The BSE FMCG index declined 2.5%, while the BSE Consumer Durables index ended down 1% against a 1.2% fall in the benchmark Sensex. Sector heavyweight ITC fell below its 200-day moving average (DMA) for the first time in two months after the company's quarterly earnings disappointed investors and forced brokerages to downgrade the stock.
ITC ended at Rs 318.95 per share, down Rs 11.65, or 3.52%, from its previous close with a two-fold increase in volume. More than 1.4 crore shares exchanged hands on the BSE and the NSE compared with the 30-day average volume of 68.68 lakh shares.
The share of the tobacco and consumer staples major has been on a downward spiral since the third week of October due to concerns about moderating volume growth across the sector and the impact of currency depreciation on gross margins. The stock is down 13% from its all-time high of R380 in July.
ITC remains a compelling long-term story, but Q2 results will likely challenge investor conviction on the visibility of earnings growth amid potential large cigarette tax hikes. Valuation multiples are likely to compress to adjust for lower earnings visibility, stated Morgan Stanley in its research note that downgraded the stock to equal-weight from overweight.
The sharp fall in the ITC share also weighed on other counters within the FMCG space. United Breweries lost nearly 4% and Dabur ended down 3%. Godrej Consumer Products declined 2.7%, while FMCG major Hindustan Unilever ended down 2%. Analysts said FMCG shares have been outperforming the broader market for the last 2-3 years and are expected to take a breather until fundamentals justify the high valuations.
We have a cautious view on the sector on the back of the inflationary pressure on the economy. We prefer companies with earnings visibility in an environment where consumption is moderating, said Motilal Oswal analysts Gautam Duggad and Ruchi Rudra in their research note.
Motilal Oswal downgraded HUL to sell and said that FY14 is turning out to be a subdued year from revenue growth perspective given the absence of inflation in input prices in H1. However, this could change in H2 due to rupee depreciation-led raw-material inflation providing a valid ground for pricing action, added Duggad and Rudra.
Shares of other consumer staples company like Proctor & Gamble Hygiene and Health Care, Britannia Industries, Tata Global Beverages and Colgate Palmolive ended down more than 1% each.
Surprisingly, the Jubilant Foodworks share spiked 18% after the company confirmed the near-5% price hike across all product categories from mid-November.