Are FMCG stocks likely to make a comeback? 4 stocks with up to 22.3% upside potential
So what explains the sluggishness in stock prices of this sector? Analysts attribute this to the rising competition from regional players, slow rural market growth and inflation. But with stocks trading at reasonable valuations, rural growth set to pick up from the second half of the year and ebbing raw material prices, it may be time to reassess these companies’ prospects.
FMCG firms enjoy lower cyclicality of earnings, strong cash flows, and excellent corporate governance. Usually, the broader market cycle is complete when profits peak, valuations become expensive (cyclicals and defensive valuations converge), cyclicals melt and rate cuts begin. “We might be at this juncture now. The next churn is likely to be in underperforming quality sectors—private banks, insurance and FMCG—the traditional defensives offering earnings resilience in a downturn,” states a Nuvama Institutional Equities report.
In the previous quarters, the effect of an erratic monsoon was felt on the kharif crop output, which impacted agricultural yields and rural incomes. Rural typically forms about 40% of FMCG business and may pick up in 2-3 quarters. “By the second half of this year, rural segment may show signs of picking up. A good investing strategy may be to focus on urban-heavy FMCG stocks,” says Preeyam Tolia, Senior Research Analyst, FMCG & Retail, Axis Securities.
After the election outcome, the Budget could also provide impetus to the FMCG sector. “The scenario could improve with some Budget announcements. We have seen smaller
