Retail may be the in-vogue sector in India these days, but companies whose products go on store shelves are finding themselves quite out of favour with investors.
Leading the pack that is out of favour is the doyen of the consumer goods sector, Hindustan Lever Ltd, whose October-December quarter performance also didn’t impress investors. HLL shares lost 2.66% to close at Rs199.65 on the Bombay Stock Exchange, while the benchmark index itself fell 1.04%.
HLL, India’s largest consumer-product company, has traditionally been among the strongest-performing stocks in the market. But its stock has fallen 16.39% over the last year. Its profit after tax dropped 1.9% even as sales rose 6.1% in the fourth quarter, the results of which were announced by the company Tuesday.
HLL isn’t alone. Overall, consumer-product stocks have lagged far behind the overall stock-market performance over the last one year.
The BSE’s consumer-product index is down 1.01% even as the benchmark Sensex has risen 41.41% in the 52 weeks ended 20 February. Seven of the 11 stocks that form the consumer index fell over the year. Among the biggest losers were Tata Tea (down 29.30%), Colgate Palmolive Ltd (down 16.61%) and Britannia Industries (down 14.75%.).
This performance is in sharp contrast to previous periods. The consumer-product index has gained 79.11% over the last two years and 65.61% over the last three years, riding on higher consumption of personal-care products, particularly in the rural markets.
Even that heady performance is well below that of the Sensex though, which rose 118.12% in the past two years and 140.68% over a three-year period.
Two consumer-goods companies are in the Sensex: HLL and ITC Ltd.
Analysts point the finger at soaring raw material costs that are eating into profit margins. Anirudh Joshi, a consumer-product equities analyst, at Anand Rathi Securities, notes that the price of milk, for instance, has doubled, hitting margins at Britannia and Cadbury.
Prices of wheat and sugar, used for biscuits and other food products, are also up sharply. And oil prices are also having an impact on packaging-material costs for most companies.
Stocks that have been somewhat shielded from rising costs have been those that have managed to diversify. “ITC and Marico have managed the downturn by developing new business segments,” said Alok Aggarwal, a senior analyst at Motilal Oswal Securities Ltd.
“Revenue and profit contributions from ITC’s hotel, paper, and e-chaupal initiative are unaffected by the margin squeeze on its main business. Marico has developed products such as Kaya Kalp, which are positioned at the premium price end,” said Aggarwal. ITC shares were up 8.12% over the last year, while Marico shares have gained42.44%.
But the new rush into organized retail, coupled with rising incomes, might, in the end, help these companies by boosting consumption of personal care products, some analysts say.
“The changing retail dynamic will lead to volume driven growth,” said Harendra Kumar, head of research at ICICI Direct, an online brokerage.