FMCG Sector Q2 Results Review: Muted demand seen with margin-led earnings; check out key stocks to buy

The fast moving consumer goods (FMCG) companies saw subdued overall top line growth during the July-September quarter of FY24. The impact on FMCG companies’ sales growth in Q2FY24 was largely due to the shift of the festive loading to Q3 and the anniversary of the price hike.

The rural market has seen a low-key recovery, but a rebound in demand is lacking. The urban market continues to do well due to the accelerated growth of modern trade and e-commerce channels, according to brokerage firm Emkay Global Financial Services.

Meanwhile, Foods & Beverages continues to outperform the Home and Personal Care categories.

Also read: FMCG growth up in September qtr, signs of rural recovery visible

“This is in sharp contrast to the sector growing by 9% (as reported by Nielsen), where small and regional players are appearing healthily. Unlike Home which is hit by muted demand, international markets are offering strong double-digit growth, stable currency for FMCG players,” the brokerage said.

However, FMCG companies have largely managed to maintain product prices in the face of subdued demand amid softening raw material prices. This helped deliver a better than expected gross margin.

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“While some players took advantage of gross margin benefits to increase A&P spending, EBITDA margin increased healthy across our entire coverage universe. Better-than-expected earnings in Q2FY24 have been driven by improved margin and higher yield. Also, higher-than-expected non-operating income helped the earnings delivery,” Emkay Global analyst Nitin Gupta said in a report.

FMCG Valuations

FMCG (ex-ITC) sector valuations, trending close to the 10-year average fwd P/E of 49x, are keeping up with the optimism of demand recovery in H2FY24 thus helping double-digit earnings going forward, as the earnings story is based on margin. mostly playing, he said.

“While we see continued margin recovery, recovery in demand may require players to pass on raw material benefits to accelerate volume growth. Q2FY24 results do not give us enough reason to change our stock calls, but muted demand lowers the top line for FY24E,” the report said.

Also read: Future Retail RP files for liquidation in NCLT

FMCG stocks to buy

The brokerage has a ‘Buy’ rating on Godrej Consumer Products (TP: 1,200), Dabur India (TP: 650), Britannia Industries (TP: 5,250), ITC (TP: 525) and Emami (TP: 625) among the FMCG stocks.

Emkay Global has a ‘Sell’ call on Colgate-Palmolive India with a target price of 1,800 and ‘Hold’ rating on Hindustan Unilever with TP of 2,800 and Marico with a goal of 560.

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Updated: 13 November 2023, 01:55 PM IST

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