Softening raw material costs lift FMCG stocks; 40% of Nifty FMCG stocks are near 52-week highs

As inflation appears to be cooling down along with the revival in rural consumption has boosted FMCG stocks recently. Demand in rural India for fast-moving consumer goods grew 6.7 percent in value in August, while urban areas registered a value growth of 5.5 percent over July, as consumption in rural areas increased due to normal and above normal monsoons in most parts of the country, Business Standard reported quoting Bizom data.

The Nifty FMCG index hit an new all time high of 43,928.90 on Tuesday. In Tuesday's trading session, two stocks—Varun Beverages and ITC also set fresh 52-week highs, while four other stocks are currently 1-8% away from their 52-week highs.

In addition to that, the Nifty FMCG has outperformed the benchmark Nifty by rallying 15.83% since the start of the year, whereas the Nifty has risen only 1.73% in the same time period.

During the Russian-Ukraine war, palm oil prices have shot up, affecting the margins of FMCG companies in the March quarter as these companies rely on palm oil for their soap business, which accounts for nearly 10-30% of their overall revenues.

In the March 2022 quarter and the beginning of the June quarter, FMCG companies faced a double whammy effect of rising input cost prices on one hand and shrinking demand caused by elevated inflation on the other hand. For context, food inflation reached a new high of 7.68 percent in March, which was the highest since November 2020, and in April 2022, the annual inflation rate rose to 7.79 percent, the highest since May of 2014.

However, easing supply chain disruptions and increasing supplies from Malaysia, the world's second-largest producer of palm oil, as well as lockdowns in China, have all contributed to a drop in price for palm oil.

According to media reports, the prices of palm oil, wheat, and edible oils have corrected 20 to 50% in the past one month. While Crude oil prices have fallen from peaks of over $136 a barrel to around $90 a barrel. Analysts expect commodity prices to cool off further in the coming months, providing margin relief to consumer goods companies.

The drop in edible oil prices also aided in lowering inflation in India to 6.71 percent in July, down from 7.1 percent in June, and sparked buying interest in FMCG stocks in recent weeks. Sectoral rotation away from high-beta stocks and toward more defensive plays has also helped.

Meanwhile, two stocks in the Nifty FMCG Index increased by more than 50% in the last six months. Five stocks returned between 20% and 30%, while two stocks gained between 10% and 15%.

FMCG stocks Skyrocketed

Shares of Varun Beverages rose about 6% in Tuesday's trade and set a new 52-week high of ₹1,102.8 on the BSE. The stock has picked up steam since April, rising nearly 76.2% year-to-date (YTD) against a1.73% rise in the benchmark Nifty.

ITC's share price has been an outperformer so far in 2022. The stock set a fresh 52-week high of ₹330 in Tuesday's trade on the BSE. In the last six months, the stock has surged from around ₹215.85 to ₹327.15 levels, logging a near 52.16 percent rise in this period.

ITC Limited posted a consolidated net profit of ₹4,389.8 Cr for the quarter ended June, which was up 34.24 percent year-on-year (YoY) as against ₹3,276.5 Cr reported during the corresponding quarter in the year-ago period. The revenue from operations for Q1 of FY2023 stood at ₹18,210.2 Cr versus ₹14,687.8 Cr, which was up nearly 28.07 percent YoY.

With a rally of over 27.4 percent, HUL emerged as the third top gainer in the Nifty FMCG index. In the last six months, the stock has risen from ₹2,019 to ₹2,573.10, representing a return of 27.4 percent, while the Nifty50 has risen 1.73 percent. Given that HUL outperformed the index by 25.92 percent. The stock is currently trading 35.32% above its 52-week low of ₹1,901.6.

On the other hand, shares of United Breweries, Godrej Consumer Products, Tata Consumer Products, Radico Khaitan, Colgate-Palmolive, and Nestle India rallied between 10% and 24% in the last six months.

Sales are at pre-pandemic levels.

Despite the three Covid waves, the FMCG sector seems to have emerged as one of the most resilient segments of the economy. The April-June quarter numbers indicate a steady recovery in FMCG sales, which is now at the pre-pandemic level.

However, the majority of sales in the June and March quarters were driven by multiple price hikes executed by FMCG companies.

To protect their margins from rising commodity prices, FMCG firms have raised prices for their products multiple times. The CMIE report showed that HUL has raised prices by 9–10 percent in the March 2022 quarter and then raised them again in the June 2022 quarter. 

Similarly, Nestle, Britannia industries, and Marico have raised prices in the last two quarters.

In April-June, Britannia reported a 13.24 per cent decline in consolidated net profit to ₹337.4 crore while its sales were up 8.74 per cent to ₹3,756.5 crore.

According to recent news reports, FMCG companies may pause price increases as commodity prices fall. Analysts anticipate that FMCG operating margins will improve in the second quarter of FY23 due to lower input cost prices.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.