Q2FY18 Earnings Preview: Another quarter of subdued revenue for Consumer Sector

Motilal Oswal Securities | Oct. 13, 2017, 4:21 p.m.

Another quarter of subdued revenue For our Consumer Universe, we expect aggregate revenue to grow 4.3% YoY and aggregate PAT to grow 9.7% YoY in 2QFY18. Sales for the quarter are likely to be impacted by (a) GST-related disruptions, as well as by (b) GST accounting on sales, which will not affect the base. Aggregate EBITDA is likely to grow 9% YoY mainly because of a weak base and margin should expand 100bp YoY – GST accounting impacts sales, but not EBITDA. Despite another quarter of weak sales growth, EBITDA margins are likely to be optically higher YoY for all companies under coverage barring Glaxo Consumer, Marico, Nestle and United Breweries.

We expect ITC’s sales to grow 2.5% YoY (with 2% decline in cigarette volumes) and PAT to grow 9.5% YoY (partly due to high 34.7% tax rate in the base quarter). HUVR’s sales would be flattish (volume growth of 4%); its EBITDA margin is expected to expand 200bp YoY, mainly owing to GST accounting and a weak margin base. 15 of the 18 companies under our coverage are likely to report YoY growth in EBITDA. Britannia, Colgate, GCPL, Page Industries and P&G Hygiene are likely to report healthy EBITDA growth of over 15% YoY mainly due to weak base. United Breweries is likely to report EBITDA decline (though much lower than initially feared) due to absence of input tax credit under GST.

RM costs, promotions and new launches

PFAD/palm oil prices were stable – up 3.3%/1.9% YoY in 2QFY18. Ti02 prices increased by 14% YoY and mentha prices by 24% YoY in 2QFY18. While copra and LLP prices were up 82% YoY and 13% YoY, respectively, HDPE prices declined 7% YoY in the two months ended August 2017. Companies have started taking selective price hikes/grammage reduction following an increase in raw material costs. Given the subdued environment, there has been no stream of new launches, though HUVR has launched a spate of products in its naturals portfolio.

Preference for quality and longevity of growth

The consumer sector is characterized by rich near-term valuations, given the market’s continued preference for quality with healthy growth. Our framework for earnings visibility, longevity of growth and quality management drives our choices in the sector universe. We continue preferring Britannia, Colgate, P&G Hygiene, Emami and Hindustan Unilever notwithstanding the near-term challenges. In the discretionary pack, while the near-term outlook is highly challenging, we like Page Industries, which has demonstrated robust volume growth even in a weak environment and is poised to do better, going forward. We recently upgraded United Breweries to Buy. While its longer term prospects remain robust, the stock has been an underperformer and the actual impact on margins despite the negative news flows over the past year has been far lower than anticipated.

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