Buoy­ancy not en­tirely back yet

The home and per­sonal care and foods group is show­ing some vis­i­ble signs of re­vival, though, as growth rate in ag­gre­gate, that is im­prove­ment in both vol­umes and re­al­i­sa­tion, is the high­est seen in the past 10 quar­ters bar­ring 3Q which was helped by base-

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At an ag­gre­gate level, the con­sumer cov­er­age group is ex­pected to re­port a dou­ble-digit growth in rev­enue – over 10.3 per cent – quite sim­i­lar com­pared to the pre­ced­ing quar­ter. Earn­ings growth is also ex­pected to be at mid­teens level: EBITDA over 14.1 per cent, ad­justed profit over 14.5 per cent.

There is, how­ever, a di­ver­gence in per­for­mance be­tween Sta­ples and Dis­cre­tionary with Sta­ples’ rev­enue growth fore­casted to de­cel­er­ate se­quen­tially – 3Q’s per­for­mance was stronger than trend on ac­count of a favourable base that was im­pacted by the cash-crunch; dis­cre­tionary busi­ness’ rev­enue growth, on the other hand, is ex­pected to see a c.3ppt uptick, led pri­mar­ily by Ti­tan which was ad­versely im­pacted by rev­enue-phas­ing in 3Q.

The home and per­sonal care (HPC) and foods group is show­ing some vis­i­ble signs of re­vival, though, as growth rate in ag­gre­gate, that is im­prove­ment in both vol­umes and re­al­i­sa­tion, is the high­est seen in the past 10 quar­ters bar­ring 3Q which was helped by base-ef­fect.

Man­age­ment com­men­taries con­tin­ued to sug­gest that ru­ral de­mand im­prove­ment re­mains a grad­ual process. On the mar­gin front, the sharp in­fla­tion in crude prices – over 19 per cent year on year (YoY) -- has, to some ex­tent, been negated by a fall in prices of palm-oil (-15 per cent YoY) and other food-re­lated in­puts like sugar, wheat, SMP (all down >10 per cent YoY); we ex­pect mar­gin ex­pan­sion to con­tinue, with some mod­er­a­tion, though, on se­quen­tial com­par­i­son.

Rev­enue growth tra­jec­tory quite sim­i­lar ■ on se­quen­tial ba­sis: De­cel­er­a­tion in Sta­ples to be off­set by im­prove­ment in Dis­cre­tionary. We ex­pect our con­sumer cov­er­age group to re­port ag­gre­gate sales, EBITDA and ad­justed net profit growth of 10.3 per cent, 14.1 per cent and 14.5 per cent re­spec­tively – lower ver­sus 10.7 per cent, 18.1 per cent and 18.3 per cent re­ported in 3Q which ben­e­fited from a favourable base, though. As per our fore­casts, rev­enue for HPC and foods com­pa­nies would grow 7.8 per cent YoY in ag­gre­gate – slower ver­sus 10.9 per cent seen in 3Q which ben­e­fited from a favourable comp.

Price-cuts ef­fected to pass on GST ben­e­fits would be mostly off­set by sav­ings in taxes, and growth in net-of-tax rev­enue would be broadly un­af­fected by these changes. Ag­gre­gate EBITDA and net profit for the HPC and foods group are fore­casted to grow 13.6 per cent and 16 per cent dur­ing the quar­ter (ver­sus 21.6 per cent and 23.3 per cent in 3Q with key swing fac­tors be­ing HUL, Dabur, Bri­tan­nia, Col­gate and GSK.

Vol­ume growth for paint com­pa­nies is ex­pected to be sub-dou­ble-digit level – fore­cast­ing 7-8 per cent vol­ume growth – but re­al­i­sa­tion should con­trib­ute a healthy 4-5ppt this time round. While most com­pa­nies have al­luded to pro­gres­sive re­cov­ery in de­mand, HUL’s com­men­tary on ru­ral de­mand has been more bullish ver­sus most oth­ers’. A pick-up in rev­enue growth can be fore­cast for Ti­tan to 14 per cent ver­sus a muted 6.5 per cent in 3Q which was im­pacted by rev­enue phas­ing. For ITC, cig­a­rette vol­umes are likely to de­cline an­other 2 per cent due to the con­tin­ued im­pact of the un­ex­pected sharp tax-hikes under GST and ad­justed profit growth of 6.3 per cent, in­line with the last 6M trend.

