After delayed monsoon, dull rural demand, can festive season bring cheer for FMCG stocks?

The consumer durables industry remains hopeful of a good H2FY24 starting with festive season sales

FMCG companies are likely to see a soft Q2FY24 as rural demand remains subdued and a rise in competition from local players in select categories hurts large companies.

Kotak Institutional Equities expects low single-digit volume growth and low-to-mid single-digit value growth for most FMCG firms, with pricing growth slowing.

Still, according to the brokerage, most FMCG companies are comfortably placed on the profitability front and may see healthy EBITDA growth year-on-year (YoY), led by margin recovery.

Festive season to aid recovery?

In staples, Kotak sees a moderation in topline growth as easing inflation has not boosted volume growth yet and there is no pick-up in the underlying rural demand. Meanwhile, in the discretionary segment, after a deceleration in growth, recovery is eyed in H2FY24 largely due to the impact of the late festive season and ‘Adhik maas’.

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The brokerage sees a growth slowdown across most consumer discretionary names. It expects a moderation in ITC’s cigarette volume growth; and weaker same-store sales growth (SSSG) trends for QSR companies partly led by seasonality.

Decorative paints growth may also see a slowdown partly due to the shift of the festive season. On the other hand, the jewellery category is expected to see some positivity as the shift of ‘Shradh’ (inauspicious period) to Q3 should boost growth, according to analysts at Kotak. The carbonated beverages segment should also see a recovery in growth after a washout summer, it added.

Correction in FMCG stocks?

While the June quarter (Q1FY24) earnings for the FMCG space showed some signs of improvement, the Nifty FMCG index fell 2.1 percent in the July-September quarter. However, in the last six months, the index has jumped 11.44 percent, similar to an 11.06 percent rise in Nifty 50. Analysts at BNP Paribas continue to be cautious about the sector and expect a reasonable correction.

The firm is 'Underweight' on the Indian FMCG sector given its rich valuation. "With rising competition and muted volume growth, we see challenges for the sector to maintain double-digit (%) revenue growth and thus expect time correction in the sector," it said.

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VBL, ITC outlook positive; clouds over paint companies, HUL

Kotak expects a decent Q2 from Titan Company, Varun Beverages (VBL), United Spirits, Nestle India and Jyothy Labs and a soft quarter from QSRs, paint companies, Hindustan Unilever (HUL), Britannia and United Breweries. Meanwhile, BNP Paribas prefers ITC in staples, as it trades at a reasonable valuation for the growth it offers, and in discretionary, their pick is Titan, which they think is uniquely positioned to gain market share in a largely unorganised industry.

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