FMCG Stocks Outlook: Low inflation, pay hikes to support next week

[B. Karthick]

FMCG Stocks Outlook: Low inflation, pay hikes to support next week
Saturday, Sep 6

FMCG shares will track the broad market in the absence of adequate
triggers, but will find support from softening inflation and pay
increases of
central government employees that will be effective from September-
end
onwards.
India's headline inflation slipped to 12.34% for week to Aug 23 from
12.40% led by a fall in prices of primary articles like foodgrains,
cereals,
vegetables, and edible oils among other things.
This is the second consecutive week that the headline inflation rate
has
declined, and it is expected that next week too, inflation may ease as
the
high base effect sets in.
"We expect the whole of September to print lower inflation rate due
to
high base effect," Shubhada Rao, chief economist at YES Bank, told
after the
inflation data came in.
We also expect the Sixth Pay Commission's salary hikes will start
coming
into the market from October onwards, and a significant part may be
channelised to the FMCG sector.
It is seen that when salaries increase, consumers tend to upgrade on
FMCG products, and also spend more on food. This trend will have a
positive
effect on FMCG sector as a whole, but more on Hindustan Unilever, ITC,
Procter & Gamble, among others.
Last month, the Cabinet had approved 21% average salary hike for
central
government employees along with wage arrears with retrospective effect
from
Jan 1, 2006.
The revised salary will be credited to government employees at the
end of
September.

SHARES IN FOCUS
Frontline shares like ITC and Hindustan Unilever will remain in
focus
mainly due to price hikes that are seen offsetting margin pressure,
even as
select raw material prices ease.
ITC had hiked prices of Gold Flake Premium and Bristol brand of
cigarettes. While Gold Flake Premium stock with revised prices has
come into
the retail market, Bristol inventory is yet to reach markets.
Hindustan Unilever, too, is said to have hiked prices across its
range of
colour cosmetics over the past two months.
Procter & Gamble Hygiene & Health Care will also be in focus after
the
company reported a strong 83.7% growth in Apr-Jun net profit at 232.4
mln
rupees on net sales growth of 19.4% to 1.5 bln rupees.
Sales growth was driven by double-digit growth in Vicks and feminine
hygiene brand Whisper, while margin expansion due to lower raw
material cost
and improved efficiencies lifted net profit.
Margin pressure from higher advertising and staff cost was partly
offset
by a decline in raw material costs, and operating margins improved by
90
basis points to 16.5%.
Buoyed by the good results, the stock ended the week up 4% at 802
rupees.
Bombay Stock Exchange's FMCG Index ended nearly unchanged from a
week ago
at 2,216.52 points.
In comparison, Sensex closed the week with a loss of 0.5% at
14483.83
points, while Nifty was down 0.2% at 4352.30 points.
The next trigger for FMCG stocks will be their Jul-Sep earnings, and
any
news of price hikes or fall in raw material costs.
Tea manufacturers will be in focus due to hike in tea prices at the
auctions in Kolkata.
While plantation owners like McLeod Russel will gain from the rise
in
tea prices, branded tea companies like Tata Tea and Hindustan Unilever
will
be impacted by higher raw material prices.

Following are the closing prices Friday of most liquid FMCG shares
on
NSE, compared with a week ago:

Company Sep 5 Aug 29 Change

Hind Unilever 245.10 245.40 -0.1%
ITC 189.90 188.70 0.6%
Colgate-Palmolive 409.30 409.55 0.1%
Dabur 96.60 91.45 5.6%
Marico 59.10 60.25 -1.9%
Procter & Gamble 802.00 768.00 4.4%

BSE FMCG Index 2216.52 2215.60 0.1%
Nifty 4352.30 4360.00 -0.2%
Sensex 14483.82 14564.53 -0.5%

B.Karthick
Research Analyst.