This Underperforming Sector Produces Nine Multibaggers in 2021; What Should You Do?

Almost 60 per cent of the companies – 36 out of 62 – in the S&P BSE FMCG index hit a fresh 52-week high in June, including names like HUL, United Breweries, Marico, Vadilal Industries, Tata Coffee, Venky’s and Dalmia Bharat, among others; Unlock 2.0 sparks off huge sales.

The S&P BSE FMCG (fast-moving consumer goods) index has been a marked underperformer so far in the year 2021.

It is up 7 per cent, compared to about 13 percent rally seen in the Nifty50 that houses nine stocks, which more than doubled investors’ wealth on a year-to-date basis.

“The sugar sector is seeing tailwinds with the ethanol blending related positives surrounding the sector,” Divam Sharma, Co-founder of Green Portfolio said.

“Unlock 2.0 has sparked a huge growth in FMCG sales as per recent reports. With the opening up of retail stores, the spark in consumption trends is reflecting a positive sentiment for the sector,” he added.

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Almost 60 per cent of the companies – 36 out of 62 – in the S&P BSE FMCG index hit a fresh 52-week high in June that include names like HUL, United Breweries, Marico, Vadilal Industries, Tata Coffee, Venky’s and Dalmia Bharat, among others.

Doubling investors’ income

Stocks that more than doubled investors’ wealth include most of the top sugar companies – Balrampur Chini, Dhampur Sugar, Uttam Sugar Mills, Shri Renuka Sugars, and Dalmia Bharat, among others.

Over the last few years, the FMCG industry has faced stagnation in growth amid the GST rollout and demonetization, which led to a broader economic slowdown.

 Now COVID-19 has added to their troubles.

After underperforming the Nifty50 in the recent past, experts are of the view that this theme is now picking up traction, and looks prepared to sustain disruptions, if any, caused by a Third Wave, thanks to the adoption of technology.

FMCG underperformer 

Said Likhita Chepa, Senior Research Analyst, CapitalVia Global Research Ltd: “The FMCG sector is one of the largest segments in the country and has underperformed in the past few months in comparison to the benchmark index. However, it is gaining investors’ interest in recent times as the sector looks well prepared to sustain disruption in case of Third Wave.”

“FMCG companies have stepped up technology adoption in their sales, warehouse, inventory management and distributor systems, which will help in improving efficiency and productivity in the long run,” she added.

The FMCG sector witnessed a growth momentum in Q2FY21 and Q3FY21 on the back of a consumption shift in key categories from the unorganized to the organized sector.

New product launches and increasing activity through online sales have supported the growth of late. Even the Q4FY21 numbers were good on the back of the low base (lockdown in March 2020), suggest experts.

“We are of the opinion that valuations of many selected premium stocks have been narrowed down to reasonable levels in the last one year, and offer a much-balanced risk/reward profile for FY22E/FY23E driven by steady earnings growth,” Arihant Capital said in a report.

“We expect that categories like packaged food, health and hygiene and some discretionary categories like cosmetics, skin care, etc will witness acceleration in demand in 1HFY22E,” it pointed out.

The report further added that essential categories are reaching normalcy while weaker performing categories like QSR (quick service restaurant), cigarettes, etc are expected to recover well in 2HFY22E.

Can FMCG turn out to be a dark horse?

India witnessed the Second Wave of COVID and went under a lockdown for a couple of months in 2021. However, with faster recovery and drastic fall in positive rates, the country is back to unlocking gradually, which will support FMCG stocks, suggest experts.

Investors should pick stocks in the sector that are showing signs of momentum, and are available at attractive valuations as the segment could well turn out to be a dark horse.

“India’s per capita FMCG consumption is still low in comparison to its peers. This facilitates the industry a long runway for growth. With increasing digitization, changing consumer behaviour and gradual economic recovery, this sector holds the potential to turn out to be a dark horse in the medium to long run,” said Chepa of CapitalVia Global Research Ltd.

Although in the near term, the ride could be bumpy amid an increase in raw material and product prices.

“Increasing raw material prices would be a cause of concern for FMCG players, but with most of the companies opting to hike prices to strike a balance between growth and profitability, the near-term road appears to be bumpy,” she added.

Which stocks to pick

Chepa advised investors to pick stocks that are well placed fundamentally with healthy balance sheets and can sustain in the long run.

Sharma, Co-founder of Green Portfolio, recommends investors to pick up certain FMCG companies in the broader market that are still offering good opportunities for investment.

However, the more prominent universe of FMCG stocks still looks fairly valued.

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