Lower trade margins, discounts, ad-spends moderation provides earnings succour
Our neutral sector view is intact despite it turning “relatively cheaper” tactically – a 13% moderation in sector valuation (as per I-Sec Consumer Momentum Indicator (ICMI)) sector overvaluation now at 23% (versus 36% in Apr’20). We continue to see medium-term revenue headwinds due to the impact of secondorder macro deceleration. There are some positives too – multiple margin levers that are likely to provide downside protection to earnings. First is lower discounts (both for trade and consumer), second is lower adspends (higher than anticipated) without the marketer compromising on share of voice (as the industry spends has moderated), third is cost saving initiatives (rental renegotiations, SG&A). Packaged food which are witnessing strong growth in FY21 may see revenue decline in FY22 (assuming normalcy returns).
Our tactical relative preference is for Bajaj Consumer, Colgate, GCPL, HUL, ITC.
* Consumer sector overvaluation, although moderated in 3M, remains high: As per I-SEC Consumer Momentum Indicator (ICMI), sector overvaluation remains high at 23% - despite having moderated from 36% in Apr’20. This moderation is primarily driven by underperformance versus other sectors – consumer stock basket up 3% versus Nifty (+19%) and BFSI (+11%), IT (+36%) and Auto (+31%).
* Second order impact of macro slowdown a reality: We expect medium-term impact likely to be driven by (1) excess consumption reset, (2) dreaded word of downtrading to make a comeback (we expect pack-size downtrading rather than brand downtrading), (3) continuing pressure on wholesale channel (liquidity, operational challenges, lower discounts and hence lower margins for the channel) and (4) local / regional players benefitting in categories with low entry barriers.
* Performance of packaged food companies could fall off a cliff in FY22: Although the packaged food players are benefitting from higher consumption as consumers are spending more time at home, we note that the risk of a decline in FY22 is real, assuming normalcy returns by then. This could likely reverse the strong performance being witnessed in FY21 by biscuits (Britannia), Saffola (Marico) etc.
* Cost savings provide downside protection to earnings: Given the challenges to revenue growth, most consumer companies have been managed their costs well. We note the lower ad-spends, both in terms of volume and per unit cost, as the key area of cost saving. Large media buyers like HUL have the opportunity to buy media in bulk and lock-in low rates for rest of FY21. Bajaj Consumer commented that it did not advertise on TV for 2.5 months till mid-June and Marico has guided to ~100bps saving in ad-spends without compromising on their share of voice.
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