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FMCG Sector Update Report - Divergence narrows; refocus on core - HDFC Securities

Posted On: 2021-02-22 05:00:21 (Time Zone: Arizona, USA)


Mr. Varun Lohchab, Head Institutional Research, HDFC Securities & Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

The HSIE Consumer-Index sales indicated a sustained recovery with growth of 7% YoY in 3QFY21 (+5% in 3QFY20, +1% in 2QFY21) as easing of restrictions and increased mobility of consumers boosted OOH and discretionary demand. The three-year CAGR (which normalises all base adjustments over the past three years) in 3QFY21 was +8% YoY (+10% in 3QFY20, +7% in 2QFY21), supported by the healthy growth of the past two years. Categories that outperformed our index in 3QFY21 are OTC FMCG, Paints, Hair care, F&B, Oral Care and Personal care, clocking 27/24/12/11/11/11% YoY growth. QSR, Cigarettes, Footwear, Liquor and Dairy categories were impacted the most, contracting by 10/6/8/3/2% YoY. The divergence between the underperforming and outperforming categories narrowed sequentially as growth in essentials moderated and OOH and discretionary categories returned to a growth trajectory. Companies are refocusing on core strengths (product innovation, distribution expansion, cost and capital efficiencies). In our recent thematic (Opportunity in Adversity- A Comparative Scorecard), we shared the company-wise strategic initiatives of the past five years to drive core.

Within the FMCG universe, Marico, Dabur, Emami, GCPL, and Nestle outperformed, clocking revenue growth of 16/16/15/11/10% YoY. Growth in essential categories continued to moderate as easing of restrictions led to reduced fear among consumers. Increased mobility and improved sentiment supported discretionary demand, which returned to a growth trajectory. Rural growth remained ahead of urban, although most companies saw strong recovery in urban markets. We expect urban and discretionary demand to drive growth over the next few months. However, we remain cautious and selective within the sector due to an unfavourable medium-term risk-reward, given only modest absolute growth relative to expectations and valuations. Despite defensive characteristics, we are underweight on the sector in our model portfolio. We recommend BUY on ITC and ADD on Dabur, GCPL, Marico, UNSP, Colgate and Radico.

Essentials decelerated, Healthcare sustained: Growth for essential and hygiene categories continued to moderate sequentially. Easing of restrictions, reduced fear among consumers, and lower pantry loading led to growth moderation. Increased economic activity as well as mobility led to higher instances of going out, impacting in-home consumption. Continued recovery in outside eating also impacted growth of packaged foods. However, demand for categories like immunity-boosting supplements and OTC healthcare remained elevated as awareness around health and hygiene remained high.

Discretionary and OOH bounce back: Discretionary and OOH witnessed consistent sequential recovery as more instances of going out improved demand. Categories like QSR saw sequential improvement in demand as consumers were willing to eat outside. Cigarettes' recovery continued with an improved product mix, although the category remained below FY20 level. Liquor companies witnessed recovery due to increased home consumption and reopening of pubs.

E-commerce and rural leading the way: E-commerce continued to grow ahead of all other channels, despite strong growth in GT and recovery in MT. Most companies significantly improved in e-comm revenue salience (2x-3x mix in FY21). The recovery across channels was mainly driven by semi-urban and rural markets while that in urban markets was gradual. However, urban returned to growth for most companies and the sequential recovery was encouraging.

Near-term outlook: Consumer offtake has indicated rapid improvement in demand and mean-reversion in category growth could sustain. Packaged foods and Hygiene will remain soft while OOH, discretionary categories and urban markets are expected to be the incremental drivers for the next few quarters. Success of new launches, distribution reach, price hike and improvement in international business will be the key monitorable.


Source: Equity Bulls

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