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Inflationary pressures dent volumes

The 19 Consumer companies under our coverage universe are likely to report muted cumulative growth numbers – revenue/EBITDA/PAT of 8%/7%/5% – in 4QFY22. This is on a cumulative sales/EBITDA base of 26.7%/26% in 4QFY21. Two year average sales/EBITDA growth is expected to be 17.2%/16.3%. Sales growth will largely be led by price hikes as Staples volumes hover in the negative to slightly positive range, impacted by spiraling inflation and a slowdown in rural demand. Inflation has been the theme in 4QFY22, with already elevated commodity costs pushed further upwards owing to the Russia-Ukraine war, which broke out in Feb’22. With most companies having taken steep price hikes in 3QFY22, managements were already apprehensive of raising prices further as it risked affecting demand. However, spiraling input costs compelled most managements to raise prices further in an effort to protect margins. The recent correction in stock prices has resulted in pockets of opportunities, especially in companies with a lower exposure to commodity cost pressures and strong structural growth visibility. In the case of distribution channels, e-commerce continues to strengthen its salience for most Consumer companies, while general trade (GT) remains resilient. Recovery in the MT channel, while still not back to preCOVID levels, is certainly well on its way. However, the recovery in certain categories may not be as strong as consumers tighten their purse strings when looking at discretionary purchases. A few key developments to monitor include: a) a fresh COVID wave engulfing the country, b) further escalation in the ongoing conflict in Ukraine continuing to affect commodity costs, and c) extended slowdown in rural demand. On the positive side, a good Rabi harvest may help boost rural demand.

Top picks in the Consumer Staples space

GCPL, DABUR, MRCO, and VBL: The appointment of the new CEO at GCPL offers scope for transformative change, especially if the company is able to robustly grow the domestic business and introduce better capital allocation. We like DABUR on account of: a) its focus on the core Healthcare business, b) its power brand strategy, c) acceleration in innovation and launches, d) an increasing direct distribution reach, e) narrowing gap v/s domestic peers using analytics, and f) cost savings, which are being plowed back into the business in the form of higher advertisements. MRCO is the only company within our coverage that is witnessing an input cost decline in its key raw material: copra. The ongoing momentum in revenue growth in each of MRCO's core segments, significantly higher growth rates as well as targets in the Foods portfolio, and INR4.5-5b targeted from its 'digital first' range of products offer a much-needed diversification that can lead to higher multiples compared to the past. We like VBL owing to: a) the revival in out-of-home consumption on the back of an increase in the pace of vaccine distribution, b) rising penetration in newly acquired regions (Southern and Western India), and c) the growing penetration of Refrigerators in rural/semi-rural areas per household as well as power availability for longer hours.

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