Consumer Goods On path to recovery; Essentials hold an upper edge Sector Update Most consumer goods companies started Q4FY2020 with good growth, as Q4FY2020 Results Review gradual recovery was seen in the demand environment (especially in rural markets). However, the outbreak of COVID-19 resulted in a complete lockdown Sector: Consumer Goods in India in the last 10-15 days of March, leading to complete stoppage of production and disruption in supply chain. This impacted sales volumes of most Sector View: Positive companies at the fag end of the quarter, resulting in weak Q4FY2020 numbers. Volumes of most companies (barring food companies) under our coverage declined by 3-22% in Q4FY2020 (revenue of Sharekhan universe declined by 7.8% y-o-y). Companies such as Britannia Industries and Tata Consumer Products Our coverage universe (TCPL) registered growth of 2.5% and 5-6% (at organic level), respectively, in Q4FY2020. On the other hand, companies such as Godrej Consumer Products CMP PT Companies Reco. (Rs) (Rs) (GCPL), Emami, Jyothy Labs, and Dabur India posted double-digit decline in revenue, as pre-season inventory loading by dealers/distributors was affected Asian Paints 1,709 Buy 1,987 by the lockdown. On the international front, companies having large presence Britannia in Africa, Middle East and South East Asian countries registered lower sales in 3,623 Buy 4,060 Industries the international business affected by lockdown and macro headwinds. Lower raw-material prices (especially crude-linked inputs) and lower packaging costs Colgate- 1,383 Positive 1,551 aided gross margins of some companies to expand by 100-300 bps. Lower Palmolive (India) operating leverage resulted in OPM of most companies to decline by 40-590 Dabur India 466 Positive 515 bps. PAT for Sharekhan consumer goods universe (excluding Zydus Wellness Emami 230 Hold 240 and TCPL) declined by 5.4% y-o-y in Q4FY2020. Godrej Consumer Outlook 708 Buy 810 Products Recovery expected by H2FY2021: In the backdrop of the pandemic situation, Hindustan consumer goods companies were impacted by supply disruption caused by the 2,162 Buy 2,305 Unilever lockdown. Production was completely on halt till mid-April 2020 and gradually ITC 200 Buy 240 started with lower capacity utilisation. Post the easing of lockdown norms, most companies scaled up their capacity utilisation and are currently operating at Jyothy Labs 125 Buy 140 85-90% of pre-COVID levels. Distribution and supply are also coming back to Marico 352 Buy 405 normalcy with permission for inter-state transport for essential products. Essential categories such personal wash, detergents, home care, and health and hygiene Tata Consumer 405 Positive 443 are gaining strong traction, while categories such as biscuits, breads, noodles, Products and branded atta are witnessing strong double-digit growth. Rural markets are Zydus Wellness 1,406 Buy 1,520 witnessing faster recovery than urban markets. Overall, Q1FY2021 is expected to be subdued for consumer goods companies (barring food companies). We expect business to attain normalcy for consumer goods companies by Q2FY2021 (except for discretionary categories such as paints). Recovery in rural demand, shift to branded products, strong demand for health and hygiene products, and expansion in distribution reach are near to medium-term catalysts of growth for consumer goods companies. Benign input prices, lower packaging cost, and stringent cost- cutting measures would reduce margin pressure in the near term. However, the same are expected to be better off with recovery in volume growth in the coming Price chart quarters. 