Stellar Q1FY2010 results, consistent earnings upgrades, and high visibility have helped FMCG stocks in outperforming the Sensex over the past year.
However, the sharp rally has come to a halt, owing to the likely impact of a weak monsoon on the topline and volume growth.
Although we expect the monsoon’s impact to be less severe than that in FY2003 and to be mixed for companies, we change our stance on the FMCG sector, from overweight to equal-weight, as we believe that both earnings upgrades and P/E re-ratings are likely to take a breather from the current levels.
Hence, we continue to emphasise selective stock picking, and prefer a set of companies with a leadership position in their product categories, a diverse product portfolio and with stronger pricing power, which are better placed to combat the vagaries of a weak monsoon.
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