2023 in Review: Nifty FMCG soars 25%; 3 stocks jump over 50%, only 1 in the red
The Nifty FMCG index outperformed the benchmark, jumping 25 percent in 2023 as against an 18 percent rise in Nifty. All constituents of the Nifty FMCG index, except one (Dabur India), gave positive returns in the current calendar year with 3 rallying over 50 percent.
On the back of sustained signs of rural recovery, easing inflation and improvement in gross margins, the fast-moving consumer goods (FMCG) sector witnessed robust growth in 2023. The Nifty FMCG index outperformed the benchmark, jumping 25 percent in 2023 as against an 18 percent rise in Nifty.
Earlier this week, the index hit its record high of 55,581.40 on December 20; it has surged 28 percent from its 52-week low of 43,550.10, hit on February 1, 2023.
Constituents
All constituents of the Nifty FMCG index, except one (Dabur India), gave positive returns in the current calendar year with 3 rallying over 50 percent.
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Varun Beverages was the top gainer, surging almost 87 percent in 2023, followed by Radico Khaitan and Colgate-Palmolive, which soared 58 percent and 56 percent, respectively.
Meanwhile, ITC, Tata Consumer Products, Nestle India, United Spirits, Godrej Consumer, and Britannia Industries advanced between 20 and 37 percent each. P&G Hygiene and Emami added around 17 percent each whereas Marico was up 3 percent. United Breweries and Hindustan Unilever were flat but in the green, however, Dabur shed 5.5 percent.
Varun Beverages recently hit its record high of ₹1,380.45 on December 20 after the company announced the acquisition of South Africa’s Bevco, which analysts expect to be a good value-creation opportunity. It has now skyrocketed over 150 percent from its 52-week low of ₹550, hit on February 3, 2023. The stock has gained 13 percent in December after a 21.5 percent rise in November. It gave positive returns in 9 of the 12 months of 2023.
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"Varun Beverages’ success in SA, in our view, will require marketing investments (ATL/BTL) and product/packaging innovation to influence consumer habits. Presence at magic price points also remains key to increasing market share from regional players. However, proof points of success in Zimbabwe/Nepal (>50% share now after starting from scratch) and VBL’s best-in-class execution strengths give us confidence of share gains in SA as well," Emkay Global Financial Services said in a note.
Meanwhile, Radico Khaitan added 6 percent in December, extending gains for 3rd straight month. It rallied 24 percent in November and was up 1 percent in October. The stock also gave positive returns in 9 of the 12 months in 2023. The stock hit its record high of ₹1,882 on December 5 and has advanced 99 percent from its 52-week low of ₹945.05, hit on December 26, 2022.
In a recent note, Sharekhan said that Radico Khaitan's premiumisation strategy has enabled it to consistently generate double-digit volume-led revenue growth, surpassing the industry for the previous few years with the exception of FY2021.
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"Margins have bottomed out and we should expect consistent improvement in profitability and cash flows in the coming years. The stock trades at 49x/40x its FY2025E/26E EPS. We maintain a Buy rating with a revised price target of Rs. 1,965 (rolling over to Sept-25 earnings)," the brokerage said.
On the other hand, Colgate Palmolive has also given positive returns in 9 of 12 months this year. It has advanced 9 percent in December, extending gains for the 4th straight month. The stock also hit its record high of ₹2,437.40 on December 20 and has jumped 70 percent from its 52-week low of ₹1,434.60, hit on January 30, 2023.
Earnings
As per Axis Securities, most of the FMCG companies have highlighted muted performance as the delayed festive season impacted the overall volume growth. However, the positive side was the improvement in margins due to declining raw material prices, providing support for earnings growth.
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Axis noted that the companies expect H2FY24 to be better. Moreover, sustained signs of rural recovery are visible, it added. Axis also forecasted that full rural recovery will take a few more months.
"Companies have highlighted that volume growth is likely to pick up gradually. On a gross margins front, most companies have delivered sequential recovery as key raw material prices – crude, packing, and palm remained stable. We expect further recovery in the upcoming quarters as raw material prices have now stabilized. Nonetheless, EBITDA margins have shown slower recovery as companies increased ad spending to increase the voice of share and gain market share. Though this has a short-term negative impact on margins, it will help in the longer run," it said.
Meanwhile, Softness in input costs emerged as a positive factor, contributing to improved gross profit margins (GPM) and operating margins (OPM).
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What makes the FMCG sector a good bet, as per Axis:
Structural growth trajectory: Indian FMCG companies have been on a structural growth trajectory with many categories still under-penetrated (shampoos and premium detergents) and underserved as rural penetration is still underway.
Premiumisation agenda to drive the overall growth: As Indian consumers increase their purchasing power, the propensity to buy premium and branded products will increase; thus premiumisation agenda will drive the overall growth for the sector.
Best-in-class returns ratios (ROCE, ROE): The FMCG sector provides best-in-class returns ratios (ROCE, ROE) and dividends yield in the VUCA (volatility, uncertainty, complexity, and ambiguity) world which help protect the capital in the longer run.
Read here: FMCG Q2 review: ITC among Axis Securities' top 3 stock picks after earnings; details here
Outlook
Nomura Research analysts expect GPM expansion to persist, given the deflationary trend in input cost prices. Companies are anticipated to continue investing in brands, launching new products, and increasing advertising spending, with an expectation of better volumes in 3QFY24.
They prefer companies that are demonstrating pockets of strength in the form of superior growth (in volumes and pricing) trajectory than peers/industry, making investments in distribution, digitisation and R&D capabilities to support innovative new launches, witnessing structural tailwinds despite volatile macro conditions, having a leaner/efficient business model; and having strong brands, pricing power and higher saliency of premium portfolio to stand out
Top picks
Nomura's top picks include Godrej Consumer Products Ltd, DABUR and ITC Ltd.
Meanwhile, Motilal Oswal Financial Services likes ITC Ltd, Godrej Consumer Products and Tata Consumer Products; and Axis Securities prefers Varun Beverages, ITC, and Jyothy Labs.
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
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