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Q3FY21 Result Preview - FMCG - ICICI Direct

Posted On: 2021-01-12 03:22:02 (Time Zone: Arizona, USA)

With the strong demand conditions backed by festive season demand & increasing out of home activity, FMCG companies are expected to witness stronger growth in the December quarter. We believe 'at-home' consumption for branded packaged food has helped companies to accelerate the unbranded to branded consumption shift. Moreover, we believe increasing out of home activity has resulted in stronger growth for discretionary products as well. Our FMCG coverage universe is likely to witness 12.1% revenue growth (ex-ITC 16.4% increase) with strong growth in ITC (FMCG), Nestlé, Dabur, Marico, Tata Consumer Products (TCPL) & Zydus wellness. Moreover, with increase in some commodity prices (palm oil, tea), companies have taken selective price increase, which would have also contributed to growth. Aggressive new products in H1FY21 have been contributing 1-4% to sales for most FMCG companies. ITC FMCG business is expected to continue its growth momentum with higher growth in packaged foods categories. We believe Dabur would witness stronger growth in health supplement portfolio (Chyawanprash & Honey) given higher winter demand for immunity boosting products. Moreover, entire Ayurveda range of products are gaining traction for company. Marico has seen double digit volume growth in Q3 with continued traction in Saffola & foods portfolio. The growth in HUL is largely contribute by acquired businesses but mature categories (detergents, personal care) are likely to see muted sales. We expect higher 13% sales in Nestlé that is likely to be aided by higher primary sales (distribution stocking up). With increased health awareness & stronger distribution network, Zydus is likely to see 11% rise in gross sales but due to expiry of tax benefits, net sales is likely to grow 7%. With price hikes in tea & continued consumption shift from unbranded to branded, TCPL is expected to continue the growth momentum with 13.9% (like to like) increase in sales. We expected cigarettes companies (ITC, VST) to witness 6-7% YoY volume decline (Q2FY21 -12-14% volume decline) with slower recovery.

Stable operating margins despite adverse RM price movement

Our coverage universe is (ex-ITC) is expected to see 20 bps increase in operating margins despite high inflation in some of the commodities. Though tea prices have cooled off from 70-80% YoY higher in Q2FY21 to 30-40% higher in Q3FY21, it would impact gross margins for HUL & Tata Consumer Products given only partial price hikes have been taken in the last six months to pass on this price inflation. Similarly, palm oil prices (average) in Q3FY21 has been up 35% compared to Q3FY20. This would also partially impact FMCG company's gross margins but bigger impact would be felt in Q4 and price hikes in many categories are imminent. FMCG companies have been able to rationalise their overhead & advertisement spends to offset adverse raw material price movement. Net profit (ex-ITC) is expected to witness strong 23.1% growth.

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Source: Equity Bulls

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