The Nifty FMCG index was the top gainer among sectoral indices on Tuesday, rising 2.7%. The biggest gainer was ITC Ltd, (shares gained about 6%), after tobacco taxes were left unchanged. Investor focus now shifts to cigarette volume performance in coming quarters.
For the other FMCG companies, subdued consumer demand, especially in the rural areas, has been a concern amid rising income inequality in recent years and elevated inflation. So, it helps that the government has taken steps to boost consumption, albeit to a certain extent only.
The budget announced measures to buoy employment and agricultural income. To begin with, a proposal was made to allocate ₹2.7 trillion for rural development. A provision of ₹1.52 trillion was announced for agriculture and allied activities. The government had already announced higher minimum support prices for all major crops a month ago, “delivering on the promise of at least a 50% margin over costs”, finance minister Nirmala Sitharaman said in her budget speech.
These measures should help improve rural demand, which bodes well for FMCG and auto companies (mainly entry-level two-wheelers, cars and tractors) that have meaningful exposure to the hinterland. Employment linked incentives should raise disposable incomes and aid demand.
The budget also announced some rationalization of personal income taxes. “Change in tax slabs and higher standard deduction will drive an additional ₹17,500 per year tax saving for a taxpayer with ₹15 lakh in taxable income, opting for the new regime, which is a slight positive for small-ticket consumption plays including Zomato, Nykaa, Trent, QSR (Jubilant Food, Devyani),” said analysts from Jefferies India in a report on 23 July.
Meanwhile, shares of jewellery companies Titan Co. and Kalyan Jewellers India rose 4-6% on Tuesday. A reduction in custom duties on gold is expected to increase the affordability of gold jewellery products, particularly in the run-up to the festive/wedding season. It also accelerates organized channel penetration.
The impact of the budget on earnings could be reflected over time. But for now, it is sentimentally positive. That said, a further re-rating in FMCG, two-wheelers and other rural-focused stocks continues to hinge on how the monsoon season pans out. So far in 2024, the Nifty FMCG index has rallied by around 9%, underperforming Nifty50’s double-digit returns. Plus, the valuations of many FMCG and discretionary stocks such as paints/jewellers, are rich and do not provide much comfort.
