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Great buying opportunity? - YouTube
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hi everyone welcome to today's video so
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on today's video we are going to analyze
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the demolition of fmcg stocks this is a
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very important video if you're looking
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to invest in the fmcg sector would now
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be the great time to do it or should you
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just sell everything and go away that is
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the specific analysis that we are going
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to do this will be a short but a very
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insightful video but let me give out
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some very quick disclaimers point number
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one i am investing in the fmcg sector if
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you don't trust me take a look at my
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holding of hul now the reason why i'm
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openly sharing this is fairly simple
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because i don't dole out hollow words
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there are a lot of people who will do
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analysis but they themselves in their
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personal life would not go and take
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positions in whatever they themselves
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are analyzing so i do not do any of that
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thing yes i can be incorrect like any
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other investor about the market
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but whatever analysis that i'm
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presenting i myself am following it if
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you like it please invest at your own
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behalf if you don't like it please do
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not invest but i am going to explain you
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my rationale of why am i doing something
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or not doing something second a lot of
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you ask me that akshat how do you get to
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invest so much money in stocks in
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different other asset classes how do you
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do it so the trick is fairly simple that
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i keep a good track of my money i am
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frugal with my spending habits i am good
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with my investing habits and i have been
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doing that for years and that has
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allowed me to build a good corpus to
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build these habits you can check out
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jupiter who are the sponsors of this
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video they allow you to track your money
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really well they allow you to spend it
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wisely and invest it in a more
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systematic manner so the links are in
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the description box do go and check it
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out they promote something called a
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sports based investing which is linked
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to your goals so do go and check it out
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and let us start with today's video so
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three specific things that i am going to
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speak about so one is that i am going to
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give you an overall analysis of the fmcg
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sector from a technical standpoint
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second we are going to speak about the
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pain points or the reasons for fall in
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the fmcg stocks what are the primary
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reasons and more importantly should you
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be worried about those reasons third and
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finally what you should be doing and
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what am i doing in this market so we'll
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have a brief discussion around these
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points but one very quick concept that i
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want to cover is the concept of mean
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reversal now what is mean reversal this
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is a very very important concept for you
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to understand to make sense of what is
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happening with fmcg stocks so mean
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reversal in simple word means that you
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would have seen a 200-day moving average
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line i will show you on the chart of hul
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also in a minute but 200 day moving
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average line is considered to be the
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last one year average of the stock so
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this will be to an extent is an
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indicator of mean right so this is
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generally what the stock price is this
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is what this line simply indicates now
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what you will see is that the stock
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price so i'm highlighting this in blue
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so the stock price moves something like
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this right sometimes it will follow
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200-day moving average it will come down
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then it will climb back up so this type
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of stuff keeps on happening so the
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theory of mean reversal in simple words
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say says this that things that go up
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much higher than their 200-day moving
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average line at some point they will
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return to their 200-day moving average
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line and things that go way down their
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200-day moving average line they will
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come back up to their 200-day moving
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average line this is a simplistic
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definition please don't quote me on this
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i'm just explaining it from a conceptual
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level understanding now why am i talking
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about mean reversal the reason is fairly
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simple because right now the fmcg stocks
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are badly beaten down so let me take you
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to hindustan unilever which is one of
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the foremost fmcg stock in india and
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present this analysis so here you will
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see this 200-day moving average line
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right so this is indicated here right so
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this black line is 200-day moving
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average and this is currently the price
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so essentially the 200-day moving
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average indicates that the price should
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have been roughly 24-30 and the stock is
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trading at roughly 2300 so there is a
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huge difference between these two things
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now what does this mean and what is the
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implication this has for you so the
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implication is fairly simple that if you
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are an investor then you just simply
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need to answer one simple thing that is
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mean reversal going to happen in this
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industry or is it not going to happen in
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this industry has something
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fundamentally changed completely if
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something fundamentally has changed
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completely that you know the fmcg
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margins have been brought down or these
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companies are going through a very high
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debt situations or these companies have
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lost their pricing power then yes you
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can make an argument that mean reversal
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is not going to happen has such a
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situation played out in the past yes
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this situation played out in 2018 2019
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with housing finance companies when
