Best FMCG Stocks to Buy in India 2024

In this article, we will cover:

• Overview of the FMCG sector in India
• List of the Best FMCG stocks to buy now
• Factors to consider while picking the best FMCG stocks to buy now
• A model portfolio with optimal exposure to the best Indian FMCG stocks
• A detailed table with various parameters for Best FMCG Stocks to buy

Overview of the FMCG sector in India

Fast Moving Consumer Goods (FMCG) is the 4th largest sector in the Indian economy. It is considered as a barometer of consumer demand in every country. This sector is mainly divided into three categories: Food & Beverages (19%), Healthcare (31%), Household & Personal care (50%). Growing awareness, easier access, and changing lifestyles have been the key growth drivers for the sector. The urban segment contributes around 55% in revenues of FMCG companies and 45% is contributed by the Rural segment. Consumer Staples has underperformed over the last couple of years largely battered by unprecedented and broad-based material cost increases. The COVID-induced restrictions imposed in urban centers and disruptions to the modern trade (MT) channel also led to lower premium product sales. In recent months, Modern trade has rebounded to near normalcy in tandem with the gradual lifting of COVID-led restrictions. However, the ongoing geopolitical crisis has led to a further build-up of material cost pressures, which has been quite steep in some cases. With several companies having already taken sharp price hikes. Slowing rural and bottom-of-pyramid demand would make them wary of passing on the recent sharp commodity cost increases.

Summary Table of the best FMCG Stocks to buy now

*As on 12th July 2024

Factors to consider while picking the best FMCG stocks to buy now

• Diversity in product portfolio: It is important to identify the product mix of a FMCG company as it determines the categories in which that player is operating. A company present in the segment such as toothpaste, soaps, and detergents which come under essential categories tend to have stable sales whereas companies present in discretionary segments such as perfumes, cosmetics, etc often report declining sales during times of recession like we are facing now due to COVID-19 lockdowns. You should always prefer companies having a diverse product-mix catering to different needs. Also, presence in one or two niche categories where competition is fairly low can strengthen its market position as it can be a price setter.
• Brand equity and Market share: A company which is successful in gaining high market share has several advantages. It ensures a stable relationship and long drawn contracts with distributors. If a company has high market share in a product it does not need to offer very high discounts since this gets compensated for by the higher volumes. So find a company which has highest market share in one or two product categories for eg, Nestle has 96% market share in Infant Cereals- Cerelac in its Milk Products & Nutrition segment consists of 46% of its total revenues. To acquire this kind of market share a company needs to create Brand equity for that product, it is the degree of consumer loyalty that a company’s product maintains. If brand equity/loyalty is strong consumers tend to be willing to pay a high price for the product and will be reluctant to switch to other competing brands.
• Strong Distribution Network: Every FMCG company keeps a close eye on changing consumer preferences and trends and companies change their marketing strategies accordingly. In India, it is important to have a good rural and urban sales mix as it may help even out any uncertain impact on one segment for eg, due to the lockdown most of the urban areas were shut as it was impacted the most by the spread of COVID-19 but rural areas comparatively had lesser infections so companies which had better distribution reach in the rural areas gained during this time. Companies having wider dealer networks enhance the reach of their products which is an advantage in this business. Also companies with international presence have an advantage especially during downtrends in the domestic market.
• Supply chain management: A company’s ability to offer a product when the consumer wants to purchase is likely the most important factor that drives sales and also promotes consumer loyalty. It also motivates wholesalers and retailers to stock the product before the seasonal demand starts. FMCG players have invested in supply chain related IT initiatives recently to enhance their inventory management and collection efficiencies. For example, during the lockdowns in the country all the supply chains were disrupted due to migration of workers and only companies which had invested robustly in automated supply chains were less impacted. E-commerce channels/Omni-channels are new emerging trends and even Top FMCG players have started investing in them. Apart from all this investors should also check some generic parameters like Operating margin growth (%) of the company for the last 3 and 5 years and also check debt to equity ratio of the company, usually FMCG companies do not require much debt so debt to equity has to be below 0.50. Some other parameters which you need to look at are Same Store Sales Growth (SSSG %) which is important for companies engaged in quick restaurant business. For eg, Jubilant Foodworks, Westlife Development, Burger King India.

