Cheers For Alcohol Stocks As Nuvama Predicts Strong Q3 In A Dull Consumer Space
FMCG companies continue to remain under pressure as urban demand is yet to pick up and commodity prices remain inflated.
Alcohol stocks have emerged as top picks in the consumer sector for the third quarter of fiscal 2025, driven by favourable policy changes in Andhra Pradesh, robust demand during the ongoing marriage season, and premiumisation trends, according to Nuvama.
United Spirits Ltd. and United Breweries Ltd. are Nuvama’s preferred choices, with both companies expected to report strong revenue and volume growth. United Spirits' revenue is forecasted to grow 14% year-on-year, led by a 9% volume growth, while United Breweries' revenue is likely to rise by 13%, supported by an 8% volume increase. The Andhra Pradesh government's new liquor policy is anticipated to boost market share for established players, and demand for premium spirits is expected to grow in high double digits.
Nuvama notes that liquor companies are also benefiting from a relatively softer base in the previous period, enabling them to post stronger results as market conditions stabilise and demand improves.
FMCG Sector: Pressure Persists
The FMCG sector continues to face headwinds due to inflationary pressures and rising commodity prices. Consumers are shifting towards smaller packs of soaps, snacks, and tea due to price hikes, which has negatively impacted volume growth. Margins in these categories remain under pressure amid a nearly 30% year-on-year inflation in palm oil and tea prices.
Urban demand remains challenging due to low wage growth, high inflation, and increasing housing rental costs. Nuvama expects this urban slowdown to persist for another two to three quarters. Meanwhile, rural demand is showing signs of recovery, supported by good rainfall and government freebies.
Top FMCG Picks by Nuvama
Top-tier picks: Marico Ltd. and Varun Beverages Ltd.
Mid-tier performers: Colgate-Palmolive Ltd., Britannia Industries Ltd., Emami Ltd., Hindustan Unilever Ltd., ITC Ltd., and Dabur India Ltd.
Laggards: Godrej Consumer Products Ltd., Tata Consumer Ltd., Bikaji Foods Ltd., Nestle India Ltd., and Bajaj Consumer Care Ltd.
Varun Beverages is projected to see 5% domestic volume growth and 28% consolidated volume growth, aided by acquisitions in Africa and cost efficiencies.
Marico has implemented a 10% price hike in Parachute Coconut Oil and a 20% hike in Saffola Edible Oil to offset rising copra and edible oil costs. Similarly, Tata Consumer plans gradual price hikes of 25-30% in tea products, while Nestle is expected to continue increasing prices in response to a 175% surge in cocoa prices.
Challenging Quarter For Paints
The paints sector faces challenges due to urban demand slowdown. Berger Paints is expected to outperform Asian Paints, with the latter facing growth headwinds in key urban markets. However, Berger is likely to benefit from strong demand in construction chemicals and waterproofing solutions.
Pidilite remains a preferred pick, with expected double-digit volume growth in the second half of the fiscal, driven by its pioneering category and expansion plans in Rajasthan.
