Nifty FMCG extends gains for 5th straight session to hit new record high, nears 60,000 level – here’s why

The Nifty FMCG index continued its upward momentum, marking a new milestone with a record high of 59,587 points on Thursday, extending its winning streak for the fifth consecutive trading session. It gained 0.40% during the session, accumulating a 4.3% increase over the past five sessions, bringing it closer to the 60,000 level.

The index that began its bull run in June, concluding the month with a 5% gain, has sustained its rally into July, achieving a 5% return in less than 2 weeks of July.

Notably, ITC shares surged nearly 8% in July, while Marico shares saw a 5% rise over the same period. Similarly, Britannia Industries, Godrej Consumer Products, Colgate-Palmolive (India), and HUL all recorded gains ranging from 5% to 6% in July.

What triggered the rally?

The rise in FMCG stocks has been supported by improvement in rural demand, positive June quarter business updates from major FMCG players, and the new coalition government's focus on rural economic development.

Additionally, favorable forecasts for the monsoon, which is anticipated to strengthen rural recovery; a drop in key input prices during the first quarter, price cuts and expectations of rural reforms in the upcoming Union Budget on July 23 all bolstered FMCG stocks.

Demand for FMCG products strengthened, particularly in the summer portfolio, despite a slow start early in the quarter, showing gradual improvement later on.

Rural markets outpaced urban areas, driven by heightened demand for items like cold beverages, prickly heat powder, and glucose, fueled by extreme heat in North and Central India. A promising monsoon forecast is expected to further stimulate the rural economy.

Leading FMCG companies such as Dabur, Marico, and Adani Wilmar have reported a steady improvement in demand trends during their latest quarterly updates for April–June, in line with expectations.

Dabur anticipates mid- to high-single-digit growth in consolidated revenue, backed by mid-single-digit volume growth in the domestic market. Marico reported high single-digit revenue growth for the June quarter, with a modest improvement in underlying volume growth sequentially in its domestic business.

Adani Wilmar, known for its edible oils and Fortune brand food products, recorded a 13% increase in overall volume during the June quarter.

Recovery in volume growth

Over the past two years, the FMCG sector's growth has been driven by price hikes necessitated by high inflation, while volume growth has been slower. Macroeconomic challenges and these price increases have hindered the recovery in the rural market, which faces pressure from sluggish income growth.

However, analysts anticipate a turnaround in volume growth as macroeconomic conditions steadily improve. FMCG companies have implemented price cuts and increased product grammage, along with benefits from easing raw material prices, which collectively signal a potential rebound in sales volumes.

Healthy quarter

Domestic brokerage firm Elara Capital forecasts that its FMCG coverage universe will see 7.3% YoY revenue growth and 6.9% YoY volume growth in Q1 FY25, marking a five-year CAGR of 9.6%, up from 8.9% in Q4 FY24.

According to the brokerage, companies like Mrs Bectors Food Specialities, Tata Consumer Products, Emami, Varun Beverages, and Nestle India have recorded robust revenue growth in Q1 FY25. Britannia also achieved nearly high single-digit volume growth, driven by enhanced market focus.

Elara highlighted Tata Consumer's growth, fueled by strong performance in new ventures, stable salt volumes, and acquisitions of Capital Foods and Organic India. Emami, Dabur, and Varun Beverages benefited from the intense summer season. Hindustan Unilever, however, continued to face subdued overall demand.

Jyothy Labs and Nestle saw gains from improved distribution networks. Colgate Palmolive is expected to achieve high single-digit growth, supported by its premium product portfolio, while Godrej Consumer Products is likely to achieve nearly double-digit growth in the domestic market, driven by its personal care and air freshener segments, despite challenges in the household insecticide segment due to the strong summer season.

For Q1 FY25, Elara Capital anticipates a gross margin expansion of 180 basis points year-over-year and flat quarter-over-quarter (excluding ITC, up 230 basis points year-over-year and flat quarter-over-quarter). 

EBITDA margins are expected to increase by 30 basis points year-over-year and 50 basis points quarter-over-quarter (excluding ITC, up 90 basis points year-over-year and 70 basis points quarter-over-quarter), driven by favorable input prices, partly offset by increased advertising spend.

The brokerage firm predicts an EBITDA growth of 8.6% year-over-year for its FMCG universe (excluding ITC, growth of 12.4% year-over-year). Except for ITC, Bajaj Consumer Care, Mrs Bectors Food Specialities, and Hindustan Unilever, which may experience EBITDA margin contraction, other companies are expected to achieve margin expansion.

Companies such as Godrej Consumer Products, Nestle India, Britannia Industries, Varun Beverages, and Hindustan Unilever are anticipated to report more than 100 basis points year-over-year margin expansion.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.