Safe-haven Sector

The fast moving consumer goods (FMCG) sector is never in the limelight when the bulls are in command of the market. In the last one year (May 25, 2009 to May 25, 2010), the BSE FMCG index gave returns of 30.07 per cent compared to 75 per cent from BSE Information technology, the best-performing index over the same period. But considering the sector's resilient nature, perhaps it is time to look at it again, especially against the backdrop of the European crisis. The positives Krishnan Thampi K of Hedge Equities expects the FMCG sector to do well over the next 12 months, chiefly on account of demand from the growing middle class and from rural India. He adds: “One also has to consider the growth of the infrastructure sector, the construction sector, and the realty sector that have led to better and sustained job opportunities for labourers, resulting in higher wages. Now they are able to direct a greater proportion of their wages towards FMCG products.” According to Ashwin Shetty, analyst with Execution Noble, “Due to NREGS (National Rural Employment Guarantee Scheme), rural spending continues to be robust. And the good news is that the meteorological department has given a positive outlook for the monsoon.” He further adds: “Food inflation is easing as is evident from the drop in prices of key food products such as onion, sugar, etc. Though the overall wholesale price index (WPI) of food articles is still high at 16.49 per cent, this is driven by milk and eggs, as against the across-the-board inflation of January 2010.” In his view, these three factors together bode well for volume growth in the FMCG sector. The negatives However, a few negative factors are also at play. Says NV Sivakumar, Leader Retail Practice, Pricewaterhouse-Coopers: “Some challenges in the sector include commodity price fluctuations, food inflation and increase in packaging costs.” Both Thampi and Shetty expect increasing competition to put pressure on FMCG companies' margins. Impact of monsoon In India, a good monsoon provides relief not only from high temperatures but bodes well for the FMCG sector as well. When the monsoon fails, as it did last year, agri-commodity prices rise. This is a triple-edged sword for the FMCG sector: not only do the costs of their raw materials increase, urban consumers hit by high food inflation have less money to spend on FMCG goods, and rural demand shrivels. Says Thampi: “A good monsoon will result in a strong harvest, which will help bring down food inflation. It will also enable farmers and rural India to spend more on FMCG products.” Defensive role of FMCG FMCG stocks were among the best performers in the aftermath of the 2008 crisis, when the market at large nosedived. According to Sivakumar, “We believe that FMCG players are bullish this season, judging from the increased expenditure on advertising, marketing and promotions across categories that include home care, personal care, skincare, hair care, etc. Despite the world economic situation, consumers need essential FMCG products, such as detergents, deodorants and toothpaste.” Adds Thampi: “When uncertainties loom large in the markets, investors tend to shift to defensive sectors such as FMCG and Pharma. So long as the European c