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MOSL: CONSUMER 3QFY20 PREVIEW-Persistent volume woes lead to weak earnings outlook

Consumer 3QFY20 PREVIEW: Persistent volume woes lead to weak earnings outlook

 

Weakest EBITDA growth since the quarter before GST implementation  

After eight quarters of continued outperformance, 2QFY20 witnessed rural growth slipping below urban growth, and the trend is likely to continue in 3QFY20 as well. Impact of floods persisted in the early part of 3QFY20 with liquidity concerns and weak rural demand. Also, the weak demand environment saw a rise in competitive intensity in the form of promotions and price-offs. This means that benefits of low material costs is now not expected to be as high as it would have been in a more favorable operating environment. On the other hand, ad-spends and new launches are expected to remain lower than usual as companies await signs of revival.   

 

Aggregate sales for 3QFY20 are likely to grow at 5.7% YoY while EBITDA growth is likely to come in at 7.5%, the lowest since 1QFY18, when demand fell off a cliff in the last month leading up to GST implementation.  PAT growth is expected to be higher at 16.9%, mainly due to the assumption of lower rates post the corporate tax cuts announced in Sep’19. HUVR’s sales growth for 3QFY20 is expected at ~4.3% YoY (with 4% volume growth) while EBITDA growth is forecasted at 9.3% YoY. Boosted by low other income in the base quarter, HUVR’s PAT growth is expected to be up 14.5% YoY. We expect ITC to report 3% cigarette volume growth, driving sales growth of 5.6% YoY and EBITDA growth of 5.7% YoY; its PAT should grow 22.9%, aided by the corporate tax cuts. Tepid operating performance for the quarter is expected from most others, including Britannia, Colgate (expect decline in EBITDA due to higher adspends), Dabur, Emami, GCPL, MRCO, PGHH, Page, and UNSP. We expect UBBL to see a likely YoY decline in EBITDA and PAT. Nestle is expected to report double-digit sales growth and over 20% EBITDA and PAT growth. Tata Global is likely to have outstanding results with high single-digit sales growth, 35.8% EBITDA growth and 56.3% PAT growth.

 

Commodity costs are largely benign, agri inflation increasing moderately

For 3QFY20, PFAD prices grew 33.8% YoY (29.2% sequential growth), while Mentha prices were down 23.4% YoY. Moderate YoY inflation is being witnessed in Wheat/Sugar at 8.6%/4.8%. Barley costs were up 10.9% YoY for the quarter. Tio2 costs declined 6% YoY and were down 3% sequentially. VAM YTD costs declined sharply YoY by 17.4%. After double-digit deflation in 1HFY20, Copra costs grew 3.5% YoY in Oct-Nov’19 while HDPE costs declined 29.3% YoY; Safflower was up 6.0% YoY and LLP costs were down 18.0% YoY.