Rural slowdown, funding pull down FMCG stocks; quick recovery unlikely

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The Page Industries stock was down over 10 per cent, its steepest fall in a decade, on muted volume growth and liquidity issues. The management in an investor call had highlighted pressures on the trade channel, which have resulted in 1 per cent volume growth for the March quarter.

Page joins other fast-moving consumer goods (FMCG) companies, Hindustan Unilever and Dabur, which have pointed out the impact of weak liquidity on overall volumes. The FMCG space could see further pressure if distributor funding and weak rural incomes do not improve.

This is reflected in the performance of the Nifty FMCG Index, which has remained flat last week, when the election results were announced, while broader indices such as the Nifty50 were up about 4 per cent.

Deepak Jasani, head of retail research at HDFC Securities, says that the non-banking financial company liquidity squeeze since September 2018 is one of the key factors hindering consumption demand, mainly in urban areas. Other issues include slowdown in rural income growth and high base over the past few years.

In fact, for companies like Dabur with heightened exposure to the hinterland, it is a double whammy, as rural demand is being affected more than the urban segment. Also, it would be too early to cheer the government’s focus on rural incomes and infrastructure. Disposable income in rural areas is mainly monsoon driven. Though the prediction of a normal monsoon by the India Meteorological Department is good news, the downside risk to the monsoon as forecast by Skymet cannot be completely overruled. However, analysts add that if the government’s policies crystallise into something tangible, they would be positive about consumption in the long term.

What’s equally important is the overall economic growth. SBICAP Securities says the demand for consumer staples trails gross domestic product (GDP) growth by at least four to six quarters. This means after a deceleration in the last two quarters, improved GDP growth print in the coming quarters could reflect top line growth for the sector.

However, the medium-term growth is expected to be muted, given the current rural slowdown, high base of 2018-19, and funding issues. With the election-related push largely done and dusted, analysts do not see any material tailwinds to drive up demand in the near term.

Another near-term worry is valuation. Though the current one-year forward valuation of the Nifty FMCG Index is down 12 per cent in the last two months, it is still 7-8 per cent higher than its five-year historical average. Investors may reduce exposure to the sector, given the preference for other sectors such as infrastructure after the elections. However, any sharp correction in the FMCG stocks would offer good buying opportunity for long-term investors.

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