Do it yourself: FMCG

Showing posts with label FMCG. Show all posts

Tuesday, February 11, 2025

What is ailing Indian markets? - 1

In the past two weeks, three key economic events took place in India. These events aim to provide material fiscal and monetary stimulus to the economy.

· First, on top of the 50bps cash reserve ratio (CRR) cut in December 2024, the Reserve Bank of India (RBI) announced further infusion of ~Rs1.5 trillion of sustainable liquidity in the banking system.

· Second, the finance minister Rs one trillion personal income tax concessions, benefitting over 20 million taxpayers.

· Third, RBI embarked on a rate cut cycle after a long 24 month pause, with a 25bps cut in the policy repo rate. Besides, the RBI also decided to defer the implementation of stringent Liquidity Coverage Ratio (LCR) and project financing norms, which would materially constrict the lending ability of the banks, to at least the end of FY26.

In normal circumstances, this combination of monetary and fiscal stimulus would enthuse the financial markets by igniting the risk appetite of investors and traders. However, this time the markets have mostly ignored the stimulus measures. After some momentary excitement, the markets (equity, bonds and currency) are mostly continuing with their weak trend.

· Benchmark equity indices are back to their pre-budget levels. Even Nifty Consumer and Nifty Bank – the sectors that were supposed to be primary beneficiaries of the fiscal and monetary stimulus are trading almost at pre-stimulus levels.

· The benchmark bond yields are back to the pre-budget levels.

· USDINR is weaker by over one percent in the past couple of weeks.

· Foreign portfolio investors (FPIs) are persisting with their exit strategy, and have been net sellers in India (including equity and debt) during the months January and February.

· Stock market volumes are much below one-year average levels.

Obviously, the present circumstances are not normal. It is therefore worthwhile to examine whether Indian markets are passing through a “bear phase” or it is just a “pause” in a secular bull market or a “corrective decline” after a strong bull market. In my view, it is critical because the investment strategy response to these three scenarios is usually very different.

· In case we are in a bear phase, the strategy should be to underweight risk; focus on safeguarding capital rather than return; orient portfolio towards larger, stronger companies that are more likely to survive through a prolonged rough patch; completely avoid leverage; and consolidate holdings into fewer strong companies.

· In case it is just a pause, in a secular bull market, the strategy should be ignored the noise and hold on to the growth stocks. This opportunity may be used to rebalance the portfolio for any excesses and deficiencies.

· In case it is a corrective decline after a strong bull run, investors/traders should be continuously looking for excessive negative price action in good stocks and use the opportunity to buy more using leverage; and overweight risk.

Tuesday, December 17, 2024

Bruised or damaged?

A veteran investor recently recommended investors to buy “bruised blue chips”. He was purportedly referring to the consumer goods manufacturers that have underperformed in the year 2024. For reference, Nifty FMCG index is down 0.3% YTD2024 against ~14% rise in Nifty50. Historically in India, the FMCG sector had mostly outperformed the benchmark indices. Intermittent short periods of underperformance were traditionally seen by the long-term investors as an opportunity to buy/add FMCG stocks to their portfolio.

However, the trend seen in the past one decade (reasonably long period in my view) seems to be defying this conventional wisdom. Since 2014, Nifty FMCG has yielded a return of ~236% against a rise of 305% in Nifty 50. Thus, the conventional wisdom of preferring consumer goods manufacturers may not have been a great investment strategy, even accounting for the higher dividend yield in consumer stocks.

In my view, the underperformance of traditional FMCG blue chips is structural and may continue in future also. There are several factors which support this view of mine. For example—

· I believe that in the Indian consumer market, the balance of power has shifted from the large pan India producers/brand owners (mostly colonial era legacy monopolies) to technology partners (e.g., Quick Commerce, Ecommerce), logistic partners (Modern Retail, Warehousing, Transportation, Payments), regional producers/brand owners (especially for ready to eat food and snacks catering to local tastes and dairy), financiers (consumer finance), scaled up ancillary units catering to multiple brands (contract manufacturing, packaging, digital marketing etc.). The scalability, growth prospects and profitability are much higher in most of these new/emerging “consumer” businesses.

· The composition of the spending on FMCG basket has seen a conspicuous shift in the past one decade. The current FMCG basket includes a large portion of consumer services, e.g., Data, Food Delivery Services, Beauty and Personal Care Services, Healthcare (Diagnostics, Insurance, Clinic), Air Travel, Quick Service Restaurant (QSR), etc. The share of goods, earlier considered discretionary, like Alcohol, Transportation and Cooking Fuel, Packaged Ready to Eat Food, Fashion Accessories, etc. has also increased materially in the middle-income households’ non-discretionary consumption basket.

· It is estimated that the share of the items traditionally considered “discretionary” in the India consumption basket may increase 3x from 13% in 2000 to 39% in 2030. The stock market is obviously interested in growth (discretionary consumption), moving away from de-growth (staples).

· In a few years, some of the food delivery services providers, quick commerce platforms, QSR chains, beverage bottlers, traditional sweets & snacks brands may become bigger, more popular and fit the “Buffet Investment Criteria” better than the traditional FMCG brand owners/producers.

I shall therefore not be in a hurry to buy the 2024 underperformers; for some of these might be damaged, not just bruised.

Thursday, October 22, 2020

Market moving in circles

In past one month I have read a lot of commentary about the smart investing, sectoral shifts, trade rotation, reflation trade, emergence of old economy etc. in the India equity markets. I find it pertinent to note the sectoral performances over three time periods – One year; Since Lock Down (25 March 2020); and Past three months when the unlock exercise meaningfully started.

Some of the key features of sectoral performances over these time frames could be listed as follows:

· Nifty has given positive return over all three time frames, but one year return in miniscule 2.6%, much lower than the bank fixed deposit or liquid fund return.

· Only two sectors IT and Pharma have consistently outperformed the benchmark Nifty over all timeframes. PSUs as a sector have been consistently the worst performer on all time frames.

· Energy, Infrastructure, and PSUs have been worst performers in past three months. This is in spite of the enthusiasm in the heavyweight Reliance Industries.

· Auto sector has performed well post lock down. While FMCG has mostly stagnated in past three months, underperforming Nifty over one year time frame.

· Financials have also underperformed majorly over all timeframes.

· Despite all talks about reflation trade, metals have underperformed over one year and 3 month timeframe, marginally outperforming the benchmark Nifty since lockdown.

On a closer look the market may appear fast rotating to relatively under owned sectors or sectors with material short positions, but when looked from a distance, it could be clearly seen moving in circles, going aimlessly round and round. The investors should therefore cut out the noise, and sit tight with their portfolios. In the end quality businesses that negotiate the pandemic and economic slowdown well and maintain sustainable growth shall indubitably do well. Jumping one sector to other in the hope of making some quick bucks will only lead to frustration. Remember, grass on the other side may or may not be greener, and the traffic in the other lanes may or may not be moving faster.