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Q4 preview: Demand trend to improve in discretionary, steady in staples

Low comparables due to the Covid-19-related lockdown in Mar’20 are likely to drive higher revenue growth of 20-40% across companies in our coverage universe. Recovery and growth in discretionary should remain impressive. While staples may record similar sequential trends, alcobev is expected to come back to growth. Fashion retailers are yet to see a full recovery. We expect companies under our coverage to record sales/EBITDA growth of 24%/32% in Q4 vs. 9.6%/9.9% in Q3. In terms of a 2-year CAGR, TTAN, APNT, BRGR, PIDI, VBL and PAG are likely to record high growth of 12- 23%. We remain positive on recovery plays and expect the Maharashtra lockdown to be a short-term blip. TTAN, Alcobev stocks (UBBL, UNSP and RDCK), QSRs (JUBI and WLDL), ABFRL and VBL are preferred picks, given likely upgrades to earnings. Within staples, we like BRIT, CLGT and ITC.

* Staples growth largely steady on a sequential basis: Revenue growth of 20-40% is largely driven by low comparables. We expect demand trends to be largely steady on a sequential basis. NEST/DABUR/MRCO are likely to record 2-year CAGRs of 11%/8%/8%, with other peers at 5-6%. With a 2-year revenue CAGR of -1.6%, ITC is yet to fully recover to pre-Covid levels. Cigarettes, however, should record sales/EBIT growth of 8% yoy vs. a weak Q4FY20. Growth trends in biscuits may remain muted, with BRIT likely to record sales growth of 9% (2-year CAGR of 5.8%). Input inflation in foods remains low benefitting BRIT/NEST with margin gains and PAT growth 16%/21%. We estimate gross margin contraction across HPC on higher crude prices. However, operating margins are likely to rise due to cost savings and operating leverage. A 2-year CAGR in PBT is the highest for BRIT/DABUR/CLGT/NEST at 14%/11%/10%/10%.

* Paints/PIDI to sustain strong momentum but margin risks increasing: We estimate strong mid-teens growth in Jan-Feb’21 and low comparables in Mar’20 to result in close to 40% growth for APNT/BRGR/PIDI (2-year CAGRs of 12%/13%/15%). Post the strong margin expansion in the last two quarters, the sharp increase in crude and VAM prices may lead to a severe gross margin contraction ahead. Our estimates factor in a 150-250 bps gross margin contraction in Q4FY21, assuming some benefits of low-priced inventory.

* Recovery continues in Alcobev and CSD: We expect sales recovery for UBBL/UNSP/RDCK with 8-12% growth. Slower growth in the popular segment due to a muted performance in AP and West Bengal may limit growth of UNSP/RDCK. UBBL should report strong margin expansion (+380bps) on low comparables and favorable input prices, driving 58% EBITDA growth. We expect VBL to report 20% sales growth and 100bps margin expansion, led by early summer, low base and cost savings.

* In Retail, TTAN, PAG and JUBI to outperform: Based on the Q4 update, we estimate TTAN to record 60% sales growth (2-year CAGR of 20%) and 87% PAT growth, excluding the one-off impact of reduction in customs duty on gold. PAG is also expected to report a strong performance with sales growth of 51% (2-year CAGR of 16%) vs. an 18% decline in Q4FY20 and PAT growth of 4x on a low base. In QSR, JUBI should record healthy growth of 18% with 6x jump in profit, whereas WLDL should report flat revenue with 36% increase in EBITDA. Within fashion, we expect ABFRL to return to revenue level of Q4FY20, and SHOP to recover to nearly 90%.

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