Wind at the back of the FMCG industry, further increases on stock exchanges likely

NEW DELHI: Many factors such as rural revival, healthy monsoon forecast, post-election focus on social welfare schemes and easing commodity prices are expected to bode well for fast-moving consumer goods (FMCG) companies in the D- Street.

Even though shares of top FMCG players like HUL, Dabur, Marico, Tata Consumer and Godrej Consumer have surged by 8-14% in the last 5 sessions, analysts believe that these stocks still have some room to grow.

“Most FMCG companies have seen growth of at least 10% post the election verdict, due to their defensive nature and optimism about better prospects… For the companies we discuss, we estimate a 13% CAGR in earnings in FY24-26, supported by gross margin earnings and demand recovery,” said brokerage Anand Rathi on Monday, which issued a buy call on HUL (target price or TP of Rs 3,000), Emami (TP of Rs 730) and Zydus Wellness (TP of Rs 2,150). United Breweries (TP of Rs 2,300) is a consumer choice.

The brokerage believes that the election results (in which the NDA lost its seats in Maharashtra and UP) could mean a bigger push for social welfare. “With the upcoming state elections in Maharashtra and Bihar in 2024 and the budget likely in July, we expect the government to allocate more towards social welfare programs, which will translate into higher incomes in rural areas,” it said.

According to Nielson, rural population growth improved to 7.6% in Q4FY24 (5.8% in Q3FY24, 0.3% in Q4FY23). Comments from management boards of FMCG companies also pointed to better revenue trajectories. So overall revenue growth, which Nielsen said slowed to 6.5% in the second half of FY24 (10% earlier), is likely to grow at a high single- to double-digit rate in FY25.

The drop in raw material prices, mainly crude oil, which dropped by 10% within 7-10 days, may improve gross margin. Most commodity prices have been favorable over the last six months/year, except for polypropylene, palm oil and coffee. Recently (within 1/3/6 months), the prices of barley and caustic soda have increased, while the prices of ment oil and crude oil have decreased.

Wheat and milk powder have also been soft in the last three to six months. Godrej Consumer Products, one of the leading FMCG companies, has stated that the rural landscape is evolving, offering FMCG companies a promising avenue for expansion.