Going forward, easing inflation, a strong festive season, higher government spending and increased municipal remittances will drive growth in H2FY24, however, increasing competitive intensity from smaller and regional players with raw material declines will be heavily watched, the brokerage noted. .
The brokerage also pointed out that gross margins among base companies continued to improve in Q2 as key commodity prices – crude, palm and packing material – remained stable. However, an increase in advertising spending to regain market share will slow the expansion of the EBITDA margin, although it will benefit in the long term, it warned.
How did companies perform in Q2FY24?
According to the brokerage, most of the FMCG companies highlighted muted performance as the delayed festive season affected the overall volume growth. However, companies expect H2FY24 to be better. In addition, continued signs of rural recovery are visible, it added. Axis also predicted that full rural recovery would take a few more months.
“Companies have emphasized that volume growth is likely to pick up gradually. On gross margins, most companies have delivered a sequential recovery as key commodity prices – crude, package and palm remained stable. We expect further recovery in the coming quarters as commodity prices now stabilized. However, EBITDA margins showed a slower recovery, as companies increased advertising spending to increase the share of voice and gain market share. Although this has a short-term negative impact on margins, it will help in the long term. ,” it said.
What makes the FMCG sector a good bet, according to Axis:
Structural growth trajectory: Indian FMCG companies have been on a structural growth trajectory with many categories still under-penetrated (shampoos and premium detergents) and underserved as rural penetration is still underway.
A premiumization agenda to drive overall growth: As Indian consumers increase their purchasing power, the propensity to buy premium and branded products will increase; thus a rewarding agenda will drive the overall growth for the sector.
Best-in-class performance ratios (ROCE, ROE): The FMCG sector provides best-in-class return ratios (ROCE, ROE) and dividend yield in the VUCA (volatility, uncertainty, complexity, and ambiguity) that help protect the capital in the longer term.
Top FMCG stocks post Q2 earnings:
Varun Beverages: The brokerage has a ‘buy’ call on the stock with a target price of ₹1050.
“VBL has consistently outperformed its peers in recent quarters despite the volatile environment. Going forward, VBL is expected to perform well due to 1) Normalization of operations and gaining market share in the newly acquired territories following the disruptions of COVID-19, 2. ) The continued management’s focus on effective market execution in the acquired and under-penetrated territories as reflected in the recently commissioned Bihar facility (it has started gaining market share), 3) Expansion of distribution reach to 35 lakh outlets in CY23 from the current 30 lakh, 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 the international regions,” it explained.
ITC: The brokerage has a ‘buy’ call on the stock with a target price of ₹540, indicating an almost 23 percent increase.
“We believe the ITC story is getting stronger 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 grow by 7.7 percent in FY22 and driven by – the increase in outlet coverage, effective implementation of WIMI (Win in Many Indies) strategy, promotion of premiumization, exploitation of demand and supply-side technologies and moderation of raw material costs; 3) Strong and stable growth in hotel business while travel, wedding and corporate activities increase; 4) Stable and decent performance in cardboard and agricultural business in recent quarters. Reasonable valuation among the entire FMCG package provides a large margin of safety,” it said. .
Jyothy Labs: The brokerage has a ‘buy’ call on the stock with a target price of ₹450, which implies a muted 4 percent up.
“The company’s recent initiatives, implemented over the last two years, have begun to yield positive results, and we expect these benefits to extend over the coming years. Notable initiatives include: a) Expanding value propositions through LUPs and promoting premiumization, primarily in the Detergents and Dishwash segments, b) Diversifying into the larger Body Wash segment (Toilet Soap) as opposed to its previous presence in the niche (natural) segment, creating a wider market for the company in the Soap segment, and, c ) The company’s commitment to expand its direct distribution network, with aspirations to increase its current 11 lakh outlets. We expect the company to deliver healthy Revenue/EBITDA/PAT growth of 13 percent/25 percent/25 percent CAGR over FY23-26E and ROE to increase from 15 percent in FY23 to 21 percent in FY26,” Axis said.
Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decision.
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Updated: 24 Nov 2023, 16:31 IST
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