While India’s 21-day lockdown forces consumption cuts and hits economic activity, the FMCG sector is not at the worst end of the coronavirus-led economic slowdown.
While India’s 21-day lockdown forces consumption cuts and hits economic activity, the FMCG sector is not at the worst end of the coronavirus-led economic slowdown. In fact, fast moving consumer goods companies are set to reap gains, as panic buying of items of daily use boosts the sector’s fiscal fourth-quarter revenue. Brokerages and equity research firms expect FMCG companies to post robust fourth-quarter earnings as consumers look to store soaps, hand wash, toothpaste and staples. “Most consumers have made advance purchases for a month compared to usual advance purchase of 10 days out of 90 days of a quarter. We estimate this will boost FMCG revenues by a good 10% during the quarter as people would buy additional 10 days of essentials,” said ICICI Securities.
Although coronavirus has limited movement of consumers, goods manufactured by FMCG companies still remain high in demand. ICICI Securities is pegging a superior volume growth for FMCG companies helped by panic buying across the country. Along with expected stronger volumes, falling crude and palm oil prices are also favourable for FMCG companies. This could well be the time to keep an eye out on FMCG stocks.
Tata Consumer Products
Target price: Rs 375
A major contributor to the Tata Consumer Products is the tea segment of the brand, which according to ICICI Securities has been witnessing intensified buying due to lockdown. “We believe this rampant buying would continue till this lockdown persists. Its coffee segment is primarily US geography driven and would also witness advance purchases. Also, the merged business of Tata Chemicals includes staples such as salt, pulses and spices should witness strong demand in H1FY21,” the brokerage said. Currently trading at Rs 281 apiece, an upside of 33% would take it to the target price pegged by ICICI Securities.
Target price: Rs 230
Although the FMCG giant has seen its share price tank more than 30% since the beginning of the year, it still remains a pick for the brokerage. “At the current price, the stock is trading at 11x & 10x its FY20E & FY21E earnings. Though the current economic conditions would have an adverse impact on ITC’s earnings for a quarter or two, we believe the company would be able to sustain the earnings growth in the long run backed by improvement in cigarettes as well as FMCG segments,” ICICI Securities noted. Cigarettes contribute significantly to ITC’s revenue and with the lockdown in place ITC will see a decline in revenue from cigarette sales, however, other FMCG products that contribute 25% of overall sales are expected to register a jump in demand. ITC is expected to reach the target price of Rs 230, which will see the share price jump 44% from the current market price of Rs 160.
Target price: Rs 550
Dabur’s home and personal care segment forms 50% of the domestic sales. As the demand for daily use items sky-rocketed, it is expected to show in Dabur’s fourth quarter earnings. It was noted that health supplements which account for 31% of domestic revenue would witness structural growth as Dabur is expected to post 8.7% revenue CAGR. An upside of 28% from the current market price of Rs 430 per share is expected.