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Is Consumption Boom Over In India? - Outside View by PersonalFN
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Is Consumption Boom Over In India?
Feb 2, 2016

Hire and fire culture is not only bad for the employees but also for the organisations. Many a time, companies have to fire employees because they don't hire the right talent or they pay such a high price that soon they start finding it unaffordable. Miscalculation about the precise requirement of human resources is another reason why companies have to adopt higher and fire strategy. But in bad times, even the considerate companies also have to lay off people. First to be fired are those who don't perform and take home fat salaries.

Something similar happens in case of equity investing as well. Some investors are impatient and they want instant results. As soon as they feel a particular investment is not yielding desired results, they don't wait long for the turnaround. They just get out of the stock and search for other options. Those doing this often either buy unsuited companies or buy them at very expensive valuations. Even large investors such as mutual funds are also not exception to this behaviour. But, not all are alike. A few of them give considerable time for companies to prove performance before flogging them out. When they see no light at the end of the tunnel, they shun non-performing stocks.

Is FMCG Sector Overrated?

Take example of Consumers Non-Durable sector; popularly known as Fast Moving Consumers Goods (FMCG) sector. During the economic recession of 2008-09 financials of many companies had deteriorated but as the economy dodged a bullet and recovered quickly; companies focused on consumers' spending emerged as the winners. The consumption story of India hadn't had deteriorated and business valuations were reasonable. Many of them were foreign multinationals with undisputed record, thus quoted at premium valuations. This continued for almost 5 years, until 2013. Thereafter, investors became skeptical about the valuations as growth prospects looked down.

Mutual funds come full circle

Mutual Funds, once betted big on the Consumer Non-Durable Sector. As far as diversified equity funds are concerned; Consumer Non-durables happened to be one in the top-5 sectors of their portfolio. But as their incremental growth started petering out; mutual fund managers started ditching FMCG companies out. On the other hand, they put money in sectors that they expected to do well in the economic recovery.

FMCG Sector-Losing Charm

FMCG Sector-Losing Charm

From January 28, 2013 to January 28, 2014 the Consumers Non-Durable sector generated 11.9% returns while the S&P BSE Sensex yielded only 2.9% returns. Thereafter, the quantum of outperformance of the FMCG sector started waning. From January 28, 2014 to January 28, 2015; the S&P BSE FMCG generated 26% returns as compared to huge 42% returns generated by the S&P BSE Sensex. As the markets remained lacklustre throughout 2015; performance of FMCG sector improved a little between January 28, 2015 and January, 28, 2016. While S&P BSE FMCG lost 10.5%, S&P BSE Sensex dropped 17.2% during this time period.

Are Mutual funds Bearish on FMCG Sector?

Scheme Name AUM Exposure (in %)
to FMCG Sector
Total Amount invested
in FMCG Sector
Birla SL Frontline Equity Fund (G) 10,490 7.42 778
Franklin India Bluechip Fund (G) 6,678 3.82 255
Franklin India Prima Plus Fund (G) 6,337 5.52 350
HDFC Equity Fund (G) 16,860 0.56 95
HDFC Mid-Cap Opportunities Fund (G) 10,915 3.62 395
HDFC Top 200 Fund (G) 12,488 3.42 427
ICICI Pru Focused BlueChip Eq Fund (G) 9,981 5.23 522
ICICI Pru Value Discovery Fund (G) 11,065 2.32 256
IDFC Premier Equity Fund (G) 6,380 10.94 698
Reliance Equity Opportunities Fund (G) 11,651 1.34 156

Data as on December 31, 2015
(Source: ACE MF, PersonalFN Research)

As per the portfolios disclosed on December 31, 2015; 10 largest funds in the equity diversified category, collectively invested Rs 3,931 crore in the Consumer Non-Durable Sectors. This means average exposure of top-10 funds has been about 3.8% to the sector. On the contrary, Financials and Information Technology sectors assumed significantly higher weights in their portfolios.

Performance-Equity Diversified Funds Vis-a-vis FMCG Funds

Scheme Name 1 Year 2 Years 3 Years 5 Years
HDFC Mid-Cap Opportunities Fund (G) -6.6 33.4 23.8 19.1
ICICI Pru Value Discovery Fund (G) -8.8 33.3 21.9 17.3
IDFC Premier Equity Fund (G) -6.4 27.8 19.3 16.7
Franklin India Prima Plus Fund (G) -8.8 25.9 16.8 13.9
Reliance Equity Opportunities Fund(G) -13.4 23.5 15.1 14.3
Birla SL Frontline Equity Fund (G) -11.6 19.6 13.6 11.6
ICICI Pru FMCG Fund(G) -5.4 14.9 13.2 19.9
SBI FMCG Fund (D) -5.7 14.6 12.5 20.6
ICICI Pru Focused BlueChip Eq Fund (G) -12.8 17.1 12.1 11.0
HDFC Equity Fund (G) -19.5 18.1 10.1 8.0
Franklin India Bluechip Fund (G) -10.5 16.8 10.0 9.3
HDFC Top 200 Fund (G) -19.5 15.1 8.3 7.6
S&P BSE SENSEX -17.2 8.8 6.8 5.9
S&P BSE FMCG -10.5 6.1 8.0 16.5

Returns upto 1 Year are absolute; above 1 year are compounded annualized
NAV Data as on January 28, 2016
(Source: ACE MF, PersonalFN Research)

As you know, the equity markets have been under pressure for almost a year now. It's been observed that, whenever the risk aversion sets in; mutual funds take refuge under defensive sectors. These are the ones that are not affected much by the pace of economic activities and movement of the interest rates in the economy. This time, mutual funds have chosen to avoid Consumer Non-Durable sector despite that being known as a defensive sector for years.

It is believed that, the factors such as high food price inflation and the erratic monsoon have affected the rural demand negatively. Urban demand has stagnated too. As per EquityMaster data average growth in the net sales of FMCG companies has been just 3.7% in the December 2015 quarter (on Y-o-Y basis). Profit After Tax (PAT) has grown at about 16.5% on Y-o-Y basis on an average for the same period.

To sum-up

PersonalFN believes mutual funds have been proven right so far by the sluggish movement of FMCG stocks. It remains to be seen if the mutual funds change their approach once the Goods and Services Tax (GST) is rolled out and consumption demand revives, even slightly.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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