Best stock picks: These consumer sustainable stocks are good to buy, says Sharekhan

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According to brokerage firm Sharekhan, the performance of the consumer goods sector in the fourth quarter of fiscal 2022 was affected by a slowdown in consumer demand, which impacted sales volume, and a sharp increase commodity prices, which impacted the 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 best choices of stocks to buy.

Stocks of consumer goods to be purchased

Companies Recommendation Target price in Rs
Asian Paintings To buy 3,689
Bajaj Customer Service To buy 210
Britannia Industries To buy 4,000
ColgatePalmolive (India) Hold 1,763
India To buy 645
Emma To buy 550
Globus Spirits Positive 1,193
Godrej Consumer Products To buy 959
Hindustan Unilever To buy 2,456
indigo paintings To buy 2,250
ICC To buy 320
Jyothy Laboratories To buy 175
Mario To buy 645
Nestle India To buy 20,880
Radico Khaitan To buy 1,135
Tata Consumer Products To buy 960
Zydus Wellness Zydus Wellness 2,250
Source: Sharekhan Research. Data as of June 06, 2022

In its research report, the brokerage said that “the performance of the consumer goods sector in the fourth quarter of fiscal 2022 was affected by the slowdown in consumer demand (affecting sales volume) and a sharp increase in commodity prices (affecting OPM) Volume growth for most of the consumer goods companies covered by our coverage fell to 0-4% Price increases undertaken to ease pressure on costs helped most of the businesses covered by our coverage to record high-single-digit to low-double-digit revenue growth in the quarter. led to a 60 to 800 basis point decline in OPM for consumer goods companies (excluding TCPL, Marico, Colgate and ITC). At the same time, Sharekhan’s consumer goods universe revenue and PAT increased by 12% and 8%, respectively, in Q4FY2022. »

Regarding the long-term growth prospects of the consumer goods sector, Sharekhan says the disruption in global supply has kept global and domestic commodity prices volatile. Commodity inflation should therefore be maintained (excluding copra and domestic raw tea) over the coming quarters. Although companies have implemented calibrated and judicious price increases and the government has taken constructive steps to moderate inflation, rising year-on-year commodity prices will put pressure on margins in the first half of 2023. If commodity prices experience a correction from the current level, margins for consumer goods companies could see sequential improvement starting in Q3FY2023.

The brokerage further said that the normal monsoon will play a major role in boosting rural demand and help calm agricultural commodity inflation. Comments from most consumer goods companies suggest a recovery in sales volume from Q2/Q3 of FY2023, if the inflation environment stabilizes in the coming months. Additionally, companies are optimistic about medium to long-term growth prospects, with drivers such as low levels of penetration in key categories (particularly in rural India), lower per capita consumption to that of other countries, a significant shift to branded products and the emergence of new ones such as e-commerce/D2C, which offer visibility on sustainable growth in the years to come.

Picking the large-cap sector, the brokerage said: “The stock prices of most companies in our universe have corrected from their recent highs, in line with the correction in the broader indexes. The sharp correction of late has made valuations attractive, given the discount to their five-year average multiple. In the large-cap space, we like HUL, Nestlé India and Asian Paints, which have a strong portfolio of brands that are steadily gaining market share in the domestic market. In terms of valuations, companies such as HUL and Nestlé India have underperformed broader indices over the past year. Therefore, the risk reward is favorable.”

For investors looking for mid-to-large-cap stocks in the consumer space, Sharekhan suggested that “In the mid-to-large-cap space, we like companies like Marico and TCPL, who know a favorable input cost environment with a correction in copra and raw tea prices over the last two quarters.Additionally, in the mid and small cap space, we like Zydus Wellness, whose strong presence in the low penetration and focus on expanding reach will help it deliver consistent earnings growth with strong cash flow generation in the years to come.”

The opinions and recommendations made above are those of individual analysts or brokerage firms, and not of Mint.

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