FMCG - Sector Update - Divergent FY21; aggregate demand stress in 1HFY22 - HDFC Securities

Mr. Varun Lohchab, Institutional Research Analyst, HDFC Securities and Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities.

The HSIE consumer index sales indicated a sustained recovery with reported growth of 23% YoY in 4QFY21 (-6% in 4QFY20, +7% in 3QFY21) as easing of restrictions and increased mobility of consumers boosted OOH and discretionary demand. The three-year sales CAGR (which normalises all base adjustments over the past three years) in 4QFY21 was at 9% YoY (+5% in 4QFY20, +9% in 3QFY21). Demand recovery in 2HFY21 was decent and growth divergence between necessity and discretionary categories lowered significantly. It was an interesting year as many categories were resilient, led by rapid changes in consumer buying behaviour. Categories that outperformed our index in FY21 are OTC FMCG, F&B, oral care, personal care, home care and paints, which grew 35/12/10/6/5/5% YoY. QSR, footwear, liquor and cigarette categories were impacted the most, contracting by 22/20/15/11% YoY. Within the FMCG universe, Britannia, Nestle, GCPL, Dabur, and Marico outperformed, clocking revenue growth of 12/8/2/1/1% YoY in CY20 (Link). EBITDA growth for Britannia, Nestle, Emami, Radico, Colgate was at 35/10/10/9/8% YoY in CY20.

COVID-led second wave is again impacting demand for OOH and discretionary. However, this time, the benefit/impact is less than that of the first wave. Consumer buying is more disciplined and fear of unavailability of essentials is unlike last year. Rural is resilient but impacted by the second wave; hence, aggregate demand is expected to be weaker in 1HFY22. Companies have been refocusing on core strengths (product innovation, distribution expansion, cost and capital efficiencies) since 2HFY21. In our recent thematic (Opportunity in Adversity- A Comparative Scorecard), we shared the company-wise strategic initiatives of the past five years to drive core. We remain cautious and selective within the sector due to an unfavourable medium-term risk-reward, given absolute growth has been modest relative to expectations and valuations. Despite defensive characteristics, we are underweight on the sector in our model portfolio. Within consumer, we prefer staples over discretionary owing to high expectations built-up in discretionary stocks. We have a BUY rating on ITC and ADD on Dabur, GCPL, Marico, UNSP, Colgate and Radico.

OTC FMCG, F&B and oral care outperformers in FY21: Growth for essential and hygiene categories in 2HFY21 saw moderation from the high levels in 1HFY21. Recovery in discretionary and OOH was healthy in 2HFY21 but has not fully normalised yet. The second wave has not accelerated demand for essentials (unlike last year) but thwarted the full recovery of discretionary and OOH. Demand for OTC FMCG/healthcare would sustain in FY22, albeit at lower pace.

QSR, liquor, footwear most impacted in FY21: Discretionary and OOH were most impacted in FY21. QSR, liquor and footwear categories witnessed sharp revenue contraction of 15-20% in FY21 despite recovery in 2HFY21. These categories were impacted the most in 1HFY21 and their recovery in 2HFY21 was also slower than other consumption categories. The second wave also impacted 1QFY22 and we do not expect a sharp recovery in the near term. Restaurants, social gathering, schools and colleges will not see full normalcy in the near term.

GT, e-commerce outperformers in FY21: E-commerce continued to grow ahead of all other channels, despite strong growth in GT and recovery in MT. Most companies significantly improved in e-comm revenue salience (2x-3x mix in FY21). The recovery across channels was mainly driven by semi-urban and rural markets while that in urban markets was gradual. However, urban returned to growth for most companies and the sequential recovery was encouraging. Rural grew faster than urban in 1QFY22 but was impacted by the second wave.

Near-term outlook: Higher COVID incidence during the second wave would impact aggregate demand for 1HFY22. Essentials are not seeing pantry loading led drive and discretionary/OOH are impacted by the lockdown. Rural is also seeing some pressure, which was a growth driver in FY21 (although more resilient than urban). Success of launches, distribution reach, price hikes, and improvement in international business will be the key monitorable.

Source : Equity Bulls

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