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Demand Revival Likely in 2HFY20
The companies in the consumer sector reported mid-single digit volume growth in 1QFY20. Demand environment remained subdued for the second consecutive quarter, while the management commentaries continued to remain cautious for the near-term. Most consumer companies reported strong operating performance. We believe the ongoing phase of moderation in growth (not slowdown as widely feared) is temporary, as we expect the demand to revive in the coming quarters with the beginning of festive season. Our top pick: HUL.
Volume Growth Likely to Pick-up from 2HFY20: Revenue of the consumer companies under our coverage grew by 8.9% YoY (vs. our expectation of 10.8% YoY growth) in 1QFY20 on the back of mid-single digit volume growth. Most companies saw demand moderation led by lower-than-expected volume growth in the rural markets and higher YoY base. However, the management commentaries have not been encouraging, as slowdown in consumption is expected to continue in the near-term. Most companies believe that the demand scenario is expected to improve in 2HFY20 on the back of:
(1) favourable liquidity scenario;
(2) better-thanexpected monsoon; and
(3) government’s focus on improving rural income.
Growth moderation was more visible in Retail space vs. FMCG companies.
Strong Operating Performance: EBITDA of consumer companies under our coverage grew by 12.7% YoY, while net profit grew by 13.4% YoY (in-line with our expectation). Most consumer companies demonstrated cost saving partially offset by higher employee cost. Retail companies witnessed higher discounts and lower operating leverage, which led to sub-par operating performance.
Ensuing Festivities to Drive Demand 1QFY20 results demonstrate that most consumer companies are undergoing ‘Moderation in Growth’ vs. the consensus fear of ‘Slowdown in Growth’ as none companies have posted decline in volume/revenue. Consumer companies are likely to demand revival on the back of the ensuing festivities Ganesh Chaturthi & Onam (first week of Sept’19) and Navratri (last week of Sept’19). Consumer spending is likely to witness momentum in the subsequent month led by Dussera and Diwali.
HUL - Steady Performance: It reported 5% YoY volume growth (vs. our estimate of 6%) led by focus on strengthening core brands, innovation and premiumisation strategy. Considering HUL’s ability to grow ahead of the market in the long-term due to organic and inorganic triggers, we have a BUY recommendation on the stock with a Target Price of Rs1,950...Read More.
Dabur – Volume Beat: It reported 9.6% YoY volume growth led by focus on power brands and product innovations. It maintained ‘Mid-to-High’ single-digit volume growth guidance for the full year despite robust performance in 1QFY20. Benefit of benign raw material prices are likely to get re-invested in the form of higher brand spends. We do not have any rating on the stock.
Asian Paints – Channel Push Led the Beat: It reported 15% YoY growth in decorative paints segment despite sluggish industry growth. It didn’t book the expenses relating to cost of commissioning of new plants, which contributed EBITDA margin beat. The Management commentary remained uninspiring with current valuations fully capturing the growth potential. We have a HOLD recommendation on the stock with a Target Price of Rs1,450, valuing it at PE multiple of 45x FY21E earnings...Read More.
Titan – Subdued Quarter: Tanshiq sales grew by 16% YoY (in value terms) with LTL growth of 10% YoY. While the overall demand was hit due to higher gold prices, it expects >20% YoY growth in 2HFY20 with improvement in sentiment towards higher gold prices improve and ensuing festive season. We have a HOLD rating on stock with Target Price of Rs1,110...Read More.
Jubilant FoodWorks – Growth Hit by Fortressing & Subdued Demand: It reported 5.8% YoY Like-to-Like growth and 4.1% YoY SSS growth. Higher employee cost, increasing discounts and lower operating leverage led to weak operating performance. We have a REDUCE rating on the stock with a Target Price of Rs1,060...Read More
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