Taking note of medium-term headwinds that the consumer staples and discretionaries are likely to experience, brokerage and research firm ICICI Securities has downgraded the entire sector to neutral and has withdrawn ‘buy’ calls for all the stocks covered.
Taking note of medium-term headwinds that the consumer staples and discretionaries are likely to experience, brokerage and research firm ICICI Securities has downgraded the entire sector to neutral and has withdrawn ‘buy’ calls for all the stocks covered. The brokerage said that macro-economic impact and category-specific trends are likely to impact the sector in the medium-term. “We believe that the ongoing crisis is likely to lead to a reset of excess consumption across categories,” ICICI Securities said in a research note on the sector. The expected weak macros in the medium-term owing to the coronavirus pandemic, impulse purchases are expected to drop, leading to a shift towards purchasing essential products.
Among the shares covered from the sector, ICICI Securities has downgraded 80% of the stocks. Hindustan Unilever has been downgraded to ‘add’ with an expectation that products like soaps and Horlicks will help the stock. The ‘add’ call for ITC has been maintained with the cigarette cessation rate expected to accelerate in the near future. The high dividend yield has been worked out as a positive for the scrip. A ‘hold’ call has put on Nestle. Even the star performer of 2019, Avenue Supermarts is not expected to outperform the sector with a ‘hold’ call. Store closure and weak footfall aided by social distancing norms are expected to hit sales.
“Even in the essential product categories, we expect meaningful downtrading. Potential implications from this include limited headroom for companies to raise prices – note that consumer prices have remained benign over the past five years,” the report said. Colgate has seen a downgrade from ‘buy’ to ‘reduce’ as the brokerage expects weak macros to impact premiumization, a move that could affect the company in a highly penetrated category. Bata has also been downgraded to ‘reduce’ with premiumization tailwind being delayed owing to increased value focus by consumers.
As the focus shifts towards essential products, luxury products could see less interest from consumers, forcing them to find different avenues to persuade customers. Titan has been downgraded to ‘hold’ nudged by its high-ticket discretionary nature and impulse-led purchases. Quick service restaurant Westlife Development and Jubilant Foods, have been downgraded to ‘hold’ and ‘add’, respectively.
Analysts at ICICI Securities are of the view that regional players might be able to edge past the national-level players with significantly lesser supply chain disruptions. The local mom & pop stores are also in line to make a remarkable comeback against e-commerce giants. “On the other hand, beverages (carbonated soft drinks) could struggle from loss of social gathering occasions and lower out-of-home consumption,” the report added.