Fast Moving Consumer Goods stocks had a dream run in the current year 2013, having grown by an impressive 15.35%. With sentiments on India growth story severely affected by continuous downgrading by several institutions including our own Reserve Bank FIIs developed apathy towards most Indian stocks. The rout continued in the first seven months when the Midcaps were butchered and beaten beyond recognition. Even profit making companies out of midcap space were not spared and all round selling emerged. One of the hopes left was FMCG space since the India consumption story was strongly believed.
Industrial action may be slowed or tempered but consumption of FMCG can’t be postponed and hence all eyes turned towards this segment. As a result, while the midcap stocks melted down and Index barely managed to stay afloat, FMCG stocks remained resilient. In the first seven months of rout in Indian stock markets, FMCG stocks rose higher by an impressive 14.61%. Though 7 out of 15 stocks sought lower levels in this period, they were mostly supported by poor performance. Those stocks that showed improved performance sought higher and higher levels.
Britannia spurted by close to 40% while Dabur, United Spirits and Glaxosmithkline consumer recorded 20 -25% rise. ITC and Hindustan Unilver with heavy market capitalisation have grown by close to 19% and 16% respectively contributing to rise of FMCG index. With dismal performance, EID Parry slipped by close to 41% followed by United Breweries with 27% fall which can possibly be attributed to problems at sister concern Kingfisher airlines.
Post crash of midcaps in first seven months, saner senses returned to Indian capital markets after US Fed announced continuation of QE and postponing the much feared tapering. Flow of funds is presumed to continue for some more time and happy times returned. Since FMCG stocks already enjoyed much of action in first seven months despite adversity for Midcap stocks, next three months saw tepid action in this space. The profits of a few stocks continued to grow but the valuations were so stretched by that time, there could hardly be follow up rise in prices. In fact in next three months FMCG index rose only by less than 1 %.
Britannia continued its march upwards with a further rise of 34% to reach 940 levels. United Breweries witnessed some support realising that the profits were on track and the fears of Kingfisher fallout were overplayed. Though the profits continued to fall, EID parry too witnessed some support, apparently from known quarters who wanted to take advantage of lower prices to increase their stake. However with no support coming market leaders HUL and ITC the FMCG pack on the whole stayed in sidelines.
Historically FMCG stocks were always preferred in bad times and fears of impending tough times in India saw the PE ratio of this pack going up to ridiculously high range of 35 plus. When one looks at average PE multiple of this segment it hovered around 26.63 making everyone suddenly becoming uncomfortable with valuations. Though the profits are still improving, the upside seems capped and investors may be better off booking profits and exiting this pack. If one wishes to stay in this industry for want of diversification, they may choose stocks that have recorded higher profits but not higher prices in the period. Colgate Palmolive, Marico, Mcleod Russel and Tata Global may be considered instead of other expensive stocks which could spoil the party if held on for any further period in times to come.