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MOFSL coverage universe to clock 5.6%/6.2% YoY growth in revenue/EBITDA Demand trends were steady in 4QFY24, and companies have been focusing on boosting their core portfolios through various initiatives, including distribution expansion, product relaunches, step-up in marketing budgets, etc. Urban markets continued to see improvement, and rural markets have also started witnessing recovery (Dabur’s rural growth was better than urban growth). FY24 was an interim phase when price cuts/consumer offer impacted revenue growth, while volume recovery lagged (around 12-15 months). We believe volume growth has bottomed out and expect a better print in FY25 (our recent sector thematic). We are seeing select price hikes (HPC categories); hence, we believe that revenue growth could be slightly higher than volume growth for select companies. Our FMCG universe is likely to post low to mid-single digit volume growth in 4QFY24. Paints and adhesive companies are expected to report high single-digit volume growth. The cigarette segment is seeing a moderation in demand and is expected to deliver flat volume growth. Overhead expenses related to distribution and marketing are expected to remain elevated. Still, with gross margin benefits, we expect EBITDA to grow at a higher rate than revenue. The 19 companies under our coverage are expected to deliver revenue growth of ~5.6%, EBITDA growth of ~6.2%, and PAT growth of 7.4% in 4QFY24.

Commodity prices stable; gold keeps shining

As we mentioned in our commodity note in Mar'24, in the non-agricultural basket, crude oil prices went up by 2.0% YoY but dropped by 1.8% QoQ in 4QFY24. However, the price has been range-bound for the last 30 days at around USD85/bbl. VAM prices have rebounded to USD1,013/t currently, up 15.1% since Jan’24 compared to the 3QFY24 average of USD 888/t. Despite this increase, VAM prices are still down by 7.7% YoY. Domestic gold prices increased by 10.5% YoY and 3.7% QoQ in 4Q, and they are currently trading at INR65,446 per 10gm, attributed to high US interest rates and inflation concerns. Titanium dioxide (TiO2) prices declined by 13.1% YoY and 2.8% QoQ; now at INR340/kg.

* In the agricultural basket, maize prices went up by 3.9% YoY and 4.6% QoQ. Coffee prices rose 15.3% YoY (2.5% QoQ) due to unusual rainfall, labor shortages, and higher demand. Tea prices fell sharply by 10.2% YoY and 21.1% QoQ due to low export demand and slow rural consumption. Wheat prices rose 2.6% YoY, aided by government support to farmers, but dropped 2.4% QoQ. Barley prices fell 25.1% YoY and 3.9% QoQ to INR2,032/quintal. Sugar prices increased by 10.8% YoY but decreased by 3.6% QoQ; now at INR3,800/quintal. Mentha oil prices dropped 18.7% YoY but remained steady QoQ. Malaysian palm oil prices increased by 7.9% QoQ but slightly decreased by 1.2% YoY. Palm fatty acid prices rose 2.7% YoY; now at USD816/MT.

* Overall commodity cost basket: The commodity cost basket fell 1.8% YoY but remained flat QoQ. There was an increase of 2.4% YoY/1.7% QoQ in the agricultural basket. The decrease in prices of tea, wheat, barley and sugar was offset by a rise in prices of coffee and maize. Conversely, the non-agricultural commodity basket declined 6.2% YoY and increased 2.4% QoQ, offsetting the rise in agri commodity prices.

4QFY24 – Key earnings outliers and underperformers

* Outliers: GCPL, Marico, Nestle

* Underperformer: HUL, Britannia

Outlook and recommendation

We continue to believe that discretionary categories/companies have better growth potential, driven by factors such as market penetration, deeper distribution reach, GDP multiplier, higher wallet share, etc. However, we do see growth normalization (settling of pent-up demand). We also believe that amid intensifying competition, it will be difficult for many discretionary companies to sustain high margins. Discretionary companies are also facing the risk of earnings cuts, along with a valuation check. However, we anticipate volume growth for staples companies to bottom out, with limited risk of earnings cuts. Given the comfort level in valuation and earnings, we believe that select staple companies offer a better risk-reward compared to several discretionary companies over the next 12-18 months. We recommend increasing portfolio weights for staples companies. We prefer HUL, GCPL, and Dabur in the staples category. In the discretionary category, we continue to favor the jewelry space and prefer Titan.

Top picks

* HUL: We expect that the volume growth has bottomed out and anticipate a gradual volume recovery in FY25. HUL wide product basket and presence across price segments should help the company achieve a steady growth recovery. There is scope for a turnaround in part of BPC and F&R; we will monitor the execution in these segments under the new CEO. The valuation at 45x FY26E EPS is reasonable given its last five-year average P/E of 65x on oneyear forward earning.

* GCPL: GCPL is consistently working to expand the total addressable market for its India business through product innovations to drive frequency. Besides, there has been a consistent effort to address the gaps in profitability and growth in its international business. We see margin headroom from the RCCL and Indonesia businesses. The stock valuation is expensive, but earnings are expected to outperform peers.

* DABUR: Recovery in rural markets should support Dabur’s portfolio, as it is heavily skewed toward rural areas. In the domestic business, we expect healthcare, oral care, and food business to grow faster than others. The distribution drive will further contribute to rural growth. EBITDA margin has remained in the range of 19-20% for the past several years. The margin is expected to improve in the coming years due to a better mix of products (such as higher healthcare offerings) and increased pricing in high market-share brands. The stock currently trades at a P/E of <40x FY26E EPS.

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