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Mixed trends; jewelry and liquor to outperform

In our consumer coverage universe, all segments, except paint, are expected to deliver revenue/EBITDA growth YoY in 3QFY25 – staples +5%/+4%, liquor +12%/+19%, innerwear +10%/+16%, QSR +18%/+14%, and jewelry +31%/+21%. The paint segment is expected to post a decline of 1%/12% in revenue/EBITDA.

*Consumption trends were mixed in 3Q. Staple companies are likely to witness a muted quarter amid sluggish urban demand, weak uptake for the winter portfolio, and high palm oil prices impacting the personal-wash portfolio (grammage reduction). Paint companies are impacted by a delayed monsoon and an early festive season. Demand has remained soft after the festive season and 3Q is expected to remain weak across companies. Value growth will continue to lag volume growth (price cut impact will be in the base after 4Q). Liquor companies are expected to clock strong growth, led by a new liquor policy in Andhra Pradesh, positive demand for P&A, and a higher number of weddings in 2HFY25. Innerwear companies saw positive demand trends in the festive season. Traditional channels remained sluggish, while emerging channels continued to drive growth and improve the sales mix. As high trade inventory pressure has eased, primary growth is expected to rise in 2HFY25. QSR companies saw minor improvement in demand in 3Q, particularly at the quarter end, with volume-led SSSG improvement. With a favorable base, SSSG is expected to improve in 3Q and beyond. The revenue gap between dine-in and delivery is expected to narrow down, with improvement in dine-in footfall. Jewelry companies continued to enjoy robust growth with strong SSSG. Most companies are expected to deliver flat SSSG QoQ. Store expansion will further boost revenue growth.

*With high commodity prices (particularly in agri basket) and insufficient price hikes, gross margin is expected to see pressure for most categories/companies. Staple companies are expected to limit A&P spends to maintain EBITDA margin. While QSR and paint companies may see EBITDA margin contraction, liquor and innerwear companies are expected to see EBITDA margin expansion (softening RM and improving mix). Jewelry companies would see margin pressure, but that is largely due to business model change (more franchise-driven store expansion). Studded mix will be critical for underlying margin.

*Among our coverage companies, MRCO, UNSP, JUBI, Kalyan Jewelers, and PN Gadgil are expected to be outliers in 3QFY25, whereas Asian Paints, Indigo Paint, GCPL, HUL and Dabur will likely be the underperformers.

*We continue to like HUL, GCPL, Dabur (despite near-term soft earnings) as we do not see much downside risk and expect a better operating print in the coming quarters. We like PAGE and PN Gadgil on earnings improvement expectation. For JUBI and UNSP, we are constructive on business improvement, but we remain Neutral on rich valuations.

Segment-wise performance

*Staples: Demand trends in 3Q were quite similar to 2Q, but we may see growth diversion in 3Q at the category/company level. Winter demand was muted, which would affect the performance of healthcare, skincare, OTC, HI, etc. High palm oil prices will affect multiple products, especially the personal wash portfolio, where pricing action is insufficient to offset inflation. Grammage reduction will also impact volume performance. Some companies have witnessed a higher share of LUPs, which will impact the product mix too. For most companies, YoY volume growth is expected to decline in 3Q vs. 2Q. Price cut pressure on value growth will see a reversal in 3Q, and we expect positive pricing for most companies. Gross margin for most companies may see weakness in 3Q (high RM inflation, mix and weak winter portfolio). Cost control and rationalization on marketing spends should help to sustain EBITDA margins. We expect sales/EBITDA/PAT growth of 5%/4%/2% for staples companies under our coverage in 3QFY25.

*Paint: Demand trends remained weak for paint companies as extended monsoons and early Diwali dampened festive demand. Nov’24 saw a slight improvement, but overall trends were subdued. The impact of rising competition was less, and the large impact was due to weak industry demand. The product mix can be slightly better as the economy segment has seen more pressure. 3QFY25 is expected to witness similar growth pressure that was seen in 2QFY25. In 3QFY24, paint companies cut prices by ~2% and by 4-5% in 4QFY24. Thereby, after 4QFY25, price cuts will be in the base. Moreover, prices were increased by ~2% in 2QFY25. Hence, value growth can be marginally higher than volume growth from 4QFY25 onward. EBITDA margin is expected to be subdued due to higher marketing spend and insufficient pricing. We expect sales/EBITDA/PAT to decline by 1%/12%/11% for paint companies under our coverage in 3QFY25.

