Financial services company Investec, in its latest report, said that the financial year 2020 will be a year of lower growth for the FMCG sector. It, however, believes that larger companies with scale, a diversified product presence and strong access to all distribution channels, will outperform.

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“We factor a volume growth of 4-9 percent across companies in FY20 taking into account a lower volume growth in H1FY20 at least. The reasons for the broader slowdown are: 1) overall GDP growth slowing 2) rural stress across several regions 3) liquidity pressures in the supply chain impacting wholesale channel sales," the report said.

FMCG Sector

“We believe that diversified plays that have a healthy rural market salience have a higher chance of surprising on volume growth and hence on earnings as rural volume growth recovers over the next few quarters," it added.

Rural India Growth

The brokerage believes in the longer term, rural and middle India will grow significantly ahead of urban India in volume terms and will be the key drivers of industry growth. "Therefore, rural India remains the maker and breaker as tight liquidity are constraining the wholesalers and super stockists, which in turn results in lower primary sales at the brand level," said Investec.

Overall Industry Growth

"Given the steady growth profile, higher than other sector cash conversions and return ratios, premium valuations for the sector are justified. Further, most of the companies in our coverage universe are trading at below peak valuations which gives us comfort that once growth recovers, a further re-rate is likely," the report mentioned.

Investec initiated a ‘buy’ coverage on Hindustan Unilever, Dabur, ITC and Jyothy Labs, ‘hold’ on Godrej Consumer, Marico, Britannia, Emami and Nestle India, and a ‘sell’ call on Colgate Palmolive.

First Published:Sept 18, 2019 10:44 AM IST