yatheendradas c.k.
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Amid bad monsoon, investors asked to focus on urb

Yatheendradas C.k. at 03:35 PM - Aug 18, 2015 ( ) Views: 315

Amid bad monsoon, investors asked to shift focus on urban-focussed FMCG cos


Input cost benefits to be negated by higher adpsends for rural focussed companies

If low growth in minimum support prices by the BJP-government was not enough, fast moving consumer goods companies like Bajaj Corp, Colgate Palmolive, Dabur India, Hindustan Unilever, Britannia Industries and Nestle India, which derive substantial or higher portion of their revenues from rural markets than others, will have to brace for another demand speedbreaker of erratic monsoon.

Indian Meteorological Department expects monsoon deficit further widening to 12 per cent from 10 per cent so far.

However, investors can shift focus on urban-oriented FMCG companies like Asian Paints, Emami, Godrej Consumer Products and Marico, brokerages pointed out.

Jubilant Foodworks and Bata India are also seen as good plays on urban recovery.

Among rural-oriented companies, Dabur and Britannia are common picks.

Q1FY16 witnessed tepid demand due to slowdown in rural market. “Net sales growth for the coverage universe averaged only at 1.8 per cent YoY for the quarter as against our estimate of 6.6 per cent% YoY,” Religare Capital Markets’ institutional research team pointed out in its report.

Religare’s coverage included all the frontline FMCG companies.

CNX FMCG index has outperformed CNX Nifty since April 1 till date despite the expectations of bad monsoon earlier and the same now turning into a reality.

Hence, sector valuation at an average 20-40 times one year forward for staples and 30-55 times for discretionary spending led companies looks stretched.

With commodity prices for almost all key FMCG categories witnessing a freefall, competitive intensity is expected to rise and companies would race for volume growth by spending on advertising and promotions.

Hindustan Unilever, Procter and Gamble, Jyothy Laboratories, Marico, Britannia, Parle, Nestle and Danone have already undertaken promotional activity in some form or the other, Kotak Institutional Equities pointed out in its report.

In such demand pressing scenario, market experts prefer companies which will are relatively better positioned to out its peers.

Bank of India Merrill Lynch noted that besides companies having better pricing power and sensitive to spend on brand, launches or distribution, those which are dependent on urban consumption or focussed on premiumisation are better off than others.

“Urban jobs continue to trend up. These impart more certainty to revival in urban consumption vs that in rural which also depends on monsoon,” it said.

The foreign brokerage firm expects FY16 to be a year of sharp gross margin expansions and demand-led growth happening only in FY17 led by consumption recovery especially in discretionary items.

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