NEW DELHI: Slow growth in consumption and the inability of large companies to go for price hikes amid fierce competition from small/regional players is weighing down heavily on fast-moving consumer goods (FMCG) stocks.
A dismal earning show in December quarter where heavyweights such as HUL and Nestle missed street estimates further dented investors’ sentiment. In the first two months of calendar year 2024, shares of top FMCG firms have fallen 4-19% while the sectoral index – Nifty FMCG – is down by about 6%. In comparison, share market benchmarks -- NSE Nifty50 and BSE Sensex -- have registered a small gain during this period.
“Our analyses of 11 FMCG companies (excluding ITC) showed Q3 revenue growth was just 2.1%, falling sharply from 6% in the first half and 13% in FY23. There has been a rise in competitive intensity, with small players getting aggressive. New launches and festival spending have led to a rise in advertising and promotional spending by 24% in Q4CY23 (after rising 30% YoY in prior two quarters). The above factors - a) weaker revenue growth b) rising competitive intensity have driven weakness in FMCG stocks in CY24 so far,” said Ajay Thakur, Research Analyst, Anand Rathi Institutional Equities.
As inflation has cooled down in last few quarters, there has been a resurgence of small/regional players in the FMCG segment, eating leaders’ share across categories such as soaps, detergents, hair oil, tea, and biscuits. Several listed FMCG firms like HUL, Godrej Consumer, Marico, Britannia and Tata Consumer recently highlighted competition they are facing from small players. Large FMCG firms are forced to go for price revision and spend heavily on marketing.
“The weakness in revenue growth of large FMCG players is driven by price increase fading (down to flat vs 9-10% pricing in Q1CY23). Urban volume growth has moderated a bit but rural volume growth has improved,” said Thakur. He added that the FMCG sector is likely to deliver returns in line with its earnings growth and a 10-15% return is expected is CY24 as FMCG company performance is expected to improve in coming quarters.
Top firms face challenge
In Dec quarter heavyweights such as HUL and Nestle missed street estimates further dented investors’ sentiment. In first two months of calendar year 2024, shares of top FMCG firms have fallen 4-19% while the sectoral index – Nifty FMCG – is down by about 6%. NSE Nifty50 and BSE Sensex -- have registered a small gain during this period