Key highlights of 1Q: (1) Staples-soft value growth, but improving volume/value growth trajectory (led by some uptick in rural demand) and decent margin print (yoy expansion) and (2) discretionary-sustained weakness in paints, footwear and QSR (except some improvement in pizza QSR demand trends), mixed bag from TTAN and Cello, and a good print from PIDI, VBL, ITC (cigarettes) and UNSP (P&A). We prefer GCPL, PIDI, VBL and SAPPHIRE.
Staples-improving volume / value growth trends; all eyes on rural recovery
FMCG companies witnessed some sequential improvement in the volume/value growth trajectory. Domestic value/volume growth (organic) were as follows: HONASA at 19.3%/25.2%, CLGT at 13.1%/7.5%, JYL at 8%/10.8%, DABUR at 7.1%/5.2%, GCPL at 6%/8%, BRIT at 6%/8%, NEST at 3.3%/1%, MRCO at 2%/4% and HUVR at 1.3%/4%. Staples GM was up 190 bps yoy, led by RM price stability, enabling an increase in A&P spends (up 70 bps yoy to 10% of sales). EBITDA margin expanded 60 bps yoy. Management of most companies called out/reiterated a rural uptick and remain optimistic about rural recovery considering a normal monsoon.
Discretionary-weakness in paints/QSR; growth moderates across categories
Paints: Decorative paints value growth decelerated due to underlying weakness in volumes of the core portfolio (excl. low-cost commodity products), price cuts (yoy) and a weak mix. Value/volume growths (decorative paints) of APNT ((-)2.3%/7%), BRGR (2.4%/12%), and KNPL ((-)4%/4%) were subdued, whereas the same for PIDI (6.2%/9.6%) was decent. High A&P spends and adverse operating leverage weighed on EBITDA growth (ex-PIDI). Growth moderated for INDIGOPN (~8% value growth), even as it continued to outperform the industry.
QSR and footwear: (1) JUBI: ~10% yoy revenue growth, led by 3% LFL growth (1.5-2% SSSG), was aided by a delivery fee waiver; (2) WESTLIFE/BK India: flat%/16% yoy revenue growth, led by (-)6.7%/3% SSSG and (3) DIL/SF: 7%/6% SSS decline for KFC and 8.6%/7% SSS decline for Pizza Hut-we note a qoq improvement in SSS trends for both pizza players, and subdued ADS and adverse operating leverage weighed on the operating margins (down yoy for all except BK India) and (4) in footwear, Metro/Campus prints were weak, with 1%/4% revenue declines and weak margins.
Jewelry, cigarettes, and beverages: (1) TTAN's recurring jewelry sales growth moderated to 9% yoy due to a surge in gold prices (up ~20% yoy) and muted demand sentiments-margins were largely stable (stable GM + studded share); (2) ITC's cigarette volume/EBIT growth improved sequentially to 3.0%/6.5% yoy; (3) UNSP's P&A's volume/value growths were decent at 5%/10%, whereas UBBL's volume/value growths at 5%/9% yoy were underwhelming, given a weak base; (4) VBL's domestic performance was strong-23% volume growth (on soft base), but international was weak (flat volumes yoy) due to portfolio transition in Zimbabwe and (5) Cello's revenue grew 6%, led by 16% growth in WimPlast.
Overall, the discretionary pack witnessed subdued trends, with revenue growth of 7.8% yoy (6% LFL; 8% ex-ITC) and a 105 bps yoy decline in operating margins, despite a stable GM due to high operating costs and low operating leverage. |
