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MOSL: CONSUMER | 2QFY23 PREVIEW: Discretionary demand strong; rural recovery uncertain

.  Consumer | 2QFY23 PREVIEW: Discretionary demand strong; rural recovery uncertain

We expect 2QFY23 to report strong cumulative growth numbers – +16.9% on topline, +13.8% on EBITDA, and +13.2% on PAT – for the 19 consumer companies under our coverage universe. Three-year sales/EBITDA/PAT CAGR is 12.8%/9.1%/5.3%, respectively. Sales growth in 2QFY23 will largely be led by price hikes as volumes for most categories remain negatively impacted by grammage reduction, high CPI inflation, and a sustained slowdown in rural demand. However, the prices of key commodities such as crude and palm oil have eased in the recent weeks, but they are unlikely to benefit margins in 2QFY23 as the decline came in only towards the end of the quarter. We expect companies to take sharp price cuts to pass on the benefits of lower input costs to consumers and boost volumes in 2HFY23. While the monsoon was above its long-term average (LTA) overall, the East and North-East/North-West parts of India received lesser rainfall (17%/1% below their LTA), suggesting that rural recovery in these regions may be delayed. The area for Kharif sowing was nearly in line with LTAs and companies are hopeful of a rural recovery post-harvest.

Discretionary portfolio to witness better demand than Staples

Among the large companies, we expect APNT to report 30% YoY sales growth on the back of strong demand (12% domestic decorative volume growth) and 99%/107% EBITDA/PAT growth, respectively. We expect a healthy quarter for Staples, driven by premiumisation in urban India; however, rural demand continues to be lackluster. Moreover, higher input costs are also expected to affect the margins. For HUVR, we expect YoY sales/EBITDA/adj. PAT growth of 17.0%/10.9%/11.4%, respectively. HUVR’s volume growth of 5% is likely to be the best among staples peers under our coverage on a like-to-like basis. ITC is likely to post YoY sales/EBITDA/adj. PAT growth of 24.2%/16.1%/14.1%, respectively, backed by healthy cigarette demand (three-year average volume CAGR of ~3%), full resumption of travel benefiting hotels and higher realizations in paper & paperboards business. GCPL is expected to report revenue growth of 11% with EBITDA margin of 17.5% and is the only large company to have sequential gross margin improvement. Among the Alcobev players, UBBL is projected to deliver robust sales performance on a weak base while UNSP is expected to report flattish sales YoY. However, earnings growth is likely to be lackluster for both owing to steep increase in input costs. Among other discretionaries, VBL, INDIGOPN, and PIDI are likely to report strong YoY revenue growth.

 

Key input costs move southwards

Overall inflation in the commodity basket has been 12.6% YoY, while it has moderated 6.7% sequentially in 2QFY23. Barring few commodities such as liquid paraffin, wheat, tea, maize and glass, all other commodities have seen a sequential decline in prices. Key commodities such as crude and palm oil have seen a sequential correction of 12.2% and 38%, respectively (34% and 59%, respectively, from its recent highs). Companies were compelled to pass on a significant part of the input cost inflation to consumers with price hikes taken during 4QFY22 and 1QFY23; however, with the recent correction in the prices, we expect the benefits will be quickly passed on to consumers. Even so, gross margins are likely to remain under pressure, as the impact of lower input costs will notably flow through only in 2HFY23. HDPE/LLP costs – which affect packaging/hair oil companies adversely – were on an increasing trend until Jun’22/Jul’22. VAM prices had softened in 2QFY23, down 6.6%/24.6% YoY/QoQ. This is likely to positively impact PIDI’s gross margins in 2HYFY23. The correction in palm oil prices is likely to favor HUVR, GCPL, and food companies (though to a lesser extent) in 2HFY23 if prices remain at these levels. Among other agri commodities, barley price (INR2,989/quintal) has remained flat YoY as well as QoQ; however, it is near its all-time high (INR3,250/quintal).