While consumption has been a successful investing theme for years, fastmoving consumer goods (FMCG) stocks have been underperforming for quite some time. Compared to the BSE 500 index’s 39% gain in the past year, the BSE FMCG barometer gained just 19%. Growth trends, however, are intact. Bolstered by consumer-driven growth, higher prices, product launches and rising brand awareness, the total revenue of the FMCG market is expected to grow at 27.9% CAGR from 2021 to 2027, reaching US$ 615.87 billion, as per IBEF.
So what explains the sluggishness in stock prices of this sector? Analysts attribute this to the rising competition from regional players, slow rural market growth and inflation. But with stocks trading at reasonable valuations, rural growth set to pick up from the second half of the year and ebbing raw material prices, it may be time to reassess these companies’ prospects.
FMCG firms enjoy lower cyclicality of earnings, strong cash flows, and excellent corporate governance. Usually, the broader market cycle is complete when profits peak, valuations become expensive (cyclicals and defensive valuations converge), cyclicals melt and rate cuts begin. “We might be at this juncture now. The next churn is likely to be in underperforming quality sectors—private banks, insurance and FMCG—the traditional defensives offering earnings resilience in a downturn,” states a Nuvama Institutional Equities report.
In the previous quarters, the effect of an erratic monsoon was felt on the kharif crop output, which impacted agricultural yields and rural incomes. Rural typically forms about 40% of FMCG business and may pick up in 2-3 quarters. “By the second half of this year, rural segment may show signs of picking up. A good investing strategy may be to focus on urban-heavy FMCG stocks,” says Preeyam Tolia, Senior Research Analyst, FMCG & Retail, Axis Securities.
After the election outcome, the Budget could also provide impetus to the FMCG sector. “The scenario could improve with some Budget announcements. We have seen smaller FMCG firms managing the situation better,” says Kaustubh Pawaskar, Deputy Vice-President, Fundamental Research, Sharekhan by BNP Paribas.
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In the past, slow income growth and high inflation reduced consumption. With softer inflation and FMCG price cuts, the income-to-cost balance has improved gradually. “Macro indicators suggest steady improvement, leading to anticipated volume growth from 2024-25 to 2025-26,” say Research Analysts Pratik Bipinchandra Prajapati and Tanu Jindal from Motilal Oswal. Easing commodity inflation has so far helped sustain gross margin (GM) expansion, but price cuts and higher consumer promotions may slow this expansion in the coming quarters.
From the 121 listed FMCG stocks, filters such as minimum Rs.5,000 crore current market capitalisation, at least one-year trading history, and profitability for the last four quarters narrows the stock universe to 20. The following four FMCG players are currently offering double-digit share price potential.
Hindustan Unilever
THE FIRM REPORTED flat performance in the December 2023 quarter, with top and bottom lines inching up 1% y-o-y. The underlying volume growth was 2% in the quarter, but divergence between segments and volume growth remained. Volume recovery continued in the home care and beauty & personal care segments, while foods & refreshment declined. The EBITDA margin at 23.7% improved 10 bps y-o-y.
The management is focused on expanding consumer franchise, winning market share, and enhancing brand power, despite challenges. On a year-to-date financial year basis, HUL’s premium portfolio continues to grow at more than 2.5x of the mass portfolio. The average 2024-25 EPS target of Rs.49.22, implies 11% growth over 2023-24 (estimates) on the back of 8% revenue rise. After the third quarter earnings, KRChoksey research report stated that the current valuation prices in the near-term growth and higher competition concerns. The report estimates revenue and PAT CAGR of 12% and 13%, respectively, over 2022-23 and 2025-26.
Dabur India
THE COMPANY REPORTED 7% revenue and profit growth in the December 2023 quarter due to an improvement in volume growth in the India and international businesses. The EBITDA margin expanded by 50 bps to 21%, while rural demand grew 6%, ahead of the urban growth of 3%.
The management strategy is to drive profitable growth across business verticals and remains optimistic about mid-high, single-volume growth, with double-digit revenue growth, led by a focus on power brands; double-digit CAGR in healthcare; and premiumisation across product categories. The company is spending Rs.135 crore for setting up a greenfield plant in south India for capacity expansion of toothpaste, odonil, and honey. Analysts pencil in 2024-25 average EPS at Rs.12.43, a 15% growth over 2023-24 (estimates), coupled with 11% higher revenues. A BoB Capital Markets research report stated that amid easing inflation and improving rural demand, it expects the company to deliver profitable growth. The report estimates revenue and PAT CAGR of 11% and 14%, respectively, over 2022-23 and 2025-26.
Marico
THE COMPANY REPORTED a small 2% dip in revenue, but net profit growth of 17% y-o-y in the December 2023 quarter. Parachute, value-added oils and foods businesses did well, but Saffola edible oils were weak. While rural demand and mass segments continued to remain soft, urban demand did better. The international business was resilient, except in Bangladesh. Softening inflation and a favourable mix helped, with EBITDA margin expanding 270 bps to 21%. Analysts continue to build in gradual recovery in volumes in the coming quarters. The average 2024-25 EPS target of Rs.12.75 implies 10.5% growth in 2023-24 (estimates) due to 10% higher revenue. An HDFC Securities Institutional Research report stated that it prefers Marico due to its thrust to drive growth in core brands, initiatives to drive D2C/foods, and margin upcycle. It estimates revenue and PAT CAGR of 6.2% and 13.5%, respectively, over 2022-23 and 2025-26.
Jyothy Labs
THE COMPANY REPORTED 10% revenue and 35% profit growth in the December 2023 quarter. This was achieved due to 11% volume growth, notwithstanding minor price cuts across the portfolio. Jyothy Labs’ performance in personal care has been the strongest as focus on brand investments and distribution pays off. The fabric care segment clocked around 12% growth, helped by the fast-growing liquid detergent category. Dishwash sales saw a nearly 7% advance, while household insecticide category sales increased 5.4%. The overall EBITDA margin stood at 17.5%.
The management targets a revenue of Rs.5,000 crore in the next four years via focused strategies and inorganic initiatives. The average analyst 2024-25 EPS target of Rs.11.59 translates to 13.5% growth over 2023-24 estimates, on the back of 11% higher topline. Axis Securities expects it to deliver healthy revenue and PAT growth of 14% and 31% CAGR, respectively, over 2022-23 and 2025-26, which will elevate the company’s overall return profile.
12-M forward PE based on 2024-25 EPS average. 1-year target price based on median price target.
Source: economictimes.com