Prefer MNCs in FMCG sector with high RoEs, good dividend record: Ajay Bagga

In a chat with ET Now, market expert Ajay Bagga talks about the problems FMCG companies are facing these days.

ET Now: There are different baskets within this FMCG space that are actually charting different courses for themselves - Britannia has been soaring high, while ITC, Nestle and the others are facing immense problems. What is your take on the FMCG sector at large?

Ajay Bagga: Overall, if you look at FMCG as a pack, the contraction in rural income growth, which accounts for 30-35 per cent consumption in the country, is hurting the outlook.
In the last five-six years, the rural growth had acted as the biggest driver for jump in FMCG valuations. Whether the volumes growth slows down further from here is on poses a big question mark.

Valuations are not cheap. But I like FMCG sector as it is not capital-intensive and offers high return on equity (RoE). If you had to choose high ROE stocks, I would go with FMCG any day.

The only issue is the rural consumption demand.

If we get some government stimulus measures coming, given the noises that were are hearing, it would be positive for the sector. The trigger could be a rise in number of days under NREGA scheme from 100 to 150. It could also be a hike in minimum support prices ( MSP), which should declared in the next couple of weeks.

Overall, I would still hold a positions in high FMCG stocks with high RoEs. MNCs score well. They have negative working capital, huge cash on their balance sheets and they dole out hefty dividends, Therefore, that is a good ploy to keep in any portfolio.