scorecardresearchFMCG only sector in the green in 2023 so far! A look at its outlook and
Nifty FMCG, owing to its defensive characteristics, has performed relatively well.

FMCG only sector in the green in 2023 so far! A look at its outlook and top picks

Updated: 28 Mar 2023, 03:40 PM IST

The Nifty FMCG index is up nearly 2 percent in 2023 year-to-date (YTD) as against a 6.5 percent decline in benchmark Nifty. Meanwhile, all other Nifty sectoral indices have given negative returns for the current calendar year.

Fast-moving consumer goods (FMCG) is the only sector that has been in the green in the current calendar year so far in an exceptionally volatile market environment on the back of multiple headwinds like rate hikes, inflationary concerns, weak global growth outlook, as well as the ongoing liquidity crisis in US and European banks.

The Nifty FMCG index is up nearly 2 percent in 2023 year-to-date (YTD) as against a 6.5 percent decline in benchmark Nifty. Meanwhile, all other Nifty sectoral indices have given negative returns for the current calendar year. Nifty Metal has lost the most, over 20 percent followed by Nifty PSU Bank, down 18 percent. All other indices are down between 3 percent and 17 percent.

Why is FMCG in the green?

According to Deepak Jasani, Head of Retail Research, HDFC Securities, global stock markets have taken a hit due to concerns about a potential deepening crisis in the banking sector worldwide which has rubbed onto Indian markets as well. However, Nifty FMCG, owing to its defensive characteristics, has performed relatively well during this phase.

But he added that this comes after a long period (since May 2020) of underperformance and believes that India's macro factors could emerge stronger amid global turmoil.

Narendra Solanki, Head Fundamental Research – Investment Services, Anand Rathi Shares & Stock Brokers, also noted that in the backdrop of current global volatility, the markets are favoring strong domestic-oriented sectors and FMCG not only fits this space but also has historically acted as a defensive bet in uncertain or constrained macro environment. Also, the FMCG sector is anticipating a recovery in rural demand in the upcoming quarters, despite the slowdown that was earlier experienced. The e-commerce channels have also helped the FMCG sector to drive strong demand in the urban sector, he added. Further, the companies have started to see some ease in commodity prices, which could likely have a positive impact in the upcoming quarters. The sector is expected to grow at the same pace in FY24, largely driven by volumes and moderating inflation, forecasted Solanki.

Kaustubh Pawaskar, DVP Fundamental Research at Sharekhan by BNP Paribas, also pointed out that in an uncertain global and domestic market environment, defensive sectors such as FMCG tend to get higher preference amongst investors.

"Reduction in some of the key input prices (including crude oil) augurs well for the consumer goods companies as it will help reduce stress on the margins in the quarters ahead. If monsoons are good, it might provide some boost to the rural consumption which might act as a key re-rating point for the FMCG sector and sector to outperform compared to other sectors," he said.

Nirav Karkera, Head of Research at Fisdom, explained that Nifty FMCG has been outperforming sectoral indices on account of two primary factors - weakness in other sectors amid turbulence for broader equities and growth in key Nifty FMCG constituents.

"Most other sectors, especially the highly cyclical, ones have been bearing the brunt of global risk-off during the current quarter. At the same time, defensive FMCG counterparts have been resilient. Within the index, stocks like ITC, Radico Khaitan, Varun Beverages and Godrej Consumer make up a chunky 40 percent. These stocks have been performing well on a YTD basis owing to company-specific positivity. The same contributes to the uptick exhibited by the NIFTY FMCG basket," he said.

Meanwhile, Vinit Bolinjkar, Head of Research at Ventura Securities, pointed out that in the recent budget, the government has given tax relief to the middle class, which is expected to boost consumption. In addition, he expects the inflationary pressures are easing out and the pent-up consumer demand could fizzle out in FY24. Furthermore, he believes that improving infrastructure for last-mile delivery could revive consumer demand and promote consumption within the economy.

Preeyam Tolia, Senior Research Analyst, Axis Securities, also revealed that as per their channel checks, some pockets of rural areas have seen early signs of a sustained recovery in January and February, which could lead to overall volume growth for the sector. Further, the recent correction in crude and palm oil prices will result in margins recovery for most of the FMCG companies in the coming quarters which is another positive for the space, he added.

Outlook and picks

Bolinjkar of Ventura Securities believes that the growth trend in the FMCG sector will continue and recommends investing and holding FMCG stocks for the long term. His top picks in this sector are:

ITC – He noted that all the businesses of ITC are on the sweet spot and free cash flow generation has been robust.

Patanjali Foods – As per the expert, the company has consolidated its Patanjali portfolio in the listed entity, which includes FMCG and ayurvedic products. The EBITDA margin in new businesses is ~20 percent, which is higher than the 5 percent margins in the edible oil business. The company has also started a nutraceutical business, which is a vertical integration for its FMCG and oil business, he said.

