FMCG - Q2FY21 Result Preview - ICICI Securities

FMCG companies have restored distribution supplies completely to the pre-Covid levels. However, demand remained slack in discretionary categories, specifically in urban regions, largely due to reverse migration of workers in the last six months. According to Nielsen data, rural growth was 17%, 4% in July, August, respectively, compared to pre-Covid levels. However, metro cities are still struggling to return to pre-Covid level demand and witnessing 10-15% lower sales. Though, we believe new product launches in health & hygiene space has created opportunities for companies to drive growth in newer categories, some discretionary categories like skin care, cosmetics, ice-creams and juices continue to see subdued demand conditions. There has been a wide trend of down-trading to mass brands or lower SKUs. Our coverage universe is expected to witness 6.7% growth largely led by 13.4%, 50.5% growth in HUL, Tata Consumer (TCPL), respectively, mainly on account of consolidation of their respective acquisitions. In our coverage universe, Dabur would be an outlier with 6.5% revenue growth, which would be contributed by new products introduction in immunity boosting & hygiene space. Marico is also expected to witness 7.5% growth largely led by strong growth in Saffola, foods portfolio and low base quarter effect for Parachute & VAHO. Nestlé should see dismal growth numbers with infant & baby food products witnessing subdued sales. Moreover, Maggi growth has moderated compared to Q1 sales. TCPL, on a like-to-like basis, is expected to report 18% growth largely contributed by price hikes in tea & strong growth in international business. However, we expect cigarette sales to continue to stay dismal with 4-5% volume decline given intermediate lockdowns impacting growth in July.

Mixed trend in RM cost; reduction in overhead to sustain margin

Though, on a reported basis, our coverage universe is expected to see 120 bps contraction in operating margins, ex-ITC it is expected to see 60 bps improvement in operating margins. Some commodity prices have seen a sharp dip in January-June, which should benefit FMCG companies in Q2. Palm oil prices have been volatile in the last nine months (dipped 30% from January 2020 to June 2020 and then recovered to similar levels). However, it is up ~25% YoY. Copra prices have remained stable in the last one year while crude prices have been down 20% compared to last year. The major price inflation has been seen in tea prices, which are up ~80% YoY. We believe lower crude based commodity cost would largely benefit FMCG companies with a significant reduction in packaging cost. However, a considerable increase in tea prices would impact HUL and TCPL's gross margins. FMCG companies have restored advertisement spends gradually. However, lower ad rates throughout the quarters & cost cutting measures would have helped in sustaining operating margins. Net profit of our coverage universe is down 5.5%, largely due to a lower corporate tax in the base quarter (adjusted due to a change in the corporate tax rate).

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_FMCG_Q2FY21.pdf

Source : Equity Bulls

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