In a recent research report analysing India’s consumer sector stocks, BNP Paribas has retained its ‘underweight’ call, expressing concerns about the sector’s growth prospects, even while noting improved margin comfort. In the report, analyst Kunal Vora examines the financial metrics of the FMCG sector over the past decade, including pre- and post-pandemic trends. Despite these concerns, the report highlights that stocks such as Titan and Britannia are favoured for their growth potential, while ITC and Emami are seen as offering value.
Time correction due for Indian FMCG stocks
The report suggests that the FMCG sector may experience a time correction. While the industry appears well-positioned in the first half of FY24, with a tailwind from raw material costs, growth is expected to moderate in the second half of the fiscal year. Pricing benefits are likely to fade, and volume-led growth will be crucial. Furthermore, the risk of El Nino and its potential impact on rural recovery could pose additional challenges. Overall, the research report emphasises the need for caution in the consumer sector due to growth challenges and evolving market dynamics.
The report also notes that industry revenue growth has accelerated, driven by high inflation. However, it anticipates a normalisation of growth from the second half of FY24. Over the past decade, the industry witnessed an 8% increase in revenue, with raw material costs rising at a similar pace. EBITDA (earnings before interest, taxes, depreciation, and amortisation) grew by 11%, aided by lower operating costs and reduced advertising spends. The report suggests that price cuts may be necessary for companies to remain competitive and drive volumes, which could impact the street’s optimistic revenue CAGR estimate of 11% over FY23-25.
Optimism on margin recovery
On the positive side, the research report shares the street’s optimism regarding margin recovery. With a decline in raw material costs, the industry has seen a gross profit CAGR of 7% over the last decade and FY20-23. It is expected that some benefits will be passed on to customers, while increased advertising spends may partially offset the impact. Regarding specific categories, the analysis reveals that mature segments like hair oil and oral care have struggled to achieve significant revenue growth. This trend reflects the challenges faced as penetration levels increase.