Axis Securities recommends Varun Beverages, ITC, and CCL Products from FMCG sector post Q1 results; here's why

livemint.com:

FMCG) companies during Q1 have highlighted continued signs of rural recovery, boosting volume growth, according to domestic brokerage Axis Securities, following the April-June (Q1FY24) earnings season. Companies have indicated that volume growth is anticipated to pick up gradually, the brokerage added, even though a full recovery in rural areas would take a few more months. Due to the stability of the pricing of essential raw materials such as palm, packaging, and petroleum, most companies have shown sequential improvement in their gross margins.

The brokerage expects more recovery in the next quarters as raw material costs have already stabilised. Year over year (YoY) recovery is currently under way. Even so, when companies boosted their advertising budgets in an attempt to grow market share and voice, earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins recovered more slowly.

In the long run, this will benefit margins even if it has a short-term negative effect, the brokerage report stated. Furthermore, while with caution, the domestic brokerage stated that H2FY24 would be better. Future rural growth momentum will be determined by factors such as eased inflation, more government expenditure, and rising remittances from urban areas.

But one must keep a close eye out for El Nino's effects. Structural growth trajectory: According to the brokerage's report, Indian FMCG companies have been seeing structural growth, but many categories—such as premium detergents and shampoos—remain underserved and underpenetrated while rural penetration continues to progress. Premiumisation agenda to drive the overall growth: From the brokerage's perspective, the premiumization agenda will drive the sector's