Good to be in FMCG

The FMCG sector has been among the more resilient ones in the recent market meltdown, with the BSE FMCG index losing only 2 per cent so far this year.

Though market fancy for FMCGs has been driven partly by its “defensive” connotations, there has also been an improvement in sector fundamentals. FMCG companies reported an average sales growth of 17 per cent for 2007-08, up from 12 per cent last year.

Thanks to price increases on several products, they also managed to improve or hold profit margins despite rising input costs and closed the year with a 36 per cent surge in net profit, among the highest recorded by any sector this year.

Multiple drivers have pushed up demand for FMCGs. Strong rural/semi urban demand has buoyed the growth rates for toothpastes, shampoo and hair oils, urban “uptrading” aided demand for premium skin and hair care products; and food categories finally lived up to their potential by recording strong growth.

However we expect a bigger divergence in performance hereon. High input costs could compel companies to hike prices further. Yet, FMCG makers may not enjoy uniform pricing power. Companies in ‘staple’categories such as soaps or shampoos may find it more challenging to hike prices than those in premium, urban-centric categories such as , personal products or foods.

The current valuation gap between stocks such as Nestle and Hindustan Unilever and others such as Marico and Dabur, also argues for a portfolio rejig.

Preferred picks: Buy recent underperformers such as Marico Industries and Dabur India and take partial profits in Nestle India, GSK Consumer and Hindustan Unilever.

via BL