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MOSL: CONSUMER 2QFY20 PREVIEW-Amidst woes, weak earnings likely in 2QFY20-Rural growth slips below urban after earlier sustained outperformance

Consumer 2QFY20 PREVIEW: Amidst woes, weak earnings likely in 2QFY20; Rural growth slips below urban after earlier sustained outperformance

 

Bleakest operating outlook since the quarter before GST implementation  

After eight quarters of continued outperformance, rural growth slipped below urban growth for several consumer staple companies in 2QFY20. Additionally, the on-going liquidity concerns, succession of drought and floods during the monsoon season in large parts of the country, and muted initial response to the festive season added to the woes. The operating environment in 2QFY20 was perhaps the most somber since the Jun’17 quarter (1QFY18), which had witnessed massive down-stocking ahead of the GST implementation from Jul’17. In such a weak demand environment, competitive intensity is increasing in the form of promotions and price-offs, which means that benefits of the low material costs will be nowhere as high as it would have been in a more favorable operating environment. On the other hand, adspends and new launches will continue to be lower than usual as companies await signs of revival.  

 Aggregate sales for 2QFY20 are likely to grow at 8.4% YoY while EBITDA/PAT growth is likely to come in at 10.2%/7.4%. We are not assuming any benefits of the corporate tax reduction in 2QFY20 as many companies would have paid advance tax. HUVR’s sales growth for 2QFY20 is expected at ~7.0% YoY (with 6% volume growth). While EBITDA growth is likely to be 14.4% YoY, very high other income in base quarter would result in Adj. PAT growth of 6.6% YoY. We expect ITC to report 2% cigarette volume growth, driving sales growth of 6.7% YoY and PAT growth of 7.9% YoY. Tepid operating performance for the quarter is expected from Britannia Colgate, Dabur, Emami, GSK Consumer, Nestle, PGHH and Page. We expect UBBL and UNSP to likely see a sharp YoY decline in EBITDA and PAT, mainly due to very high base of margins in 2QFY19. Marico is expected to report 9% sales growth and EBITDA/PAT growth between 15-20%. APNT and PIDI are likely to report sales growth between 13-15% and EBITDA growth above 20%, due to better-than-peer volume growth and soft commodity cost environment.