The overall topline of fast-moving consumer goods (FMCG) companies grew slowly during the July-September quarter of FY24. The impact on FMCG companies' sales growth in Q2FY24 was mostly attributable to the festive loading shifting to Q3 and the price-hike anniversary.
The rural market has recovered from a low base, but demand has yet to rise. According to brokerage firm Emkay Global Financial Services, the urban market is doing well due to faster expansion in modern trade and ecommerce channels.
"This is in stark contrast to the sector's 9% growth (as reported by Nielsen), which has seen healthy offtake from small and regional players." Unlike the domestic market, which is seeing dampened demand, international markets are providing FMCG businesses with robust double-digit, constant-currency growth," according to the brokerage.
However, despite low demand and falling raw-material prices, FMCG companies have mostly maintained product prices. This has contributed to a higher-than-expected gross margin delivery.
"While some players have taken advantage of gross-margin benefits to increase A&P spending, our overall coverage universe has seen healthy EBITDA margin expansion." Earnings in Q2FY24 were greater than predicted due to improved margins and increased yield. In addition, higher-than-expected non-operating income improved profits delivery," Emkay Global analyst Nitin Gupta wrote in a report.
FMCG Market Valuations
FMCG sector valuations (ex-ITC), which are moving near the previous 10 year average forward P/E of 49x, are holding up on the hope of demand recovery in H2FY24, aided by double digit earnings ahead, he noted, as the margin-led earnings story is substantially at play.
"While we see continued margin recouping ahead, demand recovery may necessitate players passing on raw-material benefits to accelerate volume growth." "Q2FY24 results do not provide sufficient reason to change our stock calls, but we reduce topline for FY24E due to muted demand," according to the report.
Buy FMCG Stocks
Godrej Consumer Products (TP: 1,200), Dabur India (TP: 650), Britannia Industries (TP: 5,250), ITC (TP: 525), and Emami (TP: 625) are among the FMCG stocks with a 'Buy' rating from the firm.
Emkay Global has a 'Sell' rating on Colgate-Palmolive India with a target price of 1,800, a 'Hold' rating on Hindustan Unilever with a target price of 2,800, and a 'Hold' rating on Marico with a target price of 560.
