 "FMCG")
Nuvama on FMCG stocks: Analysts at domestic brokerage firm Nuvama Institutional Equities are observing a gradual improvement in the consumer sector outlook, primarily fuelled by an increase in rural demand.
The rural markets have outpaced urban demand, registering a 7.6 per cent increase compared to a 5.7 percent rise in urban areas, in March quarter of FY24.
“Rural consumption revival is crucial for the FMCG industry reeling from growth pangs amid anaemic rural demand,” said Nuvama in a note.
Among players, the analysts remain optimistic regarding Nestle, Varun Beverages, Tata Consumer, Colgate, and Godrej Consumer Products (GCPL), on the back of favourable macros and strategic manoeuvres undertaken by these companies.
However, a cautious stance is taken on the paints sector in the near term due to potential challenges in volume and value growth, resulting from price cuts and an adverse mix. Yet, Pidilite is preferred within the paints category due to its focus on core growth and pioneering initiatives.
Looking ahead to FY25, analysts said, the focus for most companies is on volume growth without compromising on margins.
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Here are the top reasons for Nuvama’s upbeat outlook:
Weather in favour
The onset of La Niña is expected to boost rural FMCG demand, with normal to above-normal rainfall predicted by IMD. This could positively impact rural incomes and sentiment, potentially benefiting companies operating in these areas.
Summer-specific portfolios are projected to drive a strong performance in Q1FY25, with Varun Beverages and Emami expected to benefit from increased demand for cold drinks and talcum powders.
Most of the consumer stocks are nearing 52-week/all-time highs
Consumer stocks are riding high, nearing either their 52-week peaks or all-time highs, fuelled by robust signs for rural consumption. ITC reached a peak of Rs 499.60 within the past year, settling at Rs 430.30 on June 13.
Similarly, Varun Beverages closed at Rs 1,578.80 (with a 52-week high of Rs 1,596.35), while Godrej Cons settled at Rs 1,408.20 (with a 52-week high of Rs 1,467.30).
Pricing power to return
Pricing power is anticipated to make a comeback in the FMCG sector, with operating deleverage expected to reach its lowest point post-Q1FY25.
Following a period of negative pricing in FY24, sector-wide pricing growth of approximately 3 per cent is expected to resume in the H2FY25.
Individually, Marico plans to utilise the pricing power of its core brands to offset any input cost pressures, particularly in copra and LLP, during FY25, the company said in a management commentary. Price adjustments in Saffola are expected to stabilise from Q2FY25 onwards
Competition easing
Local competition in the FMCG sector has been gradually easing off after causing challenges for companies such as HUL and Marico. Smaller regional brands had been eroding their market share, particularly in products like biscuits, tea, edible oils, detergents, and soaps.
However, the impact of these local players has diminished or ceased altogether following price adjustments aimed at passing on savings from lower production costs to consumers.
With pricing power returning to FMCG leaders, especially in terms of ad spends and distribution, analysts anticipate that local competition will fade out by the first quarter of fiscal year 2025.
Revenue performance
In Q4FY24, United Breweries (UBBL) showed robust revenue growth of 21 per cent Y-o-Y, mainly attributed to strong performance in its premium portfolio and effective strategic initiatives and product launches. Colgate (10 per cent), Emami (9 per cent), and Nestle (9 per cent) also reported positive revenue growth across their core categories during the period.
However, certain companies experienced flat-to-negative revenue growth. HUL faced subdued performance in the Beauty and Personal Care (BPC) segment while ITC encountered weak cigarette volumes, and a decline in value in its Agri and Paper segments.
Volume growth
UBBL also saw a robust volume growth of 21 per cent Y-o-Y in Q4FY24 in its premium segment, benefiting from strategies focusing on premiumisation, product launches, and strategic overhauls initiated by the new MD. Meanwhile, the overall volume growth stood at 10.9 per cent Y-o-Y.
In the staples category, GCPL led with a 15 per cent Y-o-Y volume growth, of which 7 per cent was organic.
“In FY25, most companies will focus on volume growth and without any trade-off on margins. A combination of factors, including under ownership by investors and rotation out of other sectors is driving renewed interest in FMCG stocks,” analysts said.
