Consumer Products: 4QFY17 review: better, but not quite there yet - Kotak

4QFY17 review: better, but not quite there yet. On balance, 4QFY17 was a modest quarter with sequential recovery in both revenue/profits; however, we note (1) growth rates are still languishing below 1HFY17 levels (especially volume growth) and (2) aggregate performance was pulled up by select companies. Overall, discretionary companies performed relatively better, led by building materials and jewelry companies. Sustained cost control and cuts in A&SP helped boost profitability even as RM headwinds impacted GMs. We continue to find aggregate sector valuations expensive. Preferred picks - ITC, CLGT, GSK-CH, BRIT and PIDI (on dips).

4QFY17 - sequential improvement in comps, albeit skewed towards select performers

Single-digit revenue growth for most. Aggregate revenue growth in staples (ex-Nestle) recovered sequentially to 4.7% yoy aided by a pickup in volumes (albeit still below 1HFY17 growth rates) and higher price-led growth; however, we note that barring GCPL, all staple companies under our coverage posted single-digit revenue growth (most were sub-5%). Discretionary companies fared relatively better, with aggregate revenue growth (ex-ITC) of 11.9% yoy led by jewelry companies (partly aided by low base), Page and APNT. Others like UBBL, UNSP and JUBI posted a decline in revenues.

Double-digit EBITDA growth favored a few. Aggregate EBITDA and PAT growth (ex-ITC/Nestle) inched up to 10.8% and 7.4% yoy, respectively; however, growth rates were significantly skewed towards select companies like UNSP/Titan (lower base), Marico, GCPL and HUVR; we note only 7 of the 23 companies under our coverage posted double-digit EBITDA growth. Only 4-5 companies beat our EBITDA/PAT estimates; key beats were GCPL and Marico while BJCOR, BRIT, CLGT, JYL, and SHK were key misses during the quarter (miss on all fronts) On the revenue front, only 2 companies beat our estimates.

Quick thoughts on key parameters

- Volumes (improvement sequentially but still weak): broader FMCG (staples) volume growth improved sequentially from the demonetization quarter (led by Marico, GCPL and HUVR); however, growth still languishes below 1HFY17 levels for most companies. We note that companies like BJCOR, CLGT, GSK-CH and Emami (not under coverage) posted volume declines this quarter. On the discretionary side, performance was mixed - while APNT and PIDI posted modest improvement in volume growth (almost back to 1HFY17 levels), others like JUBI (SSSG decelerated to -7.5%) and liquor companies (8-9% volume decline) posted weak performance. Jewelry companies posted strong growth, partly aided by low bases.

- Margins (GMs dip; margin expansion driven by cost control/A&SP cuts): aggregate EBITDA margin expanded 50 bps yoy, despite 150 bps contraction in GM, aided by tight cost control (both staff costs/other expenses) and cut in A&SP (aggregate spends down 30 bps yoy). At a granular level, 10 out of 23 companies under coverage (ex-Manpasand) posted EBITDA margin expansion and 11 companies posted GM expansion; however, higher RM pressures did show up in several companies (10 companies posted 150 bps + yoy contraction in GM). Aggregate absolute A&SP spends were flat yoy, staff costs declined 1% yoy and other expenses were up just 4% yoy; we would be wary of extrapolating such a level of savings (as witnessed in 2HFY17) as a recurring margin lever.

- Demand/margin outlook: Management commentary was mixed on demand recovery (some more bullish than others) but tilted towards a more gradual recovery as wholesale rebalancing/rural pickup will take 3-6 months; GST-led destocking in 1QFY18 is also another risk highlighted by most companies. On the margin front, fading RM tailwinds will continue to pressure GMs partly negated by price hikes, cost control and cut in A&SP (though the current level of cost control may not be sustainable, in our view).

Quarterly earnings trends - detailed charts

We note all charts/tables for sector aggregates over 1QFY15 to 2QFY16 exclude ITC (due to steep volume decline over the period), Titan (volatility due to GHS redemption and closure) and Nestle (Maggi impact) to keep comparisons consistent. For 3QFY16-3QFY17, we continue to exclude Nestle (due to Maggi recovery-led revenue volatility) and ITC from aggregate charts/discussions.

*FY2017 (and FY2016) quarterly financials/aggregates are based on Ind-AS and hence not strictly comparable to earlier quarters.

Source : Equity Bulls

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