3 FMCG stocks to buy amid sector rally post election results

FMCG shares: Domestic brokerage Motilal Oswal Securities said the ongoing rally in consumer stocks is mainly attributed to portfolio allocation but it feels that the gains are driven by not only its ‘defensive sector’ tag but also the underlying excitement, which was triggered by strong post- Q4 management commentary. 

It said most investors found the risk-reward proposition favourable but they wanted to see more signs of recovery before buying into the sector. In the last two days, the risk-reward proposition along with sector tailwinds, has quickly gained the required attention, Motilal Oswal Securities said.

The earnings cut cycle had overly played out in stocks, as it led to 15-20 per cent corrections in valuation multiples of staple companies as compared to their own five-year average. The FMCG sector's valuation has seen a consistent re-rating over the last 10-15 years. The sector was trading at around 30 times P/E during 2014, but it has since undergone a rerating, with the multiple increasing to more than 40-45 times after 2019. In last 2-3 years, the sector’s valuation has remained relatively stagnant. In fact, some stocks have experienced a correction in their valuations during this period.

Motilal Oswal Securities said an improving volume print will now narrow down the valuation gaps. 

"Moreover, we saw positive the management commentary during 4QFY24 earnings calls (rural pickup, distribution expansion, new launches, etc.), which defended our expectations of volume recovery. As a result, many FMCG stocks have run up about 5 per cent to 15 per cent, particularly the ones that were corrected the most (Marico, Dabur, HUL, etc)," it said.

The brokerage has maintained its over-weight call on the staple sector as it continues to prefer Hindustan Unilever (HUL), Godrej Consumer Products (GCPL) and Dabur India Ltd as our top picks.

Hindustan Unilever 
HUL: Motilal Oswal Securities expects volume growth for HUL has bottomed out and anticipates a gradual volume recovery in FY25. HUL’s wide product basket and presence across price segments should help the company achieve a steady growth recovery, it said.

"There is scope for a turnaround in part of BPC and F&R; we will monitor the execution in these segments under the new CEO. The valuation at 49x FY26E EPS is reasonable given its last five-year average P/E of 60x on one-year forward earnings," it added.

Godrej Consumer Products
GCPL is consistently working to expand the total addressable market for its India business through product innovations to drive frequency. Besides, there has been a consistent effort to address the gaps in profitability and growth in its international business. Motilal Oswal Securities see margin headroom from the RCCL and Indonesia businesses. The valuation is expensive, but earnings are expected to outperform peers.

Dabur India
DABUR: Recovery in rural markets should support its portfolio, as it is heavily skewed toward rural areas, the brokerage said. In the domestic business, Motilal Oswal Securities expects healthcare, oral care, and food business to grow faster than others. The distribution drive should further contribute to rural growth, it said.

"Ebitda margin has remained in the range of 19-20 per cent for the past several years. The margin is expected to improve in the coming years due to a better mix of products (such as higher healthcare offerings) and increased pricing in high market-share brands," it said.