FMCG Sector - 3QFY18 Results Preview - Lower Base Effect to Prop up Earnings; Medium-term Outlook Remains Robust
Our consumer sector coverage universe comprising of 18 companies is poised to report a stellar performance in 3QFY18 albeit due to favourable base effect (Demonetisation in the base quarter). We expect the sector to report 12.1% revenue and 13.3% earnings growth in the quarter. Excluding ITC, the growth is estimated to be even higher at 12.8% for revenues and 17.8% for earnings.
We expect the growth momentum to improve in the coming quarters on the back of trade channel stabilisation post GST roll-out, two consecutive good monsoons aiding rural growth, increasing premiumisation, strong pricing power and increasing share of the organised players in the GST regime. The sector currently trades at rich valuations of 35x FY19E earnings, while excluding ITC, the multiples are even richer at 40.7x earnings. We expect the current valuations to sustain, as medium-term growth momentum is on the cusp of taking off due to above mentioned factors and hence, we remain Positive on the sector. Our top picks are: ITC, Asian Paints, Colgate-Palmolive and Kajaria Ceramics.
Coming out of a Challenging Phase
The consumer sector has been through a challenging phase for past four quarters. When the growth was seemingly recovering in 3QFY17, it was hit by government’s decision to demonetise high value currencies, which substantially impacted the companies, consumers and the entire trade channel. While other channels have witnessed gradual recovery in demand led by modern retail, the wholesale trade segment continued to remain under pressure in parts of the country. All companies have rightly made investments in enhancing their direct distribution network in past couple of years. The second near-term disrupting factor was GST roll-out. While GST rates were largely positive for the sector sans ITC, the implementation with inherent complexities and confusion led to sharp correction in trade pipeline in the run-up to the roll-out in the month of June. While the growth has somewhat recovered in 3Q, we expect the full benefits of GST to flow in with effective implementation of E-Way bill system w.e.f. Feb’18.
Mixed Input Cost Scenario
Situation on the raw material cost front was largely mixed in the quarter. While the average prices of HDPE (down 3%), PFAD (down 6%), Milk (down 11%), Wheat (down 15%), Sugar (down 5%) and Refined Palm Oil (down 7%) declined on YoY basis, the prices of Copra (up 85%), Menthol (up 75%), Liquid Paraffin (up 25% YoY) and VAM (up 22% YoY) were substantially higher. The prices of TIo2 were moderately higher by 6% in the quarter. While most consumer companies enjoy strong pricing power, there is a lag effect between increase/volatility in raw material prices and the corresponding price hikes. This may impact the near-term gross margin profile of the sector.
Outlook & Valuation
We expect our consumer sector coverage universe to report 11.8% and 15.8% growth in revenue and earnings, respectively in FY18E, and the growth is estimated to improve to 14%/18% in FY19E. While valuations at 40.7x FY19E earnings ex-ITC are rich, we expect the sector to command high multiples on visible improvement in growth trajectory in coming years. Key risks for the sector are: delay in recovery in consumer demand, sharp increase in input costs and delay in implementation of E-Way bill system. In that case, the sector is likely to go through a prolonged time correction than price correction, in our view.
Our top picks are: ITC (muted expectations and attractive valuations), Kajaria Ceramics (strong brand and increasing market share post GST roll-out), Asian Paints (double-digit volume growth and reasonable time correction) and Colgate-Palmolive (renewed efforts to recover market share loss and benefits of lower GST rates).
Next Read : Pharmaceuticals Sector -Q3FY18-Results Preview
Q3FY18-Sector Review:
Pharmaceuticals Sector -Q3FY18-Results Preview
FMCG Sector-Q3FY18-Results Preview
IT Sector-Q3FY18-Results Preview
Banking Sector-Q3FY18-Results Preview
Cement Sector-Q3FY18-Results Preview
Our consumer sector coverage universe comprising of 18 companies is poised to report a stellar performance in 3QFY18 albeit due to favourable base effect (Demonetisation in the base quarter). We expect the sector to report 12.1% revenue and 13.3% earnings growth in the quarter. Excluding ITC, the growth is estimated to be even higher at 12.8% for revenues and 17.8% for earnings.
We expect the growth momentum to improve in the coming quarters on the back of trade channel stabilisation post GST roll-out, two consecutive good monsoons aiding rural growth, increasing premiumisation, strong pricing power and increasing share of the organised players in the GST regime. The sector currently trades at rich valuations of 35x FY19E earnings, while excluding ITC, the multiples are even richer at 40.7x earnings. We expect the current valuations to sustain, as medium-term growth momentum is on the cusp of taking off due to above mentioned factors and hence, we remain Positive on the sector. Our top picks are: ITC, Asian Paints, Colgate-Palmolive and Kajaria Ceramics.
Coming out of a Challenging Phase
The consumer sector has been through a challenging phase for past four quarters. When the growth was seemingly recovering in 3QFY17, it was hit by government’s decision to demonetise high value currencies, which substantially impacted the companies, consumers and the entire trade channel. While other channels have witnessed gradual recovery in demand led by modern retail, the wholesale trade segment continued to remain under pressure in parts of the country. All companies have rightly made investments in enhancing their direct distribution network in past couple of years. The second near-term disrupting factor was GST roll-out. While GST rates were largely positive for the sector sans ITC, the implementation with inherent complexities and confusion led to sharp correction in trade pipeline in the run-up to the roll-out in the month of June. While the growth has somewhat recovered in 3Q, we expect the full benefits of GST to flow in with effective implementation of E-Way bill system w.e.f. Feb’18.
Mixed Input Cost Scenario
Situation on the raw material cost front was largely mixed in the quarter. While the average prices of HDPE (down 3%), PFAD (down 6%), Milk (down 11%), Wheat (down 15%), Sugar (down 5%) and Refined Palm Oil (down 7%) declined on YoY basis, the prices of Copra (up 85%), Menthol (up 75%), Liquid Paraffin (up 25% YoY) and VAM (up 22% YoY) were substantially higher. The prices of TIo2 were moderately higher by 6% in the quarter. While most consumer companies enjoy strong pricing power, there is a lag effect between increase/volatility in raw material prices and the corresponding price hikes. This may impact the near-term gross margin profile of the sector.
Outlook & Valuation
We expect our consumer sector coverage universe to report 11.8% and 15.8% growth in revenue and earnings, respectively in FY18E, and the growth is estimated to improve to 14%/18% in FY19E. While valuations at 40.7x FY19E earnings ex-ITC are rich, we expect the sector to command high multiples on visible improvement in growth trajectory in coming years. Key risks for the sector are: delay in recovery in consumer demand, sharp increase in input costs and delay in implementation of E-Way bill system. In that case, the sector is likely to go through a prolonged time correction than price correction, in our view.
Our top picks are: ITC (muted expectations and attractive valuations), Kajaria Ceramics (strong brand and increasing market share post GST roll-out), Asian Paints (double-digit volume growth and reasonable time correction) and Colgate-Palmolive (renewed efforts to recover market share loss and benefits of lower GST rates).
Next Read : Pharmaceuticals Sector -Q3FY18-Results Preview
Pharmaceuticals Sector -Q3FY18-Results Preview
FMCG Sector-Q3FY18-Results Preview
IT Sector-Q3FY18-Results Preview
Banking Sector-Q3FY18-Results Preview
Cement Sector-Q3FY18-Results Preview
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