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Second half crucial for FMCG space...
Wed, 23 Oct Pre-Open

For the past many years, stocks from the fast moving consumer goods (FMCG)> space have outperformed the overall market. Being a defensive sector - especially during times of uncertainty - the preference to hold such stocks increased all the more. But what really gave a boost to the sector was rising consumption, which continued healthily for a period.

But this seems to have been the case till last year i.e. FY13.

As reported in the Economic Times, Nielsen has stated that FMCG growth rates have slowed down to 7.3% YoY in the month of August this year. The same figure stood at 21.1% last year. Breaking it down between urban and rural markets, growth figures are as follows - Urban markets grew by only 5.7% in the month of August this year as compared to 16% in March. Growth in rural markets stood at 10.7% in August as compared to 15.3% in March this year.

Sales of consumer goods are believed to be close to their slowest in about a decade. Given the overall slowdown in the economy, the overall consumer spending and sentiment has remained dull, leading to such a situation.

It is, however, expected that rural markets will continue to drive demand in the next few months given the strong monsoons season this year. As per the daily, companies from the sector are pinning hopes on the same.

Are these developments likely to impact company margins? Maybe, considering that the volumes slowdown is occurring and the inability to pass on costs in such an environment (despite rising prices) given the rising competition.

What does all this mean for investors?

Well... there could be a good debate here we believe. On one side there would be a case for slowing growth thereby not justifying the current high valuations> of most of the stocks forming part of the sector. Having said that, given the preference for defensive stocks in a market situation such as the present, one could expect the sector to remain in demand for some time. A point to add in favour of the latter is that India's long term growth prospects remain intact, and as such a 'not as per expectation' performance may just be a temporary one.

While the FMCG pack does seem expensive at the moment - and has been for a long time - its valuations have been supported by growth in the past. In case the earnings do remain below expectations for a quarter or two, a possible rerating could be on the cards.

It would be difficult for one to gauge the outcome at the moment. Nevertheless we do believe it would be an interesting time to study companies, their abilities to pass on costs without seeing a major impact on volumes and an overall outperformance in difficult times.

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