While the Nifty FMCG’s 4.5 per cent gains in 2021 have lagged Nifty50’s 13 per cent, the former has stolen the march on the 50-stock index in June so far. As many as 11 out of 15 stocks that are part of the Nifty FMCG index have outperformed Nifty50 in signs that the sector is gaining traction.
“The consumer sector is a good proxy for rural recovery. As monsoon has started well and (Covid-19) second wave peak is behind us, we expect rural recovery to re-start for consumer companies,” Avneesh Roy of Edelweiss Securities said in a recent note to clients.
The monsoon is predicted to be normal for the third successive year in the country. The mid-year rainy season is crucial to the fortune of the rural economy in the country, which accounts for 30-45 per cent of sales of fast-moving consumer goods companies.
The sowing of Kharif season crops, which increases with better rains, is likely to have picked up steam with the strong start to the monsoon season in the country from June. As of March, 56 lakh hectares of area had already seen sowing of kharif crops in the country.
While the start of the monsoon season is a good indicator, easing grip of the Covid-19 virus on rural areas should also come as a relief. Unlike the first wave, the spread of the virus in rural areas was more prominent during the second wave.
Analysts, however, suggested that the government steps to provide free ration till November, reduce fertiliser costs for farmers and announce hike in minimum support prices of crops like paddy should go a long way in revitalising the rural spending power.
“Recent MSP hike besides the step for free food distribution will help. With the lockdown ending, business will start normalising for kirana shops,” Roy said.
Moreover, FMCG companies have a track record of faring better than most sectors during an inflationary environment as the one currently underway in India and across the world. During the inflation years of 2010-16, the FMCG sector was a rank outperformer aided by strong revenue growth and valuation re-rating, a recent analysis by Jefferies India showed.
Yet, FMCG stocks face a very real threat of underperformance in a market whose love affair with cyclical stocks in the face of a government-led push for revival of capital expenditure cycle is showing no signs of easing. Investors only need to remind themselves of the underperformance the sector saw during the 2003-07 bull market.
Brokerage firm Jefferies India argued that while the sector may tend to underperform others during a capex cycle, its absolute returns could still be very handsome.
“An uptick in GDP growth will likely percolate to consumer demand and accelerate penetration growth, premiumisation and shift to branded in key FMCG categories. Thus, absolute FMCG earnings growth could accelerate in such an environment, even though the relative performance appears to be weaker on earnings growth,” Jefferies said.
In a market where investors are rotating funds towards underperformers because of concerns over valuations of some of the recent outperforming sectors, FMCG could be the place to be in the near term.
