Barring a few exceptions such as Hindustan Lever and Colgate, stocks of most consumer product firms are trading way below their on one-year high levels. Some of them, in fact, are closer to their one-year low level. For instance, ITC on Monday closed at Rs149, inching closer towards its one-year low of Rs140.4.
Typically, consumer products stocks tend to underperform the market during a bull rally and are considered the ideal defensive sector to stock up during a downturn. This is because the growth in the sector tends to move in tandem with the growth in economy, which generally is much lower than the corporate profit growth. While a 9% growth in economy is considered excellent, nothing less than 30% growth in corporate profits is considered good enough in a bull market.
Due to this, defensive stocks normally tend to perform below average during a bull rally and outperform during any downswing in the stock market. The fund managers generally tend to ignore defensive stocks in favour of high-growth areas like technology and new-growth areas like infrastructure when the market witnesses a bull run.
“While the earnings growth in growth stocks tend to be higher at 35-50% or even more, fast-moving consumer goods (FMCG) stocks like HLL and Britannia records growth of 10-15% in profits. Though I agree that these stocks are very goods stocks, why should I lock my money here, when I can invest in stocks with higher growth? I may consider increasing my exposure to this sector when I feel the market is weakening or the economic growth is falling,” says a fund manager with a mutual fund, who does not wish to be identified.
Like him, there are few others who feel that the fortune of these stocks will turn now for the better.
While Sensex lost over 4% after the recent market correction—triggered by the Chinese market crash, unwinding of yen carry trade and the lukewarm Union Budget—HLL lost only 0.16% and Colgate lost just 2.5%. HLL touched its 52-week low of Rs166 on 7 March but closed at Rs185 on Monday. Colgate closed on Monday at Rs319.75, not far from its 52-week low of Rs275.15, touched on 8 June 2006.
“Some of these stocks may have seen the worst and we may see a revival of investors’ interest in them,” says another fund manager.
Analysts say that these companies have also been hit by lower margins. For example, even though HLL’s sales volume has risen by 2.93% on a quarter-on-quarter basis for the quarter ending December 2006, its profit dipped to 1.83% for the same period. Rising inflation and wage costs have increased the input costs for most of these companies but they have not been able to pass on this extra cost to the consumers due to intense competition from local brands. ITC has been affected by the 5% hike in excise duty on tobacco products in the 28 February Budget. Between 1991 and 2006, ITC posted 37.3% returns and HLL 30.2%, excluding dividend payouts.