Robust FMCG uptick could boost consumer small-caps

Mumbai: Small-cap consumer stocks could give better returns than their larger peers if demand recovery in the fast-moving consumer goods (FMCGs) space is robust, said IIFL Securities.

Sapphire Foods, Barbeque-Nation Hospitality, Mrs Bectors Food, and V-Mart are among the brokerage's top picks among smaller consumer companies. IIFL's price targets for these stocks imply a 22-28% upside from Tuesday's closing prices.

The brokerage said it is hopeful that calendar 2023 will see a recovery in low-income consumption.
"Companies having exposure to discretionary products consumed by low-income consumers are likely to benefit, should this trend plays out," said IIFL. Its top large-cap consumer stocks are HUL, Dabur and Titan. In the mid-cap space, it prefers Vedant Fashions and Emami.

"While it is early to call out definitively, macro indicators point to a revival in low-income consumption," said the brokerage. Unemployment is inching down, wage growth inching up (very slightly) and demand for NREGA (National Rural Employment Guarantee Act) jobs is moderating."

IIFL said FMCG companies are likely to witness margin expansion too as crude price eases. These companies could witness a turnaround in volume combined with margin expansion though these factors are already built into estimates, it said.

QSR or Quick Service Restaurants companies are likely to face headwinds from increased competition, price increase and high base.

"QSR companies could face headwinds from increased competitive activity within the organised as well as unorganised space with store expansion of listed players increasing to high teens vs 12% pre-Covid, a high base from a good FY23 and effect of sustained price increases," the brokerage said.

Its top pick among QSR companies is Sapphire Foods because of cheaper valuations compared to Devyani International. "We are not very positive on the two larger companies viz Devyani and Jubilant, nor do we have a strong preference between the two, given that Devyani's better growth is already commanding premium valuation."