Softening rural consumption and the likelihood of weak corporate earnings in the March 2015 quarter saw investors dump stocks from the fast moving consumer goods (FMCG) sector with the S&P BSE FMCG index slipping nearly 3%, as compared to around 2% fall, or 556 points, in the benchmark index, the S&P BSE Sensex to 27,886 levels.
On the National Stock Exchange (NSE), the CNX FMCG index also lost around 3% with Marico and Britannia Industries closing over 6% lower. Dabur India, Jubilant FoodWorks, Hindustan Unilever, ITC, Colgate Palmolive (India) and United Breweries lost 2% - 5%. In comparison, the CNX Nifty slipped 1.8%, or 158 points to end at 8,448 levels.
While analysts do not attribute Monday's sharp fall to any specific news trigger, they feel that risk averse investors are exiting these counters owing to steep valuations most of these stocks commanded ahead of the March 2015 quarter earnings amid slowing rural consumption.
"I think there has been selling from large institutional investors who are booking profits ahead of the corporate earnings for the recently concluded quarter that are likely to be weak, especially for the large-cap companies. Also weighing on sentiment is the impending monsoon forecast by the Indian Metrological Department (IMD) that will have a bearing on the financial performance for the companies in this sector going ahead," said G. Chokkalingam, founder & managing director, Equinomics Research & Advisory.
Adds Amnish Agarwal, an analyst tracking the sector with Prabhudas Lilladher: "There is no specific news pertaining to the sector that has led to these stocks correcting sharply. I feel that the valuation in most cases, except ITC, has been stretched since quite some time.
Subdued performance
As regards the performance in the recently concluded quarter, analysts do not expect any material improvement in industry consumption trends sequentially.
"Moderation in inflation trends, improvement in urban consumer confidence and sentiment boost, post-election outcome are yet to materially benefit the urban consumption oriented companies. On the contrary, rural consumption trends are incrementally softening. Unseasonal rains have further dampened the sentiments in rural markets. We expect clear trends in rural to emerge only post monsoons and a possible pickup in Government spending," said Gautam Duggad and Manish Poddar of Motilal Oswal in a result preview report for the consumer sector.
Analysts at Karvy Stock Broking also maintain a cautious view on the consumer sector and suggest that the rural fundamentals are not in place for the consumer growth story.
"We also believe that the competition in select categories would increase going ahead which is most likely to compel the consumer companies to pass on price benefits to the consumers and restrict operating margin expansion," said Sachin Bobade, an analyst at Karvy Stock Broking.
Stock strategy
Given the rich premium the sector is commanding, analysts at Motilal Oswal prefer niche plays with strong pricing power and greater visibility on volume growth like Britannia, United Spirits, Emami and Colgate Palmolive (India).
Since the rural consumption theme is likely to remain weak, Dhananjay Sinha, head of institutional research at Emkay Global prefers companies with revenues and product portfolios skewed towards urban markets that are expected to see the first signs of growth revival. According to a recent report, his top picks in this sector include Britannia, Colgate, GSK Consumer, Nestle and Godrej Consumer.
Agarwal of Prabhudas Lilladher is positive on Britannia, Pidilite Industries and Colgate Palmolive (India).
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