Overall cautious stance on staples maintained, with ‘Buy’ rating on APNT, NEST DABUR and ITC
Demand conditions stayed tepid in Q1FY20 due to rural softness and election-related wholesale trade disruptions. Monsoons remain the key monitorable for rural demand trends in 2HFY20. Input costs remain benign especially crude related (positive for HPC and paints) while food inputs saw some hardening. Pricing and promotions remain largely stable across most categories which bodes well for margins. Maintain overall cautious view on staples.
Raw material (RM) trends, food inching up, non-food down
Overall RM index was down 1% m-o-m (down 2% in 3 months) with diverging trends as food RM index was up 1.8% m-o-m (up 2.5% in 3 months) and non-food was down 3.9% m-o-m (down 6.5% in 3 months). Within companies, APNT, DABUR, MRCO and Emami saw RM basket moderation (~3-5% m-o-m) while NEST and BRIT saw uptick (~1-3% m-o-m). On a y-o-y basis, RM basket has turned negative for HPC players (HUL, Dabur, Marico, GCPL, Emami) and APNT while RM inflation is running in mid-single digits for foods companies (BRIT and NEST).
Brand pricing, largely stable to inching up
Q1FY20 has seen stable pricing to modest price hikes in key categories. Laundry continues to see highest and broad-based positive pricing action with HUL and P&G brands taking price hikes of 2-5%. Toothpaste, hair oils, biscuits, skin care saw stable pricing in June post some price hikes seen in toothpaste and skin care in Apr/May. Shampoos category saw price cuts by ‘Clinic Plus’ and ‘Pantene’ (relaunch done) and price increase by L’oreal in ‘Garnier’ brand. Saffola edible oil saw a price cut in the entry-level Tasty blend variant to drive new consumer recruitment. Within health drinks, while ‘Complan’ and ‘Bournvita’ saw price increases, Boost lowered prices.
Promotion spike in hair oils, other categories mixed trends
Hair oils have seen increase in promotional offers at value end from Dabur and Marico. Toothpaste remains competitive at value end. Laundry has seen some reduction in promotions in large SKUs while smaller SKUs have seen a step-up. Juices and biscuits have seen mild decrease in promotions. Soaps has been stable with promotions.
View and top picks
We continue to believe that re-rating cycle for staples has ended and current valuations don’t leave much on the table making us selective on the sector. Our preference is for companies with superior top-line driven earnings growth and where margins are not looking too stretched from a medium-term perspective given benign RM and competitive intensity in the last few years. Maintain Buy on APNT, NEST and DABUR given improving execution and growth traction while ITC is a Buy on favourable risk-reward.