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Consumer Goods Recovery in Discretionary Categories Points to Steady Q3 Sector Update

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Consumer Goods Recovery in Discretionary Categories Points to Steady Q3 Sector Update Consumer Goods Recovery in discretionary categories points to steady Q3 Sector Update Consumer goods companies (barring ITC) are expected to post steady performance Q3FY2021 Results Preview in Q3FY2021 with revenue growth of 5-10%, largely driven by a rise in sales volumes of value-added hair oils (VAHO), hair colour, higher demand for winter care products Sector: Consumer Goods and sustained demand for healthcare products. Meanwhile, sales of products such as hand sanitizers that peaked during the pandemic, will moderate as the virus Sector View: Positive threat eases, while sales of biscuits and packaged foods will stabilise in Q3FY21 (but will stay high compared with Q3FY20). Rural demand will continue to outpace urban demand due to better rural economics driven by a strong kharif and rabi seasons. We expect HUL (core business - excluding GSK Consumer’s portfolio), Britannia and Our coverage universe Nestle India to achieve volume growth of 6-9% in Q3FY2021. We expect mid-cap CMP PT companies such as Dabur India, Marico, Emami and Godrej Consumer Products Companies Reco. (Rs) (Rs) (GCPL) to achieve volume growth of 7-12% driven by a recovery in discretionary categories and sustained high demand for healthcare products. Tata Consumer Asian Paints 2,803 Buy UR Products is expected to post strong double-digit growth driven by double digit Britannia 3,538 Buy 4,200 growth in India beverage and Tata Coffee businesses while the recently-acquired Industries foods business is set to register mid-to-high teen growth. ITC’s cigarette sales volume Colgate- are expected to grow in low single digit while non-cigarette FMCG business will Palmolive 1,598 Buy 1,850 maintain double digit growth momentum. Asian Paints performance will be boosted (India) by sustained double-digit growth in the decorative paints business. Companies like Dabur India 534 Buy 605 HUL, Marico, GCPL, TCPL and Zydus Wellness will see gross margins decline by Emami 90-350 bps affected by a sharp surge in prices of inputs such as palm oil, copra, 451 Buy 510 domestic raw tea and HDPE prices. However companies such as Emami, Britannia, Limited Nestle India and Asian Paints would post better gross margins due to lower input Godrej prices. Overall, we expect all consumer goods companies would deliver higher OPM Consumer 745 Buy 850 y-o-y as they reap the benefits of cost saving initiatives undertaken in the past few Products quarters and judicious ad spends. Hindustan 2,417 Buy 2,790 Unilever Outlook ITC 205 Buy 250 Revenue growth momentum to sustain; better operating leverage to drive Jyothy Labs 148 Buy 170 profitability in FY2022: Q3FY2021 would be another quarter that sees a sequential recovery in volume growth and sustained high OPM on a y-o-y basis. We believe that Marico 419 Buy 477 a shift in demand towards branded products, rural demand staying of urban demand, Nestle India 18,511 Buy 19,055 gradual recovery in the out-of-home categories and new product launches remain Tata key revenue growth catalyst in the near to medium term. Growing caution on health Consumer 605 Buy 630 among consumers will continue to fuel growth for healthcare products, while increasing Products the importance of categories such as floor cleaners/toiler cleaners/disinfectants in Zydus the near to medium term. Raw material prices have increased in the recent past and 2,087 Buy 2,300 Wellness sustenance of this trend will bring some softness in the gross margins. Judicious price hikes, sustained benefits of cost saving initiatives and prudent media spends would Source: Sharekhan Research UR = Under Review coupled with strong revenue growth would help OPM to remain stable in FY2022. The structural growth story of domestic consumer goods market is intact with lower per capita consumption of products as compared to other international countries, lower penetration in rural markets and opportunities to launch new differentiated products and gaining market share from small players. Valuation Price chart More room for outperformance: Consumer goods sectors saw faster recovery compared to some of the other sectors in the pandemic environment. We remain positive on the 65000 14000 consumer goods space in view of strong earning visibility, strong balance sheet and 52500 11500 better return profile compare to other sectors. In large cap space we continue stocks like 40000 9000 HUL as more than 80% of its product portfolio is essential