FMCG Stocks Outlook for the week – 22 to 26.06.2015 (Range bound trade next week)

FMCG Stocks Outlook for the week – 22 to 26.06.2015
(Range bound trade next week)

Stocks of fast-moving consumer goods companies are seen range-bound next week in consolidation after the recent sharp swings in the stocks over the past two-three weeks.
As for the fundamentals for this sector, improved monsoon prospects are likely to support, while the ongoing regulatory issues on processed food products of FMCG companies may continue to have a negative impact.

The India Meteorological Department may raise this season's rain forecast to 90-91% of the long period average from 88%, as the condition of the southwest monsoon has been positive so far, Minister of State for Earth and Sciences Y.S. Chowdary said on Thursday.

As per IMD data, India's monsoon rains from Jun 1 till yesterday were 93.0 mm, 10% above normal. Monsoon rains are crucial for the FMCG sector, as it has a significant bearing on rural demand for consumer products. In report released on Thursday, Deutsche Bank made an interesting observation on the impact of monsoon on FMCG companies.

Consumer staples companies are highlighting weak monsoon risk for FY16; we find this intriguing. Analysis of about 30-year data does not support this hypothesis (correlation between HUL's sales and agri-GDP growth is 0.36). In 2013, staples companies expressed confidence (bordering on complacency) that 2HFY14 would be better due to good monsoons. In reality, 2HFY14 volume growth lagged 1HFY14. We find monsoons and agri-GDP growth have a higher correlation for discretionary consumption.

Market participants will continue to eye updates on Nestle India's Maggi noodles issue and on the food regulators' measures to improve quality of processed food products. A positive for Nestle India was that tests conducted in Karnataka, Chhattisgarh, Assam, Arunachal Pradesh, Sikkim, Meghalaya and Mizoram, as well as in Hong Kong showed that lead content in Maggi noodles were far below toxic levels.