The index has been flat since the middle of December and hardly participated in the post-Budget rally
The recent performance of the BSE FMCG index suggests equity investors
are no more bullish about consumption growth in India.
The index, which tracks the share prices of top consumer goods companies
such as Hindustan Unilever, ITC, Nestle, Britannia, Dabur, Colgate Palmolive, and Tata Consumer, has become a laggard by a big margin.
The index has been flat since the middle of December and hardly participated in the post-Budget rally.
It is up 2.4 per cent since the Budget against an 11.4 per cent rally in the Sensex during the period.
The Sensex is up nearly 12 per cent in the past two months, powered by a strong rally in cyclicals and high beta sectors such as banks, non-banking finance companies, automotive, metals, and capital goods.
The FMCG index had outperformed the broader market between March and September last year. (See the adjoining chart.) But if seen over the past 12 months, it is up 8.5 per cent against a 25 per cent rise in the Sensex. Hindustan Unilever, the top FMCG firm in terms of market capitalisation, is down 1 per cent after the Budget and the stock has reduced 5.6 per cent in the past two months.
Industries, a big outperformer in the initial part of the rally, is down 2.3 per cent since the Budget and 8.3 per cent in the past two months. Nestle India’s share price is down 6 per cent since the middle of December.
In contrast, ITC, Dabur, and Nestle have gained after the Budget.
Analysts attribute this to the market cycle.
“For three years, most of the large investors had high exposure to FMCG companies.
This is getting corrected as the pandemic has led to a better showing by cyclicals such as banks, auto and metals,” said Shailendra Kumar, chief investment officer, Narnolia Securities.
Analysts also say incrementally non-FMCG sectors have reported better earnings growth than FMCG companies
For example, the combined net profit of 40 Nifty companies that have declared their third-quarter results so far is up 31 per cent year-on-year. In comparison, the combined net profit of FMCG companies was up 12 per cent year-on-year during the December quarter.
Others say this is owing to the rally in commodity prices and consumer inflation, which is expected to raise input costs for consumer companies, hitting their profitability.
“Downstream products from crude oil are key raw materials for most FMCG companies. The recent rise in crude oil prices will translate into higher costs and lower margins for these companies,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services.
FMCG companies’ operating margins (or the margin for earnings before interest, tax, depreciation and amortisation) were at a record high of 25.6 per cent in the December quarter owing to a decline in raw material and employee costs.
The margins were up 160 basis points on a year-on-year basis.
Analysts expect this to reverse, hitting the earnings of these companies. The combined net sales of FMCG companies are up 2.8 per cent year-on-year during the third quarter, a slowdown from 4.8 per cent year-on-year growth in the second quarter.
Analysts say companies will require much faster growth in the top line to absorb the rise in input costs and still deliver earnings growth in the forthcoming quarters.