65000 14000 Valuation 55000 We prefer companies with a strong brand portfolio, having strong presence in rural 45000 9000 markets and stable balance sheet with good liquidity position to take care of near- 35000 term uncertainties. In view of this, we like Hindustan Unilever (HUL) as more than 25000 80% of its product portfolio is essential in nature and derives ~50% of revenue 15000 4000 from the rural market, and Asian Paints as strong recovery is expected in FY2022 15 16 17 18 19 20 - - - - - - due to higher pent-up demand and market share gains, in the large-cap space. Jul Jul Jul Jul Jul Jul Favourable risk-reward and visible recovery in core cigarette business makes BSE Sensex BSE FMCG Index ITC a preferred bet in the FMCG space. In the mid-cap space, we like TCPL as its synergistic benefits post the merger of Tata Chemicals provides stable earnings visibility in the near to medium term. Key risks Any sustained slowdown in the domestic market or significant increase in the key input prices would act as a key risk to earnings estimates of consumer good companies. Leaders in Q4FY2020: Britannia Industries, Asian Paints, and TCPL Laggards in Q4FY2020: HUL, Emami, Jyothy Labs, and GCPL Preferred Picks: Asian Paints, HUL, ITC, and TCPL July 06, 2020 12 Sector Update Q4FY2020 results snapshot Rs. cr Net sales (Rs cr) OPM (%) BPS Adjusted PAT (Rs cr) Companies YoY % YoY % Q4FY20 Q4FY19 Q4FY20 Q4FY19 (YoY) Q4FY20 Q4FY19 FMCG Companies Asian Paints 4635.6 4991.5 -7.1 18.5 17.8 79 480.2 489.0 -1.8 Britannia Industries 2867.7 2799.0 2.5 15.8 15.6 24 372.5 294.6 26.5 Emami 532.7 639.6 -16.7 18.5 24.2 -569 81.9 108.8 -24.7 Godrej Consumer Products 2153.8 2452.6 -12.2 22.1 23.6 -151 298.2 408.2 -27.0 Hindustan Unilever 9011.0 9945.0 -9.4 22.9 23.3 -42 1469.0 1589.1 -7.6 ITC 11420.0 12206.0 -6.4 36.5 37.5 -100 3457.1 3481.9 -0.7 Jyothy Labs 382.3 504.3 -24.2 10.5 16.4 -587 26.0 67.1 -61.2 Marico 1496.0 1609.0 -7.0 18.9 18.3 58 206.5 215.0 -4.0 Total 32499.1 35147.0 -7.5 26.0 26.5 -57 6391.4 6653.7 -3.9 Soft coverage Colgate-Palmolive (India) 1071.3 1153.8 -7.1 24.5 26.9 -237 197.7 201.2 -1.7 Dabur India 1865.4 2128.2 -12.3 18.9 21.5 -260 298.0 422.0 -29.4 Total 2936.6 3281.9 -10.5 20.9 23.4 -244 495.7 623.2 -20.5 Grand Total (excluding Zydus & 35435.7 38428.9 -7.8 25.6 26.3 -71 6887.1 7276.9 -5.4 TCPL) Tata Consumer Products** 2405.0 1775.5 35.5 12.8 9.8 301 70.5 41.6 69.5 Zydus Wellness# 487.9 416.2 17.2 21.4 20.8 66 71.9 72.8 -1.1 Grand Total 38328.6 40620.6 -5.6 24.7 25.5 -79 7029.6 7391.3 -4.9 Source: Company, Sharekhan Research *Tata Consumer Products Limited (TCPL) Q4FY2020 includes consolidation of consumer business of Tata Chemicals; #Zydus Wellness Q4FY2019 includes only two months of Heinz portfolio Valuations EPS (Rs) PE (x) Reco./ Price Companies CMP (Rs) FY20 FY21E FY22E FY20 FY21E FY22E View target (Rs.) Under active coverage Asian Paints 1,709 29.0 26.0 34.7 58.9 65.7 49.3 Buy 1,987 Britannia Industries 3,623 58.6 72.3 84.6 61.8 50.1 42.8 Buy 4,060 Emami 230 11.4 10.5 12.6 20.2 21.9 18.3 Hold 240 Godrej Consumer Products 708 14.3 15.3 18.4 49.5 46.3 38.5 Buy 810 Hindustan Unilever 2,162 31.9 32.5 43.5 67.8 66.5 49.7 Buy 2,305 