Now, FMCG ad spend becomes an indicator of stock performance

What consumer goods companies spend on advertisement and promotion of their products is considered to be their investment in building brands. Such investments tend to have an indirect impact on the company’s performance as they help to push volumes — with a reasonable lag of one to two quarters. A study by ET Intelligence Group of a dozen FMCG companies reveal that the impact of their brand investments is visible on the bourses — with peaking ad spends becoming a leading indicator of a rally in a company’s stock.

Companies intensify advertising to face a tough economic environment or to beat competition. As the investment bears fruit for the company in the form of better sales and margins, the stock price increases. While macro factors like crude oil prices or rupee depreciation and individual factors do impact a company’s stock performance, the ad spend measure can serve as a crude indicator.

Colgate Palmolive, for instance, has been spending a high level — about 18-20% — of its revenues on advertising in the past three quarters; its stock has risen 32% in six months and has been the top performer in the BSE FMCG Index.

The reverse is also true. For example, in FY12 at a time when most FMCG companies’ advertising spend (in proportion to their revenues) was low, their stock prices also stagnated. In the quarter ended September, FMCG companies like Dabur, Godrej Consumer Products, Britannia and Emami have sequentially reduced ad spends over the previous quarter. A continuation of that trend in the December quarter will signal tapering off of the current rally in FMCG stocks triggered by falling crude oil prices.