The BSE FMCG index gained more than 45% in 2012 as investors flocked to consumer stocks, which offered a growth haven when most other sectors struggled in the face of dismal economic growth. But the index has lost around a percentage point in December, while the broader market gained.
The general opinion about this seems to revolve around a few factors. One, the index is trading at a price-to-earnings multiple of about 38 times, compared with a multiple of 17.4 times for the broader market.
Now, typically this sector trades at a premium to the market, partly explained by its steady growth and the presence of many multinational stocks in it.
But growth in 2012 was not all that spectacular on the sales front, with sales for the companies in the FMCG index rising by 16.9% in the nine months ended September compared with a year earlier, but operating profit rose 18.8%.
The highlight of 2012 was perhaps the ability of consumer companies to increase prices to pass on cost hikes, taking care of a key concern—the effect of inflation on their financials. And, what’s better, they even managed to increase margins. This was perceived as a sign of pricing power, and a shift in strategy to profitable growth was welcomed by investors.
Another factor is that the sector’s defensive nature—as a hedge during bad times—may work against it, when good times return. In other words, the scent of an economic revival could see investors shift their attention to other sectors.
But all is not lost for consumer stocks. One, the long-term picture continues to look good due to factors such as urbanization, growing disposable incomes and increasing demand from rural markets. Also, most large companies are not waiting for growth to happen, and are trying to increase growth by entering new markets, categories, or upgrading consumers to more premium offerings.
There is one factor that could be a turning point in 2013, however, and that is inflation. Retail consumer inflation continues to be a bugbear. But inflation on the input cost front appears to be abating on several fronts, especially in agri commodities. Also, inflation was aggravated by a sharp depreciation in the rupee in 2012.
And, if the rupee remains at current levels, it may not aggravate input cost inflation in 2013, as much as it did in the previous year.
That can make a significant difference to operating profit margins, as companies have already hiked prices quite a bit in 2012. But companies may also choose to reorient their focus to volume growth, and pass on the effect of low inflation to consumers in the form of promotions and price cuts.
If that happens, consumer companies may see a rebound in growth and profits, and offer enough incentives to investors to stay put, even though the sector may not beat the broader market by as wide a margin as it did in 2012.