ITC 200 12.4 11.2 12.9 16.1 17.9 15.5 Buy 240 Jyothy Labs 125 4.3 4.4 5.6 29.1 28.4 22.3 Buy 140 Marico 352 8.3 8.1 10.1 42.5 43.4 35.0 Buy 405 Zydus Wellness 1,406 32.2 30.3 33.7 43.7 46.4 41.7 Buy 1,520 Viewpoint ideas Colgate-Palmolive (India) 1,383 30 26.6 31.4 46.1 52.0 44.0 Positive 1,551 Dabur India 466 8.6 8.4 10.9 54.2 55.5 42.8 Positive 515 Tata Consumer Products 405 7.2 7.6 10.1 56.3 53.3 40.1 Positive 443 Source: Company, Sharekhan estimates # TCPL earnings estimates are including the financials of consumer business Tata Chemicals July 06, 2020 13 Sector Update Volumes declined in Q4FY2020 due to disruptions amid the lockdown in March Companies Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 HUL consumer business (vol) 12.0 10.0 10.0 7.0 5.0 5.0 5.0 -7.0 HUL consumer business (val) 4.0 1.0 1.3 2.3 1.6 2.0 -2.4 -2.4 ITC Cigarette business (vol) 1-1.5 5-6 7.0 8-9 3.0 3.0 2.0 -10.0 ITC Cigarette business (val) 5.1 5.1 2.6 2.0 3.0 3.0 2.7 -1.7 GCPL soap (val) 10.0 11.0 1.6 -1.0 3.0 -4.0 -4.0 -23.5 GCPL home insecticide (val) 17.0 -2.0 25.0 -6.0 -4.0 4.0 3.2 -16.3 GCPL hair colour (val) 12.0 21.0 0.6 7.0 0.0 2.0 -3.7 -23.4 Marico Group (vol) 10.4 6.0 5.0 8.0 6.0 1.0 -1.0 -3.0 Marico Group (val) 9.4 13.6 8.0 -1.0 7.0 -3.8 -4.0 -4.0 Marico (Parachute) - (vol) 9.0 8.0 9.0 6.0 9.0 0.0 -2.0 -8.0 Marico (Saffola) - (vol) 10.0 5.0 2.0 18.0 3.0 1.0 11.0 25.0 Marico (VAHO) - (vol) 15.0 5.0 7.0 1.0 7.0 0.0 -7.0 -11.0 Jyothy Lab (vol) 18.5 4.4 6.1 6.0 5.6 8.3 -5.6 -22.0 Jyothy Lab (val) 2.0 2.7 0.2 0.3 2.3 0.0 -0.6 -2.0 Emami (vol) 16.0 -4.0 3.5 0.0 0.0 1.0 -2.0 -19.0 Emami (val) 3.0 0.0 3.5 3.0 2.0 2.4 0.6 -2.0 Dabur (vol) 21.0 8.1 12.4 5.9 9.6 4.8 5.6 -14.6 Dabur (val) 3.7 0.4 2.7 4.3 -0.3 -0.7 0.0 2.3 Colgate (vol) 4.0 7.0 7.0 3.0 4.0 4.0 2.3 -8.0 Colgate (val) 2.5 1.0 -0.6 2.7 2.0 0.6 2.0 1.0 Source: Company, Sharekhan Research Gross margins remained high on a y-o-y basis for few companies Gross Margins (%) Companies Q4FY20 Q3FY20 Q2FY20 Q1FY20 Q4FY19 Q3FY19 Q2FY19 Q1FY19 Q4FY18 HUL 53.7 54.2 54.5 54.0 52.3 53.8 52.0 54.0 52.6 Britannia Industries 39.7 40.9 40.2 40.4 41.2 41.3 40.0 40.0 38.5 Colgate-Palmolive 64.7 65.7 64.7 65.9 64.6 65.1 64.8 65.9 65.7 GCPL 57.7 56.7 56.6 57.1 58.7 56.3 52.8 55.8 59.0 Marico 49.3 49.1 49.6 47.5 49.0 46.3 44.0 42.3 46.6 Zydus Wellness 53.9 52.0 56.7 58.4 59.8 68.0 68.9 68.5 66.7 Dabur India 49.1 50.1 50.8 49.5 49.8 49.3 49.4 49.6 50.7 Emami 65.2 68.2 69.7 64.2 60.8 67.0 68.6 66.3 65.2 Jyothy Laboratories 44.7 47.7 45.6 47.7 44.5 45.4 45.9 47.0 46.7 Source: Company, Sharekhan Research OPM stood higher for most companies under our coverage Companies Q4FY20 Q3FY20 Q2FY20 Q1FY20 Q4FY19 Q3FY19 Q2FY19 Q1FY19 Q4FY18 HUL 22.9 24.9 24.8 26.2 23.3 21.4 21.9 23.7 22.5 Britannia Industries 15.8 16.8 16.1 14.6 15.6 15.9 15.8 15.3 15.6 Colgate-Palmolive 24.5 27.6 26.5 27.6 26.9 28.6 28.2 27.0 28.2 GCPL 22.1 22.7 21.9 19.5 23.6 22.6 18.3 18.1 23.9 Marico 18.9 20.4 19.3 21.3 18.3 19.3 16.0 17.5 17.0 Zydus Wellness 21.4 9.8 6.3 18.0 20.8 25.9 27.9 8.1 25.4 Dabur India 18.9 20.9 22.1 20.1 21.5 20.3 21.2 18.6 23.9 Emami 18.5 32.5 30.1 20.8 24.2 32.5 29.8 20.1 28.1 Jyothy Laboratories 10.5 16.0 17.0 15.9 16.4 16.5 17.1 15.1 17.1 Source: Company, Sharekhan Research July 06, 2020 14 Sector Update Upward/Downward revision in the earnings estimates in Q4FY2020 Target Change in esti- Current Previous Companies Reason Price mates Reco.