Market remained volatile in the last one month on the back of mixed domestic as well as global cues. On the domestic front, the corporate tax cut was the major boost for the market as it helped the Sensex to gain more than 2,900 points in two days (Sept 20 and Sept 23).
Also, the RBI’s monetary policy committee on October 4 slashed rates by 25 bps to 5.15 percent and kept the stance accommodative to revive growth in Asia's third-largest economy.
However, it increased inflation forecast for Q2FY20 to 3.4 percent from 3.1 percent previously while retaining H2FY20 forecast at 3.5-3.7 percent.
On the other hand, the fresh global trade war concerns kept the market under pressure.
Nifty gained 2.5 percent (277 points) while Sensex rose 2.4 percent (907 points) in September.
Nifty Energy Index has outperformed the other sectoral indices followed by Nifty FMCG index, which gained 5.25 percent, outperforming the Nifty50 Index.
FMCG is generally considered a defensive sector as it is able to withstand economic cycles. Meanwhile, the rural growth slipped below urban growth for several consumer staple companies in the September quarter (Q2FY20) after eight quarters of continued outperformance, said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services.
Additionally, the on-going liquidity concerns, succession of drought and floods during the monsoon season in large parts of the country and muted initial response to the festive season added to the woes, he added.
The government’s recently reduced the corporate tax rate to 25.17 percent including cess and surcharge for FY20, however Motilal Oswal is not assuming any benefits of the corporate tax reduction in Q2FY20 as many companies would have paid advance tax.
Elara Capital expects FMCG companies to post top-line growth of 8 percent YoY, led by 5.5 percent YoY volume growth.
Nestle, Hindustan Unilever, Britannia and Heritage Foods are among Elara Capital's top picks based on strong core category growth rates, distribution expansion and ability to drive value & profit growth through pricing.
Motilal Oswal Financial Services (MOFSL) is bullish on five stocks in the FMCG space with an upside of 14-36 percent:
Hindustan Unilever | Rating: Maintain Buy | Target Price: Rs 2,265 | LTP: Rs 1,979 | Upside: 14 percent
Hindustan Unilever continues to be the best pick among the largecap companies for MOFSL. Its revenues are expected to grow by 7 percent YoY to Rs 98.8 billion, with underlying domestic volume growth of 6 percent in Q2FY20.
Gross margins are likely to be up 140 bps YoY to 53.4 percent. The operating margin expansion (+150bp YoY) to 23.4 percent in the quarter, leading to EBITDA growth of 14.4 percent YoY. Adjusted PAT is likely to grow 6.1 percent YoY to Rs 16.1billion due to very high other income base in Q2FY19.
Key issues to watch for: 1) Comments on consumer demand environment. 2) Pace of rural growth. 3) Competitive intensity, especially in detergents. 4) Performance of Lever Ayush. 5) WIMI growth.
Britannia Industries | Rating: Buy | Target Price: Rs 3,575 | LTP: Rs 3,037 | Upside: 17 percent
Post corporate tax cuts and consequent likely passing on of benefits, MOFSL has elevated Britannia Industries to its list of preferred picks. The FMCG major is expected to see a sales growth of 8 percent YoY to Rs 30.9 billion, with base business volumes growing 4 percent on a high base of 11 percent volume growth.
The gross margins are expected remain flat YoY at 40 percent while the operating margin is seen contracting by 20 bps YoY to 15.6 percent. EBITDA/Adj. PAT, are thus, likely to grow 6.6 percent/4.8 percent YoY.
Key issues to watch for: 1) Near-term volume growth commentary, especially in rural areas. 2) Pace of growth in erstwhile weak states. 3) Raw material outlook
Colgate Palmolive | Rating: Buy | Target Price: Rs 1,750 | LTP: Rs 1,499 | Upside: 16 percent
Its sales are expected to grow 8 percent YoY to Rs 12.6 billion, with 6 percent toothpaste volume growth, while the gross margins are expected to contract 90 bps YoY to 63.9 percent. The EBITDA is seen declining by 3.4 percent YoY to Rs 3.2 billion as MOFSL expects higher ad spends to drive sales during the quarter. Thus, EBITDA margin is estimated to contract by 300 bps YoY to 25.2 percent. Adjusted PAT is likely to decline 3.4 percent for the quarter to Rs 1.9 billion.
Key issues to watch for: 1) Volume growth in toothpaste. 2) Market share movement. 3) Ad spends and promotion intensity for the toothpaste category.
Marico | Rating: Buy | Target Price: Rs 445 | LTP: Rs 385| Upside: 15 percent
Continuing to be positive on the prospects for Marico, MOFSL expects its sales to grow 8.9 percent YoY to ~Rs 19.9 billion with 6.4 percent growth in domestic volumes. With a decline of (a) over 12.6 percent YoY in copra costs, (b) close to 28 percent YoY in HDPE, (c) ~13.5 percent in rice bran oil, and (d) 8.9 percent decline in LLP, Marico is likely to report strong gross margin and EBITDA margin growth in Q2FY20.
The gross margin is seen expanding by 300 bps YoY to 47 percent while the EBITDA is expected to grow at 20.4 percent YoY, with margin expansion of 170 bps YoY to 17.7 percent in the quarter. Adjusted PAT is projected to grow 17.1 percent YoY to ~Rs 2.5 billion.
Key issues to watch for: 1) Comments on volume growth trends across key categories. 2) Outlook for raw materials. 3) Margin expansion and guidance for the international business.
United Spirits | Rating: Buy | Target Price: Rs 840 | LTP: Rs 614 | Upside: 36 percent
United Spirits is expected to post a revenue growth of 6.6 percent at Rs 23.7 billion, with 2.6 percent growth in overall volumes. Gross margins are expected to contract 250 bps YoY to 47.7 percent.
The EBITDA margin is seen contracting by 400 bps YoY to 15.9 percent and EBITDA to decline 14.8 percent YoY to Rs 3.8 billion as Q2FY19 EBITDA margins were at unusually high levels. The adjusted PAT is estimated at ~Rs 2 billion in Q2FY20, down 21.1 percent YoY.
Key issues to watch for: 1) Trend in volume growth, premiumization and margins. 2) Any price increases granted by various states. 3) Outlook for ENA/molasses. 4) Monetization of remaining non-core assets.
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