FMCG Stocks Outlook for the week – 14 to 18.09.2015 (Rangebound; concerns over rural demand to weigh)

FMCG Stocks Outlook for the week – 14 to 18.09.2015
(Rangebound; concerns over rural demand to weigh) )

The fast moving consumer goods companies are seen trading rangebound with a negative bias next week as weak monsoon has raised concerns over rural demand for consumer products.
According to data from the India Meteorological Department, monsoon rains in India have been
15% below normal at 667.8 mm during Jun 1-Sep 11. Earlier this week, IMD's Director General of Meteorology L.S. Rathore said that monsoon rains in the country might be less than the forecast of 88% of long period average.

Weak monsoon is a risk to companies who have more than 50% exposure to rural markets like HUL (Hindustan Unilever) and Jyothy Labs (Jyothy Laboratories). I think the impact will be more on discretionary items than the daily use items. Consumer durables (demand) could be affected. The FMCG sector has been on a downtrend in past five weeks with the CNX FMCG Index falling 8% since Aug 5 taking cues from weak broader market, which fell due to global macroeconomic worries.

We expect the downside (in FMCG sector) to continue for next one to two weeks. After that, we will see a rebound. We could see a fast fall and a very quick bounce back (over two-three weeks). On the demand front, we expect urban consumption to rise and sales volume growth of FMCG companies to improve from Oct-Dec quarter. The festival season during the third quarter is also seen boosting sales.

Despite weak monsoon, raw material prices have not increased as global commodity prices are
subdued, which will give companies the comfort to invest in advertising and promotions to push up sales. Input cost trends have turned further deflationary driving a pick-up in promotional intensity across categories, including shampoos, detergents, biscuits, dairy and edible oils. The current valuations for ITC are favourable and one can invest in the stock for the long-term.

The broader market is expected to be volatile next week, as investors keenly await outcome of the US Federal Open Market Committee meeting. The trend in broader market will have a bearing on the FMCG stocks.