Colgate, Pidilite, Britannia among Nuvama's top consumer bets; here's why

According to Nielsen, the consumer sector grew 4% Y-o-Y in Q1FY25, down from 6.6% in Q4FY24. Pricing saw a marginal increase of approximately 0.2 per cent, while volumes rose 3.8% Y-o-Y.

Nuvama on consumer goods sector: Domestic brokerage firm Nuvama is optimistic about the consumer goods sector and has picked Colgate, Pidilite, Britannia, and Bikaji among its top bets. The positive outlook, analysts believe, is driven by robust earnings reports and an anticipated demand revival coupled with distribution expansion.

Colgate reported a revenue of Rs 1,496.7 crore for the June quarter, marking a 13 per cent year-on-year (Y-o-Y) increase, while Pidilite saw a 4 per cent Y-o-Y rise to Rs 3,395.4 crore. 

Meanwhile, according to Nielsen, the consumer sector grew 4 per cent Y-o-Y in Q1FY25, down from 6.6 per cent in Q4FY24. Pricing saw a marginal increase of approximately 0.2 per cent, while volumes rose by 3.8 per cent Y-o-Y. 

Here are top factors contributing to the bullish outlook for the consumer goods sector:

Rural demand picking up
 

Nuvama noted a slight uptick in rural demand for the second consecutive quarter, which is now surpassing urban demand growth. Rural markets grew 5.2 per cent Y-o-Y compared to 2.8 per cent in urban markets. However, this growth could have been higher were it not for the heatwave and elections.

Rural areas, analysts said, continued to outpace urban regions in volume growth, although the north region experienced weaker consumption this quarter. Companies like Britannia, Dabur, and Marico have notably outperformed in rural markets, Nuvama said.

Valuations reasonable
 

Valuations in the sector are considered reasonable compared to the last five years, especially for companies like HUL, Asian Paints, and ITC. Expected earnings per share (EPS) for FY25 are 48.1 for HUL, 55.8 for Asian Paints, and 17.3 for ITC.

Pricing power returns

Pricing growth is expected to return in H2FY25, with an estimated increase of 2–3 per cent after a period of negative pricing in FY24, analyst said. Bikaji has already implemented a 0.7–0.8 per cent price hike in May and plans an additional 1 per cent increase in August 2024.

Gross margins to remain healthy
 

Gross margins are expected to remain healthy due to benign raw material costs, including crude oil, wheat, sugar, palm oil, milk, soda ash, glass, and packaging materials, Nuvama said.

Weather to aid 
 

The La Nina phenomenon is expected to boost demand for winter products, benefiting companies like Dabur and Emami, with increased sales of immunity-boosting products. 

Additionally, the hot summer has led to higher demand for carbonated soft drinks, glucose powders, ice creams, and talcum powders, while dampening sales of hot beverages.

On the downside, companies with international exposure have seen strong top-line performance but faced margin erosion due to FX impacts and macro headwinds, particularly in Africa. 

Indian firms with exposure to Bangladesh might face challenges in Q2FY25 due to recent unrest, potentially impacting companies like Marico and Emami, which have major operations in the region. Marico, in particular, could experience the highest impact due to its large market share and high Ebitda margins in Bangladesh.