FMCG Sector Q2 Results Review: Muted demand seen with margin-led earnings; check out key stocks to buy

The fast-moving consumer goods (FMCG) companies saw a subdued growth in overall topline during the July-September quarter of FY24. The impact on sales growth of FMCG companies in Q2FY24 was largely due to the festive loading shifting to Q3 and from the price-hike anniversarization. 

Rural market has seen recovery on a low base, but demand rebound is missing. Urban market continues to do well on the back of accelerated growth in the modern trade and ecommerce channels, according to brokerage firm Emkay Global Financial Services.

Meanwhile, Foods & Beverages continues to outgrow the Home and Personal-care categories.

Also Read: FMCG growth up in Sep qtr, signs of rural recovery seen

“This is in sharp contrast to the sector growing 9% (as reported by Nielsen), wherein small and regional players have seen healthy offtake. Unlike Domestic being afflicted by muted demand, International markets are offering FMCG players robust double-digit, constant-currency growth,” said the brokerage.

However, FMCG companies have largely managed to maintain product prices in a muted demand setting amid easing raw-material prices. This has helped in a better than expected gross margin delivery. 

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“While some players have utilized gross-margin benefits to further A&P spending, our overall coverage universe has seen healthy EBITDA margin expansion. Improved margin and higher yield have led to better than expected earnings in Q2FY24. Also, higher than estimated non-operating income further aided the earnings delivery,” Emkay Global analyst Nitin Gupta said in a report.

FMCG valuations

FMCG sector valuations (ex-ITC), trending near the last 10 year average fwd P/E of 49x, are holding up on the hope of demand recovery in H2FY24 and thus aiding double digit earnings ahead, as the margin-led earnings story is largely at play, he added.

“While we see continued recouping of margin ahead, recovery in demand may require players to pass-on raw-material benefits for accelerating volume growth. Q2FY24 results do not give us enough reason to change our stock calls, but we reduce topline for FY24E due to muted demand,” the report said.

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FMCG stocks to buy

The brokerage has a ‘Buy’ rating on Godrej Consumer Products (TP: ₹1,200), Dabur India (TP: ₹650), Britannia Industries (TP: ₹5,250), ITC (TP: ₹525) and Emami (TP: ₹625) among the FMCG stocks. 

Emkay Global has a ‘Sell’ call on Colgate-Palmolive India with a target price of ₹1,800 and a ‘Hold’ rating on Hindustan Unilever with a TP of ₹2,800 and Marico with a target of ₹560.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.