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Falling input costs a plus for FMCG stocks: Jefferies

The fast-moving consumer goods stocks could be re-rated over the next few months as falling input costs and rising demand pans out well for their margins, according to analysts at Jefferies.

However, given stretched valuations amidst steady demand trends, the brokerage remains cautious with select buys such as ITC, Dabur, Nestle, Asian Paints and Jubilant Foods in the sector.

After an increase in raw material prices over the past few months, input prices of both food and non-food items have corrected. In the backdrop of price increases in the past 4-5 months, the correction is good for the margins of FMCG companies, said the brokerage.

Jefferies raw material basket was down by 3.2% over a month, led by 2.5% month-onmonth dip in food-based raw materials and 4.7% MoM drop in non-food based raw materials. Correction in input prices was led by non-food based items as crude oil prices corrected 22% MoM, LAB prices used for detergents dipped 11% MoM, mentha was down 8% MoM, and palm oil corrected further by 13% MoM. Among food-based raw materials, coffee prices corrected by 14%, rice bran by 7%, and sugar by 6%.

Jefferies found risk-reward less compelling for HUL, Britannia and Godrej Consumer, given their very rich valuations. Its preference is more for potential turnaround set of companies on improving fundamentals going into FY19 such as ITC, Dabur and Nestle. Jefferies still remains on the sidelines and less convinced with risk-reward on Marico, Emami, Colgate and UNSP. Within discretionary space, Jefferies likes Asian Paints and Jubilant Foods.

Jefferies checks suggest that promotional intensity remains rational across all key categories which is also a function of a rise in input prices in the past few months.

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