FMCG Q2FY19 Result Preview: Fading GST woes and uptick in rural demand to aid growth

FMCG universe to report healthy revenue and PAT growth at 10.7% and 12.8% yoy respectively. Raw material inflation to keep check on margin expansion (60bps yoy EBITDA margin expansion expected).

Oct 12, 2018 07:10 IST India Infoline News Service

FMCG
As the sector revives from the impact of GST, we are building in mid-high single digit volume growth for the companies in our universe. We expect 10.7% yoy revenue growth for the universe with a stable operating margin (as crude inflation is yet to impact the gross margins).

Healthy sales growth projected for the quarter led by volume and rural pick-up: We expect our FMCG universe to post 10.7% yoy revenue growth (11.7% ex-ITC). Varun Beverages (VLB) is expected to post the highest sales growth in the FMCG space at 20% yoy (Bloomberg estimate), led by the organic growth, followed by Marico at 16.6% yoy growth. Hindustan Unilever (HUL), Britannia Industries (BIL), Nestle India (NIL) and Dabur India (DIL) are expected to report revenue growth of 13.4%, 13%, 12.9% and 12.3% respectively. Bajaj Corp, Tata Global Beverages (TGBL) and Jyothy Laboratories (JLL) are expected to report muted growth of ~5% yoy.   

EBITDA growth to be seen in double-digits: EBITDA for the coverage universe is expected to grow by 13.3% yoy. EBITDA margin is estimated to expand marginally by 60bps yoy for the coverage.  

For the quarter under review, concerns relating to margins hover around for FMCG companies given the inflationary pressure led by rising crude and key raw material costs (read more here). Currency volatility is further adding to the woes.

For Q2FY19, though the crude prices have witnessed inflation (up ~53% yoy) and crude derivatives like LAB and packaging materials were up by 53.2% and 29.2% yoy respectively, the sharp increase is yet to hit the FMCG companies because of some low cost inventory. Other key raw materials, sugar, liquid milk and coffee (robusta) prices have declined by 13.7%, 18% and 21.6% respectively, on a yoy basis. Wheat and tea prices were up by 11.3% and 9.2% yoy respectively. Copra prices were up 11.6% yoy, however, it declined by ~8% on qoq basis.

We believe HUL, Britannia, GSKCH and Nestle to be the key beneficiaries of decline in the sugar, milk and coffee prices and report 18.8%, 18.6%, 16.3% and 15.8% yoy growth in EBITDA respectively. The only company to report decline in EBITDA will be Emami in our universe (due to higher raw material costs).

PAT to grow by 12.8% yoy for the sector: Net profit growth for the sector is expected at 12.8%, broadly in-line with EBITDA growth. Excluding ITC, growth in net profit is marginally higher at 13.7%.

Top picks: GSK Consumer Healthcare, Dabur, Nestle, Britannia and ITC

Quarterly consensus estimates (Source: Bloomberg, IIFL Research)
Bajaj Corp Q2FY19E YoY (%) QoQ (%)
Sales (Rs cr) 214.9 5.3 0.0
EBITDA (Rs cr) 65.8 12.8 -4.8
EBITDA margin (%) 30.6 204 bps -154 bps
PAT (Rs cr) 51.5 1.6 -4.2

Bajaj Corp’s revenue is estimated to clock 5.3% yoy growth led by volume growth of ~4% yoy as the rural demand is witnessing pick-up. Though pressure on gross margin is expected due to rising raw material costs, lower ad-expense would aid EBITDA growth of 12.8% yoy. However, due to lower other income, PAT growth is expected to be restricted at 1.6% yoy.
Britannia Industries Ltd. Q2FY19E YoY (%) QoQ (%)
Sales (Rs cr) 2,866.3 13.0 13.4
EBITDA (Rs cr) 447.9 18.6 15.0
EBITDA margin (%) 15.6 74 bps 22 bps
PAT (Rs cr) 306.4 17.4 18.7

