Consumer Staples & Discretionary - Outlook 2021: Equal preference for Staples & Discretionary - ICICI Securities

CY2021: Potentially a year of consumption recovery (on low base for some).

Staples: We see moderate inflation and return of rural wage growth to be the key drivers. We expect the industry formalisation thesis to sustain - strategic focus on growth even at the cost of (gross) margins. There are risks too - consumers reverting to pre-CY20 behaviour (lower health and hygiene focus, lower in-home consumption of packaged food).

Discretionary: Growth drivers are (1) sharp demand recovery (mostly priced in), (2) store expansion (locking in lower rentals) and (some) cost efficiencies driving operating leverage benefits.

Paints: We remain structural bulls as companies continue to focus on creating multiple growth drivers, mostly DCF-accretive (home décor, ancillary products - waterproofing, adhesives, primer, putty).

Valuation: As per I-Sec Consumer Momentum Indicator (CMI), we find better margin of safety in Staples (4% undervaluation) over Discretionary (28% overvaluation).

- Top picks: Akzo, Bajaj Cons., Dabur, Godrej Cons., HUL, ITC, Jyothy Lab

- Businesses with industry tailwinds: Jubilant Foodworks, Titan, Sheela Foam, Westlife, Zydus Wellness

- Executing better: Asian Paints, Emami, Marico, Nestle, Tata Cons., United Spirits

- Special situation: Bajaj Consumer

- Preferred turnaround picks: Akzo Nobel, Page

Top-10 trends for 2021:

#1 Staples growth recovery could be delayed - lags GDP growth by 4-6 quarters
#2 Inflationary environment key to revenue growth performance
#3 Rural wage growth necessary for real rural recovery
#4 Optical recovery in rural and premiumisation trend
#5 Consumers reverting back to pre-COVID behaviour could be a big risk to growth
#6 Channel dynamics - opportunities & otherwise
#7 Retailers look for store network expansion in CY2021 (after a pause in CY2020)
#8 Volume growth focus over gross margins
#9 Cost savings and efficiencies to likely support operating margins
#10 M&As could accelerate - bolt-ons

Valuation and risks: We value stocks on DCF (WACC and TG ranging from 10-13%, 3-6% respectively) except Godrej Cons. and Tata Cons. which we value on SoTP basis. Key upside risk is better-than-expected gross margins due to correction in input prices. Key downside risk is unexpected irrational competition due to deceleration in general consumption demand.

Source : Equity Bulls

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