Why FMCG stocks remain great long-term buys | Economic Times

Use the corrections to get invested in FMCG, auto or appliance companies which are really strong businesses with good brands, excellent return on equity, fantastic track record and corporate governance standards, says Dipan Mehta, Founder & Director, Elixir Equities. Are you concerned about high valuation multiples of FMCG stocks as raw material costs going up as well? If that is coupled with higher inflation, how will it impact some of the consumer names?Sure, that is certainly a headwind for the FMCG sector. It is also true for a whole host of consumer facing businesses -- be it automobiles or appliances and even building materials. They are all going to be impacted by higher increases in raw materials, especially basic materials. But the demand is very good for these companies and they have been able to save costs elsewhere because of the pandemic. They have learnt new ways to communicate, have cut their advertising and travel costs seriously. As a result, some amount of cost saving of a permanent nature has come through. This may help these companies manage their margins vis-a-vis rising costs. At the same time, these companies are taking minor price hikes as well. I do not know how long this increase in metals and commodities cycle will last. Typically, being cyclical, you may see fresh capacities coming into play and as and when the pent up demand starts to recede globally, especially in China, Europe and US, these prices may flatten out or even correct. So I am not that concerned about raw material price increases for FMCG, auto or appliance companies which are really strong businesses. They have good brands, excellent return on equity, fantastic track record and corporate governance standards. Such corrections are great opportunities to get invested in them. These companies have managed raw material price increases and decreases very well over the past several years and they have managed commodity cycles as well. So, I am not too perturbed about this particular issue and still maintain that these are great long-term buys.