By Nuvama Research
Over the last 12 months, the consumer goods sector has outperformed the broader market, with the Nifty FMCG index outperforming the Nifty50 by 20%. Despite facing several headwinds in the near term, the sector’s long-term structural growth drivers remain intact. We analyse the consumer goods sector’s prospects in both the short and long term and identify the companies best positioned to capitalise on emerging trends.
For FY24, we anticipate consumer companies to get back on track with improved margin profiles in the wake of continued correction in raw material prices from peak. During 9MFY23, inflationary pressures and high-priced inventory adversely affected margins. To combat this, companies undertook both price hikes and cost-cutting, which helped limit margin compression. Now, as raw material prices are cooling off, companies are paring prices via grammage increase and gradual price reductions. Even so, the reduction in final prices (a mix of grammage + price cuts) is typically much smaller.
As a result, we expect margins to trend up for a number of large consumer companies.
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Launches by RIL, Amul
Nibbling into a leader’s market share in FMCG is rare; for instance, HUL’s market share in hair care is at a 15-year high. However, Reliance’s and Amul’s FMCG forays cannot – and should not – be ignored by incumbents. Reliance has strengthened its diverse FMCG portfolio, which comprises Campa Cola (recently re-launched), heritage brands from Sosyo Hajoori, confectionery range from Lotus Chocolates, as well as daily essentials under its own brands including Independence and Good Life, among others. We expect RIL to target value-for-money segments in Foods and HPC (dish wash, surface cleaners); commoditised parts of FMCG through in-house brands; dormant/ regional/ D2C brands; and leveraging Reliance Retail’s network.
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Amul, on the other hand, has plans to rapidly scale up its portfolio of non-dairy products to become a total foods and beverages company and to compete with major FMCG players. It has identified categories such as non-dairy beverages, snacks, pulses, cookies, edible oil, organic foods and frozen foods to double down on speed and scale. Amul can compete with Coca-Cola with its products such as seltzers; with Britannia in cheese and cookies and with ITC in staples. On the retail front, Amul is setting up ‘Ice Lounge’ parlours for premium ice creams, wherein it would compete with HUL.