FMCG index down over 5% in 2024 YTD; will this negative trend continue?

The fast-moving consumer goods (FMCG) sector has been one of the worst-performing sectors in the current calendar year so far and it seems the sector will remain choppy for a while. The weakness in demand for packaged goods isn't confined to rural markets; urban markets are also experiencing strain. Moreover, there are no significant catalysts expected to revive demand in the near future.

The Nifty FMCG index is down over 5 percent in 2024 YTD as against a 1 percent rise in benchmark Nifty. In the last 1 year as well, the FMCG index has underperformed. It has gained around 20 percent in this period versus a 26 percent jump in Nifty.

"The downturn in the FMCG index in 2024, following a powerful 2023, can be attributed to several factors. These could range from macroeconomic shifts affecting consumer spending, and inflation impacting operational costs, to regulatory changes targeting specific sectors like tobacco. Additionally, evolving consumer preferences towards sustainable and health-conscious products may have influenced the sector's performance. It's a complex interplay of market dynamics, cost pressures, and competitive landscape shifts that typically impact the FMCG sector's year-on-year performance," Anirudh Garg, Partner and Fund Manager at Invasset.

Read here: ITC vs HUL: Which FMCG stock should you pick for long term?

Apart from this, FMCG companies also faced subdued performance in the December quarter (Q3FY24) owing to sluggish rural demand and heightened competitive pressure, which hindered overall volume growth. Although gross margins are on an upswing due to stable raw material prices, a surge in advertising expenditure might momentarily affect EBITDA margins. However, this strategic investment is expected to yield long-term benefits in retaining market share.

FMCG Index Trend and Constituents

Down 5 percent in 2024 YTD, the FMCG index has given negative returns in both the months this year. It has shed over 2 percent in February so far after a 3.4 percent decline in January. However, it surged 7.5 percent in the last month of the previous year 2023.

Despite the weak performance this year, the index hit its high of 57,966.70 on January 5, 2024. Currently, it is 7 percent away from its peak but has advanced over 21 percent from its 52-week low of 44,392.05, hit in March 2023.

Read here: Nifty FMCG vs Nifty Finance: Which sector is better for long-term investment?

Only 4 of the 15 constituents in the FMCG index have given positive returns this year while the remaining 11 are in the red. Varun Beverages has gained the most, almost 12 percent, followed by Godrej Consumer, up 10.2 percent, Tata Consumer, up 8.7 percent and United Spirits, up 2.8 percent.

However, Emami is the top loser in the index, down over 18 percent, followed by ITC, down 11.8 percent. Meanwhile, HUL, P&G Hygiene, Britannia, and United Breweries also lost between 6 and 9.5 percent.

Going ahead, most experts believe that the volatility is likely to continue in the FMCG space but the long-term growth opportunities remain. Let's see what various analysts say about the sector's outlook as well as a look at their top picks.

Emkay

The FMCG sector has gone through time correction, where most coverage companies have reverted to their 10-year historical P/E, except for Colgate and GCPL, which have sustained their premium valuations. The FMCG sector’s forward P/E valuation at 52x is now trading at a discount to 54x, its average forward P/E for the last five years and is at a premium to 49x, its 10-year historical P/E average. The valuation premium to the broader market Sensex has gradually shrunk to 126 percent.

Read here: FMCG sector: Weakness in rural demand drags Q3 revenue growth, margins rise

Going ahead, amid muted demand setting, we see valuation holding on as companies will try to further expand margins, which will help in earnings delivery. With an assumption of subdued demand and stable raw-material setting, we see further price hikes to aid margin, which will help companies with earnings delivery. This scenario will help valuation, while any recovery in demand will result in sector valuation re-rating; although any irrational competition would be a de-rating catalyst. In our coverage, we continue to prefer names with execution and better valuations like ITC and Dabur India. We like GCPL, but the valuation caps the upside. We maintain SELL on Colgate.

Axis Securities

Most staple companies under our coverage have indicated a subdued demand environment, particularly in the mass end of the segment, as rural areas continue to face pressure. Moreover, increased competitive intensity has further hampered volume growth. Easing inflation, higher government spending, and increased urban remittances are expected to drive rural demand in the coming quarters. However, the increasing competitive intensity from smaller and regional players, especially as raw material prices ease off, will be closely monitored. Nonetheless, EBITDA margins have shown slower recovery as companies increased ad spending to increase the voice of share and gain market share. Though this has a short-term negative impact on margins, it will help in the long run.

In the volatile, uncertain, complex, and ambiguous (VUCA) world, the FMCG sector stands out for offering best-in-class return ratios such as ROCE, ROE, and dividend yield. These factors contribute to safeguarding capital over the long term. Nestle, Varun Beverages, and Jyothy Labs are top picks.

Read here: ITC, Britannia, Dabur, Asian Paints among 8 FMCG stocks picks after Q3 results

Ajay Thakur, Research Analyst, Anand Rathi Institutional Equities

A large part of the YTD negative returns in 2024 is owing to correction in both the largecaps (with heavy sector weights) of HUL and ITC. But it is early days, and we expect a better return (at least not negative) for 2024. ⁠HUL, GCPL, Emami and Zydus Wellness are preferred picks in the FMCG space, owing to reasonable growth visibility and attractive valuation (vs. historical average).

Anirudh Garg, Partner and Fund Manager at Invasset

Forecasting the FMCG sector's trajectory for the rest of 2024 requires a nuanced understanding of broader economic indicators, consumer trends, and corporate strategies. The inherent resilience of the FMCG sector, driven by the demand for essential goods, suggests the potential for a rebound as companies navigate through market challenges. For investors, the focus should be on identifying companies with solid fundamentals, including strong brand portfolios, efficient supply chains, and adaptability to digital and sustainability trends like Varun Beverages & Nestle. Also, both ITC and HUL stand out as significant players with their diversified product ranges and strong market presence. Investors should conduct comprehensive research, considering current market trends, company performances, and future growth potentials before making any investment decisions.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.