Published on 12/07/2017 2:14:22 PM | Source: Motilal Oswal Securities Ltd

Consumer Goods Sector Update Channel facing hurdles of GST implementation - Motilal Oswal

Posted in Broking Firm Views - Sector Report| #Motilal Oswal #Consumer Goods Sector #Sector Report

Channel facing hurdles of GST implementation

Destocking witnessed in most consumer categories

Subdued quarter with pressure on margins

We expect our Consumer Universe’s revenues to increase 3.1% YoY in 1QFY18, with PAT growth of 1.0% YoY. Sales were impacted in the quarter by down-stocking ahead of GST implementation. MOSL Consumer Universe’s EBITDA is likely to decline 0.9% YoY, with 90bp margin contraction. Barring Colgate and Page Industries, we expect near flattish/or contraction in YoY EBITDA margin for all other FMCG companies, mainly due to weak sales growth and consequent lack of operating leverage. Ad spends are unlikely to decline YoY and should rise sequentially. We expect ITC’s sales to increase by 4.0% YoY (with a 2% decline in cigarette volumes) and PAT by 6.2% YoY (mainly due to high 35.1% tax rate in the base quarter). HUVR’s sales growth is estimated at 2.0% (volume decline of 1%). Its EBITDA margin is expected to come in flat YoY, with volumes affected by destocking ahead of GST implementation. 11 of the 18 companies under our coverage are likely to report a decline in EBITDA YoY, with four others estimated to report EBITDA growth in the range of 0-3%. Colgate, Nestle and Page Industries are likely to report double-digit EBITDA growth, mainly due to a low margin base. Double-digit EBITDA decline YoY is expected for Dabur, Emami, GSK Consumer, Marico, Parag, United Breweries and United Spirits.


RM costs, promotions and new launches

PFAD/palm oil prices were up 3.2%/5.6% YoY, but down 13.4%/12.3% QoQ on average in 1QFY18. Ti02 prices on average increased by 26.6% YoY and mentha prices by 10% YoY in 1QFY18. Copra, LLP and HDPE prices were up 59%, 13% and - 3% YoY, respectively, for the last reported month May 2017. Companies have started taking selective price hikes/grammage reduction/lessening offers following an increase in raw material costs. Promotion intensity is reducing sequentially. Majority of new launches are postponed to 2QFY18 or even 3QFY18 due to the prevalent weak environment.


Preference for quality and longevity of growth

The consumer sector is characterized by rich near-term valuations, given the market’s continued preference for quality with healthy growth. Our framework for earnings visibility, longevity of growth and quality management drives our choices in the sector universe. We continue preferring Britannia, Colgate, P&G Hygiene, Emami, HUL and ITC, notwithstanding the near-term challenges. In the discretionary pack, while the near-term outlook is highly challenging, we like Page Industries, which has demonstrated robust volume growth even in a weak environment and is poised to do better going forward.


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