Demand concerns knock FMCG stocks hard

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ETMarkets.com

From FY26 and FY27 onwards, the street will start building high-single-digit growth for FMCG companies aided by price hikes, he added.

Synopsis

Godrej Consumer Products fell nearly 9%, leading a fall in FMCG stocks. Tata Consumer Products slumped 4.1% while Marico, Hindustan Unilever and Dabur shed over 3% each. Colgate Palmolive tumbled 2.9% while Nestle and Britannia Industries fell over 1.5%. ITC closed 1.26% lower.

ET Bureau

Last Updated: Dec 10, 2024, 05:30:35 AM IST

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Mumbai: Fast-moving consumer goods (FMCG) were among the top losers in Monday's trading after Godrej Consumer Products said it anticipated muted demand in its third-quarter business update. Investors must brace for further downside in these stocks as pressure on volumes and margins on account of an urban demand slowdown could extend beyond the third quarter, said analysts.

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"Since Godrej Consumer is a bellwether stock in terms of volume growth, other stocks have also taken a beating as investors turned cautious of other companies facing similar headwinds," said Ajay Thakur, research analyst- FMCG, Anand Rathi Institutional Equities.

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The Nifty FMCG shed 2.2%, while the benchmark Nifty dipped 0.24%. Of the 15 stocks on the FMCG Index, 14 declined while one advanced on Monday.

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"There was some expectation of better numbers in the third quarter due to the wedding and festive season which didn't pan out as indicated by Godrej Consumer Products," said Amit Agarwal, senior vp and research analyst, Kotak Securities. "Margins are likely to remain under pressure and further derating is expected."

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Agarwal said that earnings downgrades are likely to follow and at least 10-15% derating in the stocks is expected from the current levels, especially in the urban-focused companies, which is the majority of the FMCG basket.

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Godrej Consumer Products said that the subdued demand has impacted FMCG market growth in the past few months. The uptick in palm oil and derivatives prices have impacted the soaps category, driving the company to take price hikes, the company said.

Analysts said Godrej's commentary suggests volumes take some time to recover. "The valuations are stretched as the margin squeeze and negligible volume growth don't justify the valuations," said Agarwal. "Investors are advised to remain cautious on these stocks as further downside is likely."

The Nifty FMCG index declined nearly 12% in the last three month, compared to a 1.3% fall in the Nifty.

"In terms of valuations, the corrections have been sharp, and most companies are closer to the five-year average," said Amit Purohit, VP- research, Elara Capital. "However, there is no near-term trigger for the stocks."

Investors are expected to remain cautious as there are near-term headwinds with respect to demand as of now, said Purohit.

From FY26 and FY27 onwards, the street will start building high-single-digit growth for FMCG companies aided by price hikes, he added.

Some analysts are bullish on large-cap FMCG stocks. "The stocks have already witnessed quite a lot of corrections, and the valuations are attractive," said Thakur. "Hindustan Unilever and Godrej Consumers are trading attractively priced and offer good buying opportunity from a two- to three-year view."