Underperformance in Nifty FMCG lurking around the corner?

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As markets flirt with all-time high levels, the Nifty FMCG (fast-moving consumer goods) index has also been on a roll.

The index hit its peak of 52,540.50 on June 16 and is now 2 percent below that level. Since March, the index has rallied almost 18 percent. Heavyweights ITC, Hindustan Unilever and Britannia have also gained close to 15 percent. ITC, which commands over 30 percent weightage in the index, has contributed to most of this rally.

But now, technical indicators suggest that the rally is done and dusted. "At the current juncture, the index has given a bearish divergence pattern in the weekly time frame. Weakness is possible till 48,000 if it fails to hold 50,500. Currently, it has huge resistance around 52,500," technical analyst Dinesh Nagpal told Moneycontrol.

On the higher side, the index may fail to sustain above 52,500 levels. "Many components of the index are in the overbought zone, including Britannia and ITC. Only a decisive move beyond 52,500 will have bullish medium-term implications," believes Anuj Dixit, Executive VP- Equity Research, Sovereign Global said.

Not just technical levels, fundamental factors too are not working in favour of the consumer pack. Here's why:

Price growth tapers off

FMCG companies clocked double-digit sales growth in FY23 as they hiked prices to mitigate the rising cost of raw materials, especially palm oil. Volume growth took a backseat as price hikes helped FMCG companies protect their topline.

Now, raw material prices have tapered off. Palm oil prices are down over 20 percent from the highs hit after the Ukraine-Russia war. According to Elara Capital, palm oil comprises 10 percent of HUL's raw material cost, 23 percent of Godrej Consumer's and 16 percent of Britannia.

This means margin comfort is here but price-led benefits will fade. "The FMCG sector seems well poised in H1 FY24 with raw material cost tailwind. However, in H2 FY24 we expect revenue growth to moderate as pricing benefits should fade and growth would have to be volume-led," according to Kunal Vora, Head - India Equity Research.

Moreover, mature categories like hair oil and oral care have seen only 3-4 percent revenue CAGR over the last 7 years.

Can volume growth show the way?

Over the past few years, rural volume growth has remained elusive for FMCG companies. Premiumisation and urban markets have led the way. Going forward, the picture for rural volumes does not look too bright.

"Commentary on rural remains underwhelming, and pick-up
may take time, with El Niño also posing a threat in the short term," according to Jefferies.

The FMCG market (urban and rural) registered flat volume growth in the March quarter, as per Nielsen data. In a Q4 earnings concall, Hindustan Unilever's managing director and chief executive officer Sanjiv Mehta said that the overall FMCG market's volume growth should be 4-5 percent while commodity prices remain steady, only then the volatile scenario can turn a corner.

The risk of El Nino

When it comes to the impact of El Nino, surveys conducted by different brokerages suggest different results. For instance, ICICI Securities did an empirical study of 4 decades of monsoon patterns and came to the conclusion that discretionary demand (car and especially tractors) is more linked to rainfall than agri and consumer staples.

According to economists, an intense El Nino that severely disrupts the monsoon could push inflation up by 15-20 basis points by boosting food prices. A slight delay in monsoon has already pushed Kharif sowing by 10 to 15 days, as per Skymet.

In this regard, it is important to monitor the management commentary of FMCG companies after Q1 FY24 earnings.

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