Top stock picks: These consumer durable stocks are good to BUY says Sharekhan

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According to the brokerage firm Sharekhan, the consumer goods sector’s Q4FY2022 performance was impacted by a slowdown in consumer demand, which impacted sales volume, and a sharp increase in raw-material prices, which impacted operating profit margin (OPM), after which the brokerage selected good quality stocks like Marico, Tata Consumer Products, HUL, Nestle India, Asian Paints, and Zydus Wellness as top stock picks to buy.

Consumer Goods Stocks To Buy

Companies Recommendation Target Price in Rs
Asian Paints Buy 3,689
Bajaj Consumer Care Buy 210
Britannia Industries Buy 4,000
ColgatePalmolive (India) Hold 1,763
Dabur India Buy 645
Emami Buy 550
Globus Spirits Positive 1,193
Godrej Consumer Products Buy 959
Hindustan Unilever Buy 2,456
Indigo Paints Buy 2,250
ITC Buy 320
Jyothy Labs Buy 175
Marico Buy 645
Nestle India Buy 20,880
Radico Khaitan Buy 1,135
Tata Consumer Products Buy 960
Zydus Wellness Zydus Wellness 2,250
Source: Sharekhan Research. Data as of June 06, 2022    

In its research report, the brokerage has said that “The consumer goods sector’s Q4FY2022 performance was affected by slowdown in consumer demand (impacting sales volume) and a sharp increase in raw-material prices (affecting OPM). Volume growth for most consumer goods companies under our coverage slipped to 0-4%. Price increases undertaken to mitigate cost pressure aided most companies under our coverage to register revenue growth in the range of high single digit to low double digits during the quarter. A sharp increase in input prices and transportation cost led to a 60-800 bps decline in the OPM of consumer goods companies (barring TCPL, Marico, Colgate, and ITC). Overall, revenue and PAT of Sharekhan’s consumer goods universe grew by 12% and 8%, respectively, in Q4FY2022.”

In relation to the consumer goods sector’s long-term growth prospects, Sharekhan claims that global supply disruption has maintained the volatility in global and domestic commodity prices. Thus, raw material inflation is expected to remain (barring copra and domestic raw tea) in the coming quarters. Though companies have implemented calibrated and judicious price hikes and the government has taken some constructive steps to moderate inflation, higher y-o-y raw material prices will put margin under pressure in H1FY2023. If commodity prices witness correction from the current level, margins of consumer goods companies might witness a sequential improvement from Q3FY2023.

The brokerage further stated normal monsoon will play a major role in regaining momentum in rural demand and help in cooling off agri commodity inflation. Commentary of most consumer goods companies suggests recovery in sales volume from Q2/Q3 of FY2023, if inflation environment stabilises in the coming months. Further, companies are optimistic about the medium to long-term growth prospects with drivers such as low penetration levels in key categories (especially in rural India), lower per capita consumption compared to other countries, large shift to branded products, and emergence of new channels such as e-commerce/D2C, which provide visibility of sustainable growth in the coming years.

By picking large cap sector, the brokerage has said “Stock prices of most companies in our universe have corrected from their recent highs, in line with the correction in broader indices. The sharp correction in recent times resulted in valuations looking attractive, considering the trading discount to their last five years’ average multiple. In the large-cap space, we like HUL, Nestle India, and Asian Paints, which have a strong brand portfolio consistently gaining shares in the domestic market. In terms of valuations, companies such as HUL and Nestle India have underperformed the broader indices for the past one year. Hence, risk reward is favourable.”

For investors looking for mid – large cap stocks from the consumer goods space, Sharekhan has suggested that “In the mid to large-cap space, we like companies such as Marico and TCPL, which are witnessing favourable input cost environment with correction in copra and raw tea prices in the past two quarters. Further, in the mid-to-small cap space, we like Zydus Wellness, whose strong presence in low-penetrated categories and focus on expanding reach will help it to drive consistent earnings growth with strong cash flow generation in the coming years.”

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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