Disruption visible, growth divergence increases
The HSIE Consumer-Index sales declined by 7% YoY in 4QFY20 (+10% in 4QFY19 and +5% in 3QFY20) as the COVID-induced lockdown has heavily impacted supply chain across categories. The three-year CAGR (which normalises all base adjustments over the past three years) in 4QFY20 was +5% YoY, supported by healthy growth of the past two years. Categories which outperformed our index in 4QFY20 are QSRand Dairy, clocking 2/-1% YoY growth. The HairCare, Personal Careand Footwear categories have been impactedthe most, contractingby 17%, 18%, and 12% YoYrespectively.
In the FMCG universe, Nestle, Radico, Jubilant and Britannia outperformed,clockinga revenue growth of 11/15/4/2%respectively. Packaged Food and Hygiene products saw a surge in sales,which should continue in 1QFY21. Also, primary sales are expected to be strong in 1QFY21 due to partial restocking. Most companies have resumed normal operations in June,and expect a gradual pickuphere onwards. Rural is expected to do better,atleast in the near term, led by reverse migration and robust agri economy. However, we remain cautious and selective within the sector due to the unfavourablemedium-term risk-reward,given modest absolute growth relative to expectations and valuations. Despite defensive characteristics, we are underweight on the sector in our model portfolio. We recommend BUY on ITCand Radico and ADD on UNSPand Colgate.
* The most significant impact on discretionary and OOH: Most consumer companies witnessed revenue acceleration in Jan/Feb vs. a weak show in 9MFY20. However, the COVID lockdown massively impacted supply chainsin the last 10-12days of March. It massivelyimpactedprimary performancewith many categories witnessinga weak consumer offtake. Discretionary and OOH categories were impacted the most as consumers focused on essentials. Categories like discretionary Personal Care and Liquor were already struggling in Jan/Feb before COVID delivered a significant blow. QSR, which saw strong growth in Jan/Feb, was also hit in March as consumers abstained from eating out. We believe the discretionary and OOH categories will remain muted in the near term.
* Supply chain also impacted essential categories: Thelockdown also led to supply disruptions which impactedprimary growth of essential categories. In these categories, pantry loading supported Nestle, Gillette and Marico (Saffola),while Colgate and Britannia struggled owing to disruption in supply chains. However, Britannia and ITC (FMCG) grew strongly at >20% in Apr/May as they were able to restore their supply chain and demand continued to be strong.
* E-commerce gaining strength: MT and e-commerce witnessed robust growth in the past two years at a time when other channels witnessed disruption. MT now accounts for 12-15% share for FMCG companies, while e-commerce is still in single digits. Due to social distancing norms, people sought to avoid crowded MT outlets and relied on e-comm and GT. Multiple companies tied up with delivery aggregators and are now investing in growingtheir presence in the e-comm channel with innovative products and modern distribution network. As e-comm gains share, stronger players like HUL, BRITand Nestle would continue to gain market share and drive premiumisation.
* Near-term outlook: Consumer offtake is expected to be mixed as we expect categories like Hygiene, Home Care and Packaged Foods to do well. However, categories like discretionary Personal Care, QSR, Liquor and Cigarettes will continue to struggle in thenear term.
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