Cogencis, Friday, May 10

By Chiranjivi Chakraborty

MUMBAI - Fast-moving consumer goods companies, the go-to sector for growth-savvy investors in the Indian stock market, will face difficulty in justifying their premium valuations this year.

One of 2018's best performing sectors is staring at a prolonged slowdown in domestic consumption because of an agrarian distress, rising unemployment, and a slowdown in lending due to the crisis in non-bank lenders.

The premium valuations accorded to these companies by long-term investors are likely to revert to their historical levels, as the companies may fail to deliver on expectations of high growth, said fund managers.

Some of that reversal to historical means is already happening as analysts downgraded their earnings expectations for most FMCG companies post their Jan-Mar results.

"FMCG stocks will fall in the pecking order of investors' shopping list this year because of moderation in growth," said a fund manager on condition of anonymity.

The disinterest has already crept in, with the Nifty FMCG index underperforming the broader market so far this year, after registering 14% growth in 2018 as compared to the Nifty 50's 3% gains.

"Definitely, demand slowdown is what we have witnessed," said Mohit Malhotra, chief executive officer of Dabur India, in a post-earnings call.

He ascribed the slowdown to agrarian distress, lack of disposable income among consumers, and all-time high unemployment.

If managements of most FMCG companies have been cagey over the future prospects of demand, investors are downright negative.

"This doesn't look good. I have not heard a company like Asian Paints be 'uncertain' on demand for a very long time," said the fund manager.

The market's pessimism was reflected in the activity of both local mutual funds and foreign investors in the March quarter, as they trimmed their holding in majority of the stocks that are part of the Nifty FMCG index.

Managements of some FMCG companies, though, are hopeful of a partial recovery in demand after the outcome of the General Elections, and as effects of the liquidity squeeze in non-bank lenders wear off.

"There is clearly merit that a stable government, once elections are over, will take all the necessary steps to ensure the virtuous cycle of growth continues," said Hindustan Unilever in its post-earnings call.

Dabur India's chief executive officer suggested that no "structural or fundamental problem is there in the business", and hoped that some recovery in volume growth would take place in Apr-Jun.

But, even if rural demand recovers because of implementation of the rural income support scheme, higher government spending on job creation and a normal monsoon, it is unlikely that investors will buy these stocks so soon, said money managers.

"Market will not chase 10% earnings growth if BJP (Bharatiya Janata Party) comes to power... this dil maange more (heart wants more)... dil maange 25% earnings growth and companies delivering them will see more investments," said Amit Jeswani, chief investment officer at Stallion Asset Management.

Given the muted outlook, FMCG companies hope that the new government provides a stimulus to the economy to bring back the buoyancy in growth demanded by investors.  End

Edited by Mainak Moitra