In an uncertain time, stock market found a safe heaven in FMCG stocks in 2011. The BSE FMCG Index outperformed the Sensex by around 35 per cent. Analysts having AC Nielsen estimates at back of their mind continue to pin their hope on greater penetration of rural market by the sector stocks in 2012.
Rural market to grow
The study projected that the rural FMCG retail market will grow from $12 billion in 2011 to $100 billion by 2025. Mr Rajesh Agarwal of Eastern Financiers said rural and semi-urban areas holds untapped potential for penetration.
The assumption is that the rural income will rise steadily if not exponentially. But he felt the Government's plans to bring back standardised packing, FMCG companies would face the heat.
This would open the market for unbranded products and depress sales of some of the listed players. More than 50 per cent of the total revenues of FMCG companies come from products worth Rs 10 or less.
A recent Emkay survey in southern region indicates that, inventory is relatively older and consumer sentiment seems worse-off compared to Mumbai region.
“With inventory dating back to three months — sales momentum seems moderating in the modern retail channel for FMCG categories.”
Defensive play
It observed that the festival season in October appeared “relatively silent” — unable to attract footfalls at the big retail centres. “This aptly indicates that, strong volume growth in Q2FY12 for FMCG categories has created higher inventory in the modern trade channels. If, consumption habits are unanimous across India, moderation in growth momentum could be evident in Q3FY12 performance.”
Mr Nitin Bhasin of Espirito Securities felt that the consumer stocks would benefit from demographics and the low penetration. “Relative out-performance will be achieved by companies which continue to drive volumes and increase scale, even if that implies a compromise on margins in the near term. Large cap valuation multiples are at historical peaks, yet despite that investors' interest shows no sign of flagging as they seek safe havens,” he said.
Despite a weak macro backdrop and input cost inflation, most of the FMCG players have been able to deliver and justify their high multiples. ITC and Hindustan Unilever (HUL) surprised the market with strong volume growth momentum.
The calendar year started with the sector at 25.7x and it ends at 24.6x on consensus 12-month forward P/E, almost double the multiple commanded by the broader market.
Moderation
Espirito's economists expect private consumption growth to moderate marginally to 6.5 per cent y-o-y in FY13 from an expected seven per cent y-o-y in FY12. In the face of input cost inflation and in the absence of value accretive acquisitions, earnings upgrade opportunities in CY2012 look limited. Moreover, as the rate cycle turns and if the market shows signs of life, sector rotation could result in funds outflow to other beaten-down sectors.
“We believe stock market out-performance will be achieved by companies focusing on volumes, ahead of margins. In the current market conditions (which arguably looks similar to 2008-09), we propose a sector neutral strategy — long HUL (focus on volumes) and short ITC (focus on margins),” Mr Bhasin added.