FMCG index down over 5% in 2024 YTD; will this negative trend continue?

livemint.com:

Varun Beverages has gained the most, almost 12 percent, followed by Godrej Consumer, up 10.2 percent, Tata Consumer, up 8.7 percent and United Spirits, up 2.8 percent. However, Emami is the top loser in the index, down over 18 percent, followed by ITC, down 11.8 percent. Meanwhile, HUL, P&G Hygiene, Britannia, and United Breweries also lost between 6 and 9.5 percent.

The FMCG sector has gone through time correction, where most coverage companies have reverted to their 10-year historical P/E, except for Colgate and GCPL, which have sustained their premium valuations. The FMCG sector’s forward P/E valuation at 52x is now trading at a discount to 54x, its average forward P/E for the last five years and is at a premium to 49x, its 10-year historical P/E average. The valuation premium to the broader market Sensex has gradually shrunk to 126 percent.

Going ahead, amid muted demand setting, we see valuation holding on as companies will try to further expand margins, which will help in earnings delivery. With an assumption of subdued demand and stable raw-material setting, we see further price hikes to aid margin, which will help companies with earnings delivery. This scenario will help valuation, while any recovery in demand will result in sector valuation re-rating; although any irrational competition would be a de-rating catalyst.

In our coverage, we continue to prefer names with execution and better valuations like ITC and Dabur India. We like GCPL, but the valuation caps the upside. We maintain SELL on Colgate.