The fast-moving consumer goods sector has been the best-performing sector so far this calendar year amid the recovery in rural demand and easing commodity prices.
The Nifty FMCG is up 20.74% year-to-date in comparison to the NSE Nifty 50, which is up 6.36%, and the S&P BSE Sensex, which is up 6.82% year-to-date.
One of the major contributors to the FMCG sector's outperformance is ITC Ltd., with a 40.77% performance this calendar year. The stock holds 39% of the weightage in the Nifty basket. Other key performers include Britannia Industries Ltd., Nestle India Ltd., Varun Beverages Ltd., and Hindustan Unilever Ltd.
Key Factors Of Sector Performance
One of the key laggards for the sector in the past 18 months was the low demand in the rural market, according to Kaustubh Pawaskar, deputy vice president, fundamental research at Sharekhan, BNP Paribas.
The recent run-up in performance could be attributed to the rural recovery in the January–March quarter, Pawaskar said. The decline of commodity prices from their highs is also a factor, and one could expect the same performance continuation in the June quarter, he said.
BNP expects margin expansion to help improve the bottom line and drive double-digit earnings growth for consumer goods companies. He said the FMCG companies would also shift focus to drive volume growth.
Top FMCG Sector Picks
One has to be selective in this space and eye companies with decent valuations and good earnings visibility from a near-to-medium-term perspective, Pawaskar said.
In the large-cap space, BNP stays positive on ITC and Britannia Industries.
ITC's discounted valuations, past quarterly performance, and improved growth prospects in the non-cigarette FMCG and hotel businesses make it a better pick for large consumer goods investors. Britannia is also expanding its market share to become the number two player and is focusing on scaling up the adjacent categories, including dairy and bakery products, to drive consistent growth.
BNP prefers large- to mid-cap stocks like Tata Consumer Products Ltd. and Godrej Consumer Products Ltd., which are expected to see double-digit earnings growth as a result of a reworked strategy.
Due to their strong earnings visibility for the upcoming quarters, BNP continues to consider Jyothy Labs Ltd. and Mrs Bector Food Specialities Ltd. as top recommendations in the small-cap category, according to Pawaskar.
Foreign Institutional Investors
The fortnightly FII data showed an inflow of Rs 170 million in the FMCG sector between June 16 and 30. India's consumption story is a long-term growth story and consumer goods companies are currently looking to invest in the unpenetrated categories in the space, Pawaskar said.
Investment Strategy
Investing in the FMCG sector was a two-play strategy, Pawaskar said. It entails partially booking profits in the rallied stocks and churning the portfolio by investing in the companies that have good earnings visibility and a 15–20% return expectation in the next 12–18 months. He sees a good entry opportunity in the next two to three quarters.
Preferred picks for profit-booking would be Varun Beverages, Nestle India, and Asian Paints Ltd., Pawaskar said.
He suggested ITC, Britannia, Jyothy Labs, Mrs Bectors, Godrej Consumer Products, and Tata Consumer Products as investment opportunities in the near to medium term.
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