Discretionary segment comprising quick service restaurants (QSR), paints and alcoholic beverage categories is expected to report a weak third quarter with a sharp deceleration in consumer spends in these segments, despite the quarter coinciding with the festive season. However, staples would remain resilient during the quarter.
“Even as we expected the growth divergence to narrow, we are surprised by the sudden, sharp deceleration in discretionary growth, notwithstanding the festive season,” said analysts at Kotak Institutional Equities (KIE).
A combination of factors, including a slowdown in new hiring, the waning of pent-up demand, high inflation sapping household savings, and an increase in mortgage EMIs (equated monthly instalments), have impacted demand across discretionary categories.
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In December, FE had reported that consumption, which was driven by festive cheer since August, is weakening across consumer categories with various apparel, consumer durables, paints and QSR companies suggesting a sharp drop in discretionary demand in the past few weeks.
The slowdown in discretionary consumption is due to a combination of factors, and it does not seem like that there is an expectation of a rapid turnaround in demand given underlying economic challenges. While recovery in staples volumes is possible, there are ‘tail-risks’ from the sharp increase in global Covid-19 cases in the recent weeks, although India seems comfortable for now, analysts said.
To be sure, the discretionary basket has started to see some deceleration in demand trends specifically in restaurants, said analysts at ICICI Securities.
Reeling under the impact of high inflation, consumer spends on eating out and dine-ins have taken a hit. “There is a sudden, sharp slowdown in demand in the past 6-7 weeks, across the QSR space. The demand weakness is broad-based across mature stores, new stores, dine-in and delivery channels,” said analysts at KIE in a report dated December 23.
Analysts have cut their revenue forecast for the third quarter by 1-9% versus beginning-of-the- quarter for the discretionary pack. However, Titan, Varun Beverages Ltd and ITC cigarettes will remain exceptions.
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However, staples pack is expected to remain resilient and report stable revenue with no incremental improvement or deterioration in underlying demand trends across urban and rural markets. “Margin recovery should commence, driven by some recovery in gross margins. We estimate staples/discretionary (ex-ITC) pack to register 10.6%/14.5% 3-yr revenue CAGR in third quarter,” said analysts.
Volumes are expected to remain modest, while there maybe high-single digit to double digit value growth for staples with Nestle and Britannia leading the pack. Britannia could report 16% y-o-y revenue growth led by pricing, while volume growth could come in at 4%. Nestle is estimated to report 19% y-o-y revenue growth during the quarter.
Both companies have been reporting robust growth in the rural markets as they have invested significantly in expanding their network in the hinterland over the past few quarters.
While Hindustan Unilever is expected to report 14% y-o-y revenue growth its underlying volume growth could come in at 4%. Dabur, Marico and Colgate are estimated to report 6.5%, 1% and 2% domestic revenue growth with soft to subdued volumes.
Marico, in its business update for the third quarter, said on Tuesday, that recovery in rural demand remained muted. However, on an overall basis for the staples, analysts expect gross margins to improve sequentially, with softening of select raw material prices—primarily crude and edible oils may result in a modest recovery in Ebitda (earnings before interest, tax, depreciation and amortisation) margins too.