Is the lack of alternatives driving FMCG stock rally despite 3.3 per cent drop in Sensex?
BSE
444.55
5.85(1.33%)
Vol:135542 shares
traded
NSE
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Vol:587117 shares
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FMCG sector has reported a strong performance in
the June quarter with aggregate net sales of leading 27 FMCG cos growing over
13% year-on-year.
Shares of branded electrical equipments maker V-Guard
Industries hit a record high of Rs 444.5 on the BSE last week on Friday. On
the same day, the stock of another small-sized FMCG
company Bajaj
Corp also touched a record high of Rs 173.60. VGuard's stock price has
doubled since June while that of Bajaj Corp's has risen 48% since
July.
The stocks of several small-to-medium FMCG companies such as ice-cream maker Vadilal Industries, instant coffer &tea maker CCL Products, tea producer Mcleod Russel, personal care products maker Emami, household products maker Jyothy Labs and pizza retailer Jubilant Foodworks have also risen similarly. And it is not that this rally has been restricted only to the smaller companies in the branded consumer goods segment.
Even the FMCG biggies have gained in recent months. The stocks of 16 of the 20 leading FMCG majors have hit record highs in the past five months. Outperforming the broader market indices the BSE FMCG index rose 25% in the past six months -- against a 3.3% drop by the Sensex.
The 10-member index had no losers and Godrej Consumer Products emerged as the top gainer with its stock rising 45.6%. Companies such as HUL, ITC, Marico and Tata Global Beverage have registered gains ranging between 13% and 30% during the same period.
The ET FMCG Index has been overvalued since 2010. In 2010, the index was trading at an average price-to-earnings (P/E) multiple of 29.1 — the highest till then. It has only been rising further since then to 31.6 in 2011 and 32.04 in 2012.
So, is this investor fancy for FMCG stocks a case of irrational exuberance on account of the strong performance of these companies quarter after quarter at a time when companies from many sectors are struggling. Or is it a re-rating of these stocks due to improved quality of their earnings driven by the Indian consumption story? Or is it a clear case of 'there is no alternative'? It is probably acombination of all three.
One of the major reasons for the sector's outperformance is that investors have little choice in the current environment of slowdown in growth, uncertainty over reforms and high interest rates. "No doubt the valuations of FMCG stocks are stretched, but investors are constrained to remain optimistic about other sectors," says G Chokkalingam, chief investment officer, Centrum Wealth Management.
None of other major sectors like auto, IT, capital goods, real estate, metals, shipping and cement are doing as well. The FMCG sector has reported a strong performance in the June quarter with aggregate net sales of leading 27 FMCG companies growing by over 13% over the previous year and the operating profit rising by 28.7%. This further reinforced investor confidence in the sector.
Despite headwinds such as deficient rainfall, high inflation, economic slowdown and a slow down in discretionary spends casting a shadow on the prospects of FMCG companies, investors are chasing them owing to limited investment options.
Once the market starts seeing signs of revival in growth and hopes of reforms intensify, investors will start booking profits in FMCG stocks. However, this does not mean that they will also fall in the same measure as their rise. A certain amount of re-rating has taken place, which is bound to sustain even when the markets head northwards.
There are, of course, factors like a drop in rural demand, reduction in discretionary consumption, high inflation pushing up raw material prices and rising competition threatening the growth prospects of FMCG companies. But, if economic growth picks up, may recede.
The stocks of several small-to-medium FMCG companies such as ice-cream maker Vadilal Industries, instant coffer &tea maker CCL Products, tea producer Mcleod Russel, personal care products maker Emami, household products maker Jyothy Labs and pizza retailer Jubilant Foodworks have also risen similarly. And it is not that this rally has been restricted only to the smaller companies in the branded consumer goods segment.
Even the FMCG biggies have gained in recent months. The stocks of 16 of the 20 leading FMCG majors have hit record highs in the past five months. Outperforming the broader market indices the BSE FMCG index rose 25% in the past six months -- against a 3.3% drop by the Sensex.
The 10-member index had no losers and Godrej Consumer Products emerged as the top gainer with its stock rising 45.6%. Companies such as HUL, ITC, Marico and Tata Global Beverage have registered gains ranging between 13% and 30% during the same period.
The ET FMCG Index has been overvalued since 2010. In 2010, the index was trading at an average price-to-earnings (P/E) multiple of 29.1 — the highest till then. It has only been rising further since then to 31.6 in 2011 and 32.04 in 2012.
So, is this investor fancy for FMCG stocks a case of irrational exuberance on account of the strong performance of these companies quarter after quarter at a time when companies from many sectors are struggling. Or is it a re-rating of these stocks due to improved quality of their earnings driven by the Indian consumption story? Or is it a clear case of 'there is no alternative'? It is probably acombination of all three.
One of the major reasons for the sector's outperformance is that investors have little choice in the current environment of slowdown in growth, uncertainty over reforms and high interest rates. "No doubt the valuations of FMCG stocks are stretched, but investors are constrained to remain optimistic about other sectors," says G Chokkalingam, chief investment officer, Centrum Wealth Management.
None of other major sectors like auto, IT, capital goods, real estate, metals, shipping and cement are doing as well. The FMCG sector has reported a strong performance in the June quarter with aggregate net sales of leading 27 FMCG companies growing by over 13% over the previous year and the operating profit rising by 28.7%. This further reinforced investor confidence in the sector.
Despite headwinds such as deficient rainfall, high inflation, economic slowdown and a slow down in discretionary spends casting a shadow on the prospects of FMCG companies, investors are chasing them owing to limited investment options.
"Till the economic slowdown persists and investors don't have any attractive alternative to park their funds in, the interest in FMCG stocks is likely to continue," points out Jagannadham Thunuguntla, strategist and research head, SMC Global Securities.
Once the market starts seeing signs of revival in growth and hopes of reforms intensify, investors will start booking profits in FMCG stocks. However, this does not mean that they will also fall in the same measure as their rise. A certain amount of re-rating has taken place, which is bound to sustain even when the markets head northwards.
For instance, HUL has to report a significantly bad performance in the coming quarters for its stock to slide back to the pre-rally level of Rs 381 from Rs 503 now.
There are, of course, factors like a drop in rural demand, reduction in discretionary consumption, high inflation pushing up raw material prices and rising competition threatening the growth prospects of FMCG companies. But, if economic growth picks up, may recede.
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