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We hosted a multi-brand, large distributor of FMCG products based in Uttar Pradesh. He noted that sector demand recovery remains elusive, with lackluster festive and winter seasons in 2023, following a weak monsoon. Food and Beverages (F&B) is seeing better growth vs the Home and Personal-care (HPC) segment. He caters to the agri belt, which has been hit by poor monsoons, but he foresees a positive consumption trend for discretionary segments (durables, telecom, automotive), wherein EMI is an enabler. He is optimistic about recovery in 2024, on the back of a low base and hopes of a better summer; the elections are unlikely to have any material effect on demand, though. Restoring channel hygiene and dialing up innovation would be key going ahead. HUL’s recent margin alignment is likely to have a neutral effect on demand recovery. We maintain our preference for Dabur, ITC, and Emami, while avoiding Colgate.

FMCG demand setting still muted; hopes of revival with a better summer

Rural weakness continues to impact FMCG growth. Winter & festive period sales stayed muted in 2023, though some regional festivals saw transient demand pick-up in select categories. EMI options gave affordability for a few discretionary segments. Surge in consumer spend is seen in higher shelf-life categories. Penetration of urban discretionary brands in Rural is helping establish new entrants. The distributor is positive about demand recovery, on a low base and expectation of a better season in FY25. F&B category is doing relatively better than HPC. Of the FMCG categories, demand for the Laundry segment remains robust, while that for health-focused, mass-end segments like HFD and Health Supplements stays weak. Innovation, which has seen a significant flag-down in the last couple of years, could be a reason for such weakness. In his catchment, there is not much competition surge, as large FMCG companies are holding on to LUP packs.

Channel hygiene restoration key for General Trade

The distributor echoed the thoughts of major FMCG distributors, stating that channel dumping continues to hurt business. Simultaneously, companies are looking to optimize trade margin, which has a bearing on profitability. This has propelled distributors towards multiple-brand offerings now. He believes that compared with the last five years, the distribution moat has diminished for large companies. To support revenue and maintain profitability, distributors are partnering with newer brands. D2C brands taking a product offline is a tad easier, as brand visibility has improved across premium retail outlets. The recent change in channel margin by HUL is likely to be neutral for the distributor, on expectation of growth recovery. If recovery stays elusive, distributors will be under pressure. With respect to HUL, he is appreciative of the OTP-based retail delivery.

Dabur, ITC, Emami remain top picks in our coverage universe

FMCG sector valuations continue to uphold on market opportunity and expected demand recovery in FY25. We remain positive on Dabur, ITC, and Emami, for which we see better execution and relatively attractive valuations. We remain negative on Colgate, given lack of structural growth and a high margin base from Q4.

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