With Q4FY18 results out, consumer companies have indicated recovery in rural demand, visible in volume growth pick-up. Inflationary pressures, though not alarming right now, are increasingly becoming relevant. Ergo, we are witnessing some cooling off in promotions in the market; though price hikes are still missing, these are just round the corner. The pace of rural recovery (given another normal monsoon prediction) and margin pressures remain key monitorables. RM prices inflationary Raw material prices have seen an increase both in foods and non food RMs — both up by 3% MoM. Food inflation was largely led by tea, coffee and barley prices. Other food RMs such as sugar (down 9% MoM), milk (flattish) and wheat (down 2% MoM) remain soft.
Non-food RMs saw broad-based increase, led by crude (up 7% MoM), TiO2 (up 3% MoM), LAB (up 3% MoM) and Copra (up 8% MoM). Price hikes likely to follow There was no significant price hike in the month, except for 3% price increase in some SKUs of Surf Excel (HUVR). Based on management result commentaries and given the inflationary pressures, we expect price hikes to follow in coming months.
Promotions, stabilising Our checks suggest some cool-off in the promotion intensity. Key segments for higher promotions were soaps (extra grammage and offs on higher volume packs), detergents (especially P&G with Ariel in higher volume packs), juices (led by B Natural and Hector beverages) and deodorants.
We are witnessing higher competition in feminine hygiene and toothpaste category. We also saw better in-store visibility for Colgate Swarna Vedshakti in modern retail. What to buy? Within the ‘superior execution’ bucket in staples viz. HUVR, BRIT and GCPL, we find risk-reward less compelling given rich valuations.
Thus, we have only HUVR as Buy in this bucket, and BRIT and GCPL as Hold given limited upsides. Our preference is more for ‘potential turnaround’ set of companies on improving fundamentals going into FY19 i.e., NEST, Dabur and ITC, where we have a Buy. We still remain on the sidelines and less convinced with risk-reward on Marico, Emami, Colgate and UNSP, though recent correction provides some upside. Within discretionary space, JUBI and APNT remain BUY rated while TTAN is a Hold on less compelling risk-reward.
