Published on 16/07/2019 9:08:28 AM | Source: Reliance Securities Ltd

FMCG Sector - Mid-single digit volume growth on higher base By Reliance Securities

Posted in Broking Firm Views - Sector Report| #FMCG #Sector Report #Reliance Securities Ltd

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Mid-single digit volume growth on higher base, demand environment remains sluggish

We expect our Consumer sector coverage universe to record lower double-digit revenue growth on the back of mid-single digit volume growth in 1QFY20. Our channel check indicates that the demand environment continues to remain sluggish after cautious commentary by companies in Q4 FY19 with the rural growth tapering down from its historical high growth rates. We expect the sectoral volume growth at ~4%-6% range, while the pricing growth remains the critical which is pegged at ~3%-5% range in 1Q FY20.

ITC & HUL are likely to report 4% yoy and 6% yoy volume growth, respectively. Higher base set in Q1 FY19 is also likely to lead growth rates normalize in the current quarter along with sluggish demand scenario. HUL & BRIT reported 12% volume growth in Q1 FY19 which are likely to restrict company continue grow at the same run-rate. Company’s ability to take price hikes are likely to be tested in the current quarter. Consumer discretionary companies like Asian Paints and Titan Company are likely to witness faster growth as compared to industry. Asian Paints is likely to report strong double-digit volume growth on new capacity operational, despite higher base. Titan’s jewellery business is expected to sustain a robust growth in the seasonally strong quarter with higher wedding days. Marico and Nestle are likely to report above industry average volume growth while Britannia, Dabur and Colgate are likely to report in-line with industry average volume growth in Q1 FY20. Jubilant FoodWorks is likely to report mid-single digit SSS growth albeit on higher base. Companies guidance on revival of demand scenario going ahead will key to watch in 1Q FY20.


Margins to remain flat, pricing remains the key for operating leverage

EBITDA growth for companies under coverage is broadly to be in line with revenue growth and EBITDA margins are likely to remain flat yoy at ~25%. ITC, HUL and Dabur are likely to witness operating margins expansion qoq mainly due to aggressive cost saving and operating leverage. Higher gold prices and improved product mix are likely to result robust operating profit growth for Titan. Higher input cost and other expenses are likely to keep EBITDA growth to be muted for Asian Paints, Nestle, Britannia and Colgate however Marico and Dabur are likely to report faster EBITDA growth on the back of softening input cost. Operating leverage is likely to lead 11.2% YoY and flat QoQ growth in net profits for the companies under our coverage. Reasonable volume growth backed by pricing growth is likely to translate into operating leverage gains. Our key result plays are ITC, HUL, Marico and Titan.


Our key result plays are as follows:

ITC: We expect cigarette volumes to grow by 4% yoy and 5% yoy growth via pricing in Q1 FY20E. FMCG others are likely to grow at 7% yoy while Agri and paper segments are likely to grow at mid-teen. Gross margins are likely to expand modestly while other controlled expenditure is likely to add additional cost savings to total EBITDA margins expansion of 69bps in Q1 FY20E.

HUL: We expect company to report 6% underlying volume growth albeit on higher base (Q1 FY19 company reported 12% volume growth) and 3% pricing growth. Company is likely to demonstrate savings on cost and report EBITDA margins expansion of 76bps yoy in Q1FY20E. Marico: We expect company to report 8% volume growth. Lower input prices are likely to result healthy gross profit growth. EBITDA to grow at 24% on operating leverage and controlled expenditure. Net earnings growth is likely to be robust despite higher taxes.

Titan: Company to report strong performance in jewellery segment. Gold prices are up 9% yoy and 8% qoq and Q1 FY20 had higher number of wedding days. Watch division is likely to report higher single digit volume growth. EBIT margins in jewellery segment to expand due to improved product mix and operating leverage. 


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