*Liquor: The P&A portfolio continues to benefit from a demand uptrend, a new liquor policy in Andhra Pradesh, and a higher number of weddings, leading to healthy volume growth in 3Q for liquor companies. Gross margin is expected to see some improvement, aided by cost efficiencies, price hikes in earlier quarters and stable RM prices. ENA inflation is in low single digits, while glass prices are declining, leading to a softness in raw material prices. With improvement in volume, we expect EBITDA margin expansion YoY. We expect sales/EBITDA/PAT growth of 12%/19%/16% for our coverage companies in 3QFY25.

*Innerwear: Demand trends in 3Q were similar to 2Q. The festive season was healthy, although some benefits have preponed to 2Q due to early Diwali. Traditional channels remained sluggish, while emerging channels continued to drive growth and improve sales mix. Trade inventory is normalizing, which is expected to drive a better performance at the primary level (which was in opposite trend in the last a few quarters). We expect sales/EBITDA/PAT growth of 10%/16%/20% for our coverage innerwear companies in 3QFY25.

*QSR: QSR companies saw marginal improvement in demand trends in 3Q, particularly at the end of the quarter, with volume-led SSSG improvement. With a favorable base, SSSG is expected to improve in 3Q and thereafter. The revenue gap between dine-in and delivery is expected to narrow down with improvement in dine-in footfall. Weak underlying growth will continue to impact operating margin performance, leading to pressure on restaurant margins and EBITDA margins for most brands. Improvising menu and activation drives for dine-in are driving improvement in footfall/orders. Delivery channels remain strong, while dine-in is showing marginal improvement in the second half of the quarter. We expect sales/EBITDA/PAT growth of 18%/14%/34% for our coverage QSR companies in 3QFY25.

*Jewelry: Jewelry companies continued to enjoy robust growth with strong SSSG. Most companies are expected to deliver similar SSSG as seen in 2Q. Store expansion will further boost revenue growth. Jewelry companies would see margin pressure, but that is largely due to business model change (more franchise-driven store expansion). Studded mix will be critical for underlying margin. The reduction in customs duty is expected to result in an inventory loss of INR2-2.5b for Titan, ~INR0.5-0.6b for Kalyan, and INR0.2b for Senco in 3Q. We do not factor in this one-time impact of inventory loss on operating performance to compare margin on a like-to-like basis. We expect sales/EBITDA/PAT growth of 31%/21%/18% for our coverage jewelry companies in 3QFY25.

Agri commodity prices remain high; non-agri prices stable

*Agricultural commodities have witnessed YoY inflation for the third consecutive quarter, impacting FMCG companies like Dabur, HUL, Nestlé, Britannia, Marico, and Tata Consumer. Conversely, non-agricultural commodities, including crude oil and its derivatives, along with VAM prices, have stabilized. Oil commodity basket has faced inflationary pressures due to higher import duties, affecting margins for companies in the soaps and detergents category.

*Agricultural commodities: Wheat prices rose by 12% YoY and 7% QoQ, while barley prices surged 13% YoY and 8% QoQ, likely impacting companies like UBBL and Nestlé. Sugar prices declined by 3% YoY but remained flat QoQ. Coffee prices increased 11% YoY and were stable QoQ, posing challenges for companies like Nestlé and HUL. Copra prices have soared 42% YoY and 21% QoQ, while palm oil prices jumped 32% YoY and 21% QoQ, driven by higher import duties.

*Non-agricultural commodities: Crude oil prices declined by 11% YoY and 7% QoQ, currently trading at ~USD74/barrel. Other commodities like TiO2 and TiO2 (China) are showing a downward trend. VAM (China) prices fell by 11% YoY and remained stable QoQ, benefiting companies like Pidilite. On the other hand, gold prices jumped by 26% YoY and 7% QoQ, putting pressure on the margins of jewelry companies.

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