GPM ex­pan­sion to mod­er­ate on ris­ing ■ RM costs; ex­pect OPM ex­pan­sion to be broadly in­line with GPM: Ag­gre­gate gross mar­gin for the HPC & Foods cov­er­age group is ex­pected to ex­pand by c.120bps to 52.3 per cent, that is per­cent­age of ‘net’ sales -- our Pro­pri­etary FMCG RM in­dex is up 4.7 per cent YoY; the rise is more mod­er­ate at over 1.4 per cent on quar­ter on quar­ter (QoQ) ba­sis, though. GPM ex­pan­sion in the sec­tor is ex­pected to be led by HUL (+221bps) while on the other hand, GPM would con­tinue to com­press quite sharply for Marico (243bps) on con­tin­ued in­fla­tion in co­pra prices (c.70 per cent YoY dur­ing the quar­ter). As per our fore­casts, growth in SG&A (c.8 per cent) could be a tad higher vs rev­enue; con­se­quently, ex­pan­sion in OPM (+108bps) would be broadly sim­i­lar to that of GPM (+120bps) as far as the HPC & Foods group is con­cerned.

STA­PLES

1) Ba­jaj Corp: We ex­pect 7-8 per cent rev­enue growth largely driven by vol­umes (fore­cast­ing 7 per cent vol­ume growth on a base of 7 per cent de­cline). EBITDA growth to be muted at 1.8 per cent on RM cost pres­sures and higher SG&A spends. 2) Bri­tan­nia: We fore­cast 12 per cent vol­ume growth – quite sim­i­lar ver­sus 3Q’s 13 per cent – these rep­re­sent a sharp im­prove­ment ver­sus 3-6 per cent seen in 1H as com­par­a­tive are now more favourable (muted vol­ume growth of 2 per cent in 3Q and 4Q LY); pric­ing growth ex­pected at 1-2 per cent. Gross mar­gin ex­pected to wit­ness mar­ginal ex­pan­sion (+40bps) while OPM ex­pan­sion is ex­pected higher at 110bps on con­tin­ued con­trol over SG&A (+8.6 per cent YoY ver­sus 12.7 per cent rev­enue growth). 3) We ex­pect healthy re­ported growth from Col­gate – we fore­cast tooth­paste vol­ume at over 5 per cent aided by a be­nign base (vol­umes de­clined 3 per cent in 3Q LY). Con­tin­ued GPM ex­pan­sion cou­pled with op­er­at­ing lever­age ben­e­fit on higher through­put should help drive 233bps OPM ex­pan­sion. 4) Dabur’s rev­enue is ex­pected to grow 6.4 per cent with do­mes­tic growth of 7.2 per cent largely led by vol­umes while in­ter­na­tional growth should re­cover to 4.5 per cent on a be­nign base (in­ter­na­tional busi­ness de­clined by 18 per cent in 4Q LY. OPM is ex­pected to ex­pand 90bps, largely GPM-led. 5) GCPL’s rev­enue growth fore­casted at 6.3 per cent over­all - Do­mes­tic rev­enue is ex­pected to grow 9.2 per cent but In­ter­na­tional growth would be muted (+2.9 per cent) on re­ported ba­sis due to con­tin­ued sub­dued per­for­mance in In­done­sia and cur­rency trans­la­tion losses. We ex­pect healthy EBITDA mar­gin ex­pan­sion (+130bps) which should help drive 12-13 per cent growth in op­er­at­ing profit. 6) We ex­pect GSK Con­sumer to re­port 5 per cent vol­ume growth in 4Q - a sig­nif­i­cant de­cel­er­a­tion cf. 15.6 per cent re­ported in 3Q which was aided by a very favourable base. GPM ex­pan­sion on lower RM costs would aid profit growth. 7) We ex­pect HUL’s vol­ume growth to mod­er­ate to 5 per cent (ver­sus 11 per cent in 3Q) as the base is no more as favourable. Five per cent vol­ume growth in 4Q rep­re­sents a two-year vol­ume CAGR of 4.4 per cent – an im­prove­ment ver­sus two-year CAGR of 13 per cent re­ported in the past 9M. We ex­pect 3Q rev­enue to grow 6.1 per cent (net-of-tax ba­sis). OPM is fore­cast to ex­pand 140bps on the back of GPM ex­pan­sion of 220bps. 8) ITC’s cig­a­rette vol­umes ex­pected to de­cline an­other 2 per cent (ver­sus 5-7 per cent de­cline in past 6M) – a re­sult of the sharp un­ex­pected in­crease in cig­a­rette taxes post GST roll­out. We ex­pect cig­a­rette EBIT to grow c.6 per cent - lower ver­sus 3Q’s 7.8 per cent due to lower pric­ing growth, but bet­ter ver­sus 2Q’s 2.3 per cent. FMCG sales ex­pected is to grow 11 per cent with good growth in EBIT (we fore­cast Rs 88.1 crore for the quar­ter). 9) Marico’s rev­enue is fore­casted to grow 13 per cent mostly pric­ing-led Para­chute rigids and Saf­fola vol­umes pro­jected to be flat­tish (Para­chute vol­umes grew 15 per cent in the base pe­riod), Value-added Hair-oils vol­umes +7 per cent. Pric­ing growth to be led by steep price-hikes in Para­chute (+31 per cent YoY) which are, how­ever, still in­suf­fi­cient to re­coup the >70 per cent in­fla­tion in co­pra costs. We ex­pect gross mar­gin to con­tinue to com­press but SG&A ef­fi­cien­cies and lower tax rate would aid bot­tom­line growth. 10) We ex­pect TGB to re­port c.1 per cent rev­enue growth as high-sin­gle digit growth in do­mes­tic tea seg­ment would be off­set by de­cline in In­ter­na­tional tea and cof­fee. Lower Sell­ing, gen­eral and ad­min­is­tra­tive ex­pense or SG&A (down 8 per cent post di­vest­ment of some of the loss-mak­ing busi­nesses) should help drive a 31 per cent growth in op­er­at­ing profit. 11) Varun Bev­er­ages’ do­mes­tic vol­ume growth is ex­pected to sus­tain at dou­ble-digit level aided by mid-sin­gle digit growth in or­ganic busi­ness plus ac­qui­si­tions. With sugar prices down quite sharply, we ex­pect its GPM to ex­pand 165bps and drive 22% growth in EBITDA. 12) We fore­cast Av­enue Su­per­marts’

