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Stock up on FMCG: Nestle

The opportunities offered by Nestle are mouth-watering

Small obsessions look to be adding up to big gains. After the big Budget disappointment, most things 'consumer' look bright and beautiful and along with them so do the fortunes of the fast moving consumer goods (FMCG) sector. And what adds to the supplying businesses' lustre is their classic 'cash flow positive' character and relatively low capital hungriness.

In the current market scenario, companies making chips, beverages, detergents, razors, soaps, toothpaste and creams, promise much. Every man woman and child needs these products and demand is constant. Juxtaposed against the uncertainty in all other sectors, FMCG looks set to dominate.

We enumerate here the overall factors that impinge on the sector and what makes buying into FMCG stocks worthwhile.

FMCG Overview

The sector is the fourth-largest in the economy and had a market size, despite the slowdown, of $25 billion (Rs 120,000 crore) in retail sales in 2008, having grown consistently over the last 3 years — compounded annual growth rate (CAGR) was 20 per cent (6% between 2001-05). What is more, the sector is poised to grow at a 10-12 per cent rate for the next 10 years. It’s set to reach $43 billion (Rs 206,000 crore) by 2013 and $74 billion (Rs 355,000 crore) by 2018, a study by FICCI-Technopak stated.

The power-packed figures, however, are not expected to add wings to FMCG companies. AC Nielsen data shows that the sector grew 16.2 per cent year-on-year (YoY) during April-May 2009, which is lower than the 19 per cent reported for last year.

The numbers are eye-catching, but the same can be said of real estate and pharma, but are they really so scintillating for stocks? 

WHY FMCG

Sure, on the stock markets, FMCG companies' shares are not the most popular, even though they will never fall as sharply as those from other sectors. Simply stated, FMCG stocks are not the stock of choice in a bull run because they don’t generate superlative profits for investors.

But, in a volatile world, what FMCG stocks have become is a bulwark against uncertainty. Albeit its heyday may be over — in the 1990s it was one of the biggest wealth creators  — yet they still must form a good chunk of any investor's portfolio.

Here's why: BSE FMCG index fell from 2,319 points on December 31, 2007 to 1,987.38 on December 31, 2008, a fall of 14 per cent. In the same period, Sensex fell by 52 per cent from 20,286.99 to 9,647.31 points — this was the time of the slowdown squeeze.

In fact, during the global meltdown, the sector showed resolve, with Hindustan Unilever (HUL)  delivering a gain of 17 per cent — when everyone else was down by 50 per cent or more. Companies like Marico, Dabur, Godrej and HUL logged double-digit growth over the last three years — the first three by about 20 per cent and the last by 14 per cent.

This kind of guarding of capital and generating of gains during a downfall, caught the eye of the mutual fund industry, with all 12 companies on FMCG index between December 2007 and March 2009, except Colgate-Palmolive, Tata Tea and Ruchi Soya, seeing a rise in funds' holdings — funds’ stake in HUL rose 85 per cent, Dabur 143 per cent and United Spirits 337 per cent.

The first of the 5 stock selections is highlighted here. Over the next few days we will reveal the rest one by one.

1. Colgate-Palmolive
2. Hindustan Unilever
3. Jyothy Laboratories
4. Navneet Publications
5. Nestle

The article has appeared in the August issue of Wealth Insight magazine. The magazine is on newsstands now. Or else, to read the full article and other stories please subscribe to Wealth Insight