The consumer goods sector has been struggling against low growth for the past two quarters primarily due to the consumption slowdown in rural India. We anticipate this slowdown would worsen with revenue, EBITDA and PAT decelerating YoY to 6.4%, 10.9% and 18.3% in Q2FY20 from 8%, 14.8% and 13.8% in Q1FY20, respectively. That said, PAT growth would get a leg-up from the recent cut in the corporate tax rate. Rural growth, which grew on a par with urban growth in Q1FY20, is losing steam—now at 0.9x of urban. Key reasons:
i) liquidity crisis has hurt wholesalers as well as retailers;
ii) weak overall macroeconomic scenario; and
iii) slower ramp-up of the PM-Kisan scheme.
All in all, we expect demand to pick up from Q4FY20 once payouts under the direct transfer scheme start reaching a wider base, rural India – nourished by a normal monsoon – regains its activity and liquidity improves.
Volume growth: Rural slowdown, liquidity crunch continue to hurt
We expect most consumer goods companies to report low single-digit volume growth. In fact, Q2FY20 is likely to mark the slowest volume growth for consumer goods companies since Q1FY18, which was impacted by GST-related destocking. With most consumer companies not willing to take on credit risk, they are extending credit to distributors selectively. This liquidity crunch is now hurting retailers as well, which is further pressuring volumes at consumer goods companies. Besides, floods in parts of India would hamper demand somewhat. In staples, GCPL’s India business would have among the best volume growth of 5.7% YoY on the back of a gradual recovery in its household insecticide portfolio. Emami, on the other hand, would continue to lag with a 1% YoY dip in volume growth. Paint companies should continue to gain gloss with high single-digit volume growth in spite of an elevated base.
Mixed margin performance
Softer crude price should aid gross margin expansion at companies with higher exposure to crude derivatives such as Asian Paints, Berger Paints and Pidilite. Copra prices continue to stay soft YoY (but up QoQ), which would aid Marico’s margins; Emami would benefit Q3FY20 onwards from the subdued mentha price. United Spirits would suffer margin compression on account of elevated ENA and glass prices. We will keep an eye out for inflationary trends in agri- and milk-related companies since wheat and milk prices have risen YoY, which would impact Nestle and Britannia.
Outlook for 12 months
We expect consumer staples’ volumes to start recovering from Q4FY20 led by: 1) broadening of the beneficiary base in the PM-Kisan scheme; 2) various steps to improve systemic liquidity; and 3) a favourable rabi season perking up farmers’ income.
Top picks | Portfolio Distribution
HUL (30%), Marico (25%), Britannia (25%), GCPL (10%) and Colgate (10%)