The Hindu Business Line : FMCG stocks trail market benchmarks

Despite being such an obvious proxy for India's consumption story, FMCG stocks have sharply trailed the broad markets over the past year. Most FMCG stocks have registered negative returns over a year, with MNCs such as Hindustan Lever, Nestle India and P&G Hygiene losing 22-24 per cent in value.

Fund managers blame this poor show on the premium valuations enjoyed by FMCG stocks before this fall, which was at odds with moderate growth rates managed by the players. IPOs have also thrown up a host of fresh stock ideas for investors looking to play the consumption theme- multiplex operators, realty companies, media and television companies, film producers, as well as the telecom majors. FMCGs naturally, fell by the wayside as investors stocked up on these "high-growth" sectors.

"There was not much innovation happening in this space. These companies were generating huge cash surpluses, but weren't using this to expand their markets. There were also cost pressures from the commodity rally," says Mr Sandip Sabharwal, CIO of JM Mutual Fund, explaining why FMCG stocks have not been in favour.

"While the sector has grown well in the last 3 years, the growth rates are nowhere close to those seen in sectors like automobiles, engineering and IT services. Moreover, valuations in the sector have never been very cheap," explains Mr Mihir Vora, Head-Equities at HSBC Investments.

"It is purely a function of valuations vis-à-vis growth," points out Mr A. Balasubramanian, CIO of Birla Sun Life Mutual Fund, referring to fact that FMCG stocks have always managed to command premium multiples in the stock markets.

P/E premium dips

Because of their mature status, FMCG stocks traditionally traded at a 30-40 per cent premium to the Sensex, in terms of their P/E multiple. This premium has been whittled down by the under-performance of the last one year.

But the view that FMCG stocks will outperform in the days ahead, is now gaining ground. For one, sales growth in select FMCG categories such as soaps, laundry and foods has picked up from mid-2006, with offtake of these products from the rural and semi-urban areas recovering after a long spell. Secondly, recent price increases on soaps, laundry and food products suggest that pricing power is returning to the sector, this is seen contributing to higher profit growth for players.

"With the commodity rally peaking out and pricing power returning, we may have an inversion in performance," feels Mr Sabharwal. Then, there is also the view that FMCG companies may once again be sought after for their defensive characteristics.

With a host of sectors falling out of investor's radar screens in recent times on account of rising interest rates and "policy" risks, investors may take a fresh look at the cash-rich FMCG companies in the year ahead.

More Stories on : Stock Markets | Personal Products | Stocks

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Infrastructure funds now diversifying into new areas

Index funds return 19.57% in fiscal 2006-07

Centre clears 20-lakh tonne sugar buffer, export sops

Impact of non-fundamental factors may continue in gold

High maize cost worries poultry farmers

FMCG stocks trail market benchmarks

Benchmarks may remain sideways

Trading in g-secs listless as fiscal year-end draws near

Phase-I testing on for host of e-gov services

BHP Billiton helps take the load off Railways

Yahoo India plans new offerings on the Net

Cruise tourism gains momentum in India