FMCG stocks outperform in CY18; ITC, HUL among top analyst picks

Shares of fast moving consumer goods companies (FMCG) companies have outperformed the market thus far in the calendar year 2018 (CY18), after reporting better-than-expected volume growth while reporting their March 2018 quarter (Q4FY18) results.

Thus far in CY18, the Nifty FMCG index has rallied 6.8 per cent as compared to 0.13 per cent decline in the Nifty 50, while the S&P BSE FMCG index has surged 5.1 per cent against 1.6 per cent gain in the S&P BSE Sensex.

Nifty 50 and the S&P BSE Sensex have lost 5.5 per cent and 4.6 per cent, respectively from their all-time high recorded on January 29, 2018 in intra-day trade. In comparison, the Nifty FMCG and BSE FMCG indices were up 4.02 per cent and 3.3, respectively, during the same period.

Analysts attribute the volume growth to a pick-up in consumer demand in rural and urban India, which in turn lured investors to this segment. That apart, investors have been buying FMCG stocks over the past few months, considered a safe haven / defensive play in a volatile market, they say.

“I expect the volume growth to continue. Money has been moving away from the mid-and small-caps over the past few months and is getting allocated in large-cap space, especially defensive sectors like FMCG,” says G Chokkalingam, founder and managing director at Equinomics Research.

The 32 companies that have thus far announced their Q4FY18 results, clocked a 16.5 per cent year-on-year (y-o-y) growth in their combined net profit at Rs 74.24 billion, as against Rs 63.72 billion in the previous corresponding quarter. The aggregate net sales of these companies grew 6.9 per cent at Rs 465.58 billion from Rs 435.49 billion during the quarter.

Going ahead, analysts expect the consumer demand to remain resilient in urban India, even as rural demand picks up gradually. A normal monsoon and demonetisation and Goods and Services Tax (GST) in the base, they expect gradual improvement in demand ahead of general elections scheduled for April / May 2019. However, they do remain mindful of the rising crude oil prices that could bump up raw material prices of some of these companies.

“The government’s intent to increase farm income by higher minimum support price (MSP) and market interventions bodes well for demand as rural India houses more than 60 per cent of population,” analysts at Prabhudas Lilladher said in a report.

Among individual stocks, Nestle India, Hindustan Unilever (HUL), Britannia Industries, Parag Milk Products, Avenue Supermarts, operators of retail chain D-Mart, Jubilant FoodWorks and Jyothy Laboratories have rallied in the range of 13 per cent to 26 per cent from their January 29 levels.

“The surprise in Q4FY18 results was from HUL that reported 11 per cent volume growth. The rural spending theme will do well going ahead and benefit these stocks. That apart, at a time when the markets are volatile, FMCG stocks becomes a safe investment. Though I remain positive on FMCG stocks, rising oil prices could increase raw material prices for some companies. Prefer HUL, Dabur, ITC and Marico. They can be bought at a lower levels,” says A K Prabhakar, head of research at IDBI Capital.

With a better category mix and a diversified portfolio, analysts at Karvy Stock Broking expect Nestle’s revenue and net profit to grow at a CAGR of 10 per cent and 13.9 per cent, respectively over CY18 -20. They have a 12-month target price of Rs 10,281 for the stock. 

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