Consumer staples to outperform discretionary stocks in H2FY23, says CLSA

In the December quarter of the previous year, HUL, Colgate and Marico had reported low single-digit volume growth, while discretionary companies had clocked volume growth upwards of 20 percent

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Rebound in rural demand, easing inflationary pressures and recovery in margins bode well for consumer staple companies and could see them outperform discretionary stocks in H2FY23, foreign brokerage firm CLSA has said.

“We continue to see high base affecting growth for the discretionary names. On the other hand, staples stocks, on a low volume base in H2FY22 and with gradual easing in inflation, are placed well to report better earnings,” it said in a recent report.

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In the December quarter last year, HUL, Colgate and Marico reported low single-digit volume growth, while discretionary companies like Varun Beverages, Asian Paints and Titan clocked a volume growth upwards of 20 percent.

As rural markets account for nearly 69 percent of India’s population, staple companies are now pinning hopes on volume recovery backed by a good harvest, higher minimum support prices (MSP) and an increase in fertiliser subsidy, which will leave consumers with more money to spend.

Around 58 percent of the total 751 rural respondents noted improvement in income over pre-Covid levels, said CLSA, citing its proprietary survey. Rural demand has rebounded in October and companies are hopeful of the momentum sustaining.

Also Read: FMCG firms expect margins to improve as inflation eases

Discretionary companies, on the other hand, witnessed strong sales in October due to the festival season but the demand tapered off in November, the foreign brokerage firm said. “Discretionary companies are cautious on demand momentum,” it added.

CLSA’s preferred picks in consumer staples are Hindustan Unilever with a target price of Rs 2,950, Dabur with a target of Rs 625 and ITC Rs 375.

From August to November, ITC gained 10.6 percent, HUL 3.52 percent, Godrej Consumer was up 2.3 percent and Dabur gained 1.3 percent. Consumer discretionary stocks also gained in the same period. Varun Beverages was up 35 percent, Titan 11.7 percent and Pidilite gained 10 percent.

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