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Emkay Global Financial Services Ltd.

Fishing for stocks?
Go with the FMCG sector
November 29, 2013
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A one-time star, the FMCG sector, has lost significant grounds in the last few months. The sector, as a whole, has
been contending with ebbing consumer confidence. The volume growth has come off for all companies, indicating a
definite demand slowdown. But then having looked at the current prices, we strongly believe that it is a favourable time
to start accumulating the stocks on any declines from here on.
Sectoral Performance
Analyzing the price movement in the current quarter, the CNX FMCG index has clearly under-performed all major
sectors. Over the benchmark Nifty, the under-performance is close to around 11%. The sectors that have largely
contributed to the up-move in Nifty are Banks, Auto and Metals. Now, the bigger questi on is whether this under-
performance would sustain any longer. Our answer is an emphatic 'NO'. The price return spread analysis chart in the
next slide suggests that a reversal in the FMCG index is on the cards. .
% Price Movement (Q3FY14 till date)
-10.00
-5.00
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FMCG sector
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Relative Performance over Nifty
The lower portion of the normalized spread chart suggests that the under-performance of the CNXFMCG index
over Nifty has been 17-18% between July 24, 2013 and November 5, 2013.
Since November 5, 2013, the spread has failed to make a new bottom. It has started gaining strength as
indicated by a bounce-back to -2.94% from a low of -4.25%.
Overall, the key statistics suggests that a reversal from hereon cannot be ruled out.
Following are the key statistics in a one year data window.
11.02 -1.65 3.92 3.54 -2.94 Nifty
Percentile Z Score Standard Deviation Mean Current Spread FMCG Vs
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Derivatives Perspective
FMCG stocks have started seeing a significant accumulation of open interest in the December series. Most positions
seem to be on the long side, suggesting a probable return of confidence in the overall sector. To analyze the same,
we have tried to asses the open interest levels in the December series as a percentage of the average open interest
observed over the last 3 series on the inception day. Further, we have also analyzed the kind of accumulation in
these stocks. In the last 4-5 sessions, wherein the maximum accumulation of open interest has been observed,
prices of FMCG stocks have either moved up or have been range-bound, suggesting most accumulation on the long
side.
Long 258% 6.41 16.56 Tata Global
Long 106% 9.15 9.73 Titan
Long 231% 1.98 4.59 Dabur
Long 69% 6.35 4.38 HUVR
Long 138% 19.01 26.28 ITC
Accumulation % of Average 3M Average Open Int Current Open Int Stock
**Open Interest in million shares
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Technical Perspective
The two momentum indicators, RSI and MACD, have triggered a buy signal for most stocks. The only exception is
Titan, wherein MACD has yet to trigger the buy signal. However, the indicator has started reversing towards the
trigger line. Besides, most of these stocks are trading close to their strong support levels. With no incremental
higher trading and delivery volumes at these levels, we believe the probability of these support levels being pierced
is low.
135-136 Buy signal triggered Buy signal triggered Tata Global
207-208 Yet to be triggered Buy signal triggered Titan
157-158 Buy signal triggered Buy signal triggered Dabur
565-570 Buy signal triggered Buy signal triggered HUVR
295-300 Buy signal triggered Buy signal triggered ITC
Support Levels MACD RSI Stock
% Price Movement (Q3FY14 till date)
-10.00
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ITC HUL Dabur Titan Tata Global
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Fundamental Perspective
Analyzing the trailing 12-month PE ratio, most stocks presumably are trading below their 2-year average levels.
Further, if one analyses the percentage of data points below the current levels, the figure stands on the lower side,
indicating higher probability of a bounce-back. The only exception is Dabur, which is trading above the 2-year
average levels. Even the percentile of data points below the current levels is on the higher side for the stock.
47% 4% 89% 18% 29% Percentile
25.12 35.71 33.79 36.08 33.41 Average
30.01 45.56 41.69 42.19 38.79 High
17.89 25.03 27.59 26.13 27.82 Low
24.14 27.48 37.70 33.24 32.08 Current
Tata Global Titan Dabur HUVR ITC
TTM PE ratio since December 2012
Source: Bloomberg
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ITC HUVR Dabur Titan Tata Global
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Our Take
Considering the above factors, we strongly believe that it is a favourable time to start accumulating the stocks on
any declines from here on. Any decline of 2-3% in the stocks should be used as an opportunity to accumulate long
positions. We also expect an out-performance of 12-14% over Nifty in the next few months. We suggest to
accumulate the following:
158 141-142 147.65 Tata Global
260 222-224 227.25 Titan
180 158-160 163.05 Dabur
660 575-580 589.75 HUVR
350 306-310 313.50 ITC
Target Accumulation Range CMP Stock
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