What is up with the FMCG stocks?
FMCG stocks actually have started performing since last one week or so and Unilever, Nestle — all of them were showing some positive signs. But the basic problem would be that it is a run towards safety once the volatility increases in the markets, the taper tantrum talks are there, the dollar index is going up and the metal rally is fizzling. FMCG is one of the safe havens.
India has been a story of FMCG and consumption for a very long time. Everybody understands that these are the names which will probably continue to deliver despite global volatility. All these stocks are very positive, always expensive but when you need safety, then they are good bets. Within the FMCG pack, a disclosure, we have Emami as one of the stocks. The reason we chose Emami was because it was available at the cheapest level and secondly, the management has done a lot. So the concerns which were dragging the stock down have not been seen and that is the reason we thought it will catch up.
How much of a risk does raw material inflation pose in Q2? In Q1, companies gave off warning signs that inflation is a problem that is going to happen in Q2. We are taking price hikes in autos and consumption names. Do you see the EPS numbers slowly coming down from the highs that we saw in Q1?
Yes we do see that. In fact, in Q1 also, there was a slight difference from what we had expected. We had expected twin negatives. One on the top line itself should have impacted more because two months were wasted and raw material inflation plus all other products inflation would have resulted in margin contraction. Margin contraction has played in Q1 and in Q2 also, we expect it to happen. Post the Q1 results, more than 50% of the companies have seen downgrades for FY22.
The only good thing was post the results, most of the analysts have cut down the estimates for FY22, assuming that FY23 numbers will not be impacted because a)the top line will come back and b) inflation. A lot of supply side issues will get sorted out and therefore in the longer term, inflation will not have too much impact.
But we have a different view. We feel that probably the market is going with a more optimistic view on inflation. Inflation is not going to be as transitory as it is being made out to be . It will probably have much more recurring effect and we might see some earnings cut in FY22 as well as FY23.
The only saving grace is the way Nifty is constructed, half of the earnings come from international markets because of commodities as metals have been doing well. So, even though 50% of the earnings degraded, the metals made up for all of that and hence we saw very little change in the FY22 and FY23 numbers. If metals also start doing that, realisations start moving down and if the dollar rises, then probably we will see deeper cuts. So there is a danger to FY23 numbers also.
