FMCG & Alco Bev - 1QFY22 Results Preview Report - HDFC Securities

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

Aggregate revenue/EBITDA to grow by 18/29%: Our FMCG coverage universe is expected to deliver growth of 18/29% YoY in revenue/EBITDA in 1QFY22 (vs. -14/-13% YoY in 1QFY21 and 24/22% in 4QFY21). Although reported numbers are strong, driven by a favourable base, the underlying demand is impacted by COVID-19 led second wave. Consumer buying was more disciplined in the second wave; there were no benefits of pantry loading for packaged goods companies in it as compared to the first wave. Rural is resilient but impacted by the second wave; hence, aggregate demand was impacted in 1QFY22. Demand for discretionary categories is once again impacted, which was recovering in 2HFY21; we believe the full recovery for these categories will take slightly longer than expected.

Two-year CAGR: Our coverage universe is expected to deliver 1/6% 2-year revenue and EBITDA CAGRs in 1QFY22. Companies that are expected to outperform on two-year revenue CAGR will be GCPL, Marico, Britannia and Nestle with 10/8/8/6% YoY CAGRs. While on two-year EBITDA CAGR, Britannia, GCPL, Nestle and Emami are expected to outperform, clocking 19/12/11/10% YoY CAGRs.

Gross margins pressure in 1QFY22: Commodity inflation has sustained for the past three quarters and companies have taken calibrated price hikes. FY21 margin expansion was largely on account of steep cost controls. We believe FY22 margin expansion will be limited (as compared to FY21) although companies have been passing the raw material pressure. We believe A&P spend will still be lower in FY22 than the FY20 level.1QFY22 gross margin will be under pressure for most companies as price hikes were gradual. Discretionary companies will be able to expand EBITDA margins, owing to a favorable base, but staples will witness EBITDA margin pressures.

1QFY22 Outliers: GCPL, Marico, and Emami.

Our view: 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. Companies have been refocusing on core strengths (product innovation, distribution expansion, cost and capital efficiencies) since 2HFY21.

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 introduced FY24 estimates and rolled forward our TP to June-23 EPS for our coverage universe. We increased our target P/E multiple for HUL to 55x (earlier 52x) and Marico to 42x (earlier 40x). Please find included the table for changes in our coverage universe with respect to estimates, target multiples, changes in target prices and ratings. We have a BUY rating on ITC and an ADD rating on Dabur, GCPL, UNSP, Colgate, Marico and Radico.

Source : Equity Bulls

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