The FMCG index hit a record high on Thursday, crossing the milestone of 40,000.
So let's take a step back and map the rally.
The upmove in the FMCG index can be called a catch-up rally because in the last 12 months, the sectoral index is up around 30 percent, and the benchmark Nifty index is up almost 50 odd percent. If you take a look at any of these FMCG stocks, the kinds of HUL, Asian Paints, Dabur and Britannia are at record highs. The giants, which were sleeping earlier, have woken up.
There are a few reasons for this outperformance. One, the meatier part of the business is discretionary demand -- which is set to improve as things open up and unlock, improving a company's margin outlook. Secondly, despite the coronavirus wave, rural demand in the country was resilient. Third, a rise in input costs. Now, most raw material prices, including palm oil and vinyl acetate monomer (VAM), are is down 10-15 percent from their peaks. In cases where they are not down, companies have gone ahead to hike their prices to mitigate the impact of input cost inflation.
The other big trend that played out throughout last year was the digital space, which started to do well. A lot of these companies, which had strong balance sheets and fair amounts of cash, bought a few companies. For instance, Marico bought Beardo.
Valuations are the only concern in the FMCG basket. All these companies, Asian Paints, Titan and Pidilite, are trading in the upwards of almost 60 times their FY23 earnings. The cheapest stock in the space is Britannia, which is trading at just shy of the 50x mark.
The other big concern is the underperformance of ITC. When the Nifty50 index was at 8,000, ITC was at Rs 233 (adjusted for the bonus). The 50-scrip index moved to 11,000, and ITC was at Rs 277. In May 2019, Nifty50 was at 12,000, and ITC at Rs 288. Now, despite the Nifty roaring from 13,000, 14,000, 15,000 and 16,000 to 17,000 levels, ITC remained stuck between Rs 196 and Rs 211.
Watch the accompanying video of CNBC-TV18’s Mangalam Maloo for more details.