Brokerage firm BOB Capital Markets (BOBCAPS) believes green shoots are emerging in rural markets which will help companies such as Britannia Industries and Nestle India because of their large market share.
BOBCAPS pointed out that rural consumption, which forms close to 40 percent of the FMCG industry’s volumes, has been sluggish over the past six quarters, but green shoots have emerged towards the end of 2022.
The rural recovery will be aided by policy measures such as wage hikes under the MGNREGA scheme, free food grains, hikes in minimum support crop prices, direct benefit transfer, and higher budget allocation for infrastructure development in the hinterland.
Moreover, a respite from inflation and strong winter crop sowing should boost consumption in these markets, said the brokerage firm.
BOBCAPS believes inflation headwinds have started to moderate from the second quarter of FY23.
"Key inputs such as crude oil and palm derivatives have corrected 35-50 percent from peaks, the benefit of which will percolate through in the coming quarters. Though prices of several agricultural commodities remain firm, most consumer staples players expect to see a moderation in raw material cost," BOBCAPS said.
"Our channel checks with key players in the FMCG supply chain, including distributors, wholesalers and stockists indicate that the revival in rural markets has continued in the current quarter and volume offtake has been better than in previous quarters," the brokerage firm said.
BOBCAPS highlighted that companies with strong product portfolios, a large rural presence and localised marketing strategies are gaining market share in respective categories despite the challenging demand environment.
Britannia Industries and Nestle India are the two top picks of BOBCAPS from the consumption space.
"We retain our preference for FMCG players with a strong presence and product acceptance in rural markets. In our view, Britannia (buy; target price: ₹5,623) and Nestle (buy; target price: ₹22,860) are best placed in this regard, having already deepened their rural footprint by the addition of dealers and direct distribution channels," said BOBCAPS.
"Revenue contribution from rural markets is relatively lower for Nestle, but we expect ready acceptance of its products and a targeted distribution strategy to percolate into the revenue mix and margins going forward," the brokerage firm said.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.