In the dying months of 2009, the question of choice on the Street was - are we seeing a continuation of the previous bull run or a dead-cat bounce? Now that the market is only 18 per cent below its previous peak, we seem to be impervious to underlying global reality and boisterous talk of decoupling of emerging markets has made a comeback. The more pertinent question then (if we take up the case of the bulls) is which sector can still provide the legs for the rally to continue. How the heck does that matter? you might ask. In a bull market, everything goes up, doesn’t it? In theory, at least, it does make a difference because if a sequel is playing out, then the sectors and stocks that led the rally earlier will continue to be front-runners, while if it is a new dawn, a fresh set of leaders should emerge. When the bounce happened, the leaders of the previous rally retained their dominance. The high beta variety was the big draw unsurprisingly. That was because those were the stocks that saw the maximum battering when the euphoria was dealt a sudden death. The markets are now placing the burden of responsibility on FMCG stocks keeping in mind their “defensive” nature.
Can the FMCG sector lead the next big rally or, at least, deliver relative outperformance? If one does believe that the risks to our economy -- and markets -- emanate largely from global influences, your best bet is to invest in sectors that are largely domestically driven. FMCG and pharmaceuticals come out tops there. Infrastructure is also talked about in the same breath but then the fact remains that for infrastructure companies, returns are influenced by ease of financing. Intensive government funding is out of the equation as it has the deficit to take care of for the next few years. Sure, there will be good and bad companies but as a cluster the high capital requirement makes the sector vulnerable to private global liquidity.
| | | | "The jury is still out on whether FMCG stocks will be the next big driver for markets, but if all hell breaks loose, investors will seek shelter in the so-called defensives" | | | | |
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Coming back to FMCG, most companies seem to be fairly confident of good growth in the coming years. Topline growth, that has been an area of concern for most other sectors, has, in fact, been pretty steady for most FMCG companies. And this volume growth will possibly not vanish in a hurry. If you look back, the big spurt in consumption in India came about in the mid-nineties in the wake of increased employment and purchasing power after the last round of reforms. Companies did their bit in terms of capturing that demand effectively through their nation-wide distribution network. For shareholders, it translated into high return on equity. So even as industrials were struggling to emerge out of the capacity glut and adjust to lower import tariffs, FMCG and pharmaceuticals, along with technology, kept stock markets buoyant. That, of course, culminated in a technology stocks led blowout in early 2000.
And then we saw a long period of underperformance as complacency, regional competition and down-trading by consumers showed up in the numbers. In the last three years, things have turned markedly better with several companies managing to clock steady growth on the back of a spurt in demand backed by higher disposable spend, especially farm income. Higher consumer spending is being driven by categories like juices, snacks, hair colour that have just about scratched the surface in terms of penetration levels. Timely capacity additions and smart product strategies have also worked for companies like Nestle and ITC. For these very reasons, FMCG could continue to see buoyant sales in the coming years.
The growth compulsion of global players may set off a round of consolidation here too which, if it happens, will benefit select stocks. While that is a momentary positive, valuations are exactly where the risk lies. The sector is, currently, quoting at 30 times trailing earnings, higher than 20 times in January 2008 when the markets peaked. The jury is still out on whether FMCG stocks will be the next big driver for markets, but if all hell breaks loose, investors will seek shelter in the so-called defensives. So, FMCG can’t be an entirely losing proposition.
mahalakshmi AT outlookindia DOT com