Top Stock Picks By HDFC Securities From FMCG Sector

The fast-moving consumer goods (FMCG) industry has shown to be more robust, resulting in significant profitability. The brokerage company HDFC Securities is positive on thematic stocks, citing the FMCG sector's growth potential.

"We have seen how the market punishes when long term growth assumptions change. ITC, Emami, Colgate, Bajaj Consumer, Jyothy Laboratories were penalised (>30% derating) in last few years. It reflects the fact that valuation multiples are quite dynamic, and one must stay ahead of the curve to predict these shifts. We have been underweight on the sector since early 2020; the sector has underperformed in the last two years, with mild de-rating in progress," the brokerage says.

According to the brokerage "The Indian retail market is estimated to be worth over USD 800bn, making it the fourth largest in the world. Still, it is expected to grow at an 8-9% CAGR over the next five years. India has the second-largest number of internet users (~700-800mn), while e-commerce users account for only 140-150mn, or ~20% of all internet users (most developed countries have ~70%). Over the next five years, the e-retail market is expected to gain penetration and grow at >25% CAGR. E-retail penetration has improved from 3% FY19 to 5% in FY21, but it is predicted to reach 10% in the next five years."

HDFC Securities has claimed "We continue to believe that category leaders will be unable to sustain high market shares, which will be impacted by competition from niche offline/D2C players. Category leaders in India hold a high market share (in some cases, >50%), in contrast to developed countries, where competition is more level playing. (2) Relevant product, pricing, and communication will continue support D2C/new age brands for customer acquisition. (3) Alternate channels (MT+ ecomm) will continue to gain share, despite a significant increase in the last two years."

"India's share could be larger than that of developed countries, given the vast differences in consumer buying experiences between GT and alternate channels. (4) Margin expansion for most companies will be muted, as many have already hit the wall. A large part of cost control has already been captured. Companies must prioritise growth above margins. (5) Over the last five years, many consumer discretionary companies have expanded/gone public, providing a variety of options to investors in the consumption space. In comparison to history, changing assumptions will cause the valuation metric to shift relatively quickly," the brokerage noted.

The brokerage has maintained REDUCE for HUL, NESTLE, BRITANNIA and EMAMI. ITC as a BUY and maintained ADD on DABUR, MARICO, GCPL, and COLGATE.