4QFY20 Preview of FMCG & Alco Bev - HDFC Securities

4QFY20 Preview

Impact of Covid-19: The impact from Covid-19 on the FMCG sector will be sharper on revenues for cos in 4Q, despite many essential categories have witnessed pre-buying at offtake level in Mar. Lockdown has impacted transportations and channel filling opportunities for the quarter. Trade inventory has reduced for most categories. Lockdown of the last 12 days will impact revenues by 13-15% for the qtr for most cos. Channel filling benefits will add to FY21 revenues (~3%).

Weak demand continued: Our FMCG coverage universe is expected to deliver -3/-1% YoY revenue/Like-Like EBITDA growth in 3QFY20 (vs. 9/8% in 4QFY19 and 5/8% in 3QFY20). Broader economic slowdown continued to impact FMCG growth in Jan and Feb, led by weak rural growth. Few categories witnessed downtrading, and cos introduced LUPs across portfolio to drive revenues.

RM inflation remains benign: The overall crude-led RM basket has seen benign inflation, which helped cos improve GMs. However, Copra has seen ~5% inflation in 4QFY20. ENA saw a ~4% fall from its peak in Oct/Nov 2019, which should ease the pressure on liquor cos. Cos are rationalizing A&P costs and overheads to support margins.

4QFY20 Outliers: HUL and Radico Khaitan

Recommendation: We believe cos which have a higher revenue mix from essential commodities will benefit more in the near term (4QFY20 and 1QFY21). In turbulent times, cos with strong distribution, product diversification and superior execution, are expected to gain further market share. Bolt-on acquisitions are likely to gain pace as small players find it difficult to sustain themselves. While sector doesn't offer value bargains yet, we see better opportunities in select stocks where business models are strong and valuations have normalised in the last 12-18 months (e.g. ITC, UNSP, COLGATE) and now more in sync and reflective of their medium term growth potential.

Source : Equity Bulls

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