Nifty FMCG is the best-performing sector of 2023 so far; will this trend continue?

The fast-moving consumer goods (FMCG) sector has been the best-performing sector in the current calendar year so far on the back of improving macro conditions, recovery in demand, moderation in raw material prices as well as margin improvement in most firms.

Vinit Bolinjkar- Head of Research - Ventura Securities, informed that as per Bloomberg estimates, FMCG (14 companies) are expected to post a 10.7 percent CAGR over FY23-25. He further pointed out that the recent fall in crude oil prices (20 percent from the peak) and in palm oil prices (35 percent) is expected to provide some respite from constant inflationary pressures over the last 12-18 months. Thus, price hikes (over the last few quarters) and softer input prices should help expand the margins of most FMCG companies, he said.

Meanwhile, Suman Bannerjee, CIO, Hedonova, believes that the FMCG sector has been adapting to changing consumer preferences and market trends. Companies have focused on innovation, product diversification, and expanding their online presence to meet the evolving needs of consumers. This adaptability has allowed them to capture new market opportunities and maintain growth, he stated.

The Nifty FMCG index has jumped over 15 percent in 2023 year-to-date (YTD) as against an around 3 percent rise in benchmark Nifty. Meanwhile, in the last 1 year, the index has advanced 32 percent versus an around 12 percent gain in Nifty.

The index has given positive returns in all 5 months of the current calendar year, rising over 6.5 percent in May so far after adding 4 percent in April. Meanwhile, it was up 0.6 percent, 1 percent and 1 percent in Jan, Feb, and March, respectively.

Ten of 15 stocks in the FMCG index have given positive returns this year while 5 are in the red. ITC has gained the most, up 36 percent followed by Varun Beverages and Godrej Consumer, up over 20 percent each. However, United Breweries has shed the most, 15 percent followed by P&G, down 6.7 percent and Emami, down 5.6 percent.

Going ahead, most experts believe that the positive trend in the sector is likely to continue. Let's see what various analysts say about the sector's outlook as well as a look at their top picks.

Suman Bannerjee, CIO, Hedonova, believes that for the remainder of 2023, the FMCG sector is expected to continue its strong performance. Factors such as population growth, urbanization, and increasing disposable incomes in emerging markets contribute to the continued demand for FMCG products. Additionally, as economies recover from the pandemic, consumer spending is expected to rebound, further driving the growth of the sector, said Bannerjee.

The expert has also picked some top picks in the FMCG space for the remainder of 2023 like Procter & Gamble, HUL, Nestle, and ITC. These companies have a strong market presence, diverse product portfolios, and a history of delivering consistent returns to investors, he added.

Ajay Thakur, Research Analyst, Anand Rathi Institutional Equities, noted that this year FMCG sector is expected to benefit from dual tailwinds - rural market recovery and fall in many key input prices (primarily crude oil and its derivatives). This should aid is better earnings growth in FY24 and consequently a better relative performance as against other sectors, Thakur added. His top picks in the sector include HUL, Godrej Consumer, Emami and Zydus Wellness.

Meanwhile, Preeyam Tolia, Senior Research Analyst - FMCG & Retail, Axis Securities, also believes that the FMCG sector will perform much better by the close of 2023 as the rural slowdown has bottomed out and raw material prices have remained stable. Both these key triggers will drive the much-needed volume growth for the sector. However, one risk for the entire sector will be the effect of El Nino, which we should pay attention to as this could delay the rural recovery, Tolia warned.

In this backdrop, the expert foresees companies such as Hindustan Unilever, Nestle, Britannia and Dabur to gain from the recovery in demand, while a company such as Varun Beverages is likely to continue their strong momentum on account of the intense summer season as demand for beverages increases coupled with its strong distribution expansion in newly acquired south and west territories. Tolia also likes ITC due to its reasonable valuation and stable business outlook across its verticals.

Kaustubh Pawaskar, Deputy VP - Research, Sharekhan by BNP Paribas, said, "The rural demand has almost bottomed out and is expected to see gradual revival in the quarters ahead. If monsoons are normal it will give a substantial boost to the rural demand. Further, the government will also try to provide some incentives prior to the elections next year. Further with dropping inflation, the company are passing on benefits in the form of price cut/grammage increase to consumers in the highly penetrated mass-end categories. We expect in FY2024, the revenue growth will be largely volume-led growth for most companies under coverage. The decline in the raw material prices would OPM to improve in the coming quarters. So overall earning growth visibility for the FMCG sector is improving. Thus we believe CY2023 (FY2024) will be one of the good years for the FMCG sector." His Preferred picks in the space are Britannia Industries, ITC, Godrej Consumer Products, Marico and Mrs Bectors Food.

Nirvi Ashar - Fundamental Analyst, Religare Broking, also believes that that improving urban demand, product innovation and availability of products across various channels (digital, offline, etc.) have been the growth drivers for the FMCG sector in the past year. On the other hand, increasing inflation and weak sentiments from rural areas were impacting the companies, she added.

However, the impact of these factors is fading and she sees, in 2023, a pickup in demand from both rural & urban, coupled with innovation and easing of raw material price as well as cost optimization measures will continue to aid growth for the companies. Ashar's top picks are Britannia, Godrej Consumer, and ITC.

Finally, Nirav Karkera, Head of Research at Fisdom, noted that on the back of the multiple macro headwinds faced in 2023, market focus has shifted towards domestic-oriented themes, with the FMCG sector aligning well with this requirement.

"Furthermore, FMCG has been regarded as a defensive bet in a volatile macroeconomic environment. The sector has observed an upward trend due to expectations of a potential decline in commodity prices, better-than-anticipated earnings, and anticipated recovery in the rural economy. These factors have contributed to the favourable outlook for the FMCG sector. Our picks among the sectors are Nestle& Varun Beverages," he said.