FMCG share price target

Top Conviction Ideas (FMCG) - Varun Beverages, DOMS Industries

In Q3FY25, we observed low teen YoY revenue growth and slight expansion in EBITDA margins for our coverage companies, but overall numbers were below our estimates across the board.

Top Conviction Ideas - Varun Beverages Ltd; DOMS Industries Ltd

OUR TOP POSITIVE PLAYS Staples: HUL, Nestle, VBL , Jyothy Labs , Colgate , CCL Products, Britannia Retail: TRENT, Ethos

The FMCG sector is considered to be consumer-defensive, and expected to be resilient in an economic downturn. However, the industry is facing headwinds from slowing rural consumption.

Our Consumer Coverage universe is expected to see a muted revenue growth of 4.2% YoY/4.8% QoQ in Q4FY24E. There has been no material change in the demand environment compared to Q3FY24 despite a moderation in CPI inflation in the quarter.

Top Sector Ideas - FMCG Q3FY24

Q3FY24 presented weak demand trends like the previous quarter due to subdued volume recovery

Demand trends for the FMCG sector broadly remained steady on a QoQ basis indicating lack of significant demand uptick. India’s CPI has moderated from the peak of 7.44% seen in July 2023 to 5.55% in November 2023.

Our FMCG coverage saw muted volume growth in Q2 due to heightened regional competition and delayed rural recovery

The first quarter of FY24 has kicked off on a relatively positive note for FMCG companies, shifting the downbeat mood in the sector. Signs of an uptick in volume growth and rural recovery were visible as inflationary pressures declined. Prices of key raw materials like crude, palm oil, wheat and packing materials have remained stable, enabling many companies to reduce prices across segments.

Key observations for milk prices based on our discussions with dairy companies and channel checks are: (1) wholesale milk prices have risen YoY in Aug’23; (2) there is a steady deceleration in milk price inflation in south India; inflation has declined from 12.8% in Dec’22 to 9.6% in Aug’23 (but inflated on MoM basis); (3) milk procurement prices are likely to remain stable/ slightly lower till end of CY23.

Top Sector Ideas - FMCG

While wholesale milk prices have remained in inflationary mode, we note: 1) there is steady deceleration in milk inflation in south India, 2) normal monsoon and commencement of flush season are likely to result in lower milk procurement prices, and 3) our channel checks and interactions with dairy companies indicate milk procurement prices have declined in May-Jul’23.

Companies in the consumer staples sector typically speak about normal monsoons likely driving demand improvement; we find this intriguing. Our analysis spanning four decades does not support this hypothesis (correlation of HUL’s revenue growth with monsoons / agri-GDP growth is 0.2 / 0.56).

Key Monitorables - Rural recovery; Margins Guidance; Inflation Trajectory Top Picks from the Sector: Varun Beverages; ITC; CCL Products

FMCG companies saw signs of a recovery in Q4FY23 after a series of challenging quarters. “I wouldn't say that we are out of the woods yet, but we have started seeing volume growth coming back,” Sunil D’Souza, CEO and MD of Tata Consumer Products, said.

As the world grappled with high inflation over the past several months, businesses hiked prices to offset rising input costs. In the US, both politicians and economists raised concerns over corporations using the cover of inflation to overcharge their customers and rake in profits.