scorecardresearchWhat makes FMCG sector a good bet? Axis Securities shares key reasons;

What makes FMCG sector a good bet? Axis Securities shares key reasons; lists top 3 picks

Updated: 12 Jun 2023, 02:51 PM IST

Post the strong March-quarter earnings by FMCG firms with recovery in margins and volumes, the brokerage has picked its top 3 bets in the sector.

As per the brokerage, Indian FMCG companies have been on a structural growth trajectory.

As per the brokerage, Indian FMCG companies have been on a structural growth trajectory.

The fast-moving consumer goods (FMCG) sector has been one of the best-performing sectors 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.

The Nifty FMCG index has jumped around 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 over 35 percent versus an around 15 percent gain in Nifty.

How did FMCG companies perform in the March quarter (Q4FY23)?

A recent report by brokerage house Axis Securities pointed out that most of the FMCG companies highlighted early signs of rural recovery, thus driving volume growth in the March 2023 quarter.

However, it also noted that full rural recovery will take a few more months and the FMCG companies have highlighted that volume growth is likely to pick up gradually.

On the gross margins front, the brokerage observed that most companies have delivered sequential recovery as key raw material prices – crude, packing, and palm – are in a declining trend. It further added that on a YoY basis, the recovery is underway and it expects further recovery in the upcoming quarters as raw material prices have now stabilised.

Nonetheless, it also informed that 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 long run, it added.

FY24 outlook

The brokerage noted that most staple companies under its coverage have indicated early signs of rural recovery and moving forward, volume growth is also likely to pick up in the rural areas.

It believes that H2FY24 will be better, albeit with a little caveat. While easing inflation, higher government spending, and increased urban remittances will define future growth momentum in rural, early prediction of the El-Nino needs to be keenly watched out for. On the positive side, the IMD has forecasted a normal monsoon, it added.

What makes the FMCG sector a good bet?

As per the brokerage, 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.

"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. The FMCG sector also provides best-in-class returns ratios (ROCE, ROE) and dividends yield in the VUCA (volatility, uncertainty, complexity, and ambiguity) world which help protect the capital in the longer run," explained Axis Securities.

Top picks

Post the strong March quarter earnings by FMCG firms, the brokerage has picked its top 3 bets in the sector. Let's take a look:

Varun Beverages: The brokerage has a ‘buy’ call on the stock with a target price of 1,860, indicating an upside of almost 17 percent. The brokerage noted that VBL is consistently outperforming its peers in the last several quarters despite the volatile environment.

"Going ahead VBL is expected to perform well on account of - 1) Normalcy of operation and market share gains of newly acquired territories post COVID-19 disruptions, 2) The management’s continued focus on the efficient go-to-market execution in acquired and underpenetrated territories as reflected in its recently commissioned Bihar plant operations (it has started gaining market share), 3) Expansion in its distribution reach to 3.5 mn outlets in CY23 from 3 Mn currently, 4) Focus on expanding high-margin Sting energy drink across outlets coupled with an increased focus on the expansion of Value-Added Dairy, sports drink (Gatorade), and Juice segment, and 5) Robust growth in the International geographies," it explained.

ITC: The brokerage has a ‘buy’ call on this FMCG major as well with a target of 490, which implies an almost 12 percent upside. It noted that ITC's reasonable valuation among the entire FMCG pack provides a huge margin of safety.

Axis believes the narrative around the ITC is getting stronger as all its businesses are on the right track – 1) Stable cigarette volume growth led by market share gains and new product launches; 2) FMCG business reaching the inflection point as its EBIT margins are expected to inch up from 7.7 percent in FY22 and would be driven by – the ramp-up in the outlet coverage, effective implementation of the WIMI strategy, driving premiumisation, leveraging technology on demand and supply side; and moderation of raw material input cost; 3) Strong and stable growth in hotels as travel, wedding, and corporate activities pick up; 4) Steady and decent performance in paperboard and agric business witnessed in last few quarters.

CCL Products: The brokerage has a 'buy' call on the stock with a target price of 750, implying a potential upside of nearly 18 percent. Axis pointed out that the management remains confident of maintaining its volume guidance of 20-25 percent in the near term on account of a strong order book. It further added that the company has a strong footing in the international markets as it continues to gain market share and access new business. It is also doubling its capacity in Vietnam from the current 13,500 MT to 30,000 MT as well as expanding capacity in India, which will lead to strong volume growth visibility for the next 2-3 years, highlighted Axis Securities.

Capacity addition in the value-added products (FDC and small packs) and scaling up domestic consumer business and foray into high-margin branded retail business (continental coffee, plant-based meat protein) are some other key positives, it added.


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First Published: 12 Jun 2023, 02:51 PM IST