INVESTING IN FMCG STOCKS IS A GOOD OPTION TO BEAT INFLATION. “MYTH OR REALITY” -By

Jayadev Nair. Timespro,cochin.

What is inflation?

INFLATION Inflation is the rate at which the general level of

prices for goods and services is rising and, consequently, the purchasing power of currency is falling.

Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.

Monetarism theorizes that inflation is related to the money supply of an economy.

Inflation is generally measured in terms of a consumer price index (CPI), which tracks the prices of a basket of core goods and services over time.

Inflation is one of the primary reasons that people invest in the first place.

There is still risk, of course: bond issuers can default, and companies that issue stock can go under. For this reason it's important to do solid research and create a diverse portfolio. But in order to keep inflation from steadily gnawing away at your money, it's important to invest it in assets that can be reasonably be expected to yield at a greater rate than inflation.

Hi, Friends I am Sudesh, I am interested in investing some money is stocks? Can you advice me which sector should I invest? Should I invest in Manufacturing, Telecom, or FMCG?

Like Mr. Sudeesh there many of us who have such doubts in our mind how to invest our money wisely? If stock market is in your mind then there are countless number of options. Which sector would you invest, Before investing ones hard earned money, it is his/her duty to know about stock markets, inflation and Growth.

Fast-Moving Consumer Goods (FMCG) These are consumer goods products that sell quickly at relatively

low cost – items such as milk, gum, fruit and vegetables, toilet paper, soda, beer and over-the-counter drugs like aspirin.

The FMCG marketplace is huge and includes some of the largest companies in the world – Dole Foods Co., The Coca-Cola Co. (KO) Unilever (UL), General Mills, Inc. (GIS). As investments, FMCG stocks are a generally low-growth, but safe bets with predictable margins, stable returns and regular dividends.

FMCG accounts for more than half of all consumer spending, but they tend to be low-involvement purchases.

FMCG Product Categories

Household cares : personal wash, detergents etc.

Personal care : skin care, hair care, oral care etc.

Food & Beverages : processed foods, tea, coffee, soft drinks, snacks, edible oil, ready to eat products etc.

CHARACTERISTICS OF FMCGFrom consumer’s perspective : Frequent purchase. Low involvement (little or no effort to choose items). Low price. Short self life. Must use for daily consumption.

From the marketer’s angle : High volumes. Low contribution margins. Extensive distribution networks. High stock turn-over.

Why investing in FMCG stocks a good opinion?

The Fast Moving Consumer Goods (FMCG) sector is booming from last several years and given steady returns to its investors despite slowdown in the economy.

The India Brand Equity Foundation (IBEF) estimates a total market size in excess of US$13.1 billion for FMCG industry in 2012.

FMCG sector has several multinational players with strong presence in India such as Nestle, Procter and Gamble, Gillette, etc.

There is stiff competition among domestic companies, unorganized segment and MNC companies to increase their sales year-on-year, due to which they operate on low operational cost and margins.

The other sector indices gave negative returns in the range of 2% to 38% due to slowdown in the economy, high interest rates and rising inflation.

Classification of FMCG Sector :

Premium segment : Serve mostly to the higher / upper

middle income consumers which comprise ~25% of total population. Mass segment : Serve to consumers in semi-urban or rural areas of India which comprise ~75% of total population.

Key Drivers for growth in FMCG Sector

Rapid increase in the rate of urbanization, Rise in disposable incomes enabling the companies to focus on premium

product brands. Constant innovation in existing products from customer feedback. Penetration to rural markets with strong distribution channels. Rise in rural non-agricultural income and benefits from government

welfare programmes contributes to top-line growth for FMCG companies. Investment in this sector stocks also attracts investor’s attention because

the demand for FMCG products is throughout the year.

Investment avenues in FMCG sector

FMCG companies are expected to register strong profit and sales growth in the quarter ended March, led by hike in prices at regular intervals and sales growth.

You can invest in this sector through equity, by selecting right company stocks to add in your portfolio.

The alternative way to invest is mutual fund route. In mutual fund you can invest lump sum amount or invest regularly through systematic investment plan without worries about volatility in the indices.

(Contd)

In investing though equity route; FMCG index mainly compose by 3 players i.e. ITC Ltd, Hindustan Unilever Ltd and Nestle India Ltd. They together contribute ~80% market cap to total of BSE FMCG index.

In investing through mutual fund route; there are two sector funds available in market which invests mainly into FMCG stocks. They are SBI Magnum FMCG Fund & ICICI Prudential FMCG Fund.

Risks (Myth) in investing in FMCG Stocks The sector is considered defensive, which means its stocks are in high demand when the markets

are falling. The reason is simple. Irrespective of how the economy is performing, the demand for consumer goods, daily necessities like food and toothpastes, remains stable. During difficult times, people will reduce spending on discretionary items such as cars and air-conditioners but continue to buy basic essentials. This has held true since the 2008 crisis. But now, as other sectors revive , FMCG may not remain everyone's favourite.

FMCG stock indices have been performing quite well with CNX FMCG index on the National Stock Exchange returning 28.94% and the Bombay Stock Exchange FMCG index rising 27.26% in the one year to 26 April 2013. Funds such as ICICI Prudential FMCG Fund and SBI FMCG Fund returned 18.08% and 26.75%, respectively, during the period. But will this rally continue?

Analysts say stocks in the sector are trading higher than historical valuations. Sustaining these will be a challenge. Expansion will be difficult, and the biggest risk is the price to earnings, or PE, ratio going down. The ratio, used to value a stock, measures how much the market is willing to pay for it compared to the company's earnings.

Key concerns for FMCG sector

Rise in inflation leading to increase in raw material costs. New packaging norms from 1st July which is expected to increase cost of regular products

like biscuits, coffee, tea, toiletries and personal care items by about 10% and more. Rising fuel cost leading to increase in distribution costs. Decline in industrial growth. Slowing economy will lead to lower demand of FMCG products affecting its volume

growth. Sharp depreciation in the value of rupee against other currencies because most companies

such as Marico, Godrej Consumer Products, Colgate, Dabur, etc import raw materials. The margins of these companies will be under pressure until the rupee stabilizes.

CONCLUSION

We come to know what is inflation and how it effect the economy.

Fast Moving Consumer Goods (FMCG); its product categories, ; its characteristics.

Why investing in FMCG sector a good opinion; its classification; key drivers for its growth.

Investing avenues in FMCG sector. Risks (Myths) in investing FMCG sectors; its key concerns

References

www.investopedia.comwww.businesstoday.inwww.ninemilliondollars.com

Thank You