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Consumer Goods Q4FY18 Preview - Base normalises; gradual pickup in demand

Consumer goods – Volume growth to moderate as base normalises

FMCG players will continue to benefit from GST-led rate cuts and a gradual recovery in demand; however, we estimate lower volume growth compared to 3QFY18, as demonetisation-led disruption had receded in Q4FY17. We expect the FMCG sector (our coverage universe) to report mid to high single digit volume growth in Q4FY18. While prices of crude and crude-linked commodities (LAB,PE,LLP) continue to see uptick, which could impact qoq gross margins in the sector, on a yoy basis, favourable price/mix and moderation in palm oil prices (down 21% yoy) could provide the necessary boost to 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 benefit food players like Nestle, in our view. With channel and GST-led disruption behind us, we expect HPC players to reinvest benefit from gross margins behind core brands and new launches, resulting in a gradual step up in advertising spends. However, benefit of operating leverage, GST-led savings as well as focus on driving cost efficiencies could result aid yoy EBITDA margins in Q4FY18. Overall, for stocks within our coverage universe (ex-ITC), we estimate sales, EBITDA and PAT growth of 10%, 15% and 16% yoy, respectively, for Q4FY18. Baring Marico (where profitability is likely to be impacted most due to steep inflation in copra prices), we expect double-digit earnings growth within our consumer staples coverage universe in Q4FY18; HUL and Nestle are expected to outperform with strong 22.5% and 27% yoy earnings growth, respectively, during the quarter.

Alcoholic beverages – Restocking in key states to aid volume growth

We expect comparable improvement in volume growth for IMFL players on 1) a favourable base, 2) up-stocking in Haryana and 3) receding impact of highway ban/GST-led disruption. IMFL players should see their gross margins continue to expand on improved mix, price hikes and favourable input cost scenario. For beer companies, while disruption continues in West Bengal due to lack of clarity in pricing, primary sales in Maharashtra (which were impacted for almost two months in December) came back on track due to channel restocking, which we believe will drive overall volume growth and margins. For United Spirits, we expect volumes to decline 5% yoy, lower compared to 3QFY18. Restocking in Haryana and partial anniversarisation of operating model changes are responsible for the improvement. Further, benefits of mix, price hikes and lower cost structure will result in 211bps EBITDA margin improvement & PBT (bei) growth of 52% yoy. For United Breweries, we have factored in 20% yoy revenue growth with a volume growth of 15% led by normalisation of business in Maharashtra, which coupled with operating leverage would drive 62.5% yoy EBITDA growth. We expect lower interest cost and depreciation expense to drive 291% yoy growth in PBT (adjusted for Rs160mn impairment in 4QFY17).

Retail – A mixed bag

We expect a 3% yoy Like to like (LTL) growth for Shoppers Stop and estimate 106bp margin improvement on overhead cost savings and superior product mix. For Titan, we have factored 15%/10% yoy revenue growth in jewellery/watches division, respectively. Though margins will be stable in jewellery, a low base will aid 760bp yoy improvement in EBIT margin for watches, thereby driving overall profitability. 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 33% yoy PAT growth, an effect of strong revenue growth and lower interest costs.

Paints – Volume growth stable but margin pressure due to higher input costs

We expect Q4FY18 volume growth in paints to sustain at Q3FY18 levels on stable demand. We have factored in mid-single digit to low double-digit decorative volume growth across paint companies. Benefit of price hikes in March 2017 (3%), May 2017 (2.7%) and March 2018 (1.5%) will continue propel overall revenue growth. While inflation in input costs (TiO2, solvents, monomers) will continue to impact gross margins, benefit from operating leverage and control over costs will aid EBITDA margins during the quarter. We expect Asian Paints to report 12% yoy revenue growth, led by mid-single digit decorative volume growth. We expect Berger paints and Kansai Nerolac to report 14.5% yoy revenue growth led by continued volume outperformance (low double-digit volume growth) in the decorative segment and improved pricing in the industrial segment.