FMCG stocks have been under pressure in the recent market selloff primarily due to the concerns over inflation and weak demand.
However, the BSE FMCG index is outperfoming the benchmark slightly if we talk about their fall from their respective all-time highs. While the market benchmark Sensex is 15 percent below its all-time high, the BSE FMCG index is 13 percent down from its alltime high.
Many FMCG stocks are available at attractive valuations at this juncture. With the Ukraine war ending, and inflation coming under control, these stocks may witness healthy growth in the long term.
Deepak Jasani, Head of Retail Research, HDFC Securities said FMCG stocks seem to have reached a near term bottom even as commodity prices seem to be falling after a big rise.
However, Jasani added that a lot will depend on whether the fall in the commodity prices is sustained or not. Also if inflation does not come under control soon, demand side issues may crop up for FMCG stocks resulting in downtrading and pressure on margins.
"Consumer stocks are a great secular long term play and the best time to buy into such names is generally when they face inflationary pressures. From where we stand now, it is only a matter of time before these companies get back to their average margin levels," Yesha Shah, Head of Equity Research, Samco Securities pointed out.
Shah, however, added that from a short term perspective, the upsides from here will be limited due to stagflation concerns. Even though the valuations have come off, they remain relatively expensive and it is likely that time correction in these stocks may continue for some time more. So, while this space is a good place to be, investors should have a three-five year horizon and should be selective while choosing stocks to invest in, said Shah.
Elevated inflation has deteriorated the volume and profitability prospects of the FMCG sector. Concerns over inflation will continue to affect the performance and valuation in the short to medium-term. However, a large part of it is factored in the sector’s stock prices.
Vincent Andrews, a research analyst at Geojit Financial Services said the relaxation of war and supply of soft commodities from global market will be the key factors determining the performance of FMCG sector.
"We are positive due to moderation in valuation, defensive nature of the business, stable cashflows, normal monsoon and management of the products through volume and price calibration," said Andrews.
Santosh Meena, Head of Research, Swastika Investmart is of the view that after the correction, majority of the FMCG stocks and other consumer names are trading below their three-year media P/E ratios.
"High inflation and poor volume growth have led to the de-rating of the sectors. The markets have turned extremely volatile due to reasons like geopolitical uncertainties, rate hikes, risk of stagflation, slow down of global economic growth, etc," said Meena.
"With inflation so high and the RBI likely to raise interest rates, the companies that would gain the most are those who do not have any debt on their books and have the pricing power to pass on any cost inflation to the final consumer. Thus, FMCG stocks and other consumer names are a good bet during these turbulent times and have become attractive post the recent correction," Meena said.
However, Meena added that one thing that investors must understand is that these stocks despite the recent corrections trade at a premium compared to other sectors; the reason is their near debt-free status, cash-generating capabilities, long-term earning growth visibility, and scarcity premium in the Indian market.
HUL, Godrej consumer, Dabur and Britannia looks attarctive after meaningful correction while Tataconsumer and Marico may continue to outperform, Meena said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies and not of MintGenie.
