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Preeyam Tolia, Equity Research Analyst – FMCG & Retail, Axis Securities, says “believes that in Q4 also, there will not be much recovery in terms of the overall volume growth. So, we expect that the demand will be gradual, especially in rural areas. It will take time, mostly in the second half of FY25 we expect demand should come.”

Tolia further says that likes Nestle, Jyothy Labs and Varun Beverages and believes that they are likely to continue their performance in terms of the volume as well as on the earning size


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What do you think is really happening on ground with the rural demand recovery because the macro parameters definitely are pointing towards some green shoots. The RBI governor in his exclusive interview with ET Now said that he is not quite concerned and definitely it is on an uptick. What is really happening on reality on ground?
Preeyam Tolia: So, on the ground, the demand environment is what we have gauged while speaking to the distributors, so there are certain pockets where demand recovery is still at a slower pace. However, we believe that in Q4 also, there will not be much recovery in terms of the overall volume growth. So, we expect that the demand will be gradual, especially in rural areas. It will take time, mostly in the second half of FY25 we expect demand should come.

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You are saying that in Q4 at least we may not see that much of a recovery in rural demand. Then that K-shaped recovery trend that we have seen in the consumption side, where premiumisation as a trend has continued and premium products are doing much better than mass products for the last couple of quarters, will continue in the next couple of quarters as well?
Preeyam Tolia: Yes. Urban demand continues to remain resilient, but what we have seen from the portfolio perspective at the premium side of the portfolio for FMCG as well as in the retail side of the segment, is that the premium continues to remain strong because urban continues to remain resilient. We also expect this quarter should be similar in terms of urban growth being faster than rural which will drive the overall premiumisation for the companies.

What is your view on ITC given that the BAT is cutting stake? How do you see it playing out for shareholders of ITC?
Preeyam Tolia: We expect nothing to change in terms of the fundamentals of the company. From a longer-term perspective, we continue to remain positive. However, for a short-term perspective, at least for two or three quarters, we expect that due to the stake sale from BAT, there could be a cap in the upside for the ITC. We remain positive on a longer-term basis, but on a short-term basis, we remain cautious on ITC.

What is your outlook in the medium to short-term for the FMCG pack and where should one be seeing the sector actually headed given what we will be seeing in terms of rural as well as elections coming in. What is the view in terms of the medium to short-term for FMCG?
Preeyam Tolia: There are two-three things that we are looking at in FMCG as a sector as of now. We are focusing on companies on a bottom-up approach where the companies which are expanding their distribution reach. Secondly, they are expanding their geographical reach and thirdly, the market expansion and the fourth is the new product launches which companies are doing.

In this parameter, at Axis among FMCG stocks, we are looking at Nestle, Jyothy Labs and Varun Beverages. The overall perspective for the FMCG sector will be gradual and the companies such as HUL and Dabur which have higher share in the rural markets. We believe those companies are likely to remain under pressure versus Nestle, Varun Beverages and Jyothy Labs which are likely to deliver on a volume growth on a steady state basis.After the entry of Grasim, there seems to be an increase in competition in paints sectors but today we did have some reports suggesting that Grasim pricing may not be very aggressive. What is your view on the paint sector?
Preeyam Tolia: In the paint sector, in the last two years, three players have entered the market and the recent one, Grasim is a big boy. We believe that the paint as an overall volume growth for the sector is likely to continue. However, in terms of the margins for the larger players, what we believe is that it is likely to remain under pressure at least in the near term due to the overall discounts and promotion schemes. So, there will be some gap on the earnings growth on that side at least for the paint companies.We are just keeping it stock specific within the consumption space, do you believe as a whole firstly that the underperformance is only going to continue? Do you have any particular recommendations as well for stocks that look good?
Preeyam Tolia: Yes, we like Nestle, Jyothy Labs and Varun Beverages. We believe that they are likely to continue their performance in terms of the volume as well as on the earning size. So, we remain positive on these three stocks from a short and medium term and long term perspective.

But that concern is coming in for cocoa prices, that cacao prices have seen an increase as well. Any impact that could come in on any of these players because for example Nestle does have a lot of chocolates that they sell as well, so that price increase is quite sharp in the last one year. Is that a concern that shapes up there?
Preeyam Tolia: From a portfolio perspective, where the chocolates and the coffee prices have increased since the last one year, what we believe is that the companies are likely to pass on the raw material inflation. However, if you see from an overall basket perspective, the other raw materials continue to remain stable. There could not be a much impact from an overall gross margin perspective. But if you see from a commodity, the cocoa and the coffee prices especially, the companies are likely to increase the prices for the category.

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