Stocks to buy: HUL, Godrej Consumer, Dabur among top stock picks in the FMCG sector by MOFSL

The fast-moving consumer goods (FMCG) companies saw a steady recovery in volume growth amid improving demand and sustained margin expansion during the first quarter of FY25. Analysts expect further acceleration in volume growth in the upcoming quarters led by stable macro drivers and hopes of favourable monsoon.

FMCG companies under the coverage of Motilal Oswal Financial Services (MOFSL) posted revenue growth of 6% year-on-year (YoY) in the June 2024 quarter as against 4% in the March quarter, showing an improving consumption trend. In the consumer staples sector, demand has been steadily increasing, with signs of growth in rural markets.

“Harsh summer conditions and election-related restrictions have affected out-of-home consumption in categories like HI, beverages, alcoholic beverages, and paints, while boosting demand for cooling products. The outlook for rural markets remains positive. In our coverage universe, four companies reported double-digit revenue growth, while two saw revenue contraction,” MOFSL said.

FMCG companies continue to focus on marketing and distribution, which led to slower EBITDA margin expansion than the gross margin increase. There is expectation of a price hike in H2FY25 to offset rising raw material prices.

“Some companies are expected to take a price hike in 2HFY25 to offset the recent raw material inflation trend. Gross margin has already recovered well for most companies; hence, a further expansion in FY25 will be category/company-specific. EBITDA margins are expected to improve at a moderate pace over the medium term, supported by operating leverage, a better product mix, and growth in the premium portfolio. Local competition, rural pickup, pricing activities, and RM prices remain key monitorables,” MOFSL said.

Top Picks in FMCG Sector

MOFSL reiterated its overweight stance on the consumer staple sector owing to favorable risk-reward dynamics and anticipated volume recovery in FY25 and FY26. It noted that the earnings cut cycle had been largely reflected in stock prices, leading to 15-20% corrections in valuation multiples of staple companies compared to their own five-year averages.

“Consequently, an improvement in volume print is expected to reduce these valuation differentials. Over the past two quarters, we have observed steady improvement in volume growth, along with optimistic management commentary regarding further acceleration in growth in the upcoming quarters. Our preference for staple companies remains strong, as we anticipate a sustained upward trajectory in earnings that largely justifies their premium valuations,” MOFSL said.

It continues to prefer Hindustan Unilever, Godrej Consumer Products and Dabur India as its top picks.

Stocks to Buy

MOFSL has a buy rating on six FMCG stocks. These are HUL, Godrej Consumer Products, Dabur India, ITC, Marico and Emami. Here are top stocks to buy in the FMCG sector after Q1 results.

Hindustan Unilever | Buy | Target Price: ₹3,250

Godrej Consumer Products | Buy | Target Price: ₹1,700

Dabur | Buy | Target Price: ₹750

ITC | Buy | Target Price: ₹575

Marico | Buy | Target Price: ₹750

Emami | Buy | Target Price: ₹950

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 making any investment decisions.