The year 2020 brought defensive plays in the markets to the forefront as Covid-19 pandemic saw investors flock to safe-havens. That apart, markets discounted the financial performance of fast moving consumer goods (FMCG) companies for the ensuing quarters as the supply of ‘essential services’ remained relatively unaffected during the lockdown.
The success of Burger King at the bourses has off-late reinforced belief in the sector, especially quick service restaurants (QSRs), provided the stocks are attractively valued. However, the stock performance has not been uniform across the FMCG sector. At the bourses, Nifty FMCG index has underperformed as against the benchmark Nifty50 index between March 24 (when the market his their 2020 low) and December 15, ACE Equity data show. While the former has advanced 42 per cent, the latter has gained 74 per cent during the period.
Among the lot, Emami Ltd has outperformed both the indices by jumping 175 per cent during the period. This is followed by gains in Tata Consumer (up 129 per cent), Jubilant FoodWorks (99 per cent), Marico (64 per cent), and Godrej Consumers and Varun Beverages (63 per cent each). Hindustan Unilever (HUL), Nestle India, ITC, Dabur, and Britannia Industries, meanwhile, have gained between 14 per cent and 59 per cent, data show.
“Initially, FMCG hugely outperformed the market due to a stable outlook. But as the economy opened and new liquidity rushed into the market, growth oriented sectors started to perform better. FMCG is expected to trade positive at premium valuation while underperformance is likely to stay in the coming year,” says Vinod Nair, head of research at Geojit Financial Services.
That said, even as the economies ‘unlock’ and investors begin to rotate funds towards cyclical and beaten down stocks, FMCG stocks are holding ground. This strength, analysts say, is likely to continue in the medium-to-long term on the back of improved income in the rural economy, supplier of essential commodities, and comfortable balance sheets.
“Strong balance sheets with healthy cash generation, return on equity (ROEs) / return on capital employed (ROCEs), robust distribution networks, and more importantly relatively better visibility on earnings is giving comfort to the investors,” says Suvarna Joshi, senior research analyst at Axis Securities.
For volume growth, players in the FMCG space are now turning to tier III/IV towns and villages. The strategy, according to AK Prabhakar, head of research at IDBI Capital would prove beneficial over the next few years. “Agricultural growth and the rural sector would drive the economy over the next one year; placing FMCGs as the biggest beneficiaries,” he says.
According to global consumer research firm Kantar Worldpanel, the FMCG market expanded 4.9 per cent by volume in the September quarter (Q2FY21), clocking its highest gain in three years as consumers made hygiene and out-of-home snack purchases.
FMCG stocks have rewarded shareholders over the longer term of more than 7-10 years and have been consistent compounders. An analysis by Axis Securities shows that the average five-year price-to-earnings (PE) valuation has been around 47x, which was around 33-35x PE in the 10-year period with a CAGR of 12-15 per cent return for the index.
“However, if we look at stock specific returns over a 10 year period, Britannia has delivered 34 per cent CAGR, HUL generated 23 per cent CAGR, Nestle, Dabur delivered an 18 per cent CAGR each,” Axis Securities’ note said.
Not only on the sectoral front, market analysts believe the traction in FMCG space could also be considered as a defensive hedge against sharp rally in the broader markets.
“Historically, any meteoric rise in broader markets is followed by collapse. This fear is now seeping in traditional investors as the rally in the broader markets is largely fuelled by new retail investors. Therefore, the former group is trying to protect its wealth by picking quality defensive plays like FMCG stocks,” explains G Chokkalingam, founder and chief investment officer at Equinomics Research.
Among the lot, Axis Securities suggests investing in Dabur as it is well placed to deliver steady earnings growth of 12 per cent CAGR over FY20-23E, aided by structural tailwinds for health & immunity products. That apart, the brokerage is bullish on Emami and Varun Beverages given their respective seasonal benefit and expansion plans.
AK Prabhakar, on the other hand, is bullish on Nestle India and believes the stock has nearly 20 per cent upside over the next one-year.
“In FMCG, the QSR food space has gained importance in the last few years driven by the young population, adoption of western culture, nuclear families and working population. Investors can buy Jubilant FoodWorks and Westlife on dips while Burger King can be brought at this levels as its valuation are better than peers although it has seen strong surged than its issue price,” suggests Ajit Mishra, VP Research at Religare Broking.