Contra view: After 30% returns in 3 months for Balrampur Chini, HUL, ITC, other FMCG stocks, is a slowdown lurking?

FMCG stocks have rallied by up to 33% over the last three months, while the Nifty FMCG index has returned 13%, outperforming the headline Nifty50 during this period.

However, with seasonality working against the sector and the government's decision to hike import duties on crude and refined palm, soybean, and sunflower oil, is underperformance on the horizon?

September has historically been a weak month for FMCG, and the sector's performance in the October-December quarter has also been subpar. In the last five years, the index has slipped into the red on three occasions while underperforming the Nifty each time.


Domestic brokerage JM Financial anticipates a reversal in the outperformance of FMCG stocks and has recommended that investors trim their positions in the sector on every rise.


Moreover, the government has raised import duty on crude palm, soya and sunflower oil by 20% from 5.5% to 27.5% and refined palm, soya and sunflower oil from 13.75% to 35.75% with a view to protect farmers reeling from lower oilseed prices, which are currently quoting below minimum support prices (MSP).

Palm oil is used by companies as edible oil while its derivatives are used as a key raw material for soaps and personal care products. Meanwhile, refined palm oil (RPO) and specialty fats are used as key raw materials for biscuits, noodles, chocolates and namkeens (snacks).
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FMCGs stocks on fast lane

Over the last three months, FMCG stocks have benefitted from sectoral churning as investors appetite for defensives has grown amid valuation concerns in several pockets like the defense, railway, power and realty.

An analysis of the 15-stock Nifty FMCG index shows 9 scrips outperforming Nifty's 8% returns over the last three months with highest returns from Balrampur Chini (32%), followed by Radico Khaitan, Colgate-Palmolive (India) and United Spirits with returns of 31%, 23% and 21%. Others with double-digit returns include Hindustan Unilever (HUL), ITC and Marico.

Tata Consumer Products, Dabur India, Godrej Consumer Products and Nestle India have given returns between 9% and 2%. Among laggards are Procter & Gamble Hygiene and Health Care, United Breweries and Varun Beverages have seen their share price lose up to 3%.


Commenting on the trend, an independent market expert Hemang Jani sees FMCG rally as part of a rotation in the current global backdrop of heightened volatility, forcing people to move to the defensive themes. Better monsoon coupled with government's positioning on the rural side is fitting into this theme, he told ET Now.

FMCG has moved up quite a bit at least at the higher levels, said Nagaraj Shetti, HDFC Securities, adding that he expects some more consolidation from the higher levels in FMCG index, especially leading stocks.

On the issue of duty hike, multiple brokerages see snack food companies getting hit, though there is a unanimous view that big players could pass on the cost to consumers and gain from pricing growth.

"We anticipate the duty hike to bolster pricing growth in the consumer sector during H2FY25 and FY26," Nuvama Institutional Equities said in a note. In its view, major players will gain market share from local players. Its top buys are HUL, Britannia, Dabur and Emami.

Nomura opines an increase in import duty to likely impact margins in the immediate term, putting pressure on stock prices. "However, in the short-to-medium term, the raw materials (RM) inflationary environment should be positive for organised companies as they take price hikes that are lower than inflation and gain market share from unorganised players which they had been losing in the current environment," the Japanese brokerage said.

It has a buy on Nestle and Marico while remains neutral on HUL.

InCred also sees Britannia and Nestle getting impacted in the food category and it would require a price hike of upto 2-3% to maintain gross margins. In the personal care space, GCPL, Jyothy Labs and Hindustan Unilever are likely to be impacted as palm fatty acid distillate (PFAD), which is a key raw material for them, contributes to 18-20% to the raw material basket for these companies.

It prefers Dabur for accumulation over other FMCG peers.

Also Read: Sector churning: Power, defence, railway stocks fall up to 39% from peaks. What should investors do?

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)