The June quarter (Q1FY24) earnings for the FMCG space showed some signs of improvement as against the previous quarter. In a recent report, brokerage house Axis Securities informed that most staple companies under its coverage have indicated sustained signs of rural recovery. Moving forward, volume growth is also likely to pick up in the rural areas, it predicted. The brokerage also pointed out that gross margins across staples companies continued to improve in Q1 as key raw material prices - crude, palm, and packing material - remained stable.
However, an increase in ad-spends to regain market share will slow down EBITDA margin expansion, though it will benefit in the longer run, it noted.
Going ahead, Axis Securities expects the second half of the financial year 2024 (H2FY24) to be better, albeit with a caveat. Easing inflation, higher government spending, and increased urban remittances will define future growth momentum in rural regions, however, El-Nino's impact needs to be keenly watched out for, said Axis Securities.
How have companies performed in Q1FY24?
As per the brokerage, most of the FMCG companies have highlighted sustained signs of rural recovery, thus driving volume growth, however, full rural recovery will take few more months, it added.
It also stated that 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. On a YoY basis, the recovery is underway and Axis Securities expects further recovery in the upcoming quarters as raw material prices have now stabilised.
Nonetheless, EBITDA margins have shown slower recovery as companies increased ad spends 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, stated the brokerage.
Axis also tells you what makes the FMCG sector a good bet.
- Structural growth trajectory: Indian FMCG companies have been on a structural growth trajectory with many categories still under-penetrated (shampoos, 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 of buying premium and branded products would increase; thus premiumisation agenda will drive the overall growth for the sector.
- Best-in-class returns ratios: FMCG sector provides best-in-class returns ratios (ROCE, ROE) and dividends yield in the VUCA (volatility, uncertainty, complexity, and ambiguity) world which helps protect the capital in the longer run.
Let's now take a look at the brokerage's top FMCG stock picks post the Q1 earnings:
Varun Beverages: The brokerage has a ‘buy’ call on the stock with a target price of ₹920, indicating a flat upside of just 2.3 percent.
"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) continued management 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 3.5 million outlets in CY23 from the current 3 million, 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 international regions," it explained.
ITC: The brokerage has a ‘buy’ call on the stock with a target price of ₹540, implying an over 20 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 strategy, promotion of premiumization, leveraging demand and supply side technologies and moderation of raw material costs; 3) strong and stable growth in the 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 stated.
CCL Products: The brokerage has a ‘buy’ call on the stock with a target price of ₹750, which implies a potential upside of over 23 percent.
"Management remains confident in maintaining its volume guidance of 20-25 percent in the near future based on the strong order book. Strong positioning in international markets as the company continues to gain market share and enter new business areas. Doubling of capacity in Vietnam from the current 13,500 MT to 30,000 MT and new capacity expansion in India, which will result in strong volume growth over the next 2-3 years. Capacity expansion in value-added products (FDC and small packs). Expansion of domestic consumer business and entry into high-margin branded retail business (Continental Coffee, Plant-based meat protein)," it said.