FMCG stocks to recover? Green shoots visible in rural demand; D-Street experts peg ‘hold’ for long-term, HUL is ‘buy’

Fast-moving consumer goods (FMCG) stocks have largely underperformed so far in 2024 due to weak base demand, inflation, adverse weather conditions, and lower agri-production growth. However, D-Street experts and brokerages have estimated that the FMCG sector is now on a path of gradual recovery over a revival in rural demand and visible green shoots in volume and margin print.

In the April-June quarter of fiscal 2024-25 (Q1FY25), market analysts believe that the growth trajectory for consumer staples has improved for most players. Higher sales and revenue growth may bolster buying opportunities for defensive stocks, which are on the verge of breaking out. Experts maintain a positive outlook, saying that the FMCG sector ‘holds potential for future growth', led by a steady economy and urban consumption.

Also Read: Q1 results preview: FMCG sector may see improving volume and value growth trends amid demand recovery

‘’Though it is difficult to predict the short-term movement of stocks, the FMCG pack, on an overall basis, looks posed for gaining traction in the medium to long term basis. The expectations of a normal monsoon will likely aid the rural demand, which forms a backbone for the sector,'' said Akriti Mehrotra, Research Analyst, StoxBox.

‘’The recent management commentaries of major FMCG companies indicated stable urban demand and green shoots of rural recovery. We believe that easing consumer price inflation and hopes of some assistance for farmers and rural population in the upcoming budget bodes well for the overall FMCG sector going ahead,'' added Mehrotra.

Also Read: Sensex @80K: Power Grid to UltraTech Cement — 13 stocks outperformed Sensex in H12024; Check full list

What's triggering the fall in FMCG stocks?

Commodity prices and food inflation have played a spoilsport for the sector, which depends on raw materials—either manufactured in domestic markets or imported. Crude oil is a major commodity imported from Russia and the Middle East, which impacts the volume and margin print for several FMCG firms.

‘’Over the past three months, we witnessed price hikes across several home and personal care categories and in select food and beverage (F&B) categories due to the inflationary headwinds,'' said Amit Agarwal, Senior VP-Fundamental Research – FMCG, Kotak Securities.

Paint manufacturing companies such as Asian Paints, Berger Paints, and Kansai Nerolac Paints, among others, use raw crude oil to manufacture paint. Hence, the rise or drop in global crude oil rates impacts stock prices. Consumer goods majors such as ITC and others also use raw oil to prepare certain food items.

Vincent KA, Research Analyst, Geojit Financial Services said, "Over the past year, the FMCG sector has underperformed relative to the main indices, impacted by weak rural demand, adverse weather conditions, lower agri-production growth, high inflation, and increased local competition.''

Despite an overall bullish sentiment in Indian markets driven by foreign fund inflow and robust macro indicators, the consumer goods stocks have mostly delivered negative returns to investors and witnessed a price erosion or a sharp decline in their respective stocks over six-month to one-year periods.

Coming to individual stocks, FMCG majors, including Hindustan Unilever Ltd (HUL), ITC, Nestle, Asian Paints, and Titan Company, were among the top Sensex losers in the first six months of 2024—at a time when the 30-share BSE benchmark covered its record run from 70,000 to the historic 80,000 mark.

To be sure, Asian Paints emerged as the top Sensex loser in H12024, witnessing a 12.89 per cent erosion in its stock price, followed by Titan, which crashed 8.79 per cent. Nestle stock declined 5.94 per cent in the last six months, while ITC fell 5.89 per cent and HUL was down 3.01 per cent, according to exchange data.

On the other hand, when domestic benchmark indices Nifty 50 and Sensex crashed over six per cent on June 4, logging their biggest single-day fall in four years, the FMCG pack were among the few stocks that recorded gains, defying frontline sentiments. Even then, D-Street analysts had warned traders against playing on the sudden movement and refrain from short-term intraday buy/sell strategies due to the price erosion on a long-term basis.
 

FMCG stocks on recovery: What are the visible green shoots?

-Rise in summer demand: In Q1FY25, FMCG product demand improved due to robust performance in the summer portfolio. The summer portfolio, including cold beverages, prickly heat powder, and glucose, performed well due to severe heat in north and central India. However, the heatwave negatively affected categories, such as hot beverages (tea) and household insecticides. 

For consumer durables, domestic brokerage Kotak Institutional Equities said that the companies are likely to report a robust quarter based on a strong summer-led surge in the sale of ACs, fans, and refrigerators and a weak base.

‘’We expect 50 per cent growth in revenues of Voltas, 35 per cent in Lloyd for Havells, 24 per cent consolidated sales growth for Whirlpool of India, and 18 per cent/15 per cent growth in revenues of Crompton/Havells. For Eureka Forbes, we build in 11.5 per cent growth in continuing businesses, driven by healthy volume growth in water purifiers and vacuum cleaners,'' said Kotak.

-Rural demand recovery: According to credit rating agency Crisil Ratings, the FMCG sector is expected to report revenue growth of 7 to 9 per cent in the current year, helped by higher sales volume and a revival of rural markets. 

