Nuvama Institutional Equities is bullish on the consumer goods universe as the brokerage pencils in a rural recovery, which shall benefit the entire space. "Rural demand is experiencing a slight uptick for a second consecutive quarter after many quarters of urban outpacing rural," noted the brokerage.
For the sector, valuations are finally reasonable compared with those in the last five years, given the impending recovery, particularly in the case of HUL, Asian Paints, and ITC. The brokerage's top picks are Colgate-Palmolive, Pidilite, Britannia Industries, and Bikaji Foods.
"Given pricing growth shall soon return, operating leverage too shall be back; we reckon most companies shall take 2–3 percent price hikes in the next one year," added Nuvama.
Volumes to recover?
The consumer sector saw a four percent value growth for the first quarter ended June, against a 6.6 percent growth in the fourth quarter of the previous financial year. However, pricing was
up a mere ~0.2 percent while overall volumes grew 3.8 percent YoY, according to Nielsen data.
"For a second consecutive quarter, rural areas outpaced urban on volumes with a 5.2 percent increase compared with a 2.8 percent rise in urban markets. However, the north region experienced softer consumption this quarter," noted Nuvama.
Therefore, companies such as Britannia, Dabur and Marico posted significant rural growth, outpacing urban. Additionally, competition from local players shall ease off led by anniversarisation, cross-subsidy of lower-end, innovative launches, and wider direct distribution.
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Pricing power returns
For the overall FMCG sector, Nuvama believes that operating deleverage shall bottom out post-Q1FY25. The brokerage also estimated that pricing growth of around two-three percent for the sector shall return in H2FY25 after a period of negative pricing in FY24.
So far, Dabur, Bikaji and Marico have undertaken definitive price hikes and withdrawn some promotional offers. Colgate-Palmolive, Emami and HUL have also indicated that they will see some price increases, while on the paints front, Asian Paints and Berger Paints have announced price hikes of one percent, effective July, while other paint players have also followed suit.
Earnings growth
In the quarter gone by, most consumer names delivered overall revenue growth aided by volumes, innovation and emerging distribution channels. The key performer was Varun Beverages, which had a strong showing - driven by robust growth in the domestic portfolio.
It was followed by Bikaji, Tata Consumer and Colgate. On the other hand, HUL, Nestle, Godrej Consumer and Bajaj Consumer posted muted-to-negative revenue growth as a result of the soaring heatwave and high food inflation.
Gross margin for most consumer companies improved through mix and productivity initiatives. However, a large portion of this improvement was used to fund A&P expenses.
Companies with international exposure performed well on the top-line front, but FX impact and macro headwinds – particularly in Africa – eroded margins. Many Indian companies have exposure to Bangladesh; these may be hurt in Q2FY25 by the recent unrest, further added the brokerage.
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