In a country like India where the dependency on the rural sector remains relatively high, a round-the-year prayer to the weather gods is not uncommon. This year, though, such prayers may additionally be offered by those holding high volumes of fast moving consumer goods (FMCG) sector shares. Known for its dependency on the monsoons, the sector growth may additionally face challenges due to the possible approach of El Nino, unseasonal rains and hailstorms, and the predictions of a sub-normal monsoon in 2014. Economic uncertainty and a volatile rupee have, by themselves, adequately cast a shadow over the shares of consumer goods companies; add to it the woes of the agricultural sector and it is easy to understand why analysts fear that consumer goods may not fare well. Recent reports suggest, though, that there may be heartening news for those eyeing the Indian FMCG sector. Blanket predictions of below-par monsoons and failing consumer goods stocks may not be reasonable, after all.
El Nino and Monsoon Woes
Farmers fear that the ongoing spate of out-of-season rain and hail may end up causing immense damages to the Rabi crop – crops grown between November and April such as wheat, mustard, barley, sesame and peas. The Indian Meteorological Department has predicted a 33% probability that rainfall this year will be below the long-period average range (at about 90% the average). If rainfall is less than the 90% of the average quantities, it could result in a drought (30% probability), says the Indian weatherman.
Much of this prediction is based on the likelihood that the El Nino shall develop along the Pacific Coast and disturb weather patterns across the world. It is about 50% likely that the El Nino shall arrive. In India, the monsoons form an essential part of the irrigation with over 50% farmland lacking access to artificial means. None of these predictions, then, bode well for the agricultural sector.
In India, the consumer goods sector derives a major chunk (over 50%) of its revenues from the rural regions of the country. With the spending power of rural India, severely crippled, the consumer goods sector is hardly likely to boom. Another fallout of an errant monsoon is the boom in input prices. The impact in margins promptly affects sector growth and profits. Investors traditionally fear digging into FMCG stocks when predictions of a low monsoon hit the news.
A recent Nomura analysis has, however, turned the tide on analysts who had written FMCG off. The report said, “Based on our analysis, FMCG sector volume growth is more highly correlated to gross domestic product (GDP) growth than to vagaries of the monsoon. We believe that even with less-than normal monsoons this year, sector growth dynamics will not be significantly impacted in the short-term, unless there is a period of two-three years of poor monsoon” The research report analyzed data from the past 15 years and concluded that the sales of consumer goods are not much influenced by underperforming monsoons. Six of these 15 years saw a deficient monsoon when rainfall was less than 96% of the long period average. Between FY2005 and FY2009the FMCG sector saw a growth of over 13% while two of the six monsoon-deficient seasons also were in the same period, the research says. FY2009 and FY 2012 were both monsoon deficient. But the FMCG sector of the Indian economy saw an average growth of 15% and 14% in these years. Rainfall, the report concludes, may affect the sector’s growth by 20% at most. The Nomura Group is a Japanese financial services group with specialization in economic research.
ITC Vs. HUL
The two biggest stocks to watch out for in the FMCG space will certainly be ITC and Hindustan Unilever. Looking at the current scenario, though, investors and experts are leaning towards ITC rather than Hindustan Unilever. Hindustan Unilever’s Q4 results for FY13-14 demonstrate that the consumer goods giant has been under-performing benchmark indices with an addition of 4.8% while ITC has gained 7.7%, outperforming the BSE Sensex benchmark index. ITC seems to have everything going in its favor right now. A recovery in cigarette growth in terms of volumes is expected to trigger ITC’s earnings growth this financial year. In the packaged foods segment, ITC has plans to launch a number of new products over the next year and half. Definitely a stock to look out for!
The Silver Lining
Nomura’s report and market watchers are hopeful about the consumer goods sector. What remains to be seen is the actual growth of the sector and the new launches planned by some of the heavyweights. The rate of inflation and economic stability of the environment have important roles to play in this scenario. While caution is the watchword for potential investors, the sector itself has much scope for development. Packaged salty snacks were the highest-consumed FMCG product in 2013. That space has recorded phenomenal developments in the past few years but is still largely unorganized. The sector as a whole could do with a good push from a stable government and friendly policies. Will this dream be realized? The months to come will tell.