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Published on 5/01/2018 3:55:11 PM | Source: Kotak Securities Ltd

Consumer Products - 3QFY18E preview - low base should mean solid/spectacular growth comps - Kotak Sec

Posted in Broking Firm Views - Sector Report| #Kotak Securities Ltd #Consumer Goods Sector #Sector Report

3QFY18E preview – low base should mean solid/spectacular growth comps.

If we had a choice, we would have preferred to not build/publish estimates for 3QFY18E given the high margin of error induced by – (1) demonetization impact in the base quarter, (2) GST-related accounting changes, and (3) uncertainty on the degree of wholesale channel repair post GST; change in gap between primary sales and offtake remains tough to assess. That said, we expect reported growth comps for most companies to be anywhere between solid and spectacular.

Solid-to-spectacular quarter aided by low base, better operating leverage and GST-led savings

At the very outset, we note that current quarter reported performance isn’t strictly comparable yoy due to GST-led reporting changes and demonetization impact in the base quarter.

On a reported basis, we expect 3QFY18 growth comps to be anywhere between solid and spectacular, especially on operating and net profit lines. Overall, we expect aggregate revenues to grow by ~13% (staples to grow at 11% and discretionary growth higher at 15%) and EBITDA/recurring PAT to grow at 20%+ yoy. Aggregate EBITDA margin is likely to expand 155 bps yoy (higher in staples) aided by flattish A&SP spends (as % of sales), cost-saving initiatives, operating leverage and GST-led tailwinds (indirect savings).

Discretionary companies to perform relatively better versus staples

Overall, we expect discretionary companies within our universe to perform relatively better – we estimate aggregate revenues for discretionary companies to grow at 15% yoy led by jewelry companies (sustained market share gains), JUBI (15.5% SSG aided by low base, menu renovation and partly optical – price hikes taken to compensate for removal of ITC), Page and building materials (paints/Pidilite). We expect ITC’s cigarette volumes to decline 3% yoy.

For staples universe, we expect aggregate revenues to grow 11% yoy aided by low base and modest pickup in underlying consumer off-take. We expect volume growth to accelerate across companies (however, would urge to look at 2-year volume CAGR due to base effect) led by Dabur, GSK-CH, CLGT and BRIT (all partly aided by low base); for HUVR we expect UVG to accelerate to 10% yoy. While most companies have passed on direct taxation benefits under GST, carry-forward pricing pre-GST and withdrawal of promotions is likely to aid modest priceled growth across companies. On international front, sharp currency depreciation in Egypt, Nigeria, Turkey, Argentina and UK (GBP) is likely to hit companies like GCPL, Marico, Dabur and TGBL.

Broad-based margin expansion to aid solid EBITDA/PAT growth

Moderation in RM headwinds over the past few quarters (especially agri-inputs) is likely to aid aggregate GM expansion (up 70 bps yoy) in staples while discretionary companies are likely to post aggregate GM contraction (dragged by ITC, Titan, JUBI and APNT). However, we note oilbased inputs like crude oil, LLP, copra and mentha oil have witnessed significant inflation qoq. GST-led savings, cost saving initiatives, better operating leverage (off a low base) and muted A&SP spends (as % of sales) is likely to drive EBITDA margin expansion across most companies under coverage – we note only 4 companies under coverage (BJCOR, ITC, Marico and Manpasand) are likely to witness contraction in EBITDA margin.

At company level, we expect JUBI, UNSP (partly optical due to franchising model), HUVR, UBBL, BRIT and GSK-CH to post 250 bps+ margin expansion; overall, we expect 20 companies out of 24 companies under our coverage to post 100 bps+ expansion in EBITDA margin.

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