NEW DELHI: No matter what happens in the economy, people still need to bathe and shampoo. This may suggest that consumer staples are in demand even during the recession and fast-moving consumer goods (FMCG) companies make money even during a downturn. Turns out that’s not true. A slowdown in consumption has hit the FMCG space with companies like Hindustan Unilever, Dabur India, Godrej Consumer Products and Britannia Industries registering a soft fourth quarter in FY 2018-19, where their volume growth was disappointing. Consequently, the drab in the overall sector was seen rubbing the sheen off these shares.
The once darling FMCG stocks — perhaps touted as defensive stocks — are no longer moving fast with S&P FMCG index trading 1.03 per cent lower at 11,518.09 on Friday. The Nifty FMCG index was also in the red, trading 0.51 per cent lower at 29,850.40 points.
In the case of ITC, shares have lagged peers in the past one year, owing to worries about costs and regulatory risks. As a result, the stocks trade at 25 times of estimated earnings for FY20, much lower than other consumer goods shares. Even as the company registered better-than-expected results in the March quarter, it failed to cheer investors. On Friday, it was still trading 3.61 per cent down. Investors seem worried that higher costs and taxes would crimp profit growth in the future as well. This shouldn’t be surprising, as you never know what danger lurks around the corner with cigarette companies. “A tax hike post the elections remains a key monitorable; we are building in 10 per cent tax hike in FY20,” analysts at Jefferies India Pvt Ltd said in a note.
In another case, Hindustan Unilever Limited (HUL), whose soaps and detergents are used by nine out of 10 Indian households, in an analysts’ call earlier this month, pinned the deceleration on weak rural demand and said it is unable to say when the buoyancy of the past would return. HUL’s volume growth slowed to 7 per cent in the March quarter after five straight quarters of double-digit expansion. While HUL declined 5.8 per cent in 2019, other FMCG stocks were no better — Godrej Consumer dipped 21 per cent, Britannia 15 per cent and Dabur 11 per cent.
With the market enthusiasm over NDA’s majority win in the general elections nearly over, the focus has now shifted back to fundamentals. Firstly, investors would keep a close watch on the upcoming Reserve Bank of India (RBI) monetary policy meeting scheduled on June 6. Additionally, movement in currency and crude oil price would also be actively tracked by market participants. That apart, the slowdown is being led by rural India and the factors in rural slowdown can be resolved only after we have a good monsoon and there is a pick up in the income generation space in the rural areas, say market experts, giving a lot of weightage to the discretionary categories over staples category.
Broadly, the slowdown in the FMCG space is not here to stay with a stable government at the Centre. “It may take a couple of months but growth is bound to bounce back with a stable government focusing on bringing successful outcomes of the reforms to be brought in the next five years. Consequently, we expect the price of FMCG stocks to be higher by 15-20 per cent from the current valuations, riding on earnings recovery and consumption revival,” said Chandan Taparia, derivatives analyst at Motilal Oswal.