half of revenues for several consumer staple companies.
Shares of FMCG companies have been among the top performers on Dalal Street as investors look to take advantage of their relatively inexpensive valuations. Shares of Hindustan Unilever, Godrej Consumer Products, Dabur India, Britannia Industries, Marico and Tata Consumer Products have rsien 2-8 percent during the week.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.