Consumer Products: Reason to tread selectively

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Updated: August 28, 2017 4:42:28 AM

KIE consumer universe delivered flattish returns versus negative 2% return for broader markets. RM trends were mixed — while agri-inputs were broadly deflationary, oil-based inputs inched up and several paint inputs corrected.

Consumer companies outperformed the broader markets in July; sector valuations remain rich.

KIE consumer universe outperformed the broader markets over the past month delivering flattish returns versus negative 2% return for broader markets. RM trends were mixed – while agri-input were broadly deflationary, oil-based inputs inched up and several paint inputs corrected. Post GST, we noticed incremental activity/price changes in soaps, detergents, toothpaste, hair oils (led by Marico) and biscuits (more in pipeline, not yet fully visible in stores). Launch activity was moderate. Sector valuations remain rich at 36X FY2019e earnings (39X, ex-ITC). We retain our ‘tread selectively’ stance. Preferred picks – ITC, CLGT, BRIT, GSK-CH, BJCOR, SHK and TGBL.

Pricing/promotions – GST-led price cuts in select categories Soaps/detergents: We saw incremental activity in both soaps and detergents this month – (i) in soaps, several companies have cut prices to pass on GST benefit – HUVR has cut prices of Dove and Pears multipacks by 5-6% and Godrej has cut prices of Godrej No1 variants by 11-13%; we note many other price cuts aren’t visible in the market and hence difficult to capture and (ii) in detergents, HUVR has cut prices of its Rin and Surf Excel detergent bars by 10-14%, cut price of Rin detergent powder by 4% and it has introduced fresh promotions in Surf Excel Quickwash. We also noticed high incremental activity from P&G in detergents both in Ariel and Tide in form of price-off and promotional volumes.

Personal care items: (i) Hair oils – we did notice that level of promotional intensity has gone down – Marico’s 20% extra on 500 ml SKU of Parachute CNO was the only incremental activity we noticed; no major price changes visible in hair oils except for 20% price hike taken by Marico in Hair & Care and (ii) toothpaste – Colgate has cut prices of most of its toothpaste variants/SKUs by 7-11%; however, we did not notice any price changes yet of other players in toothpaste (more price changes still rolling out in the market and hence not yet fully visible).

Food/beverage items (i) Biscuits — We did see incremental promotional activity from both Britannia and Parle in several brands and (ii) edible oils – promotional offers continue on select brands like Fortune (offering 1L free on 5L pack) and Riso (offering 2L free on 5L pack); Marico has also launched 1L free promotion on Saffola Gold and is offering price-off in Saffola Active.

RM trends –Agri-inputs mixed, oil-based inputs inflationary while paint inputs witness correction
Agri-inputs: Agri-inputs exhibited another month of mixed trends – select inputs like domestic tea, international coffee and sugar witnessed inflationary trends while maize and liquid milk/milk powder were down 4-8% mom; other key inputs like wheat and barley were flattish mom. However, we note inflation in several key agri-inputs such as wheat, barley and sugar has come down materially over past six months (wheat and barley are down 14-20% and sugar is up just 2% over past six months).

Oil commodities basket: Oil basket witnessed a broad-based inflationary trend this month barring LLP and PFAD; other inputs like crude oil, copra, rice bran oil, kardi oil and mentha oil all inched up.

Other commodities: Among other commodities, several paint inputs corrected after sustained inflation over past several months – PAN was down 22% mom, Tio2 rutile corrected 2% mom, styrene dropped 12% mom and VAM (domestic) fell 18% mom. However, VAM (China) has inched up 10% mom.

Who benefits? (i) Deflation in wheat and barley price will give some respite to food companies like Britannia, Nestle and GSK-CH, (ii) deflation in liquid milk/milk powder prices will aid dairy companies and food companies like Britannia, Nestle and GSK-CH, (iii) fall in LLP prices will benefit all hair oil companies and (iv) correction in several paint inputs will benefit all paint majors.

Who gets impacted? (i) inflation in coffee prices will impact companies like TGBL, HUVR and Nestle, (ii) sustained copra inflation will hurt Marico, (iii) sharp jump in rice bran oil and kardi oil will also impact Marico, (iv) higher mentha oil prices will impact Emami and toothpaste companies, (v) spike in crude oil will hurt all FMCG companies and (vi) spike in VAM will impact Pidilite.

Sector (KIE consumer universe) outperforms broader markets Our overall consumer coverage outperformed the broader markets delivering near-flattish returns over the last month versus negative 2% returns for the broader markets. Despite flattish return for overall consumer universe, several stocks posted handsome gains led by PCJ, Titan, BRIT and TGBL. Key underperformers during the past month were SHK, UNSP, GCPL and BJCOR. On a 12-month basis, sector outperformed the broader markets marginally posting 14% absolute return versus 12% return for broader markets. We retain our ‘tread selectively’ stance; preferred picks – ITC, CLGT, BRIT, GSK-CH, BJCOR, SHK and TGBL.

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