FMCG, auto stocks feel the pinch

Thu, 11 Mar 01:30 pm

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Alternate bouts of buying and selling led the Indian markets to hover around the dotted line during the previous two hours of trade. The overall advance to decline ratio is currently poised at 1.2 to 1 on the BSE. Currently stocks from the auto, FMCG, and capital goods spaces are amongst the top losers, while those from the IT, realty and banking sectors seem to be the investors' preference.

The BSE-Sensex and the NSE-Nifty are currently trading higher by around 40 points and 10 points respectively. Stocks from the midcap and small cap spaces are trading flat at the moment. The rupee is trading at 45.47 to the US dollar.

FMCG stocks are currently trading mixed with HUL, Dabur and Nirma trading weak, while Pidilite Industries, Colgate and Marico are trading firm. HUL's latest ad campaign has created a strong buzz recently. The company took on rival Proctor & Gamble Home Products Ltd. (P&G) by openly pointing out that Rin detergent (one of HUL's detergent powder brands) is superior in quality to Tide Naturals (one of P&G's new product launches). While P&G has not yet retaliated in a similar manner (although it approached the court against this advertisement), it has answered using a different approach. P&G has gone ahead and increased the grammage of Tide Naturals product by about 25%, while maintaining the same price. It is reported that the grammage of the Rs 10 pack of Tide Naturals has been increased from 100 gm to 125 gm, while that of the Rs 20 pack has been increased from 200 gm to 250 gm. This is an indirect price reduction of 20% on the product.

It must be noted that a few months ago, HUL had cut prices of its products (detergents) by about 8% to 12%. Could the detergent segment of the FMCG sector see another round of price war going forward? Too soon to say as of now, but it definitely cannot be ruled out.

Textile stocks are currently trading firm led by Raymond, Bombay Dyeing and Alok Industries. A leading business daily has reported that textile major Alok Industries is looking at exiting the real estate business. This we believe is a positive move at the company will be able to focus its resources on its core business of manufacturing textiles. It is reported that the land bank that the company owns is valued at about Rs 30 bn. This includes a building worth about Rs 11 bn which the company has purchased (which is believed to be under construction) in 2007. As per the business daily, this transaction would take about 3 to 4 months to complete.

This move is part of the company's strategy to reduce the debt on its books. At the end of FY09, the company had debt of almost Rs 70 bn on its books, while the debt to equity ratio stood at about 3.6 times.