Consumer goods stocks may gain on revival of rural demand

So far this year, BSE FMCG index has risen 22.25%, outperforming Sensex which gained 20.23% in the same period. Photo: Mint

Mumbai: Stocks of packaged consumer goods have managed to perform in line with the broader market, despite sluggish demand, and the rest of the year looks brighter for the pack, thanks to the revival of the rural story.

So far this year, BSE FMCG index has risen 22.25%, outperforming Sensex which gained 20.23% in the same period. Of the 70 constituents of BSE FMCG index, 58 have logged gains year-to-date.

The most expensive and prominent stocks in the pack were Hindustan Unilever Ltd, Marico Ltd, Britannia Industries Ltd, Godrej Consumer Products Ltd, Emami Ltd and Dabur India Ltd, which rose 14.04-44.87%.

India’s rural consumption story had hit the pause button for the last three years due to two consecutive droughts in 2014 and 2015, coupled with weak growth in minimum support prices (MSPs) for crops, leading to sluggish growth for rural-dependent sectors such as FMCG (fast-moving consumer goods).

While things started looking up in 2016 on the back of a normal monsoon, a sudden announcement of demonetisation by the government on 8 November ruined the hopes of an immediate recovery in rural demand, as digital payments were much less in rural areas compared to urban areas, leading to high dependence on cash.

This will be the second consecutive year of normal monsoons and has significant positive implications for rural consumption.

“Based on rainfall and sowing so far, we believe there is a reasonable chance of another good year of agriculture production,” Nomura economists said in a note on Tuesday.

Nomura said that their models based on June and July rains suggest that kharif foodgrain production will rise by 2.4% year-on-year in fiscal year 2018, following strong 10.4% growth in fiscal year 2017.

In its baseline case, Nomura economists expect gross domestic product (GDP) growth to recover to 7.3% year-on-year in fiscal year 2018 from 7.1% in fiscal year 2017, supported by rising rural consumption, good monsoon, public investment in infrastructure, lower lending rates and resumption in production after teething issues related to the good and services tax are resolved.

Others shared the view.

“Given the confluence of several positives like normal monsoon, higher MSPs, farm loan waivers and higher government spending in rural areas, we believe rural consumption is poised to make a recovery after remaining in hibernation for last three years,” Motilal Oswal analysts said in a note.

The government has increased the guaranteed price for rain-fed kharif crops by 4-10%. The cumulative farm debt relief announced by the Uttar Pradesh, Punjab and Maharashtra states amounts to around Rs77,000 crore or 0.5% of India’s 2016-17 GDP.

Also, the amount of funds disbursed under direct benefit transfer (DBT) has increased year after year, with more than Rs746 billion disbursed in fiscal year 2017, up around 21%, from Rs618 billion disbursed in fiscal year 2016, the Motilal Oswal report pointed out.

“We are overweight staples for a few months now. Valuations are rich, and may be richer for a few stocks, but there is still opportunity to grow,” said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.

BSE FMCG index is trading at 31.38 times 1-year forward earnings, according to Bloomberg estimates, compared with its 5-year historical average of 28.18 times.

“It reflects the defensive buyers, and secondly given that there are hopes that rural area could see recovery, and government policies are inclined towards helping the rural population, it is all working in favour of consumer staples,” added Chhaochharia.

Add to this, the low base effect in the December quarter due to demonetisation, which was announced last November, will also show better growth later this year.

Also, consumer staples were the favourite of domestic mutual funds as well as foreign portfolio investors (FPIs) in the quarter ended June.

According to a Morgan Stanley report dated Monday, during the quarter, FPIs mostly bought staples and healthcare, and over the past 12 months too, they have bought staples the most.

Domestic institutional investors (DIIs) added positions in staples and technology in the quarter, and over the past 12 months, they have added most to technology and staples, the report said.

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