in­trin­sic sales growth at 26.5 per cent – re­ported growth to be lower at c.22 per cent due to GST ac­count­ing im­pact – aided by aided by a 10-11 per cent ex­pan­sion in re­tail space and SSSG. EBITDA mar­gin to ex­pand 140bps on 67bps GPM ex­pan­sion plus pos­i­tive op­er­at­ing lever­age. Net profit ex­pected to nearly dou­ble (+91 per cent) on the back of pos­i­tive fi­nan­cial lever­age, slower growth in de­pre­ci­a­tion and slightly lower tax rate. 13) Ex­pect­ing SH Kelkar’s do­mes­tic fra­grance growth to re­main healthy at 18 per cent while In­ter­na­tional Fra­grance seg­ment would also grow in dou­ble-digit aided by a favourable base. Flavours busi­ness ex­pected to re­main sub­dued due to a tough com­par­a­tive.

DISCRETIONARIES

14) ABFRL: We ex­pect Madura’s rev­enue to grow 6.2 per cent while Pan­taloons’ growth is fore­cast at c.15 per cent (cf. c.27 per cent growth in re­tail space on ac­count of lower ef­fi­cien­cies of newly opened stores). Over­all EBITDA is ex­pected to grow 26 per cent. 15) We fore­cast vol­ume growth for Paint com­pa­nies at c.7 per cent. GPM com­pres­sion for Asian Paints fore­casted at c.170bps while we ex­pect the same to be c.100bps for Berger. We ex­pect a healthy c.20 per cent growth in EBITDA for Asian Paints and 11 per cent for Berger. 16) Ti­tan’s jew­ellery re­tail sales grew at mid-teens level in 4Q. We fore­cast 1617 per cent growth in sales ver­sus 45 per cent in 1HFY18 and mere 8 per cent in 3Q. We ex­pect 160bps im­prove­ment in Jew­ellery EBIT mar­gin and con­se­quently a 35 per cent growth in Jew­ellery EBIT. Watches rev­enue is fore­cast to grow by 8 per cent while EBIT would be 5.5x LY’s level as base mar­gin was se­verely de­pressed. 17) We ex­pect Westlife to re­port an­other strong quar­ter with re­ported SSSG of c.25 per cent which would drive rev­enue higher by 30 per cent. On in­trin­sic ba­sis, this would trans­late to 9-10 per cent SSSG and to­tal rev­enue growth of 14-15 per cent. Cost ef­fi­cien­cies and mix ben­e­fit from McCafe is ex­pected to drive a healthy 220bps op­er­at­ing mar­gin ex­pan­sion and near­dou­bling of EBITDA as a con­se­quence.

—Source: JM Fi­nan­cial

Ag­gre­gate gross mar­gin for the home and per­sonal care and foods cov­er­age group is ex­pected to ex­pand by 120bps to 52.3 per cent

Ag­gre­gate gross mar­gin for the home and per­sonal care and foods cov­er­age group is ex­pected to ex­pand by 120bps to 52.3 per cent

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