Going ahead, easing inflation, a strong festive season, higher government spending, and increased urban remittances will drive growth in H2FY24, however, increasing competitive intensity from smaller and regional players with raw material prices easing will be keenly watched out for, noted the brokerage.
The brokerage also pointed out that gross margins across staples companies continued to improve in Q2 as key raw material prices – crude, palm, and packing material – remained stable. However, an increase in ad spending to regain market share will slow down EBITDA margin expansion, though it will benefit in the longer run, it cautioned.
How have companies performed in Q2FY24?
As per the brokerage, most of the FMCG companies have highlighted muted performance as the delayed festive season impacted the overall volume growth. However, companies expect H2FY24 will be better. Moreover, sustained signs of rural recovery are visible, it added. Axis also forecasted that full rural recovery will take a few more months.
“Companies have highlighted that volume growth is likely to pick up gradually. On a gross margins front, most companies have delivered sequential recovery as key raw material prices – crude, packing, and palm remained stable. We expect further recovery in the upcoming quarters as raw material prices have now stabilized. Nonetheless, EBITDA margins have shown slower recovery as companies increased ad spending to increase the voice of share and gain market share. Though this has a short-term negative impact on margins, it will help in the longer run,” it said.
What makes the FMCG sector a good bet, as per Axis:
Structural growth trajectory: Indian FMCG companies have been on a structural growth trajectory with many categories still under-penetrated (shampoos and premium detergents) and underserved as rural penetration is still underway.
Premiumisation agenda to drive the overall growth: As Indian consumers increase their purchasing power, the propensity to buy premium and branded products will increase; thus premiumisation agenda will drive the overall growth for the sector.
Best-in-class returns ratios (ROCE, ROE): The FMCG sector provides best-in-class returns ratios (ROCE, ROE) and dividends yield in the VUCA (volatility, uncertainty, complexity, and ambiguity) world which help protect the capital in the longer run.
Top FMCG stock picks post the Q2 earnings:
Varun Beverages: The brokerage has a ‘buy’ call on the stock with a target price of ₹1,050.
“VBL has consistently outperformed its peers in recent quarters despite the volatile environment. Going forward, VBL is expected to perform well due to 1) Normalisation of operations and gaining market share in the newly-acquired territories after the disruptions of COVID-19, 2) Management’s continued focus on efficient go-to-market execution in the acquired and underpenetrated territories as reflected in the recently commissioned Bihar facility (it has started gaining market share), 3) Expansion of distribution reach to 35 lakh outlets in CY23 from the current 30 lakh, 4) 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 5) Robust growth in the international regions,” it explained.
ITC: The brokerage has a ‘buy’ call on the stock with a target price of ₹540, indicating an almost 23 percent upside.
“We believe that ITC’s narrative is strengthening as all business units are on the right track: – 1) Stable growth in cigarette volumes due to market share gains and new product launches; 2) FMCG business reaching the inflection point as EBIT margins expected to increase from 7.7 percent in FY22 and driven by – the ramp up in the outlet coverage, effective implementation of WIMI (Winning in Many Indias) strategy, promotion of premiumization, leveraging demand and supply-side technologies and moderation of raw material costs; 3) Strong and stable growth in hotel business as travel, wedding, and corporate activities increase; 4) Stable and decent performance in paperboard and agricultural business in recent quarters. Reasonable valuation among the entire FMCG pack provides a large margin of safety,” it said.
Jyothy Labs: The brokerage has a ‘buy’ call on the stock with a target price of ₹450, implying a muted 4 percent upside.
“The company’s recent initiatives, implemented over the last couple of years, have begun yielding positive results, and we expect these benefits to extend over the coming years. Notable initiatives include, a) Expanding value offerings through LUPs and promoting premiumisation, primarily in the Detergents and Dishwash segments, b) Diversifying into the larger Body Wash segment (Toilet Soap) as opposed to its previous presence in the niche (natural) segment, creating a broader market for the company in the Soap segment, and, c) The company’s commitment to expanding its direct distribution network, with aspirations to increase its current 11 lakh outlets. We expect the company to deliver healthy Revenue/EBITDA/PAT growth of 13 percent/25 percent/25 percent CAGR over FY23-26E and ROE to increase from 15 percent in FY23 to 21 percent in FY26,” said Axis.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
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Updated: 24 Nov 2023, 04:31 PM IST