There is slowdown for select rural-centric players but higher-urban-salience companies are likely to more than pick up the slack
Contrary to popular perception, we do not see further deterioration in growth comps for our coverage universe. There is slowdown for select rural-centric players but higher-urban-salience companies are likely to more than pick up the slack. Strong margin expansion trends are likely to continue on the back of still-benign RM trends and sharp pullback in adspends.
Staples: slow quarter
Broad-based slowdown in staples demand continued in Q3FY20 led by the same factors— sluggish rural demand and tight liquidity conditions. That said, the low/mid-ticket urban-discretionary basket (paints, QSR, jewellery, premium innerwear, etc.) continues to see healthy demand trends, at least relatively speaking. The companies are also tweaking A&P spends and A&P mix to protect profitability and push volumes.
Among staples, we expect top-of-the-pack performance from Nestle. For HUVR, we expect UVG to decelerate marginally to 4% (5% in Q2FY20). For GCPL, India volume growth performance would be decent. Marico is likely to report much weaker set of numbers compared to its staple peers. We expect Dabur to continue to outperform peers on volume growth.
We expect stable/better margins on the back of (i) a broadly benign RM environment; (ii) a tight leash on costs. Net outcome (aggregate staples pack): revenues for our staples coverage pack would grow at 6% y-o-y (Q2FY20: 5.1% y-o-y) with Ebitda and PAT growth of 15% and 21%. Ind-AS 116 would continue to boost Ebitda growth and ETR reset would aid PAT.
Discretionary: a mixed bag
Within the discretionary pack, we expect (i) weak numbers for alcobev names (UNSP and UBBL); (ii) some deceleration in revenue growth of paint companies; (iii) pick-up for PIDI following a subdued quarter; (iv) modest volume growth for ITC (2.5%); (v) PAG (+6.8% volume growth on a high base) and JUBI (+6.5% SSG, further acceleration) would stand out; and (vi) decent quarter for TTAN.
On the margin front, we expect paint companies to report strong margin uptick. Alcobev names would continue to see pressure at the GM level. On aggregate, we expect strong performance for discretionary names—revenue up 7.4% y-o-y (Q2FY20: 5.2%) with Ebitda and PAT growing at 12.7% and 19.7%, respectively.
Focus on commentaries and budget
With the Union budget less than a month away, hopes of economic reforms and push for rural economy have emerged. However, we believe that the fiscal situation makes it difficult for the government to provide any major demand push. On the RM front, crude price needs to be watched in view of ongoing geopolitical issues. Overall, we do not see any meaningful green shoots emerging in the short term.