Tailwind for FMCG sector, more stock rallies likely

Even as shares of top FMCG players such as HUL, Dabur, Marico, Tata Consumer, and Godrej Consumer have surged 8-14% in the last 5 sessions, analysts believe these stocks have steam left to their rally.
Image used for representational purpose.
Image used for representational purpose.

NEW DELHI: A host of factors such as rural revival, healthy monsoon prediction, post-election focus on social welfare schemes and softening of raw material prices is expected to augur well for fast-moving consumer goods (FMCG) companies on the D-Street.

Even as shares of top FMCG players such as HUL, Dabur, Marico, Tata Consumer, and Godrej Consumer have surged 8-14% in the last 5 sessions, analysts believe these stocks have steam left to their rally.

“Most FMCG firms are up at least 10% post election verdict, owing to their defensive nature and optimism around better prospects...For the companies that we cover, we estimate 13% earnings CAGR over FY24-26, aided by gross-margin gains and demand recovery,” said brokerage Anand Rathi on Monday, which has a buy call on HUL (target price or TP of Rs 3,000), Emami (TP of Rs 730) and Zydus Wellness (TP of Rs 2,150). United Breweries (TP of Rs 2,300) is its pick in consumer discretionary.

The brokerage believes election results (in which NDA lost seats in Maharashtra and UP) could spell more social welfare impetus. “With Maharashtra and Bihar lined up for state elections in 2024 and the Budget likely in July, we expect the government to allocate more for social welfare schemes, which would drive higher rural income ahead,” it said.

As per Nielson, rural volume-growth improved to 7.6% in Q4FY24 (5.8% in Q3FY24, 0.3% in Q4FY23). Management commentaries by FMCG companies also painted better revenue trajectories. Thus, overall revenue growth, which fell to 6.5% in H2 FY24 (10% earlier), per Nielsen, is likely to grow in high single to double digits for FY25.

A fall in raw material prices, mainly crude oil prices which have softened by 10% over 7-10 days, could aid gross margin. Prices of most commodities were favourable in last six months/one year, barring prices of polypropelene, palm oil and coffee. Prices of barley and caustic soda recently rose (over 1/3/6 months), while those of mentha oil and crude fell.

Also, wheat and milk powder were soft in last three-to-six months. Godrej Consumer Products, one of top FMCG firms, said rural landscape is evolving, presenting FMCG companies with a promising avenue for expansion.

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