For the FMCG sector rural demand is yet to pick up and a lackluster volume growth is expected in this space this quarter, says Anand Mour, FMCG Analyst at ICICI Securities.
In an interview with CNBC-TV18, he said that he is positive on Nestle, Marico and Godrej Consumer while expects to see a ratings reduction for Colgate and HUL.
Below is the transcript of Anand Mour’s interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: If you can start off by laying down the fundamentals for us. How bad can fast-moving consumer goods (FMCG) be? From the universe that you track, what is the expectations as far as revenue growth and margin performance?
A: If you were to look at this quarter, essentially, the problem is the rural demand is yet to pick up. We expect the rural demand recovery to happen only from Q1 next year. Essentially, after the winter crop harvest. As far as this quarter goes, clearly the volume growth is going to be really lack lustre.
The near-term headwinds with regards to rural demand not picking up is going to be visible. At the same time, during the quarter, we have also seen quite a lot of adjustment which was going on in the trade with regards to ideas and people adjusting to the new way of working. That is something which also seen some kind of impact. Overall, we look at a very similar rate of growth for the FMCG companies in this quarter similar to last quarters.
While on margin front, we expect a few companies may report some earnings before interest, taxes, depreciation and amortisation (EBITDA) margin expansion, but it is going to be a mixed bag.
Latha: What are the ones that you are positive on?
A: We prefer essentially the companies which are going to benefit from the structural changes or the companies which are doing a lot of activities on the distribution front. So, we prefer that you jewellery sector, we prefer Nestle. Those would be the top picks. Besides that, we like Marico and Godrej Consumer Products.
Latha: In this hierarchy, what are your strong buys?
A: Definitely Nestle.
Latha: Any avoids?
A: We will wait to see how the quarter pans out. Right now we have a reduce rating on Colgate Palmolive and Hindustan Unilever (HUL).
Sonia: So, what sit your view on HUL in terms of a stock price? And on ITC as well, what is your expectation?
A: With regards to HUL clearly, one has to see how the volume growth pans out. We are building in about 3 percent volume growth for this quarter. And expect that there can be room for further earnings downgrades on that stock.
With regards to ITC, the stock is attractively priced, but the problem is until the clarity on goods and services tax (GST) rate comes out, the stock should remain sideways. Essentially, we are getting into the next 4-5 months where lots of noises around anti-tobacco as India hosts the world tobacco convention in New Delhi for the first time in November.
At the same time, the GST rate, lack of clarity around that and then we have the excise worries. So, clearly, the cigarette stocks need a respite from the increase in tobacco tax incidents. If that happens, clearly, we see ITC as a great bet for the long-term. However, if the tax incidents were to increase further, the legal cigarette industry is going to see brunt from the contrabands.
The government needs to be cognisant about how the contrabands are shaping up. So, we have an add rating on ITC, however, as mentioned, we will be watching out for clarity about the GST rate and the excise.