Why state government budgets are reinforcing Jefferies’ conviction on FMCG makers

Fast moving consumer good (FMCG) companies confront the risk of below-average monsoon rainfall hurting rural incomes and, consequently their sales, but Jefferies remains overweight on the sector.

Reason: a silver lining in state government budgets that the securities firm says are “exhibiting a populist trend” although overall state expenditure may decline.

An analysis of the budgets of 15 states, which make for 85 percent of India’s Gross Domestic Product, shows that spending growth is set to decline from 21 percent in FY23 to 11 percent in FY24.

“But, the bias towards populist spending is visible in the state budgets with a surge in income transfer schemes in Maharashtra, Madhya Pradesh, Chhattisgarh etc. Big promises have also been made ahead of Karnataka state elections,” Jefferies said in a recent report.

Such announcements can help revive rural consumption and so its conviction on the potential of Fast-Moving Consumer Goods (FMCG) companies stays firm. Thus, the overweight rating on the FMCG sector.

Also Read: FMCG shows no sign of recovery in rural demand, muted volume growth on cards in Q4

El Nino
To be sure, not all on the Street share the optimism about FMCG companies, who have been battling steep consumer price inflation that prompted many households to tighten their belts and cut spending.

On top of that, concerns abound about the impact of the El Nino weather phenomenon that causes a warming of temperatures in the Pacific and is associated with lower-than-average rainfall in the subcontinent.

Weather forecaster Skymet predicts a “below normal” monsoon in India at 94 percent of the Long Period Average (LPA) rainfall. In the backdrop of the prediction, many fund managers are turning underweight on FMCG stocks.

“Base-level FMCG consumption is stressed. On top of that, valuations are still expensive across the board,” said Mayur Patel, who manages IIFL Focused Equity Fund.

Also Read: Daily Voice | This fund manager is overweight on autos with EV capabilities, and underweight on FMCG

State sops

Jefferies is unfazed.

It cites the fact that Rajasthan has announced a doubling of free units of electricity to 100 units for all households. Maharashtra has announced Rs 6,000 per farmer direct income transfer at an expenditure of Rs 6,700 crore.

Madhya Pradesh is providing Rs 1,000 per month income transfer to women at Rs 8,000 crore annual cost. And, Chhattisgarh will give Rs 2,500 per month to educated unemployed youth and Rs 6,000 per annum to landless laborers, Jefferies noted.

These announcements, it says, can help revive rural consumption, reinforcing its conviction about the potential of FMCG companies. Rural consumption which makes for 45 percent of the sector’s revenue.

In an earlier report dated January 4, Jefferies analysts had noted that government’s focus on launching large new social schemes in pre-election years. Be it the Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) scheme in the last election cycle or the national food subsidy scheme prior to that.

“Given the greater presence of the economically weaker sections in rural areas, these schemes tend to benefit the rural economy disproportionately,” the analysts said.

This, coupled with rising activity in the construction sector, the largest employer of unskilled labor, can boost sales volumes in the rural market. Cooling of raw material inflation is also set drive gross margin expansion by 200 basis points and Jefferies expects about 18 percent Earnings Per Share growth for consumer staple companies in FY24, the highest in nearly a decade.

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