PL Sector Report: Consumer - Jul-Sep’23 Earnings Preview – 2Q trends tepid, all eyes on festival season
Consumer - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd.
Jul-Sep’23 Earnings Preview – 2Q trends tepid, all eyes on festival season
We estimate our coverage universe (ex-ITC) to report Sales, EBIDTA and PAT growth of 10.2%/16.5%/10.8% YoY (8.6%/13.7%/11.1% including ITC) due benefits of soft commodity prices despite slow pick up in rural demand, even as urban demand remained resilient. APNT, KNPL, CLGT, PIDI and NEST will have strong profit growth due to meaningful margin expansion.
Staples demand & sentiments remained on lines of 1Q24 as high inflation and uncertainty on monsoons delayed rural demand recovery while urban demand remained resilient. Industry is pinning hopes on 3Q for a demand recovery given hike in MSP, lower inflation and festivals driven sentiment.
Demand across discretionary categories like QSR, Apparel, Footwear and Retail remained under pressure. Paints gained from tepid monsoons in August and certain regions while Jewellery sales were impacted due to delay in marriage/festival season and Adhikmas.
We remain biased towards discretionary segments and retain structurally positive view on Westlife, D’Mart, Titan, MBL etc. we believe valuation in most staple companies’ factors in recovery in rural demand, lower RM prices and margin expansion. We rate D’Mart, Titan and Nestle as top picks.
High Inflation, patchy monsoons delay demand recovery
♦ Rural recovery stunted due to inflation and monsoons: Rural demand recovery has been delayed due to high inflation, flash floods and patchy monsoons in several parts of the country. Competition from unorganized players has been visible in foods, HPC etc. rural demand recovery hinges on high Govt expenditure ahead of elections and festival demand boost driven by higher MSP and softening inflation.
♦ Discretionary segments impacted by weak demand and delay in festival season: Discretionary demand remained weak with customers holding back purchases across categories. Apparel continues to see weakness at the mass end. Jewellery has been mixed with pick up on softening gold prices despite delayed marriage and festival season, QSRs has seen subdued quarter as demand remains under pressure. Paint companies will show negative impact of delayed Diwali on one hand and benefits of relatively dry season in August.
♦ Staples margins likely to improve QoQ/YoY: We expect margins to improve QoQ/YoY as full benefits of low input costs will be reflected in numbers. We believe Paints and Adhesives companies will show further margin expansion. We expect discretionary segment margins to remain under pressure in several QSR and retail companies on tepid demand and higher base in margins. Staples will show mixed trend as select categories like Biscuits, laundry, personal wash and foods are witnessing heightened competition from unorganised players. Staple companies have increased A&P, consumer offers, initiated price cuts and launched more starter packs to ward off competition, this is expected to curtail margin expansion in 2Q24.