Adani Wilmar – The company is significantly expanding its product portfolio to improve its customer engagement and enhance its share of kitchen products. The acquisition of Kohinoor rice and expansion in pulses, daal, rajma, chana, etc. are the recent steps towards diversification, he said.

Hindustan Unilever – The increase in the royalty has been a dampener, however, the overall impact on operating margins shall be offset with the product-mix improvement and scale benefits, said Bolinjkar.

Karkera of Fisdom also believes that while there are challenges emanating from the El-Nino effect, increased probability of higher input cost and sluggish rural demand; company-specific strengths will drive performance in select pockets of the Nifty FMCG which will continue to drive headline index performance and portray relative defensiveness.

Within the pack, stocks like ITC, Godrej Consumer Products and Hindustan Unilever seem well-poised to generate strong shareholder value in the medium to longer term, he said. Most of this growth will be delivered on the back of either one factor or a combination of higher operating efficiencies, increased span of operations and resultant earnings expansion, added Karkera.

Solanki of Anand Rathi pointed out that the FMCG sector is considered defensive because it tends to perform relatively well even during economic uncertainty. This is because people continue to buy essential items regardless of economic conditions.

"FMCG companies are expecting a rise in demand for various products, including snacking products, beverages, ready-to-eat packages, rice products, and soap categories, due to the rising temperatures, vacation, and travel. The reopening of educational institutions is also expected to lead to a further increase in the consumption of FMCG products. Additionally, increased consumer mobility during the season will help the out-of-home segment and travel packs," he explained.

Overall, the FMCG sector can be a good investment option for those looking for a defensive sector that tends to perform well even during economic downturns, however, it is important to conduct thorough research and analysis before investing in any company or sector, he added.

He prefers Tata Consumer Products since it has been focused on expanding its product portfolio, entering new markets, and increasing its presence in existing markets through strategic acquisitions and partnerships. The company has a strong brand value, a diverse product portfolio, a robust distribution network, and a track record of strategic growth initiatives, he explained.

Meanwhile, Tolia of Axis Securities, said that they are cautiously optimistic in the near term as recent predictions of possible El-Nino could put the entire FMCG sector under wait and watch as it might delay the overall rural recovery. Apart from ITC, he is positive about Varun Beverages Ltd, as the early onset of the summer season could drive overall beverage sales across regions.

Pawaskar of Sharekhan by BNP Paribas also believes rural demand for FMCG companies will continue to remain weak while urban demand remained resilient for consumer good products with a good pick-up in the modern trade while momentum in the general trade continues to remain strong for the past two to three quarters.

"Out-of-home, packaged foods and edible oil categories witnessed good growth in recent times and will maintain the momentum in the coming quarters. With mercury rising in most parts of the country, demand for summer products is on the rise as trade channels are building up the inventory prior to the season. On the other hand, stable raw material prices post the recent correction in some of the key inputs (including crude oil and vegetable oils) will help margins to consistently improve in the coming quarters. Overall, we expect Q4FY2023 to be relatively better compared to Q3 and the momentum to improve at the start of next fiscal," he predicted.

He is selective in the consumer goods space and prefers companies with better growth prospects in the near to long term led by a strong portfolio of brands, strong cost-saving strategies and focus on expanding reach in the rural and urban markets. His preferred picks in the space are HUL, ITC, Britannia Industries, Marico, Jyothy Labs and Varun Beverages.

Meanwhile, Jasani of HDFC Securities, said that despite defensive characteristics, he is underweight on the FMCG sector in the model portfolio.

"We remain selective within the sector due to an unfavorable medium-term risk-reward, given absolute growth has been modest relative to expectations and valuations. The competitive landscape is rapidly changing and evolving consumer preferences can impact market share for leading brands. The latest El Nino threat is one more dampener for the sector," he said.

For FMCG companies, he believes that demand will improve gradually, instead of the general expectation of a quick bounce-back. High inflation has dented the net income level of the bottom of the pyramid consumption. If softening in inflation sustains, then improving affordability in rural will start helping rural consumption at the end of Q4FY23 or early Q1FY24, he added.

Jasani further noted that the pace of new launches has seen acceleration, inflation headwinds have started to moderate from Q2FY23 and key inputs such as crude oil and palm derivatives have corrected 35-50 percent from peaks which should help in aiding up revenue growth.

Commentaries from key players in the FMCG space suggest that the revival in rural markets has continued in the current quarter and volume offtake has been better than in previous quarters, however, extreme weather conditions are a key risk overhanging in the near term, he cautioned. He prefers ITC on the back of strong margin performance across segments, FMCG scaling-up and margin and valuation upside.

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First Published: 28 Mar 2023, 03:40 PM IST