FMCG shares in focus; HUL, Dabur India rise 4%

Shares of fast moving consumer goods (FMCG) companies were in focus in an otherwise range-bound market on stable outlook. Hindustan Unilever (HUL), Dabur India, Colgate-Palmolive (India), Godrej Consumer Products and GlaxoSmithKline Consumer Healthcare were up in the range of 1% to 4% on the National Stock Exchange (NSE).

At 01:07 PM, Nifty FMCG index, the largest gainer among sector indices, was up 1.4% at 29,642, as compared to a 0.15% rise in the Nifty 50 index. From its recent low on October 10, the FMCG index outperformed the market by gaining 9%, against 2.3% rise in the benchmark index.

Between September and October 10, the index had corrected 18% from its high level of 32,911 on concerns of high valuations. In comparison, the benchmark index was down 12% during the same period.

HUL was up 4% to Rs 1,740, surging 12% in past one month. The stock of FMCG major is 4% away from its all-time high level of Rs 1,808 touched on August 20, 2018, on the BSE.

HUL is the largest FMCG company in India, operating across a host of categories in home care, personal care and foods. HUL’s continued proactive approach toward product innovation and distribution enhancement provides a more sustainable competitive edge over peers.

JP Morgan has ‘overweight’ rating on HUL with a target price of Rs 1,750 as brokerage firm believes premium valuations will be sustained on expectations of better volume growth/margin delivery versus peers.

“We believe a gradual recovery is underway as rural demand stabilises and benefits from lower GST rates (price reduction/grammage increase) start flowing through. Margin tailwinds remain, given mix improvement, manageable input cost inflation, judicious pricing, GST benefits, rational competitive spends and significant cost control measures,” JP Morgan said in a report dated October 13, 2018.

As regards to Dabur India, the brokerage firm said it is not overly worried on the margin front as recent correction in crude prices (packaging costs account for around 30% of COGS) coupled with selective price hike/scale back of promotions, volume leverage should keep overall margin erosion risk under check despite subdued performance of the Middle East and North Africa (MENA).

“Rising consumer bias toward naturals/herbal products and improving rural consumption trends are key tailwinds. Two key priorities for the immediate term are creating a new cluster-based framework to have localized growth strategies and embarking on channel-based product development. Overseas performance should improve (off a low base), aided by stabilizing MENA and Namaste operations and receding currency headwinds. Margins should hold out well (despite higher A&P spends and RM inflation), driven by judicious pricing, mix and cost focus,’ the brokerage firm said with 12-month target price on the stock of Rs 445.

Dabur India was trading 4% higher at Rs 416 on the BSE.

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