Q2FY21 Results Preview
* Aggregate revenue/EBITDA to grow by 4/5%: Our FMCG coverage universe is expected to deliver growth of 4/5% YoY in revenue/ EBITDA (ex-GSK, 1/1%) in 2QFY21 (vs. +6/+6% in 2QFY20 and -14/-13% in 1QFY21). Packaged foods, immunity building healthcare and hygiene segments continue to witness healthy growth while personal care, tobacco, liquor, and OOH categories continue to remain impacted, even as we see QoQ recovery trends. Given pantry loading is over, channel inventory is normalising and unlock across states is continuing, we expect growth divergence to normalise further in 3QFY21 for these categories and return to YoY growth. Personal and Homecare saw strong recovery, led primarily by recovery in the value segment. Recovery across categories has been driven by rural markets, as restrictions continued in varying degrees in most urban areas. While MT improved QoQ, growth was robust in GT and E-comm as consumers remained wary of venturing far from their homes. We expect BRIT, NEST, GCPL, MRCO, Emami to be relatively better performers in 2QFY21.
* Discretionary categories remain impacted, expect back to positive growth in 2H: Liquor, cigarettes and OOH categories continued to be impacted in 2QFY21. Closure of pubs and bars in most states throughout 2QFY21 has led to a loss of on-premise consumption. Even in states that opened bars, demand remained muted. However, home delivery could partially mitigate the impact of lost sales. Similarly, the loss of dine-in sales would impact QSR, but the strong recovery in delivery (YoY growth in Aug/September) would minimise the loss of sales. Localised lockdowns and supply chain disruptions impacted cigarettes and recovery is expected to be gradual. OOH categories like Juices and premium discretionary personal care were also under pressure due to fewer instances of going out.
* Margin tailwinds continue: We expect YoY EBITDA margin expansion for most companies as raw material remains benign (both food and crude basket down YoY). However, this will be partly negated by adverse product mix and downtrading in select categories. A&P spends remain well-calibrated, while up QoQ, and might still provide some operating leverage on a YoY basis. We expect strong EBITDA margin expansion (> 100bps YoY) for BRIT, NEST, MRCO, Emami, DABUR, CLGT and Radico while margin contraction (>100bps YoY) for ITC, UNSP and JUBI.
* 1QFY21 Outliers: Britannia, GCPL, MRCO, Emami, Radico
* Our view: We believe companies with higher revenue mix from essential commodities and rural will continue to benefit. Ecomm will continue to gain pace as consumers remain wary about venturing into crowded MT stores. Hence, companies with a strong presence and diversified offerings in Ecomm will do well. However, we expect a recovery in categories like Liquor and QSR to continue to be strong, driven by easing of restrictions and strengthening demand for home delivery. While the sector has underperformed Nifty by ~25% in the past six months, we still see limited absolute upsides, given rich valuations and risk-reward remain balanced, keeping us on the sidelines. We see better opportunities in select stocks where business models are strong and valuations have normalised in the last 12-18 months.
* We have a BUY rating on ITC, ADD rating on Radico, UNSP and Colgate.
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