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Consumer Goods Q1FY19 preview - Strong volumes on a favourable base

Consumer goods – A favourable base and demand uptick to drive volumes

We expect volume trajectory of our FMCG coverage universe to see further uptick in 1QFY19, aided by a) pick up in underlying demand, especially driven by improvement in rural markets and b) a favourable base, given the destocking at trade channels prior to GST implementation in 1QFY18. We estimate high single to double-digit volume growth within the FMCG sector (our coverage universe) in Q1FY19. In terms of input costs, prices of crude and crude-linked commodities (LAB, PE, LLP) continue to inch up, which could impact gross margins in the sector sequentially. However, a favourable price/mix and moderation in palm oil prices (down ~14% yoy) will curtail the impact on gross margins for HPC players. While inflation in agri-commodities (copra) could adversely impact Marico’s gross margins, moderation in prices of milk and skimmed milk powder (SMP) will continue to benefit food players like Nestle, in our view. We do not expect advertising spends to moderate, despite the inflationary trend in input costs, driven by improving demand and likely price increases. Pace of new launches too is expected to increase, as we expect investments behind core brands to continue. However, benefit of operating leverage, GST-led savings as well as focus on cost efficiencies could result yoy expansion in EBITDA margins in Q1FY19. For stocks within our coverage (ex-ITC), we estimate sales, EBITDA and PAT growth of 11%, 20% and 18% yoy, respectively, for Q1FY19. Baring Dabur and ITC, we estimate double-digit earnings growth within our consumer staples universe in Q1FY19; Nestle, Jyothy Labs and Godrej Consumer are expected to outperform with strong 43%, 26% and 20% yoy earnings growth, respectively, during the quarter.

Alcoholic beverages – A favourable base and price hike to drive revenue growth

We expect volume growth for IMFL players to remain strong on a favourable base (volume decline in 1QFY18 on account of highway ban). IMFL players should continue to see gross margin expansion on improved mix, price hikes and a favourable input cost scenario. For beer companies, while the change in route to market in West Bengal and Uttar Pradesh will continue to impact in the current quarter, a favourable base (given the significant impact of highway ban on volumes in key markets like Maharashtra in 1QFY18) will drive overall volume growth and margins, in our view. We estimate volume growth of 12% yoy in United Spirits, aided by a favourable base. Further, benefits of mix, price hikes and lower cost structure will result in 315bps EBITDA margin improvement, which coupled with lower interest cost will drive PAT growth of 92% yoy. For United Breweries, we have factored in 16% yoy revenue growth with 12% volume growth on a favourable base and normalisation of business in Maharashtra. However, margin expansion looks unlikely, considering higher input costs and increase in other expenses (on a low base). We have factored in flat EBITDA margins and expect lower interest cost to drive 19.6% yoy growth in PAT.

Retail – Pre GST sales in the base to impact revenue growth in Q1FY19

We expect a 2% decline in like-to-like (LTL) revenues for Shoppers Stop, impacted by a high base (20% SSSG in 1QFY18). However, improved mix and cost control should result in 28% yoy EBITDA growth with 105bps yoy expansion in margins. Titan’s Jewellery division could see muted performance due to weak consumer demand and an unfavourable base. As a result, we have factored in mere 1.5% yoy growth in revenue for Titan with 9% yoy growth in PAT in Q1FY19. Our estimates assume flat sales in the jewellery division with 80bps yoy EBIT margin improvement, aided by improved mix. Strong traction in demand across categories and benefit of store refurbishments will drive 30%+ growth in the retail division for Shankara Building products, in our view. Further, we have factored 36% yoy growth in PAT, boosted by estimated strong revenue growth and lower interest costs.

Paints – Double-digit volumes in decorative segment to drive revenue growth

We expect double-digit volume growth for paint companies (within our universe) in the decorative segment on a weak base (due to pre-GST destocking in 1QFY18). Volume growth coupled with price hikes in Mar 2018 (1.4%) and May 2018 (2.0%) will continue to propel overall revenues. While input costs (solvents, monomers) remain firm, benefits from price hikes will curtail the impact on gross margins. Moreover, benefits from operating leverage and cost control will aid EBITDA margins during the quarter. We expect Asian Paints to report 16% yoy revenue growth, led by double-digit (12%) volume growth in the decorative segment. Berger Paints and Kansai Nerolac too are expected to report 17% and 16% yoy revenue growth, respectively, on continued volume outperformance (double-digit growth) in the decorative segment.