Volume growth remained tepid in 4QFY16: The rural segment continued to slow down further and did not show signs of sequential improvement. Management commentary indicates that while 1HFY17 demand is expected to be muted, it is likely to be stronger in 2HFY17, led by the likelihood of a good monsoon and benefits arising from the government’s schemes to boost rural growth. Material costs remained soft in 4QFY16, but are now hardening. Gross margins were at multi-year highs for a few companies; some chose to use the headroom to spend more on advertising. While gross margin improvements may have peaked, hardening material costs, albeit off a low base, present the likelihood of realisation growth resuming with some companies already starting to take price increases. Excise benefits started going off from May 2015 and organic growth is likely to track reported growth for a large part of FY17.
Overall numbers were in line with our estimates: Our consumer coverage universe reported 7% y-o-y revenue growth (estimate 6.7%), 13.5% y-o-y EBITDA growth (estimate 11.9%) and 8.1% y-o-y adjusted PAT growth (estimate 8.7%).
No change in sequential volume growth: The consumer sector’s volume growth trajectory was unchanged q-o-q. Asian Paints (APNT) again delivered double-digit volume growth, Colgate and ITC surprised with 3% toothpaste volume growth and flat cigarette volumes, while Hindustan Unilever (HUVR) delivered 4% volume growth (estimate 6%).
RM benefits flowed through EBITDA level: 11 out of 16 companies in our universe met/beat our EBITDA estimates. EBITDA grew 13.5% y-o-y. With input costs being largely benign and gross margin benefits being in the base for most of our coverage companies, the margin expansion trajectory will sequentially come down, in our view.
Top picks: Pidilite (PIDI), Page, Britannia, Emami and United Spirits (UNSP)— A) PIDI offers a high quality discretionary play due to its strong competitive positioning, proven in-market excellence and impeccable track record of generating long-term shareholder value over multiple periods. B) We believe Page offers a compelling, capital-efficient long-term lifestyle play on the premiumising innerwear category. A widening product and brand portfolio, coupled with distribution expansion, should aid share expansion and drive multiple years of growth, in our view. C) The four legs on which our positive investment hypothesis has rested for Britannia —1) Industry-wide premiumisation 2) Structural gross margin expansion 3) Significant white spaces in distribution in Hindi Belt and 4) Opportunity in non-Biscuits space— are still intact. D) We continue to like Emami due to its strong medium-term earnings visibility post the Kesh King acquisition.
1) HUVR’s management believes that commodity prices have bottomed out and thus the pricing element will be higher in FY17. HUVR will be agile in pricing; however, underlying volume growth remains the focus area for HUVR.
2) APNT is cautious on the overall economic outlook with crude prices expected to remain volatile. However, the good monsoon forecast and the implementation of seventh pay commission could provide fillip to consumption demand, as per management.
3) PIDI’s aspiration remains growing revenues around mid-teens going forward as well. Pricing will be stable—current margins not sustainable and are a reflection of low crude prices, as per management.
4) BRIT believes FY17 volume growth may decline by 200-300bp, but this could be made up for by pricing growth; expect 5% material cost inflation.
5) Jyothy Labs has set an ambitious revenue target of R50 billion by 2020 from levels of R16.5 billion in FY16.
6) Emami is looking at 15-16% top-line growth in FY17. Price increases and new launches to contribute around 4% to growth.
7) PAG’s management sees demand picking up across regions, and FY17 will thus be better
8) Dabur expects high-single-digit volume growth for FY17 led by low-double-digit growth in H2FY16, and a 2-3% price increase for the full year.