FMCG stocks on a roll

Fast-moving consumer goods (FMCG) companies have been on a roll this year. In the past three months, companies like Nestlé India, Dabur, Britannia Industries and Hindustan Unilever have gained up to 12-22%. Shares of Nestlé India and Dabur on Thursday hit their fresh- highs by climbing 6.2% and 6.4%, respectively.

Analysts attributed the surge in stock prices to volume-led growth, product launches, a favourable monsoon, growing demand and petering down of impact of the twin blows of demonetisation and GST.

Many FMCG companies were not performing well last year because of the impact of these two factors. But, this year they have streamlined their policies, and settled with the impact, said Anil Talreja, partner, Deloitte India.

The road map that the management took after the Maggi fiasco seems to be working for Nestlé India. Its continued focus on product launches, innovations and volume-led growth have helped the firm. The company‘s profit jumped 50.1% in the quarter ended June 30, 2018. It posted double-digit volume growth across all its product categories. According to the management, of the 39 launches in the past three years, 25 have worked well for them and they expect innovations to contribute 3-5% to overall revenues.

“In view of the broad-base revenue growth, we upgrade our revenue forecast for Nestlé, leading to an EPS upgrade of 2% and 6% for CY18E and CY19E,” said a note by Antique, a stock brokerage firm.

While the fear of inflation still looms large, analysts believe that the company is in a position to increase product prices since they haven't been raised in the past 12 months.

New Delhi-based Dabur India had reported better-than-expected domestic volume growth of 21% in the April-June quarter of the current financial year. The company’s shares have rallied over 22% in the past three months. Axis Capital retained a ‘buy’ rating on Dabur. It also raised its EPS (earnings per share) estimate by 2% and revised the target price to Rs 550 (from Rs 480). “Dabur is our preferred pick in the staples space,” it said in a note.

Nestlé, Dabur and HUL are taking a cluster-based approach—where they divide the area into clusters—to tap regional markets and fend off growing competition from regional players. All of which seems to working in their favour.

Companies like Britannia are increasingly focussing on expanding their categories other than biscuits in India. According to analysts, new categories are contributing around 10% of the revenues.

“We prefer Britannia over HUL and Nestlé, given its higher earnings growth, and more room for revenue growth over the next 3-5 years,” said a note by UBS. “We increase our EPS estimates for FY19 and FY20 by 5.6% and 11.1%, respectively.” it said.