>INDIAN FMCG (HSBC)

Take a breather

• The pros and cons of the FMCG sector are now very finely balanced

• We downgrade most of our stocks to Neutral; only Nestle is Overweight

We believe it is time for us to lower the Overweight ratings we have had on most FMCG stocks over the last few months. The arguments against the FMCG sector are now as powerful as those favouring it. On the one hand we have robust volume growth, good margin expansion, a cut in expenses, and government spending on the social sector; on the other we have high valuations, lower margin expansion from here on, higher ad-spend, and a weak monsoon.
The tug of war between these forces is evenly poised, in our view. Investors are enamoured by the “consumption theme” and the performance of the companies is likely to be good, so we do not envisage a steep fall in stock prices. But nor do we expect a substantial increase from these levels, as incremental buyers at these valuations are unlikely to emerge, especially since most investors have already bought these stocks at much cheaper levels. In this report, we downgrade HUL and ITC from OW to N, and upgrade Colgate from UW to N. Except for Nestle, which is OW, all our stocks are now N or N(V).

In this situation, this is what we recommend:

■ For the next two quarters, most stocks should trade within a narrow range. Hence any sharp moves up may be an opportunity to sell, and vice versa.

■ Nestle, being OW, is obviously our top pick, and within the Neutral stocks our order of preference is Dabur, followed by HUL and ITC, then Marico and Colgate.

To see full report: INDIAN FMCG