Jubilant FoodWorks Ltd. has replaced Titan Company Ltd. as global brokerage Morgan Stanley’s top pick in Indian fast-moving consumer goods segment, after the Dominos pizza operator garnered higher sales and margins in comparison to costs incurred.
Morgan Stanley’s top three picks from the FMCG now are:
- Future Consumer Enterprise Ltd.
- Titan
- Jubilant Foodworks
The brokerage firm also downgraded United Spirits Ltd. to ‘Equal-Weight’ from ‘Overweight’.
Jubilant FoodWorks
- Losses fromquick service restaurant Dunkin Donuts are rationalised as demand is seen improving for the QSR segment in the second half of the current financial year.
- Demand trends and higher same store sales growth helped Jubilant FoodWorks to reap full benefit from the product mix and operating costs increases following Goods and Services Tax.
Preferred Picks
Morgan Stanley’s preferred stock picks have performed well, it said in the report. Future Consumer was up 3.5 times, Titan was up 2.5 times, and Jubilant Foodworks was up 2.3 times over the past 12 months.
Combination of strong revenue and better product mix with milder commodity costs will drive margin expansion higher than market expectations, said Morgan Stanley. An aggregate margin expansion of 340 basis points is expected for all the four stocks covered in the report over four financial years up to March 2020.
Apart from margin expansion, other drivers of the consumer goods industry include lower household debt and accelerating discretionary consumption growth.
United Spirits Downgraded
Morgan Stanley downgraded United Spirits as price and distribution control of alcohol by government agencies in key states can hinder profit growth. The Bengaluru-based alcohol distributor trades at 44 times the expected price-to-earnings ratio of financial year 2020 which may not be as expensive as other Indian consumer stocks.
Being less expensive signals towards low probability on incremental price hikes, which can dampen earnings growth. Coupled with this is a trailing performance and unfavourable risk reward ratio.
Hence, Morgan Stanley recommends that “investors pare positions into expected strong third quarter results.”
