Why are consumer sector stocks falling: 4 things to know

Publish Date: September 07, 2018

Fast Moving Consumer Goods or FMCG are companies that create and distribute products that are frequently bought by the consumers. Usually, these are low-risk stocks with stable returns and regular dividends. Over the past one week, a sharp selloff was witnessed in shares of these companies. The Nifty FMCG index is down 5.4% against a NSE Nifty fall 1.4%.

Here are 4 things you may want to know about the fall in consumer sector stocks.

Read about how to evaluate consumer companies here

Impact of rupee depreciation

You might have noticed the dramatic fall in the value of rupee. A substantial number of consumer sector companies rely on import of raw material. Thus, rupee depreciation would have a considerable impact on their production cost. Considering the competitive nature of the business, it may not be easy for companies to pass on this increase to consumers.

Read more about rupee depreciation here

Impact of rising crude oil prices

A rise in crude oil prices also increases the prices of consumer durables. An increase in crude oil prices often leads to a rise in raw material cost as well as the transportation expenses of the companies. Also, when a company imports its raw materials, fright costs account for a sizable amount of the overall production cost. Thus, any hike in crude oil prices has an indirect impact on the prices of these commodities.

Read more about effects of rising crude oil prices on Indian economy here

Other input costs surge

Prices of sugar, wheat and barley have been rising since last few months. All of these are used as raw materials for producing biscuits. This could hurt companies like Britannia and Nestle. Further, an increase in the price of groundnut oil, mentha oil and castor oil could hurt companies such as Marico, Dabur and Emami. An increase in the cost of production is reflected in the prices of these products. This, in turn, affects the consumer demand. Any impact on consumer demand is going to reflect in stocks of the affected companies.

Read more about rising crude oil prices and its impact here

Easing of promotional activity

As the production cost rises, the companies have to cut down their promotional expenditures. This is done to deal with the rise in prices of goods. This further brings down consumer demand, which indirectly affects investor sentiments.

Read here about factors that affect India’s consumer sector

Recently, promotional activity has eased a bit in premium variants of detergent powders. However, across other consumer durables, it has remained more or less stable. For instance, earlier, Ariel was providing 20% extra on its 1kg pact; partly offset by 10-12% price cuts. This promotional activity has now been withdrawn by the company. Further, promotional activities on personal care products and ‘food and beverage’ items have been largely stable.

Profit booking

Between July and August end the BSE FMCG Index had rallied sharply by 14%. Post the steep rise, there is some profit booking taking place in the FMCG stocks.

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