Consumer goods: Caught in rural-urban divide

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Updated: August 11, 2016 4:35:29 PM

Rural growth slows, but slight pickup seen in urban demand

We expect consumer goods universe to register year-on-year revenue, Ebitda and PAT (ex of ITC, United Spirits, Nestle) growth of 9.1%, 12.5% and 8.9% (9.1%, 19.0%, 14.7% y-o-y growth in Q4FY15), respectively. Though rural growth seems to have tapered off a tad, the slight pickup in urban consumption will compensate for it.

Gross margins would continue to expand y-o-y, benefits of which will be partly ploughed back in to ad spends.

Currency translation will continue to suppress international growth. The ban on Maggi noodles has pressured noodles sales of all players but will lead to idle capacity in flour mills, leading to softer flour prices (positive for biscuit, bread, pizza players).

Volumes continue to be under pressure: Outperformers in volume growth are likely to be Dabur, Emami and Godrej Consumer (GCPL), while ITC’s cigarette volumes are likely to disappoint—to fall 16-17% y-o-y (declined 13% y-o-y in Q4), owing to fresh price hikes. Hindustan Unilever (HUL) is likely to post 5-6% y-o-y volume growth, and Emami 6-7%  (12% y-o-y in Q4) impacted by the softer summer season. We estimate Dabur to post 8% y-o-y volume growth. GCPL is expected to surpass category and post double-digit sales growth in all three categories.


Colgate is likely to clock 4% y-o-y volume growth and is likely to be impacted by the phasing out of excise benefits (300 basis points y-o-y impact on sales growth). Regulatory actions against Maggi have taken a toll on Nestle’s domestic sales; we estimate sales dip of 6% y-o-y as 23% of the portfolio was banned from sale for 1.5 months. Asian Paints and Pidilite Industries are likely to clock volume growth of 4% each, respectively, as demand remains subdued.


Margins to continue to expand despite higher A&P: While Dabur (up 86 bps y-o-y) and GCPL (up 80 bps) are likely to outperform on the margin front, Nestle (to decline 314 bps y-o-y) is likely to disappoint. HUL’s royalty expenses will step up 40 bps y-o-y. Write off over Maggi stock returns is likely in Q2CY15 (we estimate R1.2 bn in Q2CY15 versus management guidance of Rs 3.2 bn, and the balance likely in Q3CY15).

Outlook: Even though demand slowdown in urban areas seems to be ebbing, any significant recovery will only be gradual. Rural growth has decelerated to some extent. Good monsoon and MSP (minimum support price) hikes
(3-4%), though minuscule, will contribute a bit to rural growth. Demand in urban areas could benefit over the long term from the government’s push for smart cities and housing for all, especially for Asian Paints, Pidilite, tiling and sanitaryware companies. Further positivity in consumption stems from expectation of India’s economic growth surpassing China’s.

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