in nature and derives ~50% 27500 6500 of revenue from the rural market and Asian Paints as a strong recovery is expected in FY2022 due to higher pent-up demand and market share gains. Discounted valuations 15000 4000 15 17 21 19 16 16 18 20 18 - - - - - and an improving margin profile of non-cigarette FMCG business makes ITC a preferred - - - - Jul Jul Jan Apr Apr Dec Aug Nov Mar pick in the basket. Among mid-caps, we prefer Tata Consumer Products Ltd and Dabur India as both companies have good earnings visibility in the near to medium term. We BSE Sensex BSE FMCG Index also like Emami as management has changed its gear to improve the growth prospects of the company and improve the shareholders value in the medium term. Key risks: Increase in competition in some of the high penetrated categories and sustain spike in the key input prices would act as a key risk to performance of consumer goods companies. Leaders in Q3FY2021: Asian Paints, Emami and Dabur India Laggards in Q3FY2021: ITC Preferred picks: Asian Paints, HUL, ITC, Dabur India, TCPL and Emami January 06, 2021 14 Sector Update Q3FY2021 earnings estimates Net sales (Rs cr) OPM (%) Adjusted PAT Company Q3FY21E Q3FY20 YoY (%) Q3FY21E Q3FY20 Y-o-Y BPS Q3FY21E Q3FY20 Y-o-Y % Asian Paints 5946.8 5420.3 9.7 23.3 21.9 137 932.4 779.7 19.6 Britannia Industries 3259.3 2982.7 9.3 19.0 16.8 216 451.5 369.9 22.1 Colgate-Palmolive (India) 1202.7 1147.2 4.8 29.7 27.6 215 234.2 199.1 17.6 Dabur India 2671.4 2353.0 13.5 21.5 20.9 58 485.7 415.0 17.0 Emami 939.2 812.6 15.6 35.1 32.5 260 243.5 200.0 21.8 Godrej Consumer Products 3059.6 2755.1 11.1 23.4 22.9 51 486.2 421.2 15.4 Hindustan Unilever 11782.5 9808.0 20.1 24.5 24.9 -44 2048.2 1688.3 21.3 ITC 12240.0 12013.0 1.9 34.3 38.4 -406 3564.9 3898.4 -8.6 Jyothy Labs 439.1 407.3 7.8 16.2 16.0 25 45.9 42.6 7.6 Marico 2012.4 1824.0 10.3 20.0 20.4 -45 304.5 276.0 10.3 Nestle India 3209.9 2960.8 8.4 25.1 22.9 224 530.6 473.0 12.2 Tata Consumer Products 2809.9 1961.9 43.2 13.0 12.2 76 257.2 136.4 88.5 Zydus Wellness 355.1 332.7 6.7 10.7 11.2 -56 29.0 8.9 - Grand Total 49928.0 44778.4 11.5 25.5 26.5 -91 9613.8 8908.4 7.9 Source: Company, Sharekhan estimates * Estimates for HUL and Tata Consumer Products are including the merger of acquired businesses # Nestle India is a calendar year ending company and hence, estimates are for Q4CY2020 Trend in the key input prices Particulars Q3FY21 Q3FY20 yoy% Q2FY21 qoq% Copra (Rs/kg) 125.6 104.1 20.7 112.9 11.2 Kardi oil (Rs/kg) 163.6 197.3 -17.1 166.7 -1.9 Rice bran oil (Rs/kg) 82.0 64.4 27.3 76.8 6.8 LLP (Rs/Ltr) 47.0 45.0 4.4 42.0 11.9 HDPE (Rs/kg) 98.0 85.0 15.3 92.0 6.5 Titanium dioxide (Rs/kg) 260.0 257.0 1.2 256.0 1.6 Palm oil prices (MYR / tonne) 3590.0 2586.0 38.8 3150.0 14.0 Mentha oil (Rs/kg) 963.0 1252.2 -23.1 1094.5 -12.0 Raw tea prices 207.9 141.3 47.1 240.0 -13.4 Barley (WPI)) 150.0 172.0 -12.8 154.0 -2.6 Wheat (Rs/kg) 25.0 30.0 -16.7 27.0 -7.4 Sugar (Rs/kg) 33.0 33.0 0.0 34.0 -2.9 Source: Bloomberg, Sharekhan Research Valuations Price EPS (Rs) P/E (x) Company CMP (Rs) Reco Target (Rs) FY21E FY22E FY23E FY21E FY22E FY23E Asian Paints 2,803 Buy UR 28.2 35.6 43.4 99.6 78.7 64.6 Britannia Industries 3,538 Buy 4,200 75.7 85.2 98.4 46.7 41.5 36.0 Colgate-Palmolive (India) 1,598 Buy 1,850 31.7 35.1 38.5 50.4 45.5 41.5 Dabur India 534 Buy 605 9.5 11.6 13.7 56.2 46.0 39.0 Emami Limited 451 Buy 510 13.6 16.5 19.7 33.1 27.3 22.9 Godrej Consumer Products 745 Buy 850 17.0 19.7 22.6 43.8 37.8 33.0 Hindustan Unilever* 2,417 Buy 2,790 35.9 45.3 51.7 67.3 53.4 46.8 ITC 205 Buy 250 10.2 12.4 14.2 20.1 16.6 14.5 Jyothy Labs 148 Buy 170 5.4 6.5 7.6 27.3 22.7 19.4 Marico 419 Buy 477 8.6 10.5 11.9 48.7 39.9 35.2 Nestle India# 18511 Buy 19,055 229.8 270.8 311.0 80.6 68.4 59.5 Tata Consumer Products* 605 Buy 630 10.0 12.0 13.8 60.5 50.4 43.8 Zydus Wellness 2,087 Buy 2,300 30.0 47.1 59.0 69.6 44.3 35.4 Source: Company, Sharekhan estimates UR = Under Review * Nestle India is a calendar year ending company # Estimates for HUL and Tata Consumer Products are including the merger of acquired businesses January 06, 2021 15 Sector Update Q3FY2021 Consumer Goods earnings preview Company wise key expectations Company Q3FY21E Y-o-Y (%) Q-o-Q (%) Comments Asian Paints Sales (Rs crore) 5946.8 9.7 11.2 Volume growth in decorative paints business to sustain in double digits due to good demand in tier III and IV towns and a gradual recovery in key metros OPM (%) - BPS 23.3 251 -29 Lower input prices and cost saving initiatives would help the OPM to expand by 251 bps Adjusted PAT (Rs 932.4 19.6 9.5 PAT is expected to grow by ~20% led steady revenue growth and crore) margin expansion.
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