Here's why FMCG stocks are trading higher in an otherwise weak market

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FMCG stocks were trading higher on Monday as investors turned positive on the space owing to a number of factors including globally coordinated efforts to tame inflation, price hikes taken by companies like HUL and most importantly because the monsoon is picking up pace.

While Nestle was trading higher by 2 percent, Godrej Consumer was up 4.07 percent. Britannia, Dabur and Marico were trading 1.3 percent, 2.56 percent and 2 percent higher, respectively at the time of publishing this copy. This is when the benchmark indices, Nifty and Sensex, are trading flat.

Hindustan Unilever (HUL) was trading near day’s high, up 4.23 percent.

The gains in the FMCG stocks come after a consistent underperformance in the past with the index correcting about 14 percent from the highs.

Individual stocks have seen worse fall compared to the index with HUL, Tata Consumer and Britannia falling between 20 and 30 percent from their 52-week highs.

The pain has been much sharper in the broader markets with Jubilant FoodWorks and Bata almost halving from their 52-week highs.

Dabur, Pidilite, Marico and Colgate too have fallen significantly.

Inflation in certain commodities including oil had led to a sharp rise in inputs costs for FMCG firms, shrinking their margins. However, as policymakers across the world take coordinated efforts to control inflation, including multiple hikes in interest rates, a recovery is expected.

Besides, several companies have announced an increase in prices and cut costs to support margins. Firms such as Nestle and HUL have hiked product prices by up to 10 percent in the March quarter owing to inflationary pressures and are mulling another round of increase in rates.

Hindustan Unilever MD Sanjiv Mehta on June 15 told CNBC-TV18 that every inflation impact on items such as toilet soaps and detergents meant more price hikes were in the offing.

“Price rises for Q1 will be higher than the March quarter and price rise for September quarter could be higher than June. We are trying to take price increases in small and not large amounts,” he said.

While most parts of the country have seen a rainfall deficit so far, the situation will likely improve going ahead as the monsoon picks up.

The IMD on June 15 said the rainfall activity is likely to increase in Bihar, Jharkhand, and Odisha, among other states going ahead.

“Rainfall activity likely to increase gradually over Bihar, Jharkhand, Odisha and Gangetic West Bengal with fairly widespread to widespread rainfall with thunderstorm/lightning/gusty winds during next 5 days,” it said.

“Southwest Monsoon has further advanced into some more parts of Arabian Sea, some parts of Gujarat, entire Konkan, most parts of Maharashtra & Marathwada, Karnataka, some parts of Telangana & Rayalaseema, some more parts of TN, most parts of SHWB, some parts of Bihar,” it had tweeted on June 13.

As monsoon is India’s largest source of irrigation for crops, a catch-up in rains is expected to boost output and bring down prices.

Meanwhile, the two-year underperformance in the FMCG sector has sobered valuations and as the ‘risk off’ sentiment picks up in other sectors, investors are likely to turn towards these stocks for safe bets as usual.

(Edited by : Niral Sharma, Abhishek Jha)

First Published: Jun 20, 2022, 02:50 PM IST

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