An FMCG player’s rebranding exercise,
decoupling of gold from inflation, and India’s move to self-sufficiency confuse
It need not take a dot-com bust, credit crunch or
pandemic to send investors back to the drawing board. A sudden corporate action, an unexpected transformation
in the relation between economic indicators and off-the-track policies in
response to emerging situations can merit a reexamination of the traditional
strategies to chart out the outlook based on past experiences. The market, not
surprisingly, shrugged off HUL’s decision to replace the prefix of its fairly
popular beauty-enhancing label. The FMCG sector had an eventful run in the two
years since CY 2019, with the Nifty sector index returning over 45%. Defensives
were favored due to the turmoil caused by the transition to the goods and
services sector from 1 July 2017 and the drying up of liquidity following the
collapse of IL&FS in September 2018. The lockdown to contain the covid-19
outbreak has disrupted front- and back-end operations. Worse, only health and
wellness concoctions, with margins in high teens, are seeing brisk sales as the
personal-care range, with over 20% cushion between input costs and retail
prices, languish. With reported bumper sales of 10% of the total turnover,
India’s largest FMCG player has made cosmetic changes to a winning formula
without junking the underlying messaging of putting a premium on appearances. The
shift from a niche segment, implying hefty mark-up, to mass market, with thin
profitability, should prompt questions from institutional investors. The aim to
be inclusive should draw the attention of regulators and consumer protection
agencies to probe if there was mis-selling earlier. Any rebranding exercise is
an admission of a goof-up. Instead of using the current slump in consumption to
gradually phase out the politically incorrect adventurism, huge expenditure
will be incurred on repackaging when the road ahead lacks visibility. The move
will affect similar products of peers and should trigger a de-rating of the
sector.
The
rise and rise of gold is equally confounding. The precious metal is sought as a
hedge against inflation. Historically, crude has been a major contributor fuelling
food and non-food prices. Growing exposure to commodities is linked to
acceleration in economy activity. The US currency loses appeal. Though up from
its record low in April, oil is half way off from the US$80 a barrel mark that
is needed to sustain the economies of petroleum exporters. The dollar index soared
in March as infections spread in America, leading to a lockdown. The greenback
displayed strength at a time the shutdown was expected to extract a heavy toll
on employment. The benchmark has come off from the highs but is back at the early
2020 level, when businesses were roaring, due to cash infusion by the
government and the Federal Reserve. If the chasing of bullion signals fear of
the future, the consolidation of the ultimate trading converter suggests
complacency that policy makers and monetary authorities will do whatever it
takes to keep the stock market buoyant. Easy money is hedging its bets. That
both are being viewed as safe havens in times of bullishness and distress in
equities is the new reality that has to be factored in while making wealth
allocation.
The
slogan of Aatmanirbhar Bharat is as euphoric as it is problematic. Self-sufficiency
is admirable but will spell the end of global trade that is based on the
assumption that investment goes where returns can be maximized. If a barrier-free movement underwrites
prosperity, it also poses a threat as markets get linked, increasing
inter-dependence. Government role in ensuring all requirements are produced locally
can come at the cost of social spending. Labor, land and raw materials might be
available at home but not capital. A mass seller of passenger vehicles is owned
by a Japanese corporation. Nobody is sure who the owners of India’s largest
infrastructure player or the second largest tech services provider by market
value are because of their dispersed shareholding. An aggressive telecom
services provider recently sold nearly 20% equity stake in its digital arm to
overseas equity funds. Many of our pharmaceutical exporters and auto manufacturers
will need huge funds to replicate Chinese supply chains. Tariff barriers can discourage cheap imports
but will also interrupt the inflow of funds if the output is not competitive. The
idea of Make in India, to promote exports using India’s demographic dividend,
should be tinkered slightly to Make in India for India by giving foreign asset
managers an incentive to stay invested and become stakeholders in the country’s
prosperity from merely being arbitrageurs.
-Mohan Sule
