Stocks trip on high valuations
Usually, whenmarketsfall, fastmovingconsumer goods(FMCG) stocksareseen assafehavens. However, this timearound, FMCGstocks wereamongtoplosersas marketsfell, mainlydueto theirpriceyvaluations. Being amongthefewattractive sectors, FMCGstockshad remainedinthesweetspot.
Injusteightmonthsending August, theindexhadrallied over19percent. Stockssuchas HindustanUnilever, Nestle, Britannia, amongothers, were tradingabove50timestheir respectiveFY20estimated earningsbeforetherecent correction, whichnowisdown to45-46times, thoughstillon thehigherside.
Akey worryforconsumer companiesisrisinginputcosts thatisimpactingprofitability andoverallearningsoutlook. Pricesofmanykeyraw materialssuchascrudeoil derivatives, palmoil, mentha aretrendingnorthward.
Thisisfurtheraggravated byaweakrupee. However, companieshavebeenableto cuttheirotheroperating expenses, besidesselectively raisingprices, toprotecttheir marginprofilesofar.
HindustanUnilever(HUL), forinstance, witnessedasharp 162basispointyear-on-year expansioninoperatingprofit marginintheSeptember2018
quarter, despite61basispoint dipingrossmargin. Rising competition, howevercould restrictpricingpowerfor companies, sayanalysts.
Improvingdemandcould spurvolumes. Importantly, companieshavingmore exposuretoruralmarketsand strongruraldistribution franchisesuchasAsianPaints, HindustanUnileverwould standout.
Therecenthikein minimumsupportpricefor kharifcrops, nearnormal monsoonandupcoming electionsshouldprovide upwardthrusttorural consumerdemandgoing ahead. Manycompanieshad reportedfastervolumegrowth
fromruralmarkets inJune quarter.
EvenintheSeptember 2018quarter, HULindicated itsruralbusinessisgrowing 1.2-1.3timesitsurban business. Supportive developmentatmacrolevel suchassharpcutingoodsand servicestax(GST) forsome segmentslikepaintsand footwearprovidecomforton thevolumesfront.
Theabilitytoprotectprofit marginalongwithstrong distributionareimportantfor FMCGcompaniesatthis juncture. Giventheimproving demandscenarioanyfurther correctioninmajorplayers suchasHUL, AsianPaintsisa goodbuyingopportunity.