The FMCG index has rallied 11% in the last three months against a 6% gain in the Nifty. ITC contributed to 57% of the rally in the FMCG index in the past three months, while HUL, Varun Beverages, and Nestle contributed a little over 27%.
Analysts expect the index to gain another 7-8% in the near-term.
“The Nifty FMCG index is expected to head much higher towards the 54,000 level. On an immediate basis, the index has support around the previous swing high of 49,500 while positionally support is seen at 48,700-level,” said Viraj Vyas, technical analyst, Ashika Stock Broking. “ITC, Varun Beverages, Britannia, and Nestle have led the charge and will continue to do well. However, stocks like Godrej Consumer, Dabur, Radico, and Marico have interesting setups and are expected to make newer highs.”
The FMCG index has been an underperformer in 2021 and 2022 as rich share valuations of consumer companies along with the negative impact of higher raw material costs and weaker demand weighed down sector margins, keeping investors away.
While valuations remain elevated compared to the broader market, the sector has turned into a trading bet for the moment after two years of underperformance.
While Varun Beverages surged 32% in the last three months, United Spirits, ITC, and Nestle surged over 16%. Godrej Consumer, Tata Consumer, and Marico gained between 11% and 15%.Analysts said if the share valuations subsided from current levels, long-term investors would consider buying them again.
“With some moderation in valuation multiples, the FMCG space looks attractive, and companies with strong cash flow generation and top-of-the-mind brand recall can be considered for investment,” said Manish Chowdhury, head of research, Stoxbox. “We expect volumes to show a meaningful recovery going forward as some green shoots are visible in rural consumption, which forms about 40% of sector volumes, further echoed by management commentaries of some leading companies.”
The Price to Earnings Ratio – a popular valuation measure – of HUL is at 61 times, Nestle at 82, and Britannia at 49. The Nifty is at 21 times. Though the current PE ratios are lower than their peak levels, analysts said they are still expensive. Most FMCG companies reported better-than-expected revenue and margin growth in Jan-March 2023 on easing in key raw material prices and demand recovery from rural areas.
