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Consumer Goods Q3FY19 preview - Stable demand trends with few outliers

Consumer goods –  A steady quarter with a high base

FMCG companies started FY19 on a healthy note, with an uptick in volume growth in 1QFY19, aided by pick up in underlying demand and a favourable base. 2QFY19, however, saw some moderation in volume growth on account of restocking impact in the base. Going into 3Q, the demand trends remain stable and benefit of festive season will support the volume growth in the quarter. However, with the base normalising (double-digit volume growth in 3QFY18 for all the staples companies baring ITC/Marico), we could see slight moderation and as a result, factor in mid-to-high single-digit volume growth (5-9%) within our coverage universe. For the HPC players, higher crude and crude-linked commodities (LAB, PE, LLP) prices will impact yoy gross margins, partially offset by selective price hikes, focus on premiumisation and benign palm oil prices (down ~26% yoy). Agri commodities like copra have seen price moderation (down 19% yoy), which should aid Marico’s gross margins. Also, benign 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 new product launches and the festive season during the quarter. However, operating leverage benefits and focus on cost efficiencies should aid EBITDA margins and PAT growth of companies within our universe. Ex-ITC, we estimate sales, EBITDA and PAT growth of 10%, 14.5%, and 15% yoy, respectively, for our coverage in Q3FY19. We expect HUL, Nestle & Dabur to lead the staples pack with high single-digit volume growth, while ITC’s cigarette volumes are expected to remain strong on a favourable base. Overall, we expect Nestle and HUL to outperform with strong 19% yoy earnings growth for each, during the quarter.

Alcoholic beverages –  Healthy volume and margin expansion to drive earnings growth

We expect volume trends for alcoholic beverage players to remain healthy, led by a stable demand and regulatory regime. We estimate 7% yoy volume growth for United Spirits, aided by double-digit volume growth in Prestige & Above segment. A better price/mix, productivity initiatives, and leverage benefit will drive 38% yoy EBITDA growth. Lower interest cost would boost PAT growth to 48% yoy. For United Breweries, we have factored in 14% volume growth, led by healthy performance in key markets, especially Maharashtra where sales were impacted for 2 months in 3QFY18, due to lack of clarity on pricing due to excise duty hike. Favourable state/product mix and better utilisation will aid gross margins. Further, operating leverage, focus on cost efficiencies and lower interest cost should drive 31%/79% yoy EBITDA/PAT growth, respectively, in Q3.

Retail – Festive demand to drive growth for Jewellery/Fashion retail segment

Strong festive season should drive ~7% LTL sales growth for Shoppers Stop, which coupled with improved mix, leverage benefit and lower interest cost should result in 20%/24% yoy EBITDA/PAT growth, respectively. Titan’s jewellery division is likely to see strong SSSG-driven revenue growth, led by continued market share gains and festive season demand. Watch & Eyewear growth remains healthy while margins in the watch segment are expected to be subdued owing to high A&P spends. We have factored in 28% revenue growth (30% sales growth in jewellery business) and EBITDA/PAT growth of 31%/32% yoy, respectively, for 3QFY19. For Shankara Building Products, we expect retail SSSG to moderate and factor in 12% revenue growth for the retail segment while channel/enterprise revenues should remain weak, owing to lower credit business. We estimate weak margins (200bps decline) due to focus on value proposition in retail, lower processing margins, which coupled with  higher interest costs, will impact overall profitability during the quarter.

Paints – Strong uptick in decorative volume growth & price hikes to drive earnings

We expect double-digit volume growth for paint companies in the decorative segment, aided by a stable demand environment, festive season, as well as benefit of recent cut in GST rate for paints.  Further, price hikes in Mar 2018 (1.4%), May 2018 (2.0%), Oct (2.5%) and Dec 2018 (1.75%) will continue to propel overall revenue growth. Gross margins to improve qoq, but margin pressure to remain yoy, due to higher crude prices and rupee depreciation, partially offset by price hike benefits. We expect Asian Paints to report 14% yoy revenue growth, led by double-digit volume growth in the decorative segment. For Berger Paints and Kansai Nerolac (KNPL), we expect 17.7% and 15% yoy revenue growth, respectively, on continued volume outperformance in the decorative segment. While for APNT/Berger we expect PAT growth of 10%, KNPL PAT growth is likely to be lower at 2% yoy due to margin pressures in the industrial business.