FMCG stocks on a roll as household binge during lockdown drives valuations

Stocks of fast-moving consumer goods (FMCG) companies are on a roll since the lockdown in March as increased consumption at home and lesser disruption in demand compared to other sectors have boosted valuations.
The FMCG Index grew 32 percent from March 23 till now. Among the consumer stocks, several have seen massive rallies during the period with Tata Consumer Products up by 98 percent, Britannia up by 80 percent, Godrej Consumer by 56 percent, Marico by 52 percent, Colgate by 32 percent, Dabur by 27 percent, ITC by 25 percent and HUL up by 18 percent, according to Religare Broking.
Ajit Mishra, VP-Research, Religare Broking, said that with the easing of the lockdown measures, resumption of factories and easing of the supply chain of essential products, the companies present in the essential commodity segment as well as in the health and hygiene segment clocked significant revenue as they kept on picking up pace with higher demand.
Products such as biscuits, bread, milk, tea, coffee, food packets, detergents, floor cleaner and hygiene products (sanitisers, hand wash, soaps etc.) were in high demand.
Mishra said that companies such as Britannia, Dabur and Tata Consumers reported strong performance as a large part of their portfolio is present in the essential products segment while that of HUL, Marico, Godrej Consumers, ITC and Colgate reported mixed numbers.
Further, most of these FMCG companies benefitted from benign material prices as well as lower advertisement spends which led to improvement in margins.
The COVID-induced lockdown also impacted FMCG companies’ sales and demand initially as they faced disruption in distribution due to restrictions in the supply chain as well as closure of factories.
Notably, demand for essential commodities started to increase while that of premium products and discretionary items were adversely impacted as strict lockdown was imposed which restricted their movement.
Further, local kirana shops gained more as compared to branded stores as they had varieties of products available and were also able to deliver products on time. Besides, impulsive buying, bulk and economical options and move towards e-commerce and digitalisation was the new trend among the urban consumers during the lockdown period as consumers were afraid of contracting the virus.
As a result, FMCG companies tied up with delivery agents and also launched their own e-commerce apps for reaching out to the customers.
FMCG companies are continuing to focus on their core brands, managing distribution and supply chain and efforts towards growing digitalisation and e-commerce sales. These steps would help them overall the recent challenges and are expected to post decent numbers in the coming quarter.