Mr. Varun Lohchab, Head Institutional Research, HDFC Securities & Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities
Aggregate revenue/EBITDA to grow by 8/7%: Our FMCG coverage universe is expected to deliver growth of 8/7% YoY in revenue/ EBITDA (ex-GSK, 6/6%) in 3QFY21 (vs. 5/8% in 3QFY20 and 7/5% in 2QFY21). Recovery in demand continued across segments as easing of restrictions lifted sentiments. Discretionary categories like personal care, OOH, liquor, and tobacco, which were laggards in 1HFY21, saw healthy recovery. However, growth for categories like packaged foods, essentials and hygiene segments witnessed moderation, while growth in healthcare continued to remain healthy. Despite the reduced growth divergence within categories, the divergence between urban and rural recovery continued to remain significant. Rural demand was the key driver of growth across channels and categories. However, we expect the divergence in demand to continue normalising and urban to bounce back, going forward. Categories like hair care and discretionary personal care saw a recovery, which was driven primarily by the value segment. While MT improved QoQ, growth momentum sustained for GT and e-comm as consumers remained wary of venturing into large stores.
Discretionary categories witness demand revival: Liquor, cigarettes and OOH categories saw a sustained recovery in 3QFY21. Reopening of pubs and bars in most states during 3QFY21 drove a recovery in on-premise consumption. Although the recovery was gradual, off-premise is expected to support growth in 2HFY21. Similarly, the loss of dine-in sales also lowered as sentiments improved and consumers began venturing out. However, it is not expected to return to pre-COVID level in 3QFY21 and delivery will be the key driver of growth. OOH, categories like Juices saw a gradual recovery, although in-home consumption is expected to drive growth in Juices.
Margins to remain at a healthy level: Commodity inflation was higher than 2QFY21, particularly for palm oil and crude derivatives. Copra saw marginal inflation, while ENA and Mentha price remains tepid. We expect EBITDA margin expansion, driven by cost-saving initiatives, gradual restoring of overhead costs, and oplev. However, product mix in discretionary categories is expected to be adverse as value segments have been key drivers of growth. Companies have also resumed A&P investments, and we expect growth in A&P spend vs decline in 1HFY21. We expect EBITDA margin expansion for Nestle, Britannia, Dabur, GCPL, Marico, Colgate, Jubilant, Emami, Radico and margin contraction for ITC and UNSP.
3QFY21 Outliers: Britannia, Nestle, Emami and Radico.
Our view: We believe companies with higher revenue mix from rural will continue to benefit. Ecomm will continue to gain pace as consumers remain wary about venturing into crowded MT stores. Hence, companies with a strong presence and diversified offerings in e-comm will do well. We expect recovery in categories like Liquor and QSR to continue to be strong, driven by easing of restrictions and strengthening demand for home delivery. FMCG sector has underperformed Nifty by ~20% in the past six months, and we see a balanced risk-reward for the FMCG sector for FY22/FY23 with earnings led stock returns.
We have a BUY rating on ITC, ADD rating on Radico, UNSP, Colgate, Dabur, Marico and GCPL.