Companies have indicated that volume growth is anticipated to pick up gradually, the brokerage added, even though a full recovery in rural areas would take a few more months.
Due to the stability of the pricing of essential raw materials such as palm, packaging, and petroleum, most companies have shown sequential improvement in their gross margins. The brokerage expects more recovery in the next quarters as raw material costs have already stabilised. Year over year (YoY) recovery is currently under way.
Even so, when companies boosted their advertising budgets in an attempt to grow market share and voice, earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins recovered more slowly. In the long run, this will benefit margins even if it has a short-term negative effect, the brokerage report stated.
Furthermore, while with caution, the domestic brokerage stated that H2FY24 would be better. Future rural growth momentum will be determined by factors such as eased inflation, more government expenditure, and rising remittances from urban areas. But one must keep a close eye out for El Nino’s effects.
What Makes the FMCG Sector a Good Bet?
Structural growth trajectory: According to the brokerage’s report, Indian FMCG companies have been seeing structural growth, but many categories—such as premium detergents and shampoos—remain underserved and underpenetrated while rural penetration continues to progress.
Premiumisation agenda to drive the overall growth: From the brokerage’s perspective, the premiumization agenda will drive the sector’s overall expansion as Indian consumers’ inclination to purchase branded and premium goods will grow along with their purchasing power.
Best-in-class returns ratios (ROCE, ROE): “FMCG sector provides best-in-class returns ratios (ROCE, ROE) and dividends yield in the volatility, uncertainty, complexity, and ambiguity (VUCA) world which help protect the capital in the longer run,” the brokerage said.
Axis Securities top picks from the FMCG sector
Axis Securities has a ‘buy’ rating of the stock with a target price of ₹920, with a potential upside of 1.5%. Varun Beverages share price closed 0.86% higher at ₹906.25 apiece on BSE on Tuesday.
In spite of the volatile environment, the brokerage claims that the company has continuously outperformed its competitors in the most recent quarters.
After the COVID-19 disruptions, Varun Beverages is expected to perform well going forward due to the normalisation of operations and the company’s growth in market share in the newly acquired territories. The company’s management will continue to prioritise effective go-to-market execution in the newly acquired and underpenetrated territories, as evidenced by the recently commissioned Bihar facility, which has begun to gain market share.
“Expansion of distribution reach to 3.5 million outlets in CY23 from the current 3 million, focus on expanding Sting, a high-margin energy drink, in outlets, coupled with an increased focus on expanding the value-added dairy, sports drink (Gatorade) and juice segments; and robust growth in international regions,” highlighted the brokerage.
Axis Securities has a ‘buy’ rating of the stock with a target price of ₹540, with a potential upside of nearly 19%. ITC share price closed 1.45% higher at ₹454.20 apiece on BSE on Tuesday’s trade.
A significant margin of safety is provided by a decent value throughout the whole FMCG pack, according to the brokerage’s analysis.
“We believe that ITC’s narrative is strengthening as all business units are on right track: Stable growth in cigarette volumes due to market share gains and new product launches; FMCG business reaching the inflection point as EBIT margins expected to increase from 7.7% in FY22 and driven by – the ramp up in the outlet coverage, effective implementation of WIMI strategy, promotion of premiumization, leveraging demand and supply side technologies and moderation of raw material costs; strong and stable growth in hotel business as travel, wedding and corporate activities increase; stable and decent performance in paperboard and agricultural business in recent quarters,” the brokerage explained.
CCL Products Ltd
Axis Securities has a ‘buy’ rating of the stock with a target price of ₹750, with potential upside of 22.6%. CCL Products share price ended 0.5% higher at ₹611.50 apiece on BSE.
Based on the robust order book, the brokerage claims that management is still optimistic about achieving its volume guidance of 20–25% in the near future. Strong positioning in global marketplaces as the company expands its market share and explores new avenues for growth.
“Doubling of capacity in Vietnam from current 13,500 MT to 30,000 MT and new capacity expansion in India, which will result in strong volume growth over the next 2-3 years, Capacity expansion in value-added products (FDC and small packs), Expansion of domestic consumer business and entry into high-margin branded retail business,” further noted the brokerage.
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Updated: 22 Aug 2023, 07:21 PM IST