ITC, HUL, Britannia: Good time to buy FMCG stocks? Analysts weigh in

Stocks of fast moving consumer goods (FMCG) companies have been relative underperformers at the bourses thus far in financial year 2021-22 (FY22), with the S&P BSE FMCG index rising 6.3 per cent as compared to over 15 per cent gain in the benchmark S&P BSE Sensex during this period. 

The underperformance, analysts said, was mostly on account of concerns of a slowdown in the overall consumption as a result of rising input costs in an inflationary environment. According to NielsenIQ, India’s FMCG market grew 12.6 per cent in the September 2021 quarter compared to the same period last year, led by higher product prices and an increase in urban consumption. Volume growth during the quarter stood at 1.2 per cent.

“The slowdown is apparent in volume growth, but due to price increases, value growth may not show a slowdown. Inflation in product prices has caused some down-trading, while at the same time, regional / local brands have suffered due to inability to operate in the inflationary environment,” wrote analysts at IIFL in a recent note.

Despite rising prices, rural markets witnessed a slowdown due to a dip in consumption with value growth coming in at 9.4 per cent. This, NielsenIQ said, was largely led by price increase. Volumes, on the other hand, contracted 2.9 per cent due to lower consumption of items like cooking oil, packaged grocery, hot beverages and fabric care.

“Rising input costs have been a concern for companies, especially in the FMCG segment. Companies, on their part, tended to pass on this rise to the consumers. With crude oil prices correcting sharply from their recent high, a lot of these concerns should abate. This is a good time to buy ITC and Nestle, Hindustan Unilever (HUL). Given the fears of Omicron Covid variant, oil prices are unlikely to retreat to their recent highs in a hurry, which should be good news for companies, especially in the FMCG sector,” explained G Chokkalingam, founder and chief investment officer at Equinomics Research.

Inflationary environment and price hikes made the picture more complex, said analysts at IIFL, as FMCG products have a price elasticity of around -0.5x per our experience, which means volume growth will be impacted negatively, but value growth will be impacted positively. 

“Companies with a higher weightage to low-income consumers (either in the total sales or in terms of growth) could be more impacted than others, and companies with a high innovation rate will be able to stave off the effects of a slowdown,” the IIFL note said.

In the FMCG basket, Britannia, Colgate Palmolive, HUL are on the shopping list of A K Prabhakar, head of research at IDBI Capital. “Easing input cost pressures will aid the overall performance of companies. The fall in the market from its recent high has corrected the valuation in a number of these counters,” he said.

The risks

Though the reopening, exports and government spending should support growth early next year, Nomura, cautions that high inflation is a risk to private consumption demand, amid muted income growth for lower income households. 

“There are risks of a demand slowdown in mass consumption segments such as entry-level cars and two-wheelers, and supply-side bottlenecks, owing to chip and coal shortages, which constrained production in October, appear to be easing, but only at the margin,” wrote Sonal Varma, chief economist for India and Asia ex-Japan, Nomura, in a recent co-authored note with Aurodeep Nandi.