Portfolio Companies

Nestle:

Nestle India is a leading player in the Indian FMCG industry with an established market position in most of its product categories. The company is a pioneer in the culinary segment with a range of products under the Maggi brand. Nestle stands as a market leader in 85% of its product portfolio like milk products and nutrition (96% in Infant Cereals), Beverages (Nescafe 51%), prepared dishes (Instant Pasta Maggi -69%) and cooking aids (Nestle EveryDay 44%), and chocolate and confectionery (63%). In these segments, Nestle benefits from its strong cash generating and well-established brands. The company has a leadership position in seven out of eight categories and has been able to maintain its share across categories despite the increasing competition.  Nestle India also has a very diversified revenue profile, with 41% of revenue generated from milk and nutrition products (dairy products and weaning foods), 10.5% from beverages (instant coffee, iced tea, and other beverage vending mixes), 32.4% from prepared dishes and cooking aids (Maggi range), and 15.9% from chocolates and confectionery (including Kit Kat and Munch). Nestle India is currently trading at PE of 82.8x which is higher than the Industry PE of 62.7x indicating the company is trading at much premium valuations. Nestle S.A holds 62.7% stake in the India business and is one of the world’s largest players in the Food and Beverage sector. Nestle India enjoys access to its parent's proprietary technology and strong research and development capabilities which is a big advantage for the brand. The company’s PAT has grown at a CAGR of 18% in the last 5 years. It has also been maintaining a healthy ROE and ROCE of 113% and 147% respectively. Moreover, it is virtually debt free with a Debt to Equity ratio of 0.13. It has also been maintaining effective average operating margins of 22.2%. Nestle India is exposed to increasing and fierce competition in the domestic FMCG segment with the entry of new players, including multinationals, in various divisions such as instant noodles, packaged foods, beverages, chocolates and confectionery. The competition is further increasing due to aggressive product launches, evolving consumer preferences and strong marketing strategies adopted by the players. Nestle has effectively overcome the challenges faced in terms of distribution during the COVID-19 led pandemic. The Russia-Ukraine crisis caused a concern for the sector. Nestle has taken price hikes in order to mitigate the inflation pressure.

Hindustan Unilever:

Hindustan Unilever Ltd. (HUL) is one of the largest Fast Moving Consumer Goods Companies in India with a heritage of over 80 years. Five of its brands generate an annual turnover of over Rs. 2,000 Crs each and 16 brands generate an annual turnover of over Rs. 1,000 Crs each. HUL caters to a variety of product ranges which includes foods, beverages, cleaning agents, personal care products, and water purifiers. HUL has category leadership in over 85% of businesses. A few famous brands have high visibility and sustained market leadership which is backed by an extensive distribution network and a strong advertising and marketing campaign. HUL has been leveraging its distribution strengths to adapt its channel strategy for its products and market segments which has helped them launch 19 new brands in the last 10 years. HUL’s largest merger in the FMCG sector with GlaxoSmithKline Consumer Healthcare ltd has started showing synergies across its food and beverages brands, by acquiring popular brands like Horlicks, Boost HUL has strengthened its Food & Refreshments portfolio. The business is expanding in the fast growing Health and Well-being with a strategic partnership with Zywie Ventures Private Limited (OZiva) and Nutritionalab Private Limited (Wellbeing Nutrition). On a consolidated basis, the financial risk profile is supported by strong cash flow from operations and minimal debt. HUL is the first consumer company to cross Rs.5 lakh Cr market capitalization making it the highest market cap company in the FMCG sector. HUL is known for its aggressive dividend payout policy which is around 90%. The Indian FMCG industry is corroborated by both organized and unorganized players across segments and products and HUL continues to face stiff competition with the entry of new players including multinationals in all its major segments such as soaps and detergents, personal care products and packaged foods. However, HUL’s strong financial risk profile and its leading position in the domestic FMCG industry would help to maintain its leadership position and tide through any economic slowdown/ crisis.

