Concerns over a weaker-than-expected monsoon have triggered selling across FMCG stocks over the past few sessions. But according to Abneesh Roy, Executive Director at Nuvama Institutional Equities, investors may be reading too much into the El Nino risk and too little into the near-term earnings picture.
Roy believes the market is prematurely linking recent weakness in FMCG stocks to El Nino concerns. "I don't think El Nino is impacting Q1 or Q2. It will essentially impact H2," he said.
According to Roy, the current correction is being driven more by foreign institutional investor selling, higher crude prices and broader market sentiment rather than monsoon-related concerns.
He expects consumer companies to post strong performances over the next two quarters, supported by pricing actions, government welfare spending and continued consumption demand. "My sense is Q1 and Q2 should be quite strong for almost all the consumer companies," Roy said.
Near-Term Winners
Roy believes several FMCG and consumer-facing companies are well positioned heading into the first half of the fiscal year.
"So, Nestle, Marico, Asian Paints, Berger Paints, Pidilite. These will see very strong results in Q1 and Q2," he said. "Varun Beverages, Emami could also see benefit, Dabur could see benefit."
While acknowledging that a weak monsoon could create challenges in the second half of the year, Roy argued that investors are currently focusing much more on quarterly earnings performance.
"These days people don't bake in six months in advance. These days the near-term results are very important," he said.
Roy added that several positives are being overlooked, including the return of price hikes in FMCG categories and potential market-share gains for larger brands. "The bigger picture is price hike is back in FMCG and paint sector," he said.
Stock Picks Across Two Buckets
Roy went on to name a few preferred consumer names into two groups.
The first consists of companies with strong growth visibility but relatively rich valuations, including Nestle, Marico, Tata Consumer and Pidilite.
The second bucket includes companies where he sees both attractive valuations and strong near-term earnings prospects.
"If I see comfort in valuation and where I think Q1 and Q2 numbers could be good, those will be essentially Dabur, Colgate and even Varun Beverages," Roy concluded.
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