The NSE FMCG (fast moving consumer goods) index has declined 9 per cent since the end of September against a 4 per cent fall in the benchmark Nifty50. On Monday, too, the FMCG index marginally underperformed, declining 1.8 per cent against 1.65 per cent in the Nifty50.
This is unusual, because historically India’s top FMCG companies have acted as a good hedge against volatility.
The NSE FMCG index had declined by only 9.3 per cent in January-March 2020, against nearly 30 per cent fall in the Nifty50. In fact, segment leaders like Nestlé India and Hindustan Unilever (HU.....
The NSE FMCG
(fast moving consumer goods) index has declined 9 per cent since the end of September against a 4 per cent fall in the benchmark Nifty50. On Monday, too, the FMCG
index marginally underperformed, declining 1.8 per cent against 1.65 per cent in the Nifty50.
This is unusual, because historically India’s top FMCG companies
have acted as a good hedge against volatility.
The NSE FMCG index had declined by only 9.3 per cent in January-March 2020, against nearly 30 per cent fall in the Nifty50. In fact, segment leaders like Nestlé India and Hindustan Unilever (HUL) had rallied. For example, HUL’s stock price jumped 20 per cent and Nestlé India rose 10 per cent.
Similarly, the FMCG index had outperformed the broader market in previous corrections like in 2011, 2015, and 2018.
The current decline has cooled the sky-high valuation of these firms. The NSE FMCG index is currently trading at a price-to-earnings multiple of 39x, down from a 52-week high of 46.5x.
This may seem tempting for many investors, but analysts remain cautious on the near-term prospects of the sector.
“Valuations in the FMCG space have surely declined in the last few months, but it’s still too high compared with the broader market and the sector’s own valuation till 2-3 years ago. It needs to decline further to turn into a value buy,” says Shailendra Kumar, chief investment
officer of Narnolia Securities.
He said valuations may remain depressed in the near term due to margin pressures from higher inflation. “Most companies
are expected to see volume and revenue growth in the next few quarters, but it may not translate into earnings growth due to decline in margin. This isn’t a great recipe for a rally in share price,” adds Kumar.
Others are advising investors to wait for at least two weeks more before taking a call. “The broader market, including FMCG stocks, are likely to remain under pressure for at least two weeks more till clarity emerges about the severity of the Omicron variant. If the virus turns out to be more lethal than expected then FMCG stocks will act as safe-havens but if turns out to be mild investors would turn to cyclical sectors,” says G Chokkalingam, founder and MD Equinomics Research & Advisory Services.
Some brokerages, however, remain optimistic on individual stocks. “We remain positive on HUL’s ability to outgrow the market, as well as its pricing power. We also expect the company’s margins to improve sequentially on the back of price hikes and a cool down in certain raw material prices,” write analysts at Edelweiss Securities.
The brokerage expects nearly 28 per cent upside for the stock in the next 12 months, against 4 per cent decline in the last 12 months. HUL is the segment leader and accounts for nearly a third of combined market capitalisation of all 15 stocks in the NSE FMCG Index.
|Key stories on business-standard.com are available to premium subscribers only.|
Already a premium subscriber? LOGIN NOW.
Subscribe to get an across device (Website, Mobile Web, Iphone, Ipad, and Android Phone applications) access to Premium content, Breaking News alerts, Industry Newsletters, Stock and Corporate news alerts, access to Archives and a lot more.
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.