Published on 20/11/2017 5:24:19 PM | Source: Kotak Securities Ltd
QFY18 review demand trends still mixed; GST and cost control aid margins - Kotak Sec
2QFY18 review – demand trends still mixed; GST and cost control aid margins. Likely partial retention of higher input tax credits in the GST regime and the stepped-up cost control drive aided strong EBITDA and PAT growth print for our FMCG coverage universe in 2QFY18. That said, given the noise induced by GST-related destocking, restocking cycle in quarterly prints, 1H comps are perhaps more reflective and the picture there varies widely across companies and is somber in aggregate.
Broad-based volume recovery led by discretionary companies
Aggregate revenues for our consumer universe grew 8.8%; this was driven by higher growth in discretionary companies (up 12.2%) while staples posted 5.2% growth. We witnessed broad-based volume acceleration led by discretionary companies (barring ITC); within staples, growth was led by GCPL (soaps), Marico (VAHO and CNO), Emami, Dabur and BJCOR.
We note – (1) discretionary growth and select categories in staples benefitted from early festive season this year, (2) 2Q was also partly aided by restocking post GST implementation; however, this may be partly negated by weak July due to sustained disruption in wholesale and CSD (both are now stabilizing) and (3) reported revenue growth is partly distorted due to GST-led accounting changes; underlying reported growth may be higher by 100-300 bps.
Earnings growth back to low-teens; lower A&SP and sharp cut in other expenses key drivers EBITDA and PAT grew at robust 14.5% and 13.6% on aggregate terms respectively; this is the highest growth in the last seven quarters. Aggregate EBITDA margin expanded 109 bps yoy despite 133 bps contraction in GM (broad-based contraction barring few companies). At a granular level, only 7 out of 24 companies posted EBITDA margin contraction while 11 companies posted 100 bps + expansion (7 posted 200 bps + expansion). Two key drivers (apart from leverage due to better volume growth) for higher earnings growth were – (1) lower A&SP – while aggregate A&SP this quarter was flat yoy this was largely due to higher spends by HUVR, most other companies (which report A&SP separately) reported a yoy dip (barring BJCOR, UNSP, GSK-CH and JYL). We note that the dip is partly a reflection of input credits now available under GST regime, and (2) sharp 4.5% yoy dip in other expenses on aggregate basis – 13 out 23 companies in KIE consumer universe (ex-S H Kelkar) posted cut in other expenses, 5 posted sub-5% yoy jump in other expenses and only 5 companies posted 5%+ yoy jump in other expenses. On % of sales basis – barring BJCOR, Coffee Day (CDGL), Manpasand and United Spirits (flat yoy), all others posted yoy decline. Overall, we believe the sharp savings maybe a combination of both tight cost control and part retention of input credits.
Noise element in quarterly numbers; 1H performance a better indicator?
‘Demon quarter’, ‘post-demon quarter’, ‘pre-GST quarter’, ‘post-GST quarter’ – each of the past four quarters has had some one-off or the other. The destocking/restocking cycle induced by these events makes yoy comparison of quarter performance alone less-than-useful in our view. 1H comps are perhaps more meaningful and the picture here, dare we say for the much-loved sector, is not pretty enough (see Exhibit 1). That said, we appreciate that low base and GST tailwinds could mean two to three spectacular quarters ahead that should lend ample support to the rich-and-getting-richer valuations in the sector. Refer exhibit 4 for company-wise performance and our take on results.
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