Motilal Oswal positive on discretionary company stocks as inflation softens

With softer inflation and price cuts for FMCG, the income-to-cost mix has been gradually stabilising over the last 6-12 months.

With inflation aligning with the Reserve Bank of India's comfort zone, Motilal Oswal Financial Services continues to believe that discretionary companies have better growth potential. The financial advisory firm is bullish on Hindustan Unilever, Godrej Consumer Products, Dabur, and Titan, among others. Market penetration, deeper distribution reach, GDP multiplier, and higher wallet share are among the reasons attributed to backing these stocks.

"Given the comfort level with valuation and earnings, we believe that select staple companies offer a better risk-reward compared to several discretionary companies over the next 12-18 months," said Motilal Oswal in a report. "We recommend increasing portfolio weights for staples companies," the report said.

High inflation over the last two years has significantly affected consumption in the mass segment. FMCG products have the highest penetration in rural areas and have been impacted the most compared to other consumer baskets. "The mass segment has a large user base, but income growth is the slowest. Hence, such high inflation has significantly reduced the affordability to consume more," it said.

With softer inflation and price cuts for FMCG, the income-to-cost mix has been gradually stabilising over the last 6-12 months. Retail inflation in India, though, is in the RBI's 2-6 per cent comfort level but is above the ideal 4 per cent scenario. In February, it was 5.09 per cent. The Monetary Policy Committee of the Reserve Bank of India (RBI) in February unanimously decided to keep the policy repo rate unchanged at 6.5 per cent, thus maintaining the status quo for the sixth straight time, due to a softening inflation rate.

Motilal Oswal believes that the volume growth has bottomed out and it anticipates a steady improvement over 2024-25 and 2025-26. "Companies that prioritise user acquisition will be favoured during this phase. We project high single-digit revenue growth from 2023-24 to 2025-26 for our FMCG universe."

According to the Motilal Oswal report, staples contributed 68 per cent of the consumer universe in 2009-10, with major contributors being F&B, cigarettes, home care, personal care, among others. The mix of staples category, however, has decreased to 56 per cent in 2022-23, representing a fall of around 1,200 basis points (100 basis points = 1 percentage point). "The consumer wallet has shifted towards discretionary categories. The biggest gainers were paints, jewellery, and quick-service restaurants (QSR). The significant expansion of stores for QSRs and jewellery was a key factor in this shift, as consumers have transitioned from local/unorganized to organized establishments," the financial advisory firm said.

For HUL, it believes that its wide user-base network will support growth once macro tailwinds kick-in. For Dabur, Motilal Oswal said the company has been one of the key beneficiaries of consumers shifting towards Ayurvedic and naturals products since last 7-8 years.

"Oral care and healthcare categories have benefited the most with this shift, which enabled the company deliver superior volume growth among its peers (7 per cent average volume since 2018-19)," it said. (ANI)

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