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Mixed growth diversity; pricing to ease margin pressure

* Our widespread consumer coverage universe, with a combined revenue of INR4,000b and a market cap of INR32,000b, registered aggregate revenue growth of 10%/8% in 3QFY25/1HFY25. Consumption trends were mixed in 3Q. Our coverage includes six segments, out of which all segments, except paint, reported revenue growth. The revenue/EBITDA/APAT performance of all subsegments in 3QFY25: staples +4%/-1%/-5%, paint -3%/-13%/-15%, liquor +13%/+14%/+12%, innerwear +7%/+32%/+34%, QSR +12%/+6%/-52%, and jewelry +28%/+20%/+17% YoY.

* Staple companies posted a sluggish quarter due to weak urban demand, a lower uptake in the winter portfolio, and high palm oil prices, which impacted the personal wash portfolio (grammage reduction). Paint companies were affected by weak consumer sentiment, muted festive sales (due to the early Diwali impact), and rising competitive intensity. Value growth continued to lag volume growth (price cut impact will be in the base after 4Q). Liquor companies delivered strong growth, driven by a new liquor policy in Andhra Pradesh, positive demand for P&A, and a higher number of weddings in 2HFY25. In Innerwear, PAGE saw an initial festive boost but failed to sustain growth momentum. While traditional channels remained sluggish, emerging channels continued to drive growth and improve the sales mix. High trade inventory pressure eased, and secondary growth was marginally higher than primary growth. QSR companies saw minor demand improvements in 3Q, particularly toward the quarter’s end, with volume-led SSSG improvement. With a favorable base, SSSG showed an uptick. The revenue gap between dine-in and delivery narrowed, supported by improved dine-in footfall. Store expansion further boosted revenue growth. Jewelry companies continued to enjoy robust growth, with strong SSSG.

* Rising commodity costs, particularly in the agri basket (tea, wheat, palm oil, and edible oils), along with insufficient price hikes, led to gross margin contraction across most categories and companies. EBITDA margin declined due to these factors and negative operating leverage, which companies partially offset by reducing A&P spends. While innerwear and liquor companies experienced margin expansion, QSR and paint companies saw margin contraction. Jewelry margins also contracted due to a shift in the gold-to-diamond ratio within diamond jewelry amid rising gold prices and stable diamond prices, along with more franchise-driven store expansion.

* Among our coverage companies, PAGE, UNSP, PG, JUBI, Kalyan Jewelers, and PN Gadgil were the outliers in 3QFY25, whereas APNT, CLGT, GCPL, BRIT, Devyani, and Senco Gold underperformed. While the slowdown persisted across consumer segments, demand trends are expected to improve gradually, supported by income tax benefits, interest rate cuts, and a gradual improvement in the macro environment. Our top picks are HUL, GCPL, Dabur, PAGE, Titan, and PN Gadgil.

Performance summary of all categories and key areas to monitor:

* Staples: FMCG demand remained subdued, mirroring 2Q trends, with urban slowdown and a gradual rural recovery. Staple companies under our coverage reported 4% sales growth, while EBITDA declined 1% and APAT fell 5% (missed estimates). Volume growth remained in low- to mid-single digits, impacted by high palm oil prices (grammage cuts), a rising low-unit price (LUP) mix, and a weak winter portfolio (healthcare, HI, personal care). Commodity inflation (tea, wheat, palm oil, edible oils) and insufficient price hikes led to a contraction of 190bp in GM and 130bp in EBITDA margin, partially offset by lower A&P spends. E-commerce and quick commerce gained traction, putting pressure on General Trade (GT). NIQ data showed 10.6% value growth and 7.1% volume growth, driven by rural markets (+9.9% YoY), twice the urban growth (+5.0%). Despite near-term challenges, demand is expected to improve, aided by income tax benefits, rate cuts, and macro recovery. Companies are focusing on distribution expansion, product innovation, and consumer incentives to drive growth. In terms of revenue, Marico (+15%) and PG (+10%) were outliers, and EBITDA performance was better for PG (+20%).

