The consumer staple sector has significantly outperformed the broader market over the past twenty years. The Nifty has risen around 10x in the last 20+ years, while the FMCG index is up around 17x over the same period.
Most of this outperformance was reported in the last decade (2010-20), with FMCG returns at 15 percent CAGR, materially higher than those generated in Nifty (9 percent CAGR). In the prior decade (CY00-10), the sector performed broadly similar to the broader market although there were periods of significant underperformance and outperformance, according to Jefferies report.
Sticky nature of demand, strong brand equity and pricing power, ability to ring-fence profitability are a few reasons for the FMCG sector's resilient earnings and stock price performance during disruptive periods.
While the Nifty has returned 11.4 percent CAGR, the market-cap weighted performance for eight FMCG companies (Hindustan Unilever, ITC, Nestle India, Britannia Industries, Dabur India, Marico, Godrej Consumer Products, Colgate-Palmolive) stood at 14.2 percent CAGR over the last two decades.
Source: Jefferies; weighted average performance considered for HUL, ITC, Nestle, Britannia, Dabur, Marico, GCPL and Colgate
FMCG stocks have shown resilience in times of crisis. According to an analysis by Jefferies, during the period of heightened uncertainty and volatility such as GFC, demonetisation, first COVID-19 wave etc, staple stocks may have gone down but had comfortably outperformed Nifty, given their relative demand stickiness, pricing power, and strong balance sheets.
Further, the FMCG sector starts to underperform in periods of strong economic growth. While a pick-up in economic activity does help accelerate revenue growth for staples too, the impact is much lower when compared to cyclical sectors.
However, staples can do well on an absolute basis, even if it underperforms.
During 2004-07, the FMCG sector returned 18 percent CAGR which is one of the best in identified time blocks. Yet, the sector underperformed as Nifty returns were at 34 percent CAGR, with the BSE Capital Goods index returning 70 percent CAGR during this period.
Also, with only modest operating leverage and little financial leverage (net cash balance sheets), earnings growth does not exceed revenue growth by a large margin, unlike cyclical sectors, Jefferies said in a report.
Among stocks, HUL consistently underperformed during 2002-10, broadly performed in-line during 2010-16, and has been the best performing stock from 2017-20 in the FMCG basket. ITC outperformed through 2000-07 but is the only stock that has actually declined on an absolute basis during 2017-20 on tobacco/ESG concerns, Jefferies report said.
On the strong packaged food theme, Nestle massively outperformed the basket during 2000-09 but lost this to Britannia Industries which moved up over 8x during 2010-16.
GCPL was a star performer during 2008-16, returning 28 percent CAGR led by an aggressive M&A strategy but underperformed its peers thereafter on growth concerns. While Marico has shown volatility in returns over the last 15 years, Dabur has been more consistent during the blocks analyzed.
Colgate-Palmolive, which used to trade at a premium to the sector has gone into a discount consistently in the past 4-5 years, as growth concerns emerged.