FMCG Stocks Outlook: Up, but gains capped by weak market next week

[B. Karthick]

FMCG Stocks Outlook: Up, but gains capped by weak market next week
Saturday, Sep 13

Frontline FMCG shares such as ITC and Hindustan Unilever are seen
up next week, but upside will be capped by weak market outlook.
Mid-cap FMCG shares such as Dabur India and Marico are seen flat
amid lack of triggers and stretched financial outlook.
However, FMCG counter will provide a good safety net in a volatile
and uncertain market, and it is a good idea to buy on declines,
particularly in the case of frontline stocks.
In the mid-cap space, we expects Marico to face pressure from
profit sales after its gains this week, but it will find support from
the slide in edible oil prices that will provide relief on the margins
front.
Marico ended the week with an overall gain of 1.4%, helped by the
slide in edible oil prices, lower inflation, and an optimistic outlook
on the kharif crop that will be harvested in October.
In comparison, Bombay Stock Exchange FMCG index ended the week
with a loss of 0.5%.
Sensex closed at 14000.81, shaving off 3.3% over the week, while
Nifty ended down 2.8% at 4228.45.
In the fundamental view most of the factors such as price hikes
and slide in raw material prices have already been factored into
current valuations, and the next trigger for FMCG stocks would only be
the Jul-Sep earnings.
We expect the FMCG sector to report a stable 15-18% growth in
topline, led by price hikes and volume growth, while profitability
growth may be lower, at around 10%, weighed down by margin pressures.
Within the sector, the market will take cues from the earnings of
leaders like Hindustan Unilever and ITC.
ITC will remain in focus all through this month and the next, till
the company details its performance on cigarette volumes front.
In Apr-Jun, the company had reported lower-than-expected fall in
cigarette volumes despite having exited the non-filter cigarettes
business, which had become unviable following a hike in excise duty on
non-filters.
The cigarette volumes will be a major trigger for the stock,
especially in the wake of mounting losses in the personal care
business, which is in an investment phase still.
However, recent price hikes in foods and cigarettes have come into
effect in the market and will help subsidise the losses of the new
FMCG business at the operating level.
Stocks that will find support from a slide in raw material prices
are ITC, Hindustan Unilever and Godrej Consumer on the back of the
recent fall in palm oil prices, a key ingredient for making soaps.
Palm oil prices have nearly halved from their March levels, and
this, coupled with price hikes taken by the companies, may help shore
up operating margins.
Meanwhile, cigarette company shares may be weak around October
first week as the ban on smoking in public places, office buildings
and restaurants comes into effect from Oct 2.
However, government's twin measures of banning smoking in public
places and printing of pictorial health warnings on cigarette packs,
from Nov 30 onwards, are not likely to have any major impact on
cigarette sales in the near term.
It will not revise its earnings estimates for now, but "will wait
and watch" as the situation unfolds.
Tata Tea will also find support from Chairman Ratan Tata's recent
statements saying the company is looking at strategic acquisitions
anywhere in the world to strengthen its product range.
A majority of Tata Tea's revenue comes from acquired brands and
companies.

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

Company Sep 12 Sep 5 Change Next week

Resistance Support

Hindustan Unilever 248.80 245.10 1.5% 255
241
ITC 191.40 189.90 0.8%
198 186
Colgate-Palmolive 404.95 409.30 (-)1.1% 410
387
Dabur India 89.80 96.60 (-)7.0%
97 85
Marico 59.95 59.10 1.4%
64 54

BSE FMCG Index 2206.29 2216.52 (-)0.5%
Nifty 4228.45 4352.30 (-)2.8%
Sensex 14000.81 14483.82 (-)3.3%


B.Karthick
Research Analyst.