The Future of FMCG Stocks

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FMCG stocks rose after the Indian Meteorological Department (IMD) forecast a normal monsoon, which is seen as a bellwether of rural demand and consumption.

All FMCG majors saw an immediate drop in rural demand for consumer non-durables after demonetization.

But even prior to the latest Indian market news based on the IMD’s announcement, the sector has been witnessing a bit of an upswing to tame a slowdown.

Established FMCG stocks, such as Godrej Consumer Products, Hindustan Unilever, Marico, ITC and Colgate-Palmolive, have long been the darlings of seasoned investors for their consistent margins and earnings. But the entry of Patanjali’s products, with its brand loyalty and novelty factor, surprised many industry veterans.

An increase in raw material costs has also resulted in higher prices for some FMCG staples, such as biscuits and soap.

FMCG’s growth rate has historically been 1.2 times nominal GDP. This number has come down to 0.8 times since FY ‘13, according to a recent report from CII and Bain & Company. Experts say e-commerce has made only a dent in this figure, and companies have simultaneously lowered their investments in marketing, promotions and new product launches during the same period.

However, over the last three months, the BSE FMCG and Nifty FMCG indices have beat the Sensex and Nifty by 2% to 3%. FMCG funds have subsequently returned 16.5%. Zoom out and the trend becomes even more apparent: over a five-year period, FMCG funds have delivered a 18% return.

What explains these metrics?

Between FY ‘13 and FY ‘16, the government made efforts to stimulate rural demand: spending on initiatives such as MGNREGA has coincided with the sluggish FMCG rate of growth to GDP.

Although rural agricultural incomes increased in the third quarter of FY ‘17, on average, by more than 8% year-over-year, this year’s Union Budget provided a 1 lakh crore increase to the agricultural credit target. FMCG stocks read this as a sign that rural consumption would soon pick up.

The CII and Bain & Company report noted there’s significant room for FMCG to grow in the next five to 10 years – anywhere from 9% to 17%, depending on the nominal GDP growth rate. Last year, it grew at 9% until the third quarter, with rural growth outpacing urban growth 1.7 times. Food led the way, with 10% growth, mostly due to volumes.

Observers expect GST, set for introduction on July 1, will also benefit the FMCG sector with its uniform national sales tax making pan-India administration simpler.

In such a fiercely competitive sector, brands must continuously evolve to perform and win some recall among consumers.

Analysts say with FMCG, the bottom line for investors will always be corporate performance, rather than bandwagon buying and selling led by irrational market exuberance.

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