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Worries over slowing consumption demand in urban and rural markets and its consequent rub-off on the topline numbers of fast-moving consumer goods (FMCG) companies, coupled with varying forecasts of the monsoon have seen stocks of some quality companies fall significantly in the recent past. A look at the data show a third of the top 25 FMCG companies by market capitalisation are trading 16-32 per cent lower than their respective 52-week highs. In comparison, the S&P BSE Sensex is down by about six per cent from its 52-week high of 30,024.74.
This correction provides an opportunity for long-term investors to buy some of these quality names at reasonable prices, say market pundits.
"Stocks such as ITC and Asian Paints, which have been trading at handsome valuations over the past two years, have corrected significantly in recent times and are attractive value buys at current levels," says an equity fund manager with a leading mutual fund. Apart from lower prices, there are other reasons that justify investment in these companies.
For instance, the June rains have been the best so far. Except for a dry spell in July, which is on expected lines, the monsoon season so far has been ahead of expectations at close to 110 per cent above the long-term average. If this healthy trend sustains till July-end, rural incomes and hence consumption demand could be boosted, believe analysts, adding that it will have a rub-off on FMCG stocks. Already some of these stocks have started looking up on the bourses.
Nitin Mathur, research analyst, emerging markets consumer, Societe Generale, says, "A good monsoon, increment in minimum support prices against falling international agri prices and the 7th Pay Commission are medium-term triggers for the sector. We believe urban demand recovery should be around the festive season and will be another positive. Thus valuations should improve." ITC, Titan and Emami are his top picks in the sector.
After putting filters such as an upside potential of 15 per cent plus (according to the Bloomberg consensus target price) and compound annual growth rate (CAGR) rise during FY15-17, here are four stocks that look attractive.
Akzo Nobel
Akzo Nobel is a play on recovery in urban demand and pick-up in the industrial segment. The management's focus on driving cost efficiencies should drive earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins 150-200 basis points higher over the next two years, believe analysts. The company is likely to post about 18 per cent earnings per share (EPS) CAGR over FY15-17 and currently trades at 27 times FY16 estimated earnings. Going forward, the company plans to launch premium products, which will aid revenue as well as profitability. Delayed demand recovery and a sudden sharp rise in crude oil prices are key downside risks.
Bajaj Corp
Bajaj Corp's flagship product, Almond Drops, has grown at a healthy pace in the past few quarters and maintained its leadership position with 60 per cent volume market share in the light hair oils segment, despite rising competition from the likes of Dabur. Soft light liquid paraffin (LLP) prices, among key inputs, should aid margin performance in FY16 and drive 32 per cent EPS CAGR over FY15-16, believe analysts. While the company is present in other segments via "No Marks", which has witnessed healthy traction in revenue growth so far, its huge dependence on a single brand - 90 per cent revenues from Bajaj Almond Drops Hair Oil - is a key risk. Any earnings accretive acquisition - it plans to raise Rs 1,000 crore through sale of shares -should be positive, while entry into a new segment would de-risk the business, too.
ITC
Rising regulatory restrictions and excise duty on cigarettes has weighed on the scrip. However, analysts believe implementation of new regulations like the ban on sale of loose cigarettes will be difficult. Although volumes have taken a hit due to the sharp increase in taxes, given the high demand inelasticity for cigarettes, they should start looking up in the next couple of quarters. Improving profitability of the FMCG business is another positive, which would rub-off positively on sentiment. "The discount for ITC has expanded to about 30 per cent versus 17-18 per cent vis-a-vis HUL, and that should correct sooner than later," adds Mathur of Societe Generale. The ITC stock trades at 23.7 times the FY16 estimated earnings versus the sector average of 35 times. Even as EPS CAGR is moderate at 12 per cent, analysts believe current valuations capture the negatives adequately.
Kansai Nerolac
Strong parentage (Kansai Paints, Japan), a pick-up in auto volumes (30-35 per cent of revenues) along with improving margins in this segment are key positives for Kansai Nerolac. "Healthy EPS growth should help ROIC (return on invested capital) to reach 25 per cent plus over FY14-17 from 19 per cent now. We believe Kansai Nerolac's EPS growth will outpace peers with the gap widening as the industrial pick-up gains pace," says Avi Mehta of IIFL. The company is likely to post a strong 32 per cent EPS CAGR over FY15-17.
