Market

FMCG pack can underperform for multiple years, says Jefferies

NEW DELHI: Last one year’s relative underperformance by the FMCG pack vis-a-vis Nifty50 could just be the beginning of a multi-year trend. History has many examples to suggest so, Jefferies said in a detailed report.

Jefferies divided the last 20 years into seven time phases where consumer staples underperformed the NSE barometer in three time periods, namely 2002-2003, 2004-2007 and April 2020 till date.

The most prominent periods of underperformance were during the 2002-2007 (2002-2003 & 2004-2007), when Nifty50 soared six times over the six-year period against a two-times rise in consumer staples stocks. This was the period when India witnessed a strong investment-led economic growth.

Jefferies said if the economy were to see a sustained capex-led upturn, there is a real risk of FMCG underperforming the broader index over the coming years.

“A common investor concern is the high valuation multiples (40-60 times ) that FMCG companies trade at , which could de-rate going forward. If we go back to periods of strong economic growth, the technical factor (investor preference for cyclical plays) can also drive outflows from staples and result in de-rating, which is evident from the long term PE premiums of FMCG pack vs Nifty,” it said.

Data showed Nifty50 delivered a compounded annual growth rate (CAGR) of 34 per cent during the 2003-2007 period, compared with a 14 per cent return given by the FMCG pack.

Calendar 2002 was the third year of sub-par monsoon, which impacted FMCG demand, especially in rural areas. But starting 2003, Indian economy began to recover, led by a capex revival. Nifty, after seeing weak performance for three years, rebounded sharply, returning over 70 per cent during the year against a 30 per cent rise in the FMCG pack.

The period of 2004-2007 was marked by strong cyclical upturn in the Indian economy, led by capex heavy sectors such as real estate, capital goods, cement etc. Nifty returned 221 per cent in this 4-year period, materially higher than 93 per cent returned by consumer staples.

Current scenario
Since 2020, the FMCG pack has delivered 17 per cent return against Nifty’s 20 per cent.

Jefferies said Covid-19 created a major economic disruption in 2020, with imposition of a strict nationwide lockdown. While FMCG companies too were impacted; the sector outperformed the Nifty during the initial period of lockdown. “However, with a swift recovery in the economy, cyclical sectors made a strong comeback leading to FMCG underperforming,” it said.

“An expansionary budget in February 2021, strong cyclical recovery following the first wave of the pandemic in 2020 and global examples on similar lines have also capped returns in the FMCG sector to some extent. In addition, rising input prices along with increasing investor concerns on peaking margins have also been a deterrent,” it said.

Jefferies, however, pointed out that absolute stock returns could still be healthy and company-specific drivers could influence individual performances.

Giving the example of

, the brokerage said that 2004-2007 for the FMCG pack was almost entirely led by HUL, which faced competition with P&G and weak volume growth. Excluding HUL, the sector was an equal performer with some stocks such as Marico and even outperforming the Nifty50. This time around, was a beneficiary of Covid-19 lockdowns, while Marico saw a sharp turnaround after weak growth in the past few years, it noted.

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