 ''We believe a strong revival in rural demand is critical for the FMCG sector, with companies hoping a favourable monsoon will bolster the rural economy,'' said domestic brokerage Elara Securities. The rural markets outpaced urban due to the low base effect.

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‘’The sector shows signs of a gradual recovery in rural demand, driven by a reduction in inflation and strategic measures by companies to boost volumes. Additionally, the prospects of a better monsoon and potential policy shifts towards social economics could further enhance rural demand,'' said Geojit's Vincent KA.

-Stable urban demand: The volume growth from urban consumers will remain steady at 7 to 8 per cent, supported by rising disposable incomes and a steady focus on premium offerings by industry players, especially in the personal care and home care segments, according to Crisil. The rating agency estimates that the premiumisation and volume growth will expand the operating margin of FMCG firms by 50-75 basis points (bps) to 20-21 per cent. 

Product realisations in FY25 are likely to grow in the low single digits, with a marginal rise in the prices of key raw materials for the F&B segment. F&B accounts for nearly half of the sector's revenue, while the personal care and home care segments form a quarter each.

Crisil Ratings Associate Director Rabindra Verma said revenue growth will vary across product segments and firms. "F&B is expected to grow 8-9 per cent in FY25, aided by improving rural demand, while the personal care segment will grow 6-7 per cent. Home care, which outpaced the other two last fiscal, is expected to grow 8-9 per cent, led by premiumisation push and steady urban demand,” he said.

-Revenue growth: On revenue growth, Crisil added that the FMCG sector will be supported by modest realisation growth of one to two per cent "primarily due to marginal rise in prices" of some key F&B raw materials, including sugar, wheat, edible oil, and milk. However, prices for most crude-based products like linear alkylbenzene and high-density polyethylene packaging remain range-bound.

‘’On the raw material front, we witnessed a sequential decline in crude and palm oil prices, inflationary agri-prices which include milk, sugar, coffee, cocoa, copra, and barley and stability in chemical prices,'' said Kotak's Amit Agarwal.

Similarly, Elara Securities expects the FMCG coverage universe to report a revenue growth of 7.3 per cent year-on-year (YoY) and volume growth of 6.9 per cent YoY in Q1FY25E at a five-year CAGR 9.6 per cent vs 8.9 per cent in Q4FY24.

-Discretionary categories on gradual recovery: Kotak's Amit Agarwal expects stable-to-improving growth trajectory and margin print across most players for consumer staples. ‘’We expect stable-to-improving volume and value growth trends for most FMCG companies going forward. While in case of discretionary, we have observed continued strength in cigarettes/alcobev/jewelry, while there are demand challenges in QSR/paints/footwear,'' said Agarwal.

Also Read: Sensex @80K: Power Grid to UltraTech Cement — 13 stocks outperformed Sensex in H12024; Check full list

How to navigate FMCG stocks: Should you buy, sell, or hold?

Most D-Street experts agreed that the FMCG sector in India is set for a healthy CAGR in the coming years despite the recent underperformance. According to analysts, while inflation has impacted prices, a moderation in trend could improve margins for FMCG companies, which deal in essential goods, making them less affected by discretionary spending changes.

‘’The sector's valuation is slightly above its long-term average, and re-rating is anticipated to continue due to these multiple positive developments. Consequently, we have a strong positive outlook on the sector,'' said Geojit's Vincent KA. Analysts added that the consistent dividend payouts from many FMCG companies offer a stable income stream for investors.

According to Pranjal Bansal, Partner A A P T & Associates, Chartered Accountants, ‘’The recent underperformance of FMCG stocks, including major players like HUL and Asian Paints, presents a potential buying opportunity for long-term investors. For those navigating FMCG stocks, we recommend diversifying holdings across various product categories like food, personal care, and home care to mitigate risk,'' said Bansal.

Bansal suggests traders HOLD the stocks for the long term. ‘’Despite being among the top Sensex losers over the past six months, FMCG stocks have shown resilience, often rising when the market crashes, as seen on June 4. In this scenario, traders should consider holding FMCG stocks long-term rather than engaging in short-term buy/sell intraday strategies. The sector's stability and growth prospects make it a wise choice for long-term investment,'' said Bansal.

Amit Agarwal of Kotak Securities also advises traders to HOLD the stocks. ‘’As the market becomes more expensive, shifting focus to defensive sectors like FMCG is essential. Holding onto existing long positions is crucial, as many underperforming stocks are on the verge of breaking out. Instead of selling during every rally, the strategy must be to buy stocks from a medium-term perspective selectively,'' said Agarwal.

Ajay Thakur, Research Analyst, Anand Rathi Institutional Equities, expects only earnings revival, which could lead to re-rating and potential stock outperformance. ‘’We remain cautiously optimistic on both the stock in long term but do not expect any immediate upside trigger for them. We have a BUY on HUL and HOLD recommendation on Asian Paints,'' said Thakur.

Elara Securities' preferred FMCG stock picks are Jyothy Labs, Godrej Consumer Products, and Tata Consumer Products. Bajaj Consumer Care, Ms Bectors Food Specialities, and HUL could see a margin contraction in Q1FY25. Others, such as ITC, Nestle, and Britannia, could post margin expansion of over 100 bps YoY.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.