FMCG Q1 Performance: Margin Boost And Strong Investment Prospects
In the first quarter of the fiscal year 2024 (Q1FY24), the FMCG sector demonstrated signs of improvement compared to the previous quarter. A recent report from Axis Securities, a brokerage firm, highlighted that several essential goods companies within its purview indicated ongoing rural recovery. The report predicted that there would be a gradual increase in volume growth in rural areas moving forward. Furthermore, it pointed out that the gross margins of staple goods companies continued to enhance in Q1 due to the stability of crucial raw material prices such as crude oil, palm oil, and packaging materials.
Nonetheless, the report noted that a rise in advertising expenditures aimed at regaining market share would impede the expansion of EBITDA margins. Despite this short-term setback, the brokerage believed that such a strategy would yield long-term benefits.
Looking ahead, Axis Securities projected a more positive second half of the financial year 2024 (H2FY24). This projection was contingent upon factors such as alleviating inflation, increased government spending, and a rise in urban remittances, which would likely influence growth momentum in rural areas. However, the report cautioned that the potential impact of El-Nino should be closely monitored.
Regarding Q1FY24 company performance, the brokerage report revealed that most FMCG companies had reported sustained signs of rural recovery, contributing to volume growth. However, complete rural recovery was anticipated to take a few more months. The report also indicated that companies expected a gradual upswing in volume growth. As for gross margins, many companies demonstrated sequential improvement due to the stability of key raw material prices, even though year-on-year recovery was still ongoing.
On the other hand, EBITDA margins displayed a slower recovery due to increased advertising spending aimed at enhancing market share and visibility. Despite the temporary negative impact on margins, the report believed that this strategic move would yield positive results in the long term.
Axis Securities also outlined why the FMCG sector presented a promising investment opportunity:
Structural Growth Trajectory: Indian FMCG companies were noted to be on a structural growth trajectory, with several product categories still being under-penetrated and underserved. This was particularly evident in areas like shampoos and premium detergents, where rural penetration was still progressing.
Premiumisation Agenda: As Indian consumers' purchasing power increased, their inclination to buy premium and branded products was expected to grow. This premiumisation trend was projected to drive overall sector growth.
Strong Returns Ratios: The FMCG sector was highlighted for providing robust returns ratios such as Return on Capital Employed (ROCE), Return on Equity (ROE), and dividends yield. These ratios were seen as protective measures for capital in a volatile and uncertain business environment.
In conclusion, the Q1FY24 earnings report from Axis Securities indicated signs of improvement in the FMCG sector, with rural recovery and positive growth momentum. The brokerage highlighted the strategic investments made by companies to enhance market share and visibility, even though this might temporarily impact margins. The report also underscored the sector's structural growth prospects, premiumisation trend, and strong returns ratios. Finally, the brokerage provided stock recommendations for Varun Beverages and ITC based on their growth potential and favorable market positioning.
