Aggregate revenue/EBITDA to grow by 11/10%: Our FMCG coverage universe is expected to deliver growth of 11/10% YoY in revenue/EBITDA in Q2FY22 (vs. 7/5% YoY in Q2FY21 and 24/27% in Q1FY22). The reported numbers for Q2FY22 are now on normalised base across most of the companies with some disruptions seen in the initial part of Q2FY22. Consumer sentiment along with mobility improved during the quarter. Rural demand remained resilient. The aggregate demand in Q2FY22 was overall good for the companies, especially for their domestic businesses. Demand for discretionary categories saw recovery across segments.
Two-year CAGR: Our coverage universe is expected to deliver 7/6% 2-year revenue and EBITDA CAGRs in Q2FY22. Companies that are expected to outperform on two-year revenue CAGR will be Marico, Radico, Emami, and Dabur with 14/10/10/10% YoY CAGRs. On two-year EBITDA CAGR, Britannia, Colgate, Radico and Emami are expected to outperform, clocking 17/15/15/15% YoY CAGRs.
Gross margins pressure in Q2FY22: Commodity inflation has sustained for the past 3-4 quarters, impacting gross margin as companies have taken calibrated price hikes. FY21 EBITDA margin expansion was largely on account of steep cost controls. We believe FY22 margin expansion will be limited (as compared to FY21) although companies have been passing the raw material pressure. We believe A&P spend will still be lower in FY22 than the FY20 level. Q2FY22 gross margin will remain under pressure for most companies as price hikes were gradual. Discretionary companies will be able to expand EBITDA margins, owing to favourable bases, but staples will witness EBITDA margin pressures.
Q2FY22 Outliers: Radico, Marico and GCPL.
Our view: With increased mobility and optimistic outlook on the consumer confidence index, we expect the companies to continue with their growth momentum into H2FY22. Further, rural demand continues to be resilient as a result of good crop, MSP support, and normal monsoon. Success of launches, distribution reach, price hikes, and improvement in international business will be the key monitorables. Companies have been refocusing on core strengths (product innovation, distribution expansion, cost and capital efficiencies) since H2FY21.
We remain cautious and selective within the sector due to an unfavourable medium-term risk-reward, given absolute growth has been modest relative to expectations and valuations. Despite defensive characteristics, we are underweight on the sector in our model portfolio. Within consumer, we prefer staples over discretionary, owing to high expectations built up in discretionary stocks. We have rolled forward our TP to Sep-23 EPS for our coverage universe. We have increased our target P/E multiple for Marico to 45x (earlier 42x), for UNSP to 50x (earlier 45x) and for Radico to 38x (earlier 30x). Please find included the table for changes in our coverage universe with respect to estimates, target multiples, changes in target prices and ratings. We have a BUY rating on ITC and ADD ratings on Dabur, GCPL, UNSP, Colgate, Marico and Radico.