Tata Consumer Products, Britannia, HUL: Nifty FMCG index jumped 18% in 12 months; what lies ahead?

FMCG stocks, stock market today: Nifty FMCG, the sectoral index, which is designed to reflect the behaviour of Indian fast-moving consumer goods (FMCG) companies, has gained over 18 per cent in the past one year on the back of resilience in Indian consumer demand, driven by a growing middle-class and increasing urbanisation. Analysts, by and large, remain positive about the space and suggest investing in the stocks from a long-term perspective; however, there are risks one should be mindful of.

Factors contributing to growth in the FMCG space-

>> Government initiatives such as the rural electrification programme, infrastructure development, and rural employment schemes have boosted rural purchasing power, a significant market for FMCG products. 

>>The rollout of the goods and services tax (GST) has streamlined the tax structure, reducing operational complexities for FMCG companies and enhancing their competitiveness.

>>Since the COVID-19 pandemic, there has been a notable shift towards health and hygiene-related products, driving sales for FMCG companies manufacturing such items. 

>> Lower interest rates are coming in the future, which will lead to an increase in demand.

>>Volatility has been decreasing as compared to previous quarters.

>>El Nino effect is lowering.

>>The companies can sustain their margins even after competing with small players who are eating up the market share in the space.

>> Growth in past and future performance expectations. 

A look at company-wise performance in the segment: 

As per Kaustubh Pawaskar, Deputy VP Fundamental Research, Sharekhan by BNP Paribas, barring underperformers like HUL and Dabur, all other stocks in the Nifty FMCG basket have given double-digit returns in the past one year. 

Major players that constitute 36 per cent of the Nifty FMCG index, such as Tata Consumer Products, Godrej Consumer Products, Varun Beverages, Nestle India, Colgate, and United Spirits, have delivered strong returns of 69 per cent, 28 per cent, 107 per cent, 34 per cent, 75 per cent and 52 per cent, respectively. 

Dominant player ITC, which has the biggest share of around 30 per cent in the basket, has delivered over 10 per cent returns in the last one year. 

Food and beverage companies such as Tata Consumer Products, Varun Beverages, and Nestle India have registered relatively better performance in the last nine months. 

Furthermore, Godrej Consumer Products is witnessing a stark improvement in performance due to its revamp strategy, while Colgate is witnessing a gradual revival in performance under the new leadership.

What are the risks involved in the FMCG segment?

As per Mohit Gang, CEO of MoneyFront, competition from the unorganised players, muted rural demand, disruptions in global sea routes, increases in crude oil prices, and some commodities like cocoa can hurt the sector. 

On the other hand, Ajay Thakur, Research Analyst at Anand Rathi Institutional Equities, notes the current increase in input costs is largely in pockets and may be transitionary in nature. 

For instance, the crude price had risen to $90-95 earlier in September-October 2023 due to the Israel-Gaza conflict, but it didn’t remain elevated for the long term, and the prices corrected after that.

What should investors do? 

Anand Rathi Institutional Equities is positive on the FMCG sector, as the brokerage believes there has been a correction in the stock prices of many FMCG stocks, which has brought down the valuations to more reasonable levels. 

Meanwhile, Sharekhan remains intact with a long-term perspective but is selective in the FMCG space and prefers companies with better earnings growth visibility along with relatively stable valuations. 

The brokerage is bullish on Britannia Industries, Tata Consumer Products Limited (TCPL), Godrej Consumer Products (GCPL), Jyothy Labs, Heritage Foods, Mrs Bectors Food, Varun Beverages, and Radico Khaitan.

Vaibhav Kaushik Research Analyst GCL Broking suggested buying FMCG stock for the long term, but by remaining selective. His top picks are ITC and Tata Consumer Products.

However, Anirudh Garg, Partner and Fund Manager at Invasset, advises investors considering FMCG stocks for the long term to conduct a thorough analysis by keeping in mind factors such as the companies' ability to manage cost pressures through efficient supply chain management, innovation in product offerings, and brand strength, which become crucial. Additionally, evaluating the potential for price hikes to offset increased expenses is essential.

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