Published on 5/08/2020 9:20:04 AM | Source: Motilal Oswal Financial Services Ltd

FMCG Sector Update - Weak earnings continue, exacerbated by lockdown impact By Motilal Oswal

Posted in Broking Firm Views - Sector Report| #FMCG #Motilal Oswal #Sector Report

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Weak earnings continue, exacerbated by lockdown impact

Expect weak performance from staples; Discretionary to fare worse

Financials of Consumer companies are likely to see a significant impact in 1QFY21 due to impact of the COVID-19 led lockdown on supply chain and manufacturing. Additionally, discretionary segments and categories vulnerable to social distancing have also seen persistently weak demand for a major part of the quarter. Thus, we expect cumulative sales decline of 20.5% YoY, EBITDA decline of 30.5% and PAT decline of 28.9% YoY in 1QFY21. In Jun’20, near-normalcy was witnessed in several staples categories with some of the discretionary demand also surprisingly bouncing back in the month. However, whether this sustains given the worsening situation on the COVID front in several parts of the country – especially in large urban clusters – remains to be seen. On the other hand, rural demand should be healthy in 1QFY21 and for the remainder of FY21 due to (a) healthy Rabi crop cash flows, (b) timely sowing of Rabi crop, (c) good monsoons, and (d) sharp increase in MNREGA allocation. Further, the benefit of low material costs for most companies and the sharp reduction in advertisement/travel spends is likely to be outweighed by the impact of sharp sales decline and limited maneuverability on other cost items.

HUVR (adjusted for GSKCH merger from 1st Apr’20) is expected to report YoY sales decline of 1% with 1.5% volume growth (LTL volume decline of 11%) in 1QFY21. The company’s EBITDA is likely to decline ~10% YoY due to down-trading and impact on the high-margin discretionary sales of some premium personal product segments. Boosted by high other income and low corporate tax, HUVR’s PAT is likely to decline by just ~2% YoY. We expect ITC to report 35% decline in cigarette volumes (owing to negligible sale of cigarettes for close to half the quarter) with sales/EBITDA decline of ~28% YoY each. Tata Consumer’s reported numbers in 1QFY21 is likely to be unusually high (due to the addition of Tata Chemicals’ consumer business); like-tolike sales/EBITDA is likely to grow at 2%/5% YoY. Operating performance of most companies in 1QFY21 is expected to remain tepid, barring BRIT, NEST and GCPL. Moreover, we expect double-digit EBITDA decline for CLGT, Dabur, MRCO, HMN, JYL, APNT and EBITDA loss for UBBL, UNSP and PIDI.


Commodity costs largely benign

PFAD prices grew 35.5% YoY in 1QFY21 (14.9% sequential decline) while Mentha prices were down 18.5% YoY. Wheat costs declined 2.8% YoY and 13.6% QoQ while sugar costs were up ~2% YoY/QoQ. Barley costs were down 16.9% YoY and 27.5% QoQ. Titanium dioxide (TiO2) costs declined 7.7% YoY while YTD VAM costs plummeted 28.5% YoY. Copra cost was up 13.3% YoY and 1.2% QoQ, while HDPE costs declined 16.7% YoY. LLP costs were down 8.6% YoY.


Preference for quality and longevity of growth

Our framework for earnings visibility, longevity of growth and quality management drives our choices in the Consumer universe. We continue to prefer HUVR as our large-cap pick as it stands out like a beacon of light in terms of superior visibility on near and medium-term earnings, particularly in such volatile times. Also, valuations still offer scope for reasonable upside after factoring in the GSKCH merger and synergies. We have upgraded DABUR to ‘Buy’ as it offers best visibility beyond 1QFY21 due to (a) successful efforts by the new CEO to boost growth, (b) its high rural dependence, and (c) large part of its portfolio being non-discretionary in nature. MRCO remains our top-pick in the Tier-II space as it has a more resilient portfolio than peers to withstand the COVID-19 led sales/earnings decline in FY21. Furthermore, the outlook on material costs is also better than the earlier expectation of possible inflation.


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