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there was massive debt burden on entire
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industry the entire industry collapsed
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and it has not been able to come up up
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until now so that was a systemic issue
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but the only thing that you need to be
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worried about right now is that is the
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fmcg industry going through a similar
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type of a crisis or not if not this mean
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reversal will happen in all the fmcg
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stocks are going to go on an upward
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journey now let me also share very quick
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technicals around it so as to make my
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point even clearer so you can see that
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this is the nifty chart and if you take
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a look at this chart the nifty from its
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recent high has been down by roughly
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five point zero four percent so this is
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the current level of nifty from its top
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and it has been down by roughly five
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percent only so what about fmcg nifty so
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if we take a look from the recent high
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how much is it down by so it is roughly
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down by twelve and a half percent so
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huge difference right there is seven
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seven and a half percent difference to
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be made and if there is a run-up in the
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nifty then fmcg stocks are likely to
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contribute more so i hope this concept
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of mean reversal is clear now let's jump
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into the analysis as to why fmcg stocks
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are falling and should you be worried i
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will break down all these specific
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reasons for you so according to me there
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are four specific reasons as to why fmcg
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stocks are going now first and foremost
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relates to high inflation so here is the
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data from the u.s in the u.s the
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inflation and u.s is a stable economy
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even there the rate of inflation is
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roughly seven percent which is very very
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high and that is causing panic in the
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market now comes the interesting
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question because this is something that
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everyone tells you that high inflation
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therefore fmcg prices are down but they
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don't tell you this and for this i had
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to do a lot of digging so similar
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situation happened in india in 2012 2013
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when there was high inflation and
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companies like hul were able to
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successfully pass on the prices to
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consumers this is the most important
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point that if hul back a decade ago in
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2012 was able to do it why can't they do
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it now here is the article to prove it
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you can zoom it out and i will read this
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with you even in 2012 to 2013 this kind
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of scenario high inflation scenario
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where inflation was extremely high
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companies like hul and other leading
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fmcg companies managed to pass on the
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input cost so input cost simply means
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that hul if it is making a soap then the
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supplier demands more compensation
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because everything has gone up in price
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so hul pays them now they pick up these
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price and inflate the prices for
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consumers like us and we still end up
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buying those products so hul does not
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become a sufferer under such
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circumstances now the second key thing
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is around sector rotation now if you
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want me to make a separate video on
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sector rotation i will make it but just
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to cut the long story short this ties
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into the mean reversal concept that i
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was telling you that right now if you
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check the fmcg sector it is down by
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roughly 12 if you check nifty 50 it is
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down by roughly 5 similarly if you check
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banks they will be roughly down by 10
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from their top so if you make an
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argument that nifty has to go up from
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17700
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to 20 000 then which sector do you think
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is going to contribute more of course
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these will be sectors like fmcg and
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banks why because of the fact that these
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sectors have not given run up as of now
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when they start giving run up you will
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have a very hard time chasing these
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stocks because they will go up by three
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four percent in a day if you don't
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believe me just check the performance of
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hul today itself and i'm putting the
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chart here it gave an up run of three
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percent now the third reason for the
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fall is shrinking rural demand this is a
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very interesting macro concept to
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understand now the way rural demand
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functions is like this and you need to
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understand the entire landscapes what
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happens in villages is that the majority
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of the economy is unorganized economy
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what do i mean by that for example if
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you are working with tcs infosys
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mckinsey bcg you are educated if you go
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and tell your employer that hey employer
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the inflation is high please increase my
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salary they are likely to do it why
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because you are educated and your
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employer is also educated so they
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understand this basic game now i'm not
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saying that they will 100 increase your
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salary but at least that's the
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understanding that next year probably
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will have to increase people's salary
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because the inflation in the economy is
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high now this situation does not work
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out in the unorganized sector for
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example when there is a local labor or a
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farmer if he or she tries to sell their
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product or if they say that malik please
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increase my salary by 15 rupees or 20
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rupees per day they are not going to do
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it the malik will simply say that no you
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know what the entire economy is very
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expensive my expenses have also gone up
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so i am not going to increase your
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salary just do whatever that's a major
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problem and that is precisely the reason
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why poor people in india suffer the most
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now how does this impact fmcg companies
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what ends up happening is that if there
