The Hindu Business Line : FMCG stocks untouched by `feel-good factor'

DESPITE the sizzling Sensex, the fast moving consumer goods (FMCG) industry continues to languish on the markets. The absence of a growth story for this sector appears to be the reason why investors have panned several FMCG stocks.

During the November 15 to January 8 period, when the Sensex straddled an all-time high of 6108.54 points, a growth of over 25.5 per cent, the FMCG index registered a comparatively weaker 21 per cent increase.

Equity analysts tracking the FMCG sector point to the fact that the `feel good' factor that has brought cheer to many industries has bucked the consumer goods segment.

"FMCG does not really represent the aspiration segment of the wallet spending," said an analyst at a securities firm. In a robust economy with more money to spare, it is aspirational spends such as mobile phone hand sets, electronic appliances and travel that consumers typically reach out to.

Further, studies show that spending on non-durables have come down.

Hindustan Lever Ltd (HLL), the most watched FMCG stock on Indian bourses, represents the slackness that is faced by this industry. The share price of HLL rose by 20.19 per cent over the near two-month period from Rs 181.55 to Rs 210.05 on January 8, 2004, when the BSE Sensex touched its all time high. Colgate Palmolive reported a similar movement on the bourse gaining 20.19 per cent to Rs 161.9 on January 8.

However, a satisfactory southwest monsoon notwithstanding, the companies are yet to witness an improvement in rural sales. According to company officials, the trickle effect of an improvement in rural incomes is yet to show on consumer goods sales.

Consequently, in a bid to induce buying, companies are forced to keep prices of goods under check. Yet at the same time they are confronted with rising input costs impacting profit margins. The recent reduction in customs duty on imports of palm oil could augur well for products such as soaps, analysts said.

The industry is faced with many challenges such as downtrading, sustaining growth in certain segments, improving distribution efficiencies, and increasing the reach of products with low penetration.

"FMCG companies have to work towards improving their volume sales to propel growth. They may have to resort to competitive pricing," said Mr Nikhil Thacker, Assistant Vice-President - Research, Asit C. Mehta Investment Intermediates.

Still, the picture for this lot of stocks is not altogether dismal. "If you take a 10-year-view, the FMCG sector has not had such a downturn, therefore the upturn is also slow," said an analyst who declined to be named.

Fund managers are also optimistic about the sector's long-term potential. Mr B.P. Singh, Head Equities, Deutsche Asset Management, said that FMCG is traditionally the last sector to reap the benefits of a buoyant economy. Higher consumption of FMCG products happen after acquisition of high ticket products, so it is premature to conclude that FMCG is not participating in the current market rally, he said.

Mr Singh believes that over a longer period, the FMCG sector will show growth, which is likely to be reflected in stock prices. Within this category of stocks, some companies' shares have moved more or less in line with the Sensex or even outperformed it.

Apart from Tata Tea (up by 53.42 per cent to Rs 399.90 on January 8, 2004), they include Nestle (up by 27.09 per cent to Rs 713.95), ITC (up by 25.96 per cent to Rs 1077.25) and Dabur (up by 34 per cent to Rs 92.55).

Some of the paint companies, including Asian Paints and Goodlass Nerolac, which can qualify as quasi-FMCG companies, have also recorded good growth on the stock markets, Mr Thacker said.

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