Analysts on Dalal Street are cautious about the FMCG (fast-moving consumer goods) sector due to dual stress in the form of demand slump and inflationary pressure. The sector already disappointed equity investors in 2024. With a gain of just 1.48%, the BSE FMCG index underperformed the benchmark BSE Sensex (up 8.16%) in the previous calendar year.
In the forthcoming earnings season, Emkay Global Financial Services believes that the near-term sector outlook staying muted, on weak execution by companies and an unfavourable macro. “We expect the earnings downgrade cycle to continue during Q3FY25 results and hence have a bearing on near-term stock performance,” the brokerage said.
In the BSE FMCG index, shares of HMA Agro Industries declined nearly 53% in 2024. It was followed by Honasa Consumer (down 42%), Dhampur Sugar Mills (down 36%), Uttam Sugar Mills (down 36%) and Dwarikesh Sugar Industries (down 36%). On the other hand, LT Foods, DOMS Industries, Godfrey Phillips India, Gokul Agro Resources and Manorama Industries advanced 106%, 109%, 148%, 178% and 182%, respectively.
Sharing its view on FMCG majors, Emkay Global Financial Services added that ITC, Marico, and Bikaji Foods International are the only players to report double-digit YoY revenue growth for the quarter ended December 2024. “Operating profit margin contraction is likely to be accentuated for Honasa, Colgate, Gopal, ITC, and Britannia, where we see 200-450bps YoY contraction. Earnings to see decline YoY, with Emami and Marico the only players likely to post mid-to-high single-digit growth,” it said.
The brokerage has an ‘Add’ rating on Bikaji Foods International (Target price: Rs 825), Dabur India (Rs 550), Emami (Rs 875), ITC (Rs 520), Marico (Rs 700), Nestle India (Rs 2,300). Emkay Global Financial Services has ‘Buy’ rating on Emami with a target price of Rs 875.
Nuvama Institutional Equities sees 6% year-on-year dip in profit after tax of FMCG sector on 9% year-on-year growth in revenue. The brokerage expects profit after tax (PAT), EBITDA and revenue of FMCG major ITC may dip 3% YoY, 4% YoY and 8% YoY.
“EBITDA margins of ITC are likely to decline due to sharp raw material inflation in palm oil, maida and negative pricing in notebooks. ITC has not undertaken short-term measures such as cutting A&P (advertisement and promotional expenses),” Nuvama said in report.
In the case of Hindustan Unilever (HUL), Nuvama projects 2% and 1% dip in core profit after tax (PAT) and EBITDA in Q3FY25 on 1% YoY growth in revenue.
HDFC Securities also cautious about the sector. The brokerage sees revenue and EBITDA growth of 9% and 1%, respectively, in Q3FY25. However, it believes that profitability is expected to decline by 6% due to negative operating leverage and gross margin pressures.
“The macroeconomic environment remains subdued and some companies have undertaken hygiene inventory corrections to improve the health of the system. Additionally, adverse weather conditions, including a delayed and warmer winter, have impacted the consumption of winter products. The largest modern trade player, Reliance, has also been implementing significant inventory optimisation measures, which has reduced offtake from FMCG companies,” HDFC Securities said adding a sharp surge in food inflation, coupled with reduced lending by financial institutions, has negatively impacted urban consumption.