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is shrinkage of economy in the rural
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sector people a would not have the money
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to buy stuff immediately because they do
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not have any disposable income so to say
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and second and more importantly is that
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everything to them would look very
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pricey for example you might have read
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that hul increased its product prices by
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15-20 percent now imagine this that if
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you are a local farmer who goes and buys
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soap from a local shop you will say that
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okay last week the price of this soap
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was 10 rupees now you are selling it to
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me at 12 rupees so my price has gone up
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i can't afford to buy this yes and this
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is a very valid concern and we should be
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scared but what is the tool that these
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big fmcg companies deploy that's the
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very interesting part so this is what
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they do and i hope the picture itself
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explains you the concept of shrink
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flashing so shrink flashing simply means
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that instead of increasing product
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prices they decrease the quantity of the
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product that is being sold and a lot of
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people might not even be able to
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understand this or process this and they
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will eventually end up buying this stuff
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so these type of tricks are always
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deployed by big fmcg company i am not
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supporting that move but this is the
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reality but the point that i want to
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drive home through this conversation is
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that see the rural demand in the short
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term will shrink a little bit but it's
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not as if that it will permanently
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disappear as the situation starts to
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improve a little bit as the inflation
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number goes down a little bit all these
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buying habits will return and it will
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hardly take a couple of quarters now
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comes fourth and final point and i have
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seen a lot of people commenting on
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social media that the reason why fmcg
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stocks like hul nestle americo is
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following is very simple that a lot of
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local competition has come into the
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picture in fact this understanding is
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incorrect why am i saying this because
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you need to think about this situation
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from a profit margin viewpoint
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now inflation has risen for everyone
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it's not as if that inflation has only
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risen for hindustan unilever and not
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local players what happens is that these
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big players like hul dabur mariko what
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they do is that they procure things in
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bulk so they still have something called
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as bargaining power because if hul is
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buying let's say 1 000 kilo of tomatoes
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to make tomato sauce now if they are
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buying 1 000 kilo of tomatoes that's a
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huge quantity and therefore they will
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have some bargaining power but if a
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local tomato sauce manufacturer is
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trying to do the same they will probably
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buy 20 kilos of tomato so this supply
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side inflation is going to hurt these
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local players more compared to these big
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giants they still have pricing power
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they still have branding power they
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still have tools like shrink-flation at
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play so they are going to deploy every
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tactic in the book to keep their profit
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margins intact now how can i demonstrate
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this point from a quantitative viewpoint
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can i show you some numbers to prove
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this fact yes so let us go to hul's
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balance sheet so here is what you will
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see as revenues right so let's compare
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2016 number so 2016 the sales were at 32
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000 crores and the profit was
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4151 crores
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now let's take a look at 2021 the
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profits have 2x so profits have become
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2x have the sales even doubled the
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answer is no they have been less than
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double so what does this show this shows
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that the profit margins of these big
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companies is very much intact and in
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fact it goes up because of high
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inflation environment so this is a very
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important point and let me also depict
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how does this translate to a better
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stock price so if you check these stock
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prices of hul in 2019 so it was roughly
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trading between 1815 to 2000
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to 2100 right so 2019 we are talking
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about now what were the sales number in
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2019 it was roughly 40 000 what were the
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profits the profit were 6800
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now the profits have gone up by how much
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so they have gone up by roughly 27 28 if
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you take a difference between these
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numbers twenty nineteen six thousand
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zero five four and roughly eight
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thousand so that's a roughly twenty five
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to thirty percent increase in profits so
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this should translate in the increase of
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stock price also so from that particular
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simple analysis the correct rough
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approximation of stock price for hull
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comes out to be 2500 which is closer to
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its mean reversal where i started the
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story from so i hope this analysis is
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clear now the final verdict what is the
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summary should you be buying it should
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you not be buying it now i'm buying it i
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can be wrong but this is what the data
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tells me that the mean reversal in fmcg
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should happen when will it happen i
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don't know maybe two months six months
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one year two years but long term
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prospects have not changed for this
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industry there is nothing off about this
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industry
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in the short term no one can predict the
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stock prices but this according to me is
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a great buying opportunity i hope you
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enjoy the video do check the links in
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the description box for jupiter it's a
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wonderful app it would allow you to
[799]
track your money better save your money
[800]
better and invest your money better
[802]
please like the video and i will see you
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tomorrow
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