Double Trouble for Top Stocks in FMCG Sector

For fast-moving consumer goods companies, its a double trouble. With companies just
coming out of the demand shock post-demonetization, the rise in crude prices following
production cuts announced by OPEC, comes as a new challenge. All the categories, except
foods, are now witnessing cost inflation.

Impacts of rising Crude Prices:

Topline growth is likely to be hit in the second half of FY17 with
low pricing power, deceleration in volume growth and lack of
support from new launches, input costs rises, especially crude
prices. This will affect the high margins enjoyed by the
companies over the past two years. Crude oil recently touched its
18-month high, up 50 per cent year-on-year. All companies are
affected by the rise in crude prices in terms of packaging costs,
while some, such as paint-maker Asian Paints, soaps and
detergents maker Hindustan Unilever, Godrej Consumer
Products and chemicals producer Pidilite being greatly reliant on
crude-based derivatives.
Analysts were anticipating the second half of FY17 to be improved than the first for topline.
Though demand has been restored to pre-demonetization levels, loss of business in
November cannot be made up. The impact of demonetization will spill over to the March
quarter as liquidity issues have not been resolved.
Experts see no significant growth in the second half of FY17. They do not anticipate a
complete recovery, even in staples, until end-Q3FY17. However, they believe the liquidity
crunch impact is short-term, and things should normalize by end-Q4FY17.

Stocks Affected:
Nifty FMCG has lost over 8 per cent since November 8 th. From Rs. 21902.85, Nifty FMCG
has come down to Rs. 20136.05 on December 15th, mainly on the back of FMCG-Packaging.

In the same period Crude oil gained over 13 per cent, tanking the stock prices of the
packaging companies.
Cosmo Films is the Multibagger stock from the FMCG Packaging, as recommended by
Dynamic Levels. Since the day demonetization was announced, Cosmo Films share price
dropped over 11 per cent from Rs. 382.05 on November 8th to Rs. 336.90 on December 15th.
Another Multibagger from the sector that was double hit by Demonetization and rising crude
oil prices is Uflex. Since November 8th Uflex share price has lost approximately 12 per cent,
sliding from Rs. 292.10 on 8th November to Rs. 258.50 on December 15th.
Jindal Poly is the Top 500 performing stock for the quarter by Dynamic Levels. Jindal Poly
share price has tanked over 14 percent from the price of Rs. 403.90 on November 8 th to Rs.
346 on December 15th.

Belied expectations
Despite many companies being unsatisfactory in terms of volume growth in the September
2016 quarter, most did well on margins, mostly due to low raw material prices. Analysts
anticipate stable margins, if not an improvement. That is not happening either.
Analysts have pointed out that rising crude prices may affect gross margins, which continued
to expand for most companies. They also see limited scope for further expansion in gross and
operating margins.

Concluding:
Everything said and done, analysts say that any spillover of the current negatives to FY18 is
unlikely. The next three to four months will be very difficult. But they do not expect a big
downward trend in FY18.
In terms of top picks in the sector, experts recommend companies that can maneuver revenue
and profitability without excess reliance on the macro-environment.

Disclaimer
The investment advice or guidance provided by way of recommendations, reports or other ways are solely the personal views of the research
team. Users are advised to use the data for the purpose of information and rely on their own judgment while making investment decision.
Dynamic Equities Pvt. Ltd - SEBI Investment Advisory Reg. No.: INA300002022

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Answers to the Best of our knowledge and belief of Dynamic/ its Associates/ Research Analyst: DYNAMIC/its Associates/ Research Analyst/
his Relative:

Do not have any financial interest / any actual/beneficial ownership in the subject company.
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Article Written by
Tanaya Nath