FMCG among top 5 performers in 2022 as faith in India’s consumption story intact

That the faith in the long-term story of India’s consumption trend remains intact reflects in the performance of the stocks of fast moving consumer goods companies this year.

A year that saw volume growth drop sharply due to the inflation impact on rural consumption,and profitability bearing the brunt of spiralling commodity prices, most FMCG majors weathered the storm and managed to report growth in sales and profits.

This supported stocks as well because the Nifty FMCG index was the 4th best performing sectoral index in 2022, with more than 22% gains. Moreover, this is the best returns given by the index since 2017.

The Nifty FMCG index earlier this month scaled a lifetime high of 46,331.20 points.

One of the major contributors to the stellar performance of the index is ITC. Year-to-date, the stock has given 56% returns, the highest in more than a decade.

Investors have drawn comfort from the considerable improvement in the capital allocation by ITC due to the changes made in the hotels business, closing some of the loss-making businesses, and deferring few of the new plans

Besides, ITC’s increased focus on the fast moving consumer goods business and expansion has helped in improving the margins and growth trajectory of the business significantly.

The second hero in the pack is Britannia Industries. The stock has given 25% returns in 2022 so far and is the second best in the FMCG pack. The company’s market capitalisation also crossed the Rs 1 lakh crore mark.

Despite the volume growth and profitability challenges, Britannia managed to increase its reach particularly in rural markets. This saw its overall market share in the industry hit a 15-year high in the September quarter.

And last but not the least, sector bellwether Hindustan Unilever. The stock has given more than 15% return this year and remains a top pick for most brokerages.

How does 2023 look for the sector?
Given that India’s consumption story remains bright, most analysts are bullish on the sector and do expect 2023 to bode well in the backdrop of a recovery in rural consumption, cooling off inflation, and strong domestic growth.

However, they recommend taking stock-specific investment bets, because earnings recovery is unlikely to be broad-based.

Kotak Institutional Equities prefers consumer staples stocks over high-end discretionary stocks based on the view of a faster recovery in incomes of low-income households.

“We would expect consumer staples stocks to hold up better in the case of any meaningful market correction,” the brokerage said in its 2023 outlook report.

Within consumer staples, Kotak Equities has increased weight on Colgate Palmolive by 40 basis points to 150 bps. According to the brokerage, the stock is reasonably valued at 38 times its one-year forward earnings, and is not discounting any turnaround in the business.

“We expect toothpaste volumes to recover anyway in line with recovery in consumption on staple items and any acceleration in volumes due to the company’s strategic initiatives on volume growth may result in re-rating in multiples,” it said.

There exists contrarians as well and BNP Paribas is one among them.

The brokerage has downgraded consumer staples sector to “neutral” from “overweight”, and has excluded ITC and Britannia Industries from its model portfolio after the recent run-up in the stocks.

While not completely out of the woods, FMCG remains a bet on India’s consumption theme.

(Data inputs from Ritesh Presswala)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)