ITC:

ITC has evolved from a tobacco company into a well-diversified business conglomerate with a strong presence in other Fast-moving consumer goods (FMCGs), paperboards, printing and packaging, agricultural commodities, hotels, branded packaged foods, personal care products, branded apparel, stationery, safety matches, agarbatti. It has also added luxury chocolates, ghee, dairy, and frozen food products to its branded packaged foods segment. With ITC’s latest acquisition of Sunrise Foods Pvt Ltd it is expected to strengthen its presence in the eastern market in the spices category. ITC has over time grown its presence in the FMCG segment (Other than Cigarettes). This clearly shows that ITC has shifted its focus on growing its FMCG business. The company has also grown its presence in Agri-business (26% of revenues), Paper & Packaging (12% of revenues) and Hotels (1% of revenues). Liquidity of the company is exceptionally strong because of cash and liquid investments (bonds, debentures, mutual funds, and bank deposits) of ~Rs. 30,000 Cr as on March 31, 2022. The company has maintained a healthy dividend yield of 3.52% and has consistently rewarded its shareholders. Due to COVID-19 led lockdowns, the company’s Hotels business was impacted the most as occupancy was down due to severe travel restrictions. But as the economy starts to revive, the near-term outlook is expected to start improving. On the other hand, FMCG others and Cigarettes business showed good resilience, its FMCG others segment has grown 21% YoY in Q2FY23 and its agribusiness also grew at a stellar rate of 44% YoY in Q2FY23 offsetting de-growth in its Cigarette and Hotels Segment sales.

Britannia:

Britannia is one of the front-runners in the Indian biscuit industry with a market share of over a third in value terms. The company has a diversified portfolio of biscuits across all seven categories like glucose, Marie, cookies, crackers, cream, milk, and health. Also, it has strong brands across its product portfolio including Good Day, Tiger, Marie, Nutri choice and Milk Bikis. The strong market position is supported by a wide distribution network in both rural and urban areas. Britannia has also set up a green field unit in Nepal which is operational now. Further, the company has commissioned additional lines for cakes and biscuits at Ranjangaon, in Pune. Over fiscal 2014 to fiscal 2020, the direct reach of the company has tripled to 23.7 lakh outlets with rural distributors reaching 28,000 (No of dealers) in September 2022 from mere 8,000 dealers in 2016. The company also has plans to enter new food categories and has recently launched new products such as cream wafers (10% market share), baked salted snacks, milk shakes and croissants and it re-launched its popular biscuit brand ‘Milk Bikis’ (Milk +  Glucose) as it plans to compete popular brand ‘Parle-G’ and eyes a big pie in glucose biscuits segment. Its sales and PAT have grown at a healthy CAGR of 9% and 11% respectively for the last 5 years. The company has also maintained a healthy ROE and ROCE of 42% and 41.5% respectively over the past 3 years. Britannia intends to become a global foods company and has set up strategic business units for adjacent bakery, dairy and international businesses. The competitive intensity has been fairly high in terms of launching new product launches during the last few quarters in order to capitalise on the market share.

Godrej Consumer Products Ltd (GCPL):

GCPL has a portfolio of strong brands in India as well as in International markets. GCPL holds the market leadership position in household insecticide and hair colour segments in India and is the second largest player in the soaps category. It is a market leader in all the segments where it operates in household insecticide, air fresheners and wet tissues in Indonesia. In Africa, it is the market leader in dry hair extensions (hair braids), and ethnic hair colour segments. It is also the second-largest toilet soap marketer after HUL with a 10-12% market share in primary brands such as Godrej No.1 and Cinthol. To expand its geographical presence, GCPL has made few acquisitions in the past few years. With acquisition of Darling Group - leader in hair extension in Africa, it has further strengthened its foothold in the continent. The dominant leadership position across various segments provides pricing power in those segments which helps the company maintain its profitability. The company has grown its Profits at a CAGR rate of 10.4% and its Sales have grown at a CAGR of  in the last 5 years. Also it’s ROE and ROCE have grown at a healthy rate of 19% and 19.6% over the past 5 years. Godrej Consumer has a presence in Asia (India and others 54%), Africa (23%), Indonesia (17%). The growth in revenue from international operations has been driven primarily through acquisitions. GCPL has a demonstrated track record of acquiring strong local brands and generating synergies by combining operations of the acquired entities to drive scale and profitability. On the risk front, due to its international presence, the company may face some risk of geopolitical events such as a change in government and local unrest that could affect its operations.

Watch our video on how to analyse and pick FMCG stocks for investments

Model Portfolio:

In order to get an exposure to best Indian FMCG stocks, you would need a total of Rs. 47,409/- for the below curated portfolio as of July 12, 2024.

The below table covers some of the most important factors while evaluating FMCG stocks

*As on 12th July 2024

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