From ITC To Varun Beverages Top Stock Picks By Axis Securities From FMCG Space

The brokerage firm Axis Securities is bullish on the FMCG sector as most of the FMCG companies have highlighted sustained signs of rural recovery in Q1FY24, thus driving volume growth.

On a gross margins fronts, most companies have delivered sequential recovery as key raw material prices - crude, packing and palm remained stable, according to the brokerage.

Nonetheless, EBITDA margins have shown slower recovery as companies increased ad-spends to increase voice of share and gain market share. Though this has short-term negative impact on margins, it will help in longer run, said Axis Securities in a note.

Why FMCG Sector Is A Good Bet?

According to the research analysts of Axis Securities, Indian FMCG companies have been on a structural growth trajectory with many categories still under-penetrated (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. 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, said the brokerage.

Top FMCG Stocks To Buy

Varun Beverages

Axis Securities has maintained a target price of Rs 920 for Varun Beverages with a buy rating.

"VBL has consistently outperformed its peers in recent quarters despite the volatile environment. Going forward, VBL is expected to perform well due to 1) normalisation of operations and gaining market share in the newly acquired territories after the disruptions of COVID -19, 2) continued management focus on efficient go-to-market execution in the acquired and underpenetrated territories as reflected in the recently commissioned Bihar facility (it has started gaining market share), 3) expansion of distribution reach to 3.5 Mn outlets in CY23 from the current 3 Mn, 4) focus on expanding Sting, a high-margin energy drink, in outlets, coupled with an increased focus on expanding the value-added dairy, sports drink (Gatorade) and juice segments; and 5) robust growth in international regions," said the brokerage firm.

ITC

ITC has been picked up by Axis Sec with a buy rating for a target price of Rs Rs 540. Commenting on the rational behind the stock, the brokerage said "We believe that ITC's narrative is strengthening as all business units are on right track: - 1) Stable growth in cigarette volumes due to market share gains and new product launches; 2) FMCG business reaching the inflection point as EBIT margins expected to increase from 7.7% in FY22 and driven by - the ramp up in the outlet coverage, effective implementation of WIMI strategy, promotion of premiumization, leveraging demand and supply side technologies and moderation of raw material costs; 3) strong and stable growth in hotel business as travel, wedding and corporate activities increase; 4) stable and decent performance in paperboard and agricultural business in recent quarters. Reasonable valuation among entire FMCG pack provides large margin of safety."

CCL Products

Buy CCL Products for a target price of Rs 750 said Axis Securities in a note. "Management remains confident in maintaining its volume guidance of 20-25% in the near future based on the strong order book. Strong positioning in international markets as the company continues to gain market share and enter new business areas. Doubling of capacity in Vietnam from current 13,500 MT to 30,000 MT and new capacity expansion in India, which will result in strong volume growth over the next 2-3 years. Capacity expansion in value-added products (FDC and small packs). Expansion of domestic consumer business and entry into high-margin branded retail business (Continental Coffee, Plant-based meat protein)," said the research analysts of Axis Securities.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.