FMCG stocks spike on strong buying interest

With companies reporting robust earnings growth, FMCG stocks like Hindustan Unilever (HUL), Procter & Gamble, Colgate and ITC are seeing strong buying interest from domestic and foreign investors.

Over the past one month, the BSE FMCG Index has outperformed the market, as it has risen 5.6 per cent against the Sensex’s gain of 3 per cent.

According to analysts, fast moving consumer goods (FMCG) companies have weathered the GST implementation glitches and are reporting better quarter results. They are now seen as beneficiaries of the GST regime, as the new tax makes unorganised players in the space relatively less competitive.

The market leader HUL’s revenue  grew by 16 per cent to Rs 9,090 crore as against the Street expectation of 12 per cent. The multinational company’s Ebitda/adjusted PAT growth of 24/26 per cent was far ahead of analysts expectation of 16/13 per cent.

The HUL stock on Wednesday hit its 52-week high of Rs 1,581 as the market perceived that the company’s recovery  post -GST was faster than its peers. Analysts expect that the market leader will drive category growth during a challenging environment, thereby gain market share.

“Our thesis remains intact and we  believe earnings growth will sustain driven  by  recovery in rural demand, premiumisation, new product launches, strong  pricing  power (pass on inflation) and strong brand investments,” said HDFC Securities in a report.

ITC, a diversified conglomerate having business interest in FMCG, paper, hotel, and agri segments, beat analysts expectation by reporting 9.9 percent year-on-year (YoY) increase in net profit at Rs 2,933 crore for the fourth quarter of FY18.

ITC’s FMCG-others comparable revenue growth based on gross sales value stood at 10 per cent during the fourth quarter on a relatively firm base driven by snacks, biscuits, juices and personal care items.

According to a Crisil report, revenue growth in the Rs 3.4 lakh crore FMCG sector is poised to rise 300-400 basis points to 11-12 per cent in the current financial year from  about 8 per cent last year, thanks to the revival in rural demand and new product launches.

The double-digit revenue growth will significantly improve the operating performance and credit profile of FMCG companies.

Crisil said disposable incomes and demand are expected to rise following higher minimum support prices for crops, more non-agriculture rural employment, and expectation of adequate monsoon. Continuing product launches and acceptance of ayurvedic and herbal products will also help.

“Ergo, growth in FMCG revenue from the rural segment (40-45 per cent of FMCG revenues) will improve to 15-16 per cent in fiscal 2019 compared with 10 per cent estimated for fiscal 2018. Growth had recovered partially from the 5 per cent range during fiscals 2016 and 2017 – a period that saw sluggish rural demand resulting from weak monsoons, intense competition and demonetisation.”