- Margins under pressure from higher raw material prices
Mumbai : Shares of companies in the fast moving consumer goods (FMCG) sector are considered defensive stocks as they usually have the least volatility. The chances of bumper returns are less in these, but with regular dividends, there is an expectation of good returns in the long term. That’s why every institutional investor always keeps the shares of big FMCG companies in his portfolio.
When the market falls, investors focus on investing in FMCG sector stocks. At present, due to rising raw material prices, the growth in the FMCG sector is slowing down with pressure on profit margins. Due to the sharp rise in the prices of crude oil, palm oil, tea, coffee and other raw materials globally this year, the profit margins of most of the companies in this sector are affected. Is kept.
Companies have increased the prices of all their products to maintain profit margins. Their sales have been affected due to the increase in price. Sales, especially in rural markets, have declined as consumers in rural areas often cut back on their consumption and purchases when the product is expensive. Due to this, there is also a declining trend in the shares of giant companies. In the last 3 to 4 months, the stocks of the top 10 companies in the sector have fallen by 10 to 20% in all others except Nestle. Analysts believe that the fall in the shares of the country’s major FMCG companies is a good opportunity for investors. Investors can improve their investment portfolio by buying these blue-chip stocks. In the next one or two quarters, as margin pressure eases and growth picks up, these stocks are expected to take a bullish trend again. Signs of this are starting to show.
Profitability to grow further
According to analysts, there was a good demand for FMCG products across the country, especially in urban areas, during the festive season and the turnover of the companies registered an average growth of over 12%. Now the companies are expecting good business due to increase in demand in the matrimonial season across the country. Along with this, now the prices of crude oil, palm oil, tea and other commodities have also braked sharply and commodity prices are also coming down. This is expected to ease the pressure on margins. Also, everyone’s profits can also increase further because most of the companies in the FMCG sector once increase the price, then do not reduce it, they sell only at the increased prices.
Great returns in the long term
The stocks of FMCG sector giants have always given good returns in the long term and have created wealth for the investors. If we look at the returns of the last 5 years, then the stock of the largest company Hindustan Unilever has become almost 3 times. After gaining 180% in the last 5 years, its stock is now trading down 18% from its peak. Similarly, the stock of Nestle has gained 200% in 5 years. While the share of Britannia Industries has gained 134% and Dabur has gained 107%. Godrej Consumer has gained 85% and Marico has gained 110%.
Highest returns in Tata Consumer
The maximum wealth creation has happened in Tata Consumer Products. Due to the special focus on its growth by the Tata Group, its stock has jumped more than 6 times i.e. 526%. Analysts are also expecting faster growth at Tata Consumer. ITC is the only stock which has not given any return in last 5 years but is in loss of 6%. The main reason for this is its cigarette business, which is profitable, but foreign institutional investors, especially European funds, are selling in it. However, now ITC is taking forward the FMCG business and is at the forefront of paying dividends. Its dividend yield is over 6%.
Investors should take advantage of the fall in shares: Suvarna Joshi
Suvarna Joshi, Senior Research Analyst, Axis Securities, says that all the giants in the FMCG sector are debt free and cash rich. Presently though there is a declining trend due to margin pressure, but the major companies in this sector are the market leaders in their business segments and have a very strong track record. Their profit margins have been under pressure since last two quarters due to higher commodity prices, but product price hike will ease the pressure in this quarter (October-December). Margins are expected to increase in the next quarter due to the recent decline in crude oil, palm oil and other commodities. There is a double digit growth in urban areas, but there is some concern due to the impact of sales in the rural market, but there is a possibility of further growth. Overall, investing in this declining phase will be very beneficial in the long term for investors. Hindustan Unilever and Dabur are the best looking FMCG stocks.