The Union Budget 2025 put the limelight back on the FMCG sector, which had broadly lagged the stock market returns in past several years. Following the income tax cuts, Elara Securities said it prefers high-growth and 'predictable' plays, as it picked Tata Consumer Products Ltd (TCPL), Marico Ltd and Mrs Bectors Food Specialities Ltd as top three FMCG bets for their near double-digit revenue growth.
Data showed Nifty FMCG has underperformed Nifty by 2 percentage points and is up at 10 per cent CAGR since FY19. This has come after a strong 8 percentage points outperformance against Nifty in the prior nine years through FY10-19.
While in Phase I (FY11-15) growth was close to mid-teens with modest margin expansion for large companies, Phase II (FY16-20) witnessed significant margin expansion even as revenue grew in mid-single digit, Elara Securities explained.
"Holding on to benefit from the cyclical uptrend in revenue growth and consistent margin expansion have been the investment strategy as regards FMCG plays. However, Phase III (FY21-24) has been marked by lower revenue growth with no margin expansion. So, we prefer plays with better revenue growth and stable Ebitda margin in FY26E versus FY24," it said.
In the past two quarters, FMCG sales have been subdued even as rural demand has witnessed a gradual recovery, led by normal monsoons and a lower base.
Urban demand, on the other hand, is decelerating, due to reducing disposable incomes and higher base.
"Key highlights from Q3FY25 management commentaries were consumers downtrading to smaller packs in the premium segments and capping of margin expansion in the medium term," Elara said.
The brokerage said FMCG players may be forced to go in for acquisitions and scale-up of adjacent portfolios. Increasing competition due to emergence of alternate distribution channels and new layers would keep a check on margins, it said.
"Tax relief from the Union Budget 2025 would increase disposable incomes but would not substantially benefit FMCG plays and should aid a reversal of the downtrading trend," Elara said.
For the quarter, revenue growth was in double-digits for Varun Beverages, Tata Consumer Products, Marico and Mrs Bectors Food Specialities. Among others, Hindustan Unilever, Nestle India, Dabur India, Godrej Consumer Products and Colgate Palmolive witnessed subdued revenue growth in Q3. While EBITDA margin was largely hit across companies, HUL, Dabur India, VBL and Emami witnessed very little or no impact.
"With challenges in Ebitda margin expansion persisting for most companies, we prefer plays with revenue growth ahead of Elara FMCG universe (on FY26). We prefer TCPL and Marico within large-caps and Mrs Bectors within mid-caps given better revenue predictability," it said.