FMCG sector may experience a time correction, as the growth is expected to normalise from the second half of FY24. Pricing benefits are likely to fade, and volume-led growth will be crucial.
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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.
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Raw material comfort for margins, but pricing benefits evaporate
The analysis reveals that the industry achieved a high single-digit revenue compound annual growth rate (CAGR) over the last decade, with the potential for this trend to continue as margin comfort improves. However, mature categories such as hair oil and oral care have struggled to surpass mid-single-digit revenue CAGR in recent years. The report indicates that while raw material trends provide some comfort on margins, the benefits from price hikes are expected to taper off, potentially impacting value growth. Moreover, the looming risk of El Nino and its potential impact on rural spending adds another layer of uncertainty.
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.
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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.
