The Nifty FMCG index has been rallying of late as companies are optimistic that early signs of a recovery in the rural markets will aid their volume growth. Kaustubh Pawaskar, an analyst with Sharekhan, said he favours ITC over Hindustan Unilever on valuation and business prospects.
Here's the edited excerpt from Pawaskar’s interview with Moneycontrol:
Q: FMCG stocks Tata Consumer, Hindustan Unilever and Nestle are doing extremely well. What’s leading to this exuberance given that there are concerns that the El Nino could slam the brakes on rural recovery?
A. In Q4FY23, there was some sign of improvement in rural demand, where we have seen volume growth come back to a positive trajectory, which was not the case for the past two to three quarters. But we should not get overexcited by this because we believe there still is a lot of recovery we need to see in the global market…
You have correctly said that the monsoon can play a major role…
Next year is election year. So, prior to election year, we normally see the government providing some incentives to the economy. So, that could lead to better demand in the rural markets and the commentary we have been hearing from most of the management is quite positive in terms of demand and they are expecting the momentum to increase.
A key factor is that now inflation has moderated and because of the moderation you might not see any significant price increase… in certain categories, we have seen companies have already passed on the benefits in terms of price decline, and I think this price moderation… should help… gradual recovery in terms of volumes.
So, what we believe in FY24, pricing growth should moderate, volume growth should gradually improve, and that would result in decent high to low single digit kind of revenue growth for FMCG companies. And in terms of margins, we believe that because raw material prices have reduced, we have margins improving, so, I think that should also continue in the quarters ahead.
Q: Should one look at ITC or HUL? Should one play on HUL, given that all the good news around ITC may already have been priced in?
I would prefer ITC… valuations have consistently improved. There are two key reasons for it. One is the non-cigarette FMCG business, the way it has scaled up in the last five years, its margins… and we believe that EBITDA margins will consistently improve… I think those are the margins some of the large FMCG companies are currently getting in the range of up to 20 percent. So that is one factor…
The second important point is the hotel business. The industry is expected to do well for the next two years considering the strong room demand… and supply is expected to grow by just 3 to 4 percent. So that will help the hotel business of ITC to do well… They might look into hyping up the business and generate value for the shareholders, but that is something which we need to wait and watch.
But overall, fundamentally, the non-cigarette FMCG business is doing exceptionally well, the hotel businesses is doing good and expected to maintain that momentum. The cigarette businesses also, we have seen that in terms of volume growth and also in terms of profitability have done well…
I think rural will play a major role because once there is a recovery in the rural market, we expect the volume growth momentum to improve.
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