The recent equity market weakness has sobered up investor mood, but the coming festive season is keeping analysts upbeat on stocks related to the consumption basket.
Among the lot, fast-moving consumer goods (FMCG), retail, and consumer electronics segments are expected to do well over the next few months, and investors should thus selectively take bets in these pockets, analysts suggest.
"We expect good volume growth for the FMCG sector during the festive season with some improvement in rural demand.
"Branded apparel and quick service restaurant (QSR) segments should also see strong recovery with a better second half,” said Kaustubh Pawaskar, deputy vice president, fundamental research at Sharekhan.
Pawaskar is bullish on ITC, Tata Consumer, and Godrej Consumer (GCPL) from the FMCG space.
Trent and Devyani International are his other picks from the retail space.
Inflation bites
The FMCG sector, meanwhile, sustained positive volume growth of 7.5 per cent in the June quarter, as per a report by NIQ India (formerly NielsenIQ), on the back of urban markets.
Rural demand, as per analysts, did not see a meaningful pick up in August due to vegetable price inflation and poor monsoon.
The industry’s outlook on rural recovery also remains mixed.
Moreover, with receding commodity inflation and a slow pace of price cuts, competition from unorganized players in categories like detergents and foods remains intense.
However, HDFC Securities does not see a risk of more earnings cuts for the remaining quarters.
The brokerage believes the worst impact of inflation on mass consumption is behind and with visibility on earnings improving, it expects valuation multiples to expand ahead.
Consumer electronics
Consumer electronics remains another consumption pocket, which is expected to see strong sales in the next few months, as per analysts.
“Unseasonal summer rains, inflation and delayed liquidation of non-rated fan inventory is now behind, and with the ‘housing’ theme still in good shape, fan, lighting, refrigeration & air conditioning categories will benefit in the second half of the fiscal (H2FY24) and FY25,” said analysts at HDFC Securities.
The industry too, they say, is hopeful of a good second half beginning with festive season sales.
“Stocks of consumer electronics, especially those selling smartphones, television sets, and refrigerators should be looked at to capitalise on festive sales,” said Sonam Srivastava, founder at Wright Research.
However, stiff competition from e-commerce platforms in these categories, led by smartphones will persist, reports suggest.
Limited gains
Among the other consumption and festive sales-related segments, analysts expect paint companies to register healthy sales volumes.
The gains at the bourses and in the operating margins of these companies, however, are likely to be capped due to firm raw material prices.
Paint companies are expected to register strong sales for September and October due to a favorable base and delayed Diwali, as per a ICICI Securities note.
However, a 4 per cent monthly rise in the price of key raw materials like titanium dioxide led by the surge in crude oil, coupled with the entry of large players in the industry will keep margins under pressure in the next few quarters, analysts say.
At the bourses, Berger Paints, Indigo Paints and Kansai Nerolac gained 5-9 per cent between July-September, but Asian Paints lagged with a loss of 2 per cent.
The Nifty index, in comparison, is up 3 per cent over this time.
ICICI Securities advises investors to stay underweight in paints stocks and has a reduce rating on Akzo Nobel, Asian Paints, Berger Paints, Indigo Paints, and an ‘add’ recommendation on Kansai Nerolac.
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