Too early to bet on rural recovery; stay selective on FMCG stocks: Analysts

In their quarterly update, Godrej Consumer Products, Dabur, and Marico witnessed sluggish growth in the December quarter (Q3) driven by poor rural consumption and a slowdown after the festival season

It may be a little early to cheer the recovery in fast moving consumer goods (FMCG) space as deceleration in the discretionary demand, post the festive season, may off set fragile rural recovery, analysts have cautioned.

"The overall demand environment for staples remains muted, while discretionary demand trends have seen some deceleration post the festive season. We believe margins in staples have bottomed out, but we expect only a gradual uptick with the ongoing softening in raw material prices. This is because companies have begun to effect price cuts to protect market shares against unorganised players, and would also need to increase marketing spends, which have been low for last couple of years," said Himanshu Nayyar of Systematix Research, in a co-authored note with Rajesh Mudaliar and Chetan Mahadik.

Consumer staples' demand in rural areas witnessed a sequential recovery in the latter half of the December quarter with raw material cost pressures abating, price cuts announced by companies, and inflation receding.

Besides, wage growth overtook inflation, unemployment rate dropped, and sowing and tractor sales revealed strong trends.

Abneesh Roy of Nuvama Institutional Equities, however, points out that although, overall monsoon was good, the headline data hides the deficit in four high-population states of Bihar, Uttar Pradesh, Bengal, and Jharkhand.

"The modest growth in rural markets is almost entirely due to base effect as the rural slowdown started in H2FY22. Lower end of the rural job market seems to be improving but still these are early days and sustainability is needed," he said in a report from Rushabh Bhachawat and Jainam Gosar.

According to data by retail intelligence firm Bizom, demand from rural areas declined 0.2 per cent on a month-on-month basis in December while it was down 17 per cent in November. The overall demand, however, was up 1.4 per cent on a month-on-month basis.

In their quarterly update, Godrej Consumer Products, Dabur, and Marico unanimously witnessed sluggish growth in the December quarter (Q3) driven by poor rural consumption and a slowdown after the festival season.

Dabur India said overall demand remained weak because rural markets remained under pressure. Besides, the late onset of winter in North India had added to the weakness, it said.

Discretionary demand heads south

Discretionary demand, too, has seen some decelerations post the festive season as inflation began to impact demand at the mass-end of the market. Quick Service Restaurant (QSR) players saw a slowdown in growth, with aggregators focusing on higher order values and lowering discounts.

Given this, Kotak Institutional Equities expects Asian Paints to witness a deceleration in 3-year volume (ex-putty) CAGR to 8 per cent (similar to the pre-pandemic levels) in Q3 versus 11 per cent in H1FY23.

"We expect weakness across QSRs (except Westlife Foodworld) with a flat or sequential dip in ADS. Jubilant Foodworks’ 3-year revenue CAGR should moderate further to 8.4 per cent from 9-10 per cent and margin pressure should rise. Devyani, Sapphire and RBA should report a weak revenue and EBITDA print," it said.

Investment strategy

Analysts suggest investors selectively pick FMCG stocks from a medium-to-long term perspective and focus on how the companies deal with ease in input costs.

Preeyam Tolia, senior research analyst at Axis Securities is bullish on Hindustan Unilever and Dabur India as he believes domestically inclined FMCG companies will do relatively better.

KIE has 'reduce' rating on Asian Paints, Berger Paints, and Devyani International, and has 'add' rating on Britannia Industries, Colgate Palmolive, HUL, ITC, and Jubilant Foodworks.

On the bourses, the Nifty FMCG index has underperformed the benchmark Nifty50 index over the past three months. ACE Equity data shows that the FMCG index has gained 0.7 per cent during the period as against the Nifty50 index's 3-per cent rally.

Individually, Britannia Industries, Varun Beverages, Godrej Consumer Products, Nestle India, and Dabur India gained between 1 per cent and 16 per cent.