* Paints: Paint companies faced sluggish demand in 3QFY25 due to weak consumer sentiment, muted festive sales (early Diwali impact), ~3% price cuts in 2HFY24, rising competition, and urban market stress (rural and tier 3/4 regions showed better recovery). Our coverage companies (APNT and Indigo Paints) saw a decline of 3%/13%/ 15% in revenue/EBITDA/APAT. Berger Paints outperformed peers with 3% growth, driven by urban initiatives and new categories. Competitive intensity remained high, with Birla Opus gaining market share, though APNT saw limited disruption. EBITDA margins declined YoY due to an unfavorable product mix, past price cuts, and negative operating leverage. Companies have taken 1-2% price hikes in 2Q/3Q, benefits of which will be seen in the coming quarters. Paint companies EBITDA guidance: 18-20% for APNT, 15- 17% for Berger, and 13-14% for Kansai. While urban demand remains weak, rural optimism, government spending, and industrial demand offer support. APNT expects weak growth for two more quarters, while Berger targets doubledigit volume growth and single-digit value growth in 4Q. APNT’s performance was the weakest among paint companies, with revenue/EBITDA down 6%/20% YoY.

* Liquor: The AlcoBev sector saw strong demand in 3QFY25, driven by festive season sales, wedding demand, and the reopening of the Andra Pradesh market. The Prestige & Above (P&A) segment continued its momentum, with premium volume growth at 18% for United Spirits, 33% for United Breweries, and 18% for Radico Khaitan. Mass/Popular segment also saw a marginal recovery. Inflation in neutral alcohol spirit (ENA) remains high, though ethanol production from FCI rice may ease costs, while glass prices are stabilizing after prior declines. However, barley costs exhibited an inflationary trend and are expected to remain volatile, keeping margin pressures elevated in the near term. State policy reforms in UP and Telangana—including UP’s new excise policy with e-lottery and composite shops (Beer and foreign liquor) and Telangana’s 15% beer price hike—are set to improve market efficiency and pricing power. Premiumization, regulatory stability, and strong brand momentum support a positive near-term outlook. UNSP outperformed in its category with 15%/20% growth in revenue/EBITDA, while UBBL recorded 10% revenue growth but saw a 3% decline in EBITDA.

* QSR: QSR companies reported a slight improvement in demand trends during 3Q, particularly toward the end of the quarter. With a favorable base, SSSG showed an uptick. The revenue gap between dine-in and delivery has narrowed due to increased dine-in footfall. However, weak underlying growth continued to impact operating margins, putting pressure on restaurant and EBITDA margins for most brands. Enhancements in menu offerings and promotional activations have increased footfalls. While delivery channels remain strong, dine-in is showing gradual improvement. Store expansion accelerated, with companies on track to meet FY25 targets. Jubilant outperformed its peers in 3QFY25.

* Jewelry: Jewelry companies reported strong sales growth, driven by festive demand, weddings, and higher gold prices. Titan (+27%), Kalyan (+40%), Senco (+27%), PN Gadgil (+24%), and Thangamayil (+26%) saw robust revenue gains, with SSSG at 22-24% for key players. Demand remained strong in Jan'25 but softened in the last 7-10 days due to a sharp rise in gold prices. Despite healthy studded jewelry growth, margins declined YoY as rising gold prices led to a shift within the diamond segment. The reduction in customs duty caused inventory losses for Titan (INR2.5b), Kalyan (INR548b), and Senco (INR276b), impacting profitability. PN Gadgil and Thangamayil remained unaffected. The store expansion was strong for jewelry companies. Kalyan Jewellers outperformed with revenue/EBITDA growth of 40%/34%, while Senco lagged behind as revenue grew 27% but EBITDA declined 45%.

* Innerwear: The innerwear market showed mixed demand trends in 3QFY25, with premium segments gaining traction due to improved quality and innovation. Page Industries grew 7% YoY, aided by an initial boost during the festive season; however, it failed to sustain the growth momentum. Lux (22%) and Dollar (15%) saw strong growth, driven by premium & mid-tier brands and thermal wear, whereas Rupa remained flat. E-commerce and Tier-3/4 cities led growth, followed by Tier-1, Tier-2, and metros. Inventory management improved, with Page cutting inventory days to 59 (from 93 in FY24) and Lux streamlining stocks, while Dollar increased inventory for summer demand. EBITDA margins expanded, aided by stable raw material costs and efficiency gains. PAGE delivered 7%/32% YoY growth in revenue/EBITDA.

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