Top Stock Picks: These are good consumer durable stocks to buy: Sharekhan

To buy stocks of consumer goods

In its research report, the brokerage has stated that “Q4FY2022 performance of the consumer goods sector was impacted by slowdown in consumer demand (affecting sales volume) and sharp rise in raw material prices (affecting OPM). Volume growth slipped to 0-4% for most of the consumer goods companies under our coverage. Price increases were carried out to ease cost pressures of most of the companies assisted under our coverage to register revenue growth in the high single digit to low double digit range during the quarter. OPMs of consumer goods companies (excluding TCPL, Marico, Colgate and ITC) declined by 60-800 bps due to sharp rise in input prices and transportation cost. Overall, Sharekhan’s consumer goods universe revenue and PAT grew by 12% and 8% respectively in Q4FY2022.”

With regard to the long-term growth prospects of the consumer goods sector, Sharekhan claims that the global supply disruption has kept the prices of global and domestic goods volatile. Thus, raw material inflation (excluding copra and domestic raw tea) is expected to remain stable in the coming quarters. While companies have implemented calibrated and prudent price hikes and the government has taken some constructive measures to contain inflation, higher raw material prices will put pressure on margins in the first half of FY2023. If commodity prices improve from current levels, margins of consumer goods companies may see a gradual improvement from Q3FY2023.

The brokerage further said that a normal monsoon will play a major role in accelerating rural demand and helping to cool off agri commodity inflation. Comments from most consumer goods companies suggest an improvement in sales volumes from Q2/Q2 FY2023 if the inflationary environment stabilizes in the coming months. In addition, companies are concerned about medium to long-term growth prospects with drivers such as low entry levels in key categories (especially in rural India), lower per capita consumption compared to other countries, major shifts to branded products and emergence of new I am optimistic. Channels like e-commerce/D2C, which provide visibility of sustainable growth in the years to come.

Selecting the large cap sector, the brokerage has said, “The stock prices of most companies in our universe have corrected from their recent highs, in line with the correction in the broader indices. The valuations look attractive given their trading discount of the average multiplier of the last five years as a result of the sharp correction in the recent past. In the large-cap space, we like HUL, Nestle India and Asian Paints, which have a strong brand portfolio that continues to gain share in the domestic market. In terms of valuations, companies like HUL and Nestle India have underperformed the broader indices in the past one year. Therefore, the risk reward is favourable.”

For investors looking for mid-large cap stocks from the consumer goods space, Sharekhan suggests that “In the mid to large-cap space, we prefer companies such as Marico and TCPL, which are conducive with correction in copra.” Looking at the input cost environment. Raw tea prices over the last two quarters. Also, in the mid-to-small cap space, we prefer Zydus Wellness, which has a strong presence in low-penetration categories and a focus on expansion. This will help in generating consistent earnings growth with strong cash flow generation in the coming years.

The views and recommendations given above are those of individual analysts or broking companies and not of Mint.