Cigarette inventory to hotel group ITC has gained around 19 percent so far in March, far outpacing peers such as Hindustan Unilever, which has lost 10 percent over the period.
Peers like Godrej Consumer Products, Britannia, Nestle India, Dabur India and Marico also lost between 7 percent and 11 percent in March.
While the Nifty FMCG Index has been mostly flat, the Nifty50 has lost more than 2 percent to date (MTD).
Analysts said that the decline in most consumer goods stocks was due to the rise in the prices of raw materials that gained strength against the backdrop of the Russo-Ukrainian war. During the last quarter, the prices of commodities such as palm oil, crude oil and skimmed milk powder increased by 23 – 42 percent.
Oil related derivatives currently experiencing single digit inflation are likely to catch up with a 2-3 month lag.
So, what’s going on with ITC next?
Analysts say the company is relatively isolated because it has other segments like hotels and cigarettes, cushioning the blow to the consumer goods sector from sharply rising input costs.
What also works for ITC is the fact that the government has kept the tobacco excise tax unchanged in the Union budget for FY 2022-23 (Fiscal Year 23), and that cigarette volumes are on the rise.
Regardless, the lifting of most Covid restrictions after the third wave has led to an increase in mobility, which bodes well for the ITC hotel business.
The ITC paper sector is also likely to do well given the lack of paper supplies in the domestic market and the potential increase in paper exports.
Analysts such as Vinay Khattar, head of research at Edelweiss Wealth Research, believe all components are ready for the stock to catch up with the markets now.
He said the positives would lead to a compound annual earnings growth of 12 percent in fiscal years 22-24 compared to only 7 percent in the past five years.
Cigarette volume should recover at a compound annual growth rate of 5% during FY 22-24 versus a compound annual growth rate of -1 percent in FY 2011-21. FMCG’s EBITDA margin likely to rise to higher single digits; Vinay Khattar, head of research at Edelweiss Wealth Research, said in a recent report that while the hotel, paperboard and agricultural commodities business is set to rebound.
Technical analysts also see the stock rally in the next three months, provided the overall market sentiment does not take a hit due to the ongoing political situation.