Early signs of rural recovery? Here's why Axis Securities is betting on ITC, Varun Beverages and CCL Products

The FMCG sector has outperformed the benchmarks as the Nifty FMCG index has jumped over 17 per cent in 2023 on a year-to-date basis as against an over 3 per cent rise in benchmark Nifty. Axis Securities, in its recent report, said that most of the FMCG companies have highlighted early signs of rural recovery, thus driving volume growth.

On a gross margin front, most companies have delivered sequential recovery as key raw material prices – crude, packing and palm are in a declining trend. "On a YoY basis, the recovery is underway and we expect a further recovery in the upcoming quarters as raw material prices have now stabilized. EBITDA margins have shown slower recovery as companies increased ad spending to increase the voice of share and gain market share. Though this has a short-term negative impact on margins, it will help in the long run," the brokerage added.

What Makes the FMCG Sector a Good Bet?

Axis Securities believes that the Indian FMCG companies have been on a structural growth trajectory with many categories still underpenetrated (shampoos, premium detergents) and underserved as rural penetration is still underway. As Indian consumers increase their purchasing power, the propensity of buying premium and branded products would increase; thus, premiumisation agenda will drive the overall growth for the sector.

The FMCG sector provides best-in-class returns ratios (ROCE, ROE) and dividends yield in the VUCA world which help protect the capital in the longer run, it said.

Top Picks Ideas from the Sector

Axis Securities is betting on Varun Beverages, ITC and CCL Products with up to 17 per cent upside potential.

Varun Beverages

Rating: Buy | Target Price: Rs 1,860 | Upside: 15%

The brokerage firm believes that Varun Beverages is consistently outperforming its peers in the last several quarters despite volatile environment.

Going ahead Varun Beverages is expected to perform well on account of

1) Normalcy of operation and market share gains of newly acquired territories post-COVID-19 disruptions

2) The management’s continued focus on the efficient go-to-market execution in acquired and underpenetrated territories as reflected in its recently commissioned Bihar plant operations (it has started gaining market share)

3) Expansion in its distribution reach to 3.5 Mn outlets in CY23 from 3 Mn currently

4) Focus on expanding high-margin Sting energy drink across outlets coupled with an increased focus on the expansion of Value-added Dairy, sports drink (Gatorade), and Juice segment

5) Robust growth in the International geographies.

ITC

Rating: Buy | Target Price: Rs 490 | Upside: 10%

Axis Securities believes that the narrative around ITC is getting stronger as all its businesses are on the right track – 1) Stable cigarette volume growth led by market share gains and new product launches; 2) FMCG business reaching the inflexion point as its EBIT margins expected to inch up from 7.7% in FY22 and would be driven by – the ramp up in the outlet coverage, effective implementation of the WIMI strategy, driving

premiumisation, leveraging technology on demand and supply side; and moderation of raw material input cost; 3) Strong and stable growth in hotels as travel, wedding, and corporate activities pick up; 4) Steady and decent performance in paperboard and agric business witnessed in last few quarters. "Reasonable valuation among entire FMCG pack provides a huge margin of safety," it added.

CCL Products

Rating: Buy | Target Price: Rs 750 | Upside: 17%

"The management remains confident of maintaining its volume guidance of 20-25% in the near term on account of a strong order book. Strong footing in the International markets as it continues to gain market share and access new business. Doubling of Vietnam's capacity from the current 13,500 MT to 30,000 MT and new capacity expansion in India leading to strong volume growth visibility for the next 2-3 years. Capacity addition in the value-added products (FDC and small packs). Scaling up domestic consumer business and foray into high-margin branded retail business (Continental Coffee, Plant-based meat protein)," Axis Securities said in its report.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Business Today)