Consumer Products (Cautious): 1QFY18 review - Muted quarter, but better than subdued expectations - Kotak

1QFY18 review - Muted quarter, but better than subdued expectations. 1QFY18 was a weak quarter due to GST-led disruption, but we saw more beats than misses due to a subdued set of expectations. Staples' performance was relatively weak due to GST-led destocking while discretionary companies (ex-alcohol) fared better. RM headwinds, deferment of price hikes and weak leverage led to EBITDA margin contraction across the board. Underlying consumer off-take remains healthy and GST-led disruption is likely to stabilize by 2QFY18-end, as per management commentaries. We continue to find aggregate sector valuations rich. Preferred picks - ITC, CLGT, GSK-CH, BJCOR, SHK and BRIT/TGBL (on dips).

1QFY18 - year off to a subdued start due to GST-led disruption

Aggregate revenue growth in staples slipped sequentially to 1.8% yoy dragged down by GST-led disruption which led to mid-to-high single digit volume decline across our staples universe barring BRIT (2% volume growth) and HUVR (flat UVG). Discretionary companies continued to perform relatively better with aggregate revenue growth of 7.3% yoy led by jewelry companies, Page and JUBI. Alcohol companies posted weak performance dragged down by SC's highway liquor ban even as UBBL navigated the challenging environment better by posting flat volume growth.

Aggregate EBITDA and PAT growth slipped to 1.8% and 2.9% yoy respectively dragged down by RM headwinds and weak leverage; we note most staple companies barring HUVR, CLGT, BRIT and TGBL posted declines in EBITDA. However, overall we saw more beats (higher in discretionary versus staples) this quarter than misses due to subdued set of expectations - key beats were HUVR, BRIT and Nestle in staples and JUBI, ITC, Page, TTAN and UBBL in the discretionary space. Key misses this quarter were GCPL, JYL, Marico and TGBL - all in the staples space.

Quick thoughts on key parameters

- Volumes (impacted by GST-led disruption) - broader FMCG (staples) volume growth declined with most companies posting volume decline due to GST-led destocking which accelerated in June month (5-15 days of sales lost) and no purchases from the CSD channel (contributed 3-5% on average for most FMCG companies). Growth was particularly weak for some companies like Emami (not under coverage), Marico and BJCOR while few others like BRIT and HUVR managed to post flat to low single-digit volume growth. On the discretionary side, performance was significantly better led by jewelry companies (strong season, low base and benefit from advancement of sales due to GST), Page (13.4% volume growth) and JUBI (6.5% SSG).

- Margins (RM headwinds and weak leverage drag margins down) - aggregate EBITDA margin contracted 60 bps yoy in 1QFY18 dragged down by 105 bps contraction in GM and weak leverage; however, tight cost control and 50 bps cut in aggregate A&SP spends helped curtail EBITDA margin contraction. At a granular level, 15 out of 24 companies under coverage posted EBITDA margin contraction and 16 companies posted GM contraction (led by both RM headwinds and deferment of price hikes pre-GST). Aggregate absolute A&SP spends declined 1.5% yoy, staff costs inched up just 1.5% yoy and other expenses were up 4.8% yoy.

- Demand/margin outlook - Management commentary across companies was optimistic on underlying consumer off-take which has remained healthy and expect revenue growth to recover especially in 2HFY18 aided by low base, restocking (though quantum/pace remains uncertain) and stabilization of GST-led disruption (likely by 2QFY18-end). On the margin front, RM pressures are starting to subside especially on agri-inputs which coupled with GST-led savings and price hikes (wherever needed, were deferred pre-GST) should help curtail any significant margin pressures.

Source : Equity Bulls

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