PremiumIndian consumer staples firms are likely to report steady revenue performance for the June quarter. This will be helped by a favourable base considering that Q1FY21 was far more adversely impacted by the pandemic-induced curbs
Indian consumer staples firms are likely to report steady revenue performance for the June quarter (Q1FY22). This will be helped by a favourable base considering that Q1FY21 was far more adversely impacted by the pandemic-induced curbs.
In this backdrop, it makes more sense to look at the two-year compounded annual growth rate (CAGR) performance. Kotak Institutional Equities expects consumer staples firms under its coverage to register a 6.4% revenue CAGR on a two-year CAGR basis (organic).
“We expect mid- to high single-digit two-year revenue CAGR for most staples companies. Tata Consumer Products Ltd, Godrej Consumer Products Ltd (GCPL) and Nestlé India Ltd are expected to lead the pack with 10-12% two-year revenue CAGR," added Kotak’s analysts in a report on 6 July.
GCPL’s update on the June quarter said it expects its India business to deliver sales growth in the high teens, driven by strong volume growth and calibrated price increases. It derives around 55% of its revenues from India. GCPL expects consolidated sales growth for the quarter on a two-year CAGR basis to be in double digits.
Marico Ltd said in its June quarter update that its India business delivered 30% plus revenue growth, backed by robust double-digit volume growth. Note that Marico’s India business had contributed 77% of its total FY21 revenues.
“Hindustan Unilever Ltd (HUL)’s underlying volume growth would have been around mid-teens if not for the localized lockdowns in May and distribution transitioning impact in GSK," said JM Financial Institutional Securities Ltd’s analysts in a report on 9 July.
The broker estimates HUL to report year-on-year revenue growth of 16%. However, given the higher raw material cost environment, margin performance would be crucial to watch.
Overall, analysts expect most consumer staples firms to face margin pressure due to higher input costs. “We expect the June quarter to be the sixth straight quarter of gross profit margin compression for HPC and foods businesses," said JM Financial analysts. HPC is short for home and personal care. “The sharp growth in A&P (advertising and promotion) would cause a significant dent to operating margin as well; these factors are expected to more than negate the operating leverage benefits of a good top-line growth," they added.
Meanwhile, investors should closely track management commentary on demand and input price trends. So far this calendar year, the Nifty FMCG index has increased by 5.5%, underperforming the Nifty 100 index, which has risen by 14%. Even so, its not as if valuations of consumer firms are cheap.
Shares of HUL, Dabur India Ltd and Marico trade at around 52, 48 and 46 times estimated earnings for FY23, respectively, based on Bloomberg data.
This should keep meaningful upsides at bay in the near future.
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