FMCG Sector Update - Recovery unlocked; lower growth divergence - HDFC Securities

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

The HSIE Consumer-Index sales indicated recovery with a growth of 1% YoY in 2QFY21 (+6% in 2QFY20 and -23% in 1QFY21) as easing of lockdown and resumption of economic activity supported demand. The three-year CAGR (which normalises all base adjustments over the past three years) in 2QFY21 was +7% YoY, supported by the healthy growth in the past two years. Categories that outperformed our index in 2QFY21 are OTC FMCG, F&B, Oral Care, Paints, and Haircare, clocking 50/13/8/6/5% YoY growth. The divergence between the underperforming and outperforming categories narrowed sequentially as growth in essentials moderated and discretionary demand saw improvement. QSR, Footwear, Liquor and Dairy categories were impacted the most, contracting by 30/27/16/3% YoY.

Within the FMCG universe, Dabur, Britannia, GCPL, Radico, Emami, and Nestle outperformed, clocking revenue growth of 14/12/11/11/11/10% YoY respectively. Growth in packaged food and hygiene moderated, although it continued to remain strong, following reduced fear among consumers and easing of restrictions. Discretionary demand witnessed substantial sequential improvement as increased economic activity and more instances of going out lifted sentiments. Rural growth has been ahead of urban due to lower restrictions, migration of labour & capital and healthy agri economy. We expect rural will remain strong in 2HFY21. However, we remain cautious and selective within the sector due to the unfavourable medium-term risk-reward, given 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 UNSP, Colgate and Radico.

Moderation for Essentials and Hygiene: Essential and Hygiene categories witnessed a moderation in growth rates as the quarter progressed. Easing of restrictions, reduced fear among consumers as well as lower pantry loading resulted in growth moderation. Consumers were more willing to step out of their homes, and instances of going out increased. Recovery in outside eating also impacted the growth of packaged foods. However, categories like immunity-boosting supplements and OTC healthcare products saw high demand as the awareness around health and hygiene remained high.

Discretionary and OOH improving: Discretionary and OOH categories indicated sequential improvement during 2QFY21, despite demand remaining muted. Higher instances of going out led to improved demand for discretionary personal care products. Categories like QSR saw sequential improvement in demand as consumers were willing to consume outside food. Cigarettes indicated a strong recovery towards the end of 1QFY21. However, the pace of recovery was impacted by localised lockdowns, although demand remained strong. Liquor companies witnessed recovery as increased home consumption helped recover sales lost due to continued closure of pubs.

E-commerce leading the way: E-commerce continued to grow ahead of all other channels and most companies saw significant improvement in revenue salience. GT also clocked a strong recovery. However, MT continued to struggle despite sequential recovery as consumers remained unwilling to venture into large, crowded areas. The recovery across channels was driven by semi-urban and rural markets as higher restrictions impacted the recovery in urban markets.

Near-term outlook: Consumer offtake has indicated rapid improvement in demand during 2QFY21. We expect demand for discretionary categories to return to growth over the next few months. Packaged foods and Hygiene growth are expected to moderate, although it will remain higher than other categories. Recoveries in QSR, liquor and discretionary personal care are expected to be healthy but the return to normalcy may be slower than in other categories. Winter portfolio is also expected to perform well in 2HFY21.

Source : Equity Bulls

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