Following the recent election results, there has been a surge in consumer stocks, largely due to portfolio adjustments. This rally in staple stocks is not only because they are considered defensive but also due to positive post-Q4 management commentary. Many investors were cautious initially, waiting for more signs of recovery before investing in the sector. However, the risk-reward proposition has gained attention recently, along with sector tailwinds.
The growth in the FMCG sector has been driven by price increases over the past two years due to high inflation and slower volume growth. Challenges such as macroeconomic factors and price hikes have delayed the recovery in the rural market, which has been under pressure due to weak income growth. However, with improvements in macroeconomics and price adjustments by FMCG companies, a rebound in volume growth is anticipated.
Factors Impacting Volume Growth
Factors such as a prolonged slowdown in rural markets and potential government initiatives to boost consumption, particularly in rural areas, could further fuel volume growth. Earnings catalysts are in place, and stocks are within fundamental value, keeping the risk factor under control. However, maintaining volume performance is crucial for sustained stock performance.
The sector has faced headwinds in recent fiscal years, but there is optimism for an upward trend in the earnings cycle. Factors like an above-normal monsoon, rural recovery, distribution expansion, and stable raw material prices provide visibility for earnings acceleration in FY25.
Avenue Supermarts: Target ₹5310 | Current Price ₹4745 | Upside 12%
D-Mart has shown a strong revenue growth rate of 20% CAGR from FY20 to FY24, driven by footprint additions. The company’s focus on larger-format stores and cost efficiencies, along with a recovery in discretionary demand, is expected to drive growth.
Tata Consumer: Buy | Target ₹1350 | Current Price ₹1135 | Upside 18%
Tata Consumer’s strategy aims to strengthen its core business, explore new opportunities, digitize the supply chain, and expand its product portfolio. Short-term tea business volume growth is expected at 2-4%, with margin improvement anticipated in the international beverage business in the medium to long term.
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