Brokerages see likely gain in FMCG stock with BJP’s return to power

The new Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government at the Centre is likely to roll out more “pro-consumption initiatives”, benefitting consumption as well as stock valuations of fast moving consumer goods (FMCG) firms, brokerages said in an analysis after the general elections.

The BJP returned to power on 4 June with a slimmer majority, bagging 240 seats, while its alliance partners ratcheted up another 52 seats to secure an absolute majority in the 543-member Lok Sabha. 

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Analysts expect the government's focus on pro-consumption measures, and the expectations of normal monsoons, to contribute to a potential uptick in demand in the near term.

Market expectations prior to elections was on pro-infra measures, which were perceived to benefit consumption, again with a lag, Emkay Securities analysts said in a note on 4 June. "We now believe that the current majority will keep the government on its toes with pro-consumption initiatives being key. In this light, we see tailwinds for the sector, which will aid overall valuations.” 

Over the past two years, FMCG growth was primarily driven by price hikes due to high inflation, denting volume growth. Consequently, FMCG companies witnessed a "slow and volatile" phase due to controlled populist measures from the Union government and persistent macroeconomic headwinds. However, with inflation cooling, a revival in consumption is likely, analysts added. 

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Overall, Emkay maintained its forecast of high-single digit growth for the FMCG sector in FY25.  "FMCG sector valuation is likely to see a re-rating with the emergence of tailwinds that align well with the enhancement in company execution. From the near-term perspective, the full Union Budget could likely boost consumption prospects.”

The positive outlook for the FMCG sector is underscored by various factors, including improvement in key economic indicators, a normal monsoon benefiting agriculture, and significant investments by FMCG companies in expanding their distribution networks, according to the report.

“This aligns well with the turnaround in rural growth and expectations of above-normal monsoon for FY25 (expected to be 106% of the long-period average, as per the India Meteorological Department)," the analysts said. 

"We also see structural benefits arising from central government schemes like the Ujjwala scheme, Jal Jeevan mission, Swachh Bharat Abhiyan, and Housing for All initiatives. In Q4, the management of most FMCGs had noted action plans regarding enhancing prospect with distribution expansion.” 

The forecast is in line with the findings of consumer intelligence firm NielsenIQ (NIQ), which reported that rural FMCG demand had outpaced urban markets for the first time in 15 months in the March quarter, although urban shoppers more than made up with increased spending on packaged items.

Outlook for demand positive

Meanwhile, in their March quarter earnings commentary several large companies maintained a positive outlook on demand for the ongoing fiscal year. Britannia Industries, for instance, said it is eyeing double-digit volume growth in FY25, while Dabur projected mid-to-high single-digit volume growth.

Motilal Oswal Financial Services Ltd analysts pegged FMCG value growth in high single-digits for FY25 and FY26. Consumer stocks have also rallied after the general election results. 

“We believe this rally in staple stocks is driven by not only its ‘defensive sector’ tag but also the underlying excitement, which was triggered by strong post-Q4 management commentary,” analysts said.

Motilal Oswal expects steady improvement in macro-economics and price cuts by companies, to drive a rebound in FMCG volumes. "With a prolonged slowdown in rural markets, the government can also be more active in accelerating the volume growth performance. As of now, we do not change our volume growth assumption, but it can further drive our volume growth assumption,” they said in a report released on Thursday.

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