Mr. Varun Lohchab, Institutional Research Analyst, HDFC Securities and Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities
- Aggregate revenue/EBITDA to grow by 19/26% YoY helped by base: Our FMCG coverage universe is expected to deliver growth of 19/28% YoY in revenue/ EBITDA (ex-GSK, 16/23%) in 4QFY21 (vs. -6/-9% in 4QFY20 and 10/5% in 3QFY21) with a QoQ growth of -3/+2%. Recovery in demand continued across segments. Increased mobility of consumers drove the demand for discretionary categories like discretionary PC, QSRs and beauty soaps, while health and hygiene categories saw growth moderation. Demand from metro cities and urban areas continued to improve and is likely to be a key monitorable over the next few months in wake of new partial lockdowns. Urban channels like MT saw gradual recovery. Rural and e-commerce demand continued to drive overall growth.
- Discretionary categories witness demand revival but tough road ahead: Cigarettes and OOH categories sustained their recovery in 4QFY21, but Liquor recovery was impacted during the quarter. Restrictions on operating hours for pubs and bars and lower occupancy continued to be a roadblock in recovery for the sector. QSR growth was driven primarily by delivery and takeaway, although dine-in continued its steady and gradual improvement. However, with the number of cases rising and several states reintroducing restrictions, dine-in is likely to remain under pressure.
- Margins remain healthy: Commodity inflation sustained during 4QFY21, particularly for palm oil and copra. Most companies took price hikes in 3QFY21 in response to the commodity inflation, along with further price hikes during 4QFY21, which will support margins. Improving product mix for discretionary categories will also aid margin expansion. We expect EBITDA margin expansion YoY driven by low base, cost saving initiatives, and gradual restoring of overhead costs. Companies have also resumed A&P investments, and we expect A&P spend to continue growing vs the decline witnessed in 1HFY21.
- 4QFY21 Outliers: Dabur, GCPL, Emami
- Our view: We believe companies with higher revenue mix from rural will continue to benefit, although urban recovery will also play a key part in driving growth. Despite the recovery in MT, E-comm and GT have sustained their growth momentum. Companies with a strong presence in E-comm and diversified offerings are expected to outperform. FMCG sector has underperformed Nifty by ~35% in last 1 year, and we see a balanced risk-reward for the FMCG sector for FY22/FY23 with earnings led stock returns. Rich valuations and modest earnings growth profile leaves limited scope for PE re-rating.
We have a BUY rating on ITC, ADD rating on Radico, UNSP, Colgate, Dabur, Marico and GCPL.