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In FMCG, the index is not quite telling you where the money is

80 per cent of Nifty FMCG index components have given positive returns in last one year.

Updated: Jul 19, 2018, 01.42 PM IST
FMCG major Hindustan Unilever (HUL) last week delivered a strong set of numbers for June quarter with double-digit growth across all three verticals. The company’s share price reflected happier times for the sector, rallying 52 per cent in last one year.

But the FMCG index is not reflecting similar buoyancy.

As much as 80 per cent of Nifty FMCG index components have given positive returns to investors in last one year, with Jubilant FoodWorks rallying 123 per cent to Rs 1,419 as of July 16, 2018 from Rs 636 on July 17 last year.

Shares of Britannia, United Breweries, Tata Global Beverages, P&G Hygiene, Dabur India, GSK Consumer Healthcare, Marico, Colgate-Palmolive and United Spirits have advanced between 4 per cent and 77 per cent in last one year.

In comparison, the Nifty FMCG index has risen just 8 per cent since July 2017, compared with a 10 per cent gain in the Nifty50.

So, what is putting pressure on the index when most of the stocks are trading in the green?

Industry heavyweight ITC, which has a 40 per cent weightage on the index, has capped the upside for it. The stock has dipped 16.47 per cent to Rs 271 on July 16 this year from Rs 325 on July 17 a year ago.

Kotak Institutional Equities expects ITC to deliver another set of modest numbers for June quarter as cigarette volumes continue to decline on a YoY basis.

“We bake in a 2.5 per cent YoY decline with further deterioration in the product mix. We expect growth acceleration in the FMCG and hotels businesses, partly aided by low base in both the segments,” the brokerage said in a report.

Godrej Industries and Emami, which together have a little above 2 per cent weightage in the index, dipped 13 per cent and 1 per cent, respectively, during the same period.

Angel Broking says if one were to leave out the ITC effect, this index has been a stupendous outperformer. A combination of pay hike for central government employees and payouts to the retired army personnel in last two years has resulted in a major jump in demand for FMCG products.

Companies like HUL, Britannia, and Colgate rely heavily on the rural market to boost sales. Things have changed since the Union Budget 2017.

“In the last two budgets, the government has given a major thrust to rural spending. Assured minimum support price (MSP) at 150 per cent of the cost of production, massive infrastructure projects in rural areas and an unprecedented rural employment generation programme have all been instrumental in propping up rural demand in a big way. That story looks set to continue,” Angel Broking said in a blog.

Market experts say a shift in market share from unorganised to organised sector since GST rollout will further support FMCG stocks in the coming months.

Deven Choksey, MD, KR Choksey Investment Managers, told ETNow that the rural belt is showing higher demand because of availability of funds in the hands of the rural consumer.

As a result, FMCG products will see relatively higher volumes as consumption picks up. But these numbers are not going to be beyond 15 per cent. The key lies in improving margins and that is what HUL is doing.

He said GST rollout has been by and large very successful for many of these consumer companies. On one side, they have been able to destock inventories and avail working capital benefits. On other hand, just-in-time inventories into the system have helped them bring down costs.

“Though one cannot say it has been reflecting completely in the accounts of the current quarter, larger FMCG companies will be the bigger beneficiaries as we see GST stabilise,” Choksey said.

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Regulations may prove to be another Patanjali for FMCG firms

Ayaz Motiwala adds auto ancillary, FMCG stocks

Share market update: FMCG shares slip; ITC down over 1%

Gurmeet Chadha’s 3 FMCG and industrial picks

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