Growth divergence remains high
The HSIE Consumer-Index sales declined by 19% YoY in 1QFY21 (+10% in 1QFY20 and -8% in 4QFY20) as lockdown and weak sentiments continued to weigh heavily on several categories. The three-year CAGR (which normalises all base adjustments over the past three years) in 1QFY21 was +2% YoY, supported by the healthy growth in the past two years. Categories which outperformed our index in 1QFY21 are F&B, OTC FMCG, Home Care, and Oral Care, clocking 38/33/2/-5% YoY growth. The divergence between the underperforming and outperforming categories was much sharper as consumer purchasing was largely necessity driven. Footwear, Liquor QSR and Paints categories were impacted the most, contracting by 68/58/58/46% YoY. In the FMCG universe, Britannia, GCPL, Nestle, and HUL (including GSK) outperformed, clocking revenue growth of 27/5/3/4% YoY respectively. Packaged Food and Hygiene products continued to witness higher demand as the rapid increase in the number of coronavirus cases kept consumers cautious.
However, we expect the benefit of pantry loading to reduce and growth to normalise for Packaged Food while expecting Hygiene to continue to post strong growth. Most companies have resumed normal operations from June and witnessed the benefit of pent-up demand. Rural growth has been ahead of urban, and this trend will sustain in FY21. However, we remain cautious and selective within the sector due to the unfavourable medium-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 ITC and ADD on UNSP, Colgate and Radico.
* Washout for discretionary and OOH: Lockdown was in effect across the country for most of the quarter, and consumers shied away from discretionary expenditure and focused on necessities. Closure of restaurants and bars heavily impacted the liquor and QSR sectors, while lesser instances of going out led to a dip in non-essential personal care. However, several companies have witnessed strong pent-up demand in discretionary categories since states have begun lifting restrictions, thereby leading to a robust recovery in July and August.
* Pantry loading and spillover of 4Q boost essentials: Essentials such as packaged foods and hygiene products benefited from a high level of pantry loading by consumers in April. Several companies have entered the hygiene category with multiple new launches and witnessed encouraging response. Consumers also continued to focus heavily on health and cleanliness, and healthcare products in the OTC FMCG category were in high demand. Several companies faced logistical constraints in March, leading to low channel inventory. The benefit of spillover of lost sales in 4QFY20 was visible in 1QFY21.
* E-commerce leading the way: Social distancing norms led to a rapid acceleration in the adoption of e-commerce by consumers. For companies like Dabur, e-comm salience more than tripled from the pre-COVID level. Kirana stores also gained salience as consumers remained wary about large modern trade shops. Multiple companies tied up with delivery aggregators and are now investing in growing their presence in the e-comm channel with innovative products and modern distribution network. As e-comm gains share, stronger players like HUL, Dabur and Nestle would continue to gain market share and drive premiumisation.
* Near-term outlook: Consumer offtake is expected to remain muted. We expect the growth rate in packaged foods to normalise, although hygiene & healthy products will continue to gain traction. Recovery in QSR, liquor and discretionary personal care is healthy, but return to normalcy may be slower than other categories.
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