Be cautious about FMCG stocks, analysts warn investors

By Nikita Vashisht
It may be a little early to cheer the recovery in the fast-moving consumer goods (FMCG) space as a deceleration in
discretionary demand, after the festival season, may offset fragile rural recovery, analysts have cautioned.
“The overall demand environment for staples remains muted, while discretionary demand trends have seen some
deceleration after the festival season.
“We believe margins in staples have bottomed out, but we expect only a gradual uptick with the ongoing softening in raw
material prices.
“This is because companies have begun to effect price cuts to protect market share against unorganised players, and will
also need to increase marketing spends, which have been low for the past few years,” said Himanshu Nayyar of Systematix
Research, in a note co-authored with Rajesh Mudaliar and Chetan Mahadik.
Consumer staples demand in rural areas witnessed sequential recovery in the latter half of the October-December
quarter (third quarter, or Q3), with raw material cost pressures abating, price cuts announced by companies, and inflation
receding.
Besides, wage growth overtook inflation, the unemployment rate dropped, and sowing and tractor sales reveal strong
trends.
Abneesh Roy of Nuvama Institutional Equities, however, points out that although the overall monsoon was good, the
headline data hides the deficit in four high-population states of Bihar, Uttar Pradesh, Bengal, and Jharkhand.
“Modest growth in rural markets is almost entirely due to the base effect as rural slowdown started in the second half of
2021-22.
“The lower end of the rural job market seems to be improving, but these are early days and sustainability is needed,” he
said in a report from Rushabh Bhachawat and Jainam Gosar.
According to data by retail intelligence firm Bizom, demand from rural areas declined 0.2 per cent on a month-on-month
basis in December, while it was down 17 per cent in November.
The overall demand, however, was up 1.4 per cent on a month-on-month basis.
In their quarterly update, Godrej Consumer Products, Dabur, and Marico unanimously witnessed sluggish growth in Q3,
driven by poor rural consumption and slowdown after the festival season.
Dabur India said overall demand remained weak because rural markets remained under pressure.
Besides, the late onset of winter in North India had added to the weakness, it said.
Discretionary demand heads south
Discretionary demand, too, has seen some deceleration after the festival season as inflation began to impact demand at
the mass end of the market.
Quick service restaurant (QSR) players saw slowdown in growth, with aggregators focusing on higher order values and
lowering discounts.
Kotak Institutional Equities (KIE) expects Asian Paints to witness a deceleration in the three-year volume (ex-putty)
compound annual growth rate (CAGR) to 8 per cent (similar to the pre-pandemic levels) in Q3 versus 11 per cent in the first
half of 2022-23.
“We expect weakness across QSRs (except Westlife Development) with a flat or sequential dip in average daily sales.
“Jubilant FoodWorks' three-year revenue CAGR should moderate further to 8.4 per cent, from 9-10 per cent and margin
pressure should rise.
“Devyani International, Sapphire Foods India, and Restaurant Brands Asia should report a weak revenue and earnings
before interest, tax, depreciation, and amortisation print,” it said.
Analysts suggest investors selectively pick FMCG stocks from a medium- to long-term perspective and focus on how the
companies deal with ease in input costs.
Preeyam Tolia, senior research analyst at Axis Securities, is bullish on Hindustan Unilever (HUL) and Dabur India as he
believes domestically-inclined FMCG companies will do relatively better.