Britannia is expected to report 13% yoy growth in revenue led by volume growth. With inflation in check for the key commodities, wheat, sugar and milk, EBITDA is expected to clock 18.6% yoy growth. PAT is expected to register 17.4% yoy growth.
Colgate-Palmolive (India) Ltd. Q2FY19E YoY (%) QoQ (%)
Sales (Rs cr) 1,160.8 7.7 12.3
EBITDA (Rs cr) 326.7 8.7 16.0
EBITDA margin (%) 28.1 26 bps 90 bps
PAT (Rs cr) 196.4 10.6 3.6

Colgate is expected to report revenue growth of 7.7% yoy led by ~5% yoy volume growth. Amid inflationary scenario, EBITDA margin is expected to remain mostly flat on yoy basis at 28.1%. Leverage in depreciation costs and lower tax rate would result in PAT growth of 10.6% yoy.
Dabur India Ltd. Q2FY19E YoY (%) QoQ (%)
Sales (Rs cr) 2,199.6 12.3 5.7
EBITDA (Rs cr) 470.2 12.0 21.8
EBITDA margin (%) 21.4 -6 bps 282 bps
PAT(Rs cr) 388.8 7.4 18.1

Dabur is expected to report healthy revenue growth of 12.3% yoy driven by the domestic sales growth of ~11% yoy (volume growth of 10% yoy) and healthy growth in international business (on a favorable base). EBITDA margin is expected to remain flat on yoy basis.
Emami Ltd. Q2FY19E YoY (%) QoQ (%)
Sales (Rs cr) 640.6 2.0 4.3
EBITDA (Rs cr) 191.9 -4.7 55.4
EBITDA margin (%) 30.6 -150 bps 1045 bps
PAT (Rs cr) 144.6 -2.2 442.2

Emami is expected to report muted revenue growth of 2% yoy due to a high base. Inflation in mentha oil and negative operating leverage is expected to result in EBITDA decline of 4.7% and EBITDA margin is expected to contract by 150bps yoy. PAT decline is expected at 2.2% yoy.  
GSK Consumer Healthcare Ltd. (GSKCH) Q2FY19E YoY (%) QoQ (%)
Sales (Rs cr) 1,232.4 10.5 11.3
EBITDA (Rs cr) 304.0 16.3 32.0
EBITDA margin (%) 24.7 123 bps 387 bps
PAT (Rs cr) 226.5 17.7 13.0

GSKCH is estimated to report 10.5% yoy revenue growth led by ~9% volume growth (supported by improvement in rural demand and in affordability post GST rate cut in November 2017). Led by benign input cost and cost rationalisation, EBITDA margin is projected to expand by 123bps yoy. PAT growth is estimated at 17.7% yoy.
Godrej Consumer Products Ltd. (GCPL) Q2FY19E YoY (%) QoQ (%)
Sales (Rs cr) 2,692.3 7.8 10.0
EBITDA (Rs cr) 578.3 6.6 28.8
EBITDA margin (%) 21.5 -25 bps 314 bps
PAT (Rs cr) 415.9 14.9 2.7

GCPL is expected to report sales growth of 7.8% yoy led by domestic sales growth of ~9% (with a pick-up in soaps and hair colours). Though Indonesia is expected to report healthy growth, macro challenges in Argentina and South Africa would impact growth in these regions. International business is estimated to report muted growth of ~3% yoy. On account of higher ad expenses in India and Africa, EBITDA margin is expected to be flat on yoy basis.
Hindustan Unilever (HUL) Q2FY19E YoY (%) QoQ (%)
Sales (Rs cr) 9,299.2 13.4 -0.6
EBITDA (Rs cr) 1,997.4 18.8 -11.3
EBITDA margin (%) 21.5 96 bps -258 bps
PAT (Rs cr) 1,440.3 16.5 -5.8

HUL is expected to report sales growth of 13.4% yoy led by volume growth of ~9% yoy (driven by improvement in the rural demand and stabilising trade channel and ~4-5% price hikes in certain categories such as skin care and detergents). EBITDA is expected to grow by 18.8% yoy with marginal improvement in EBITDA margin as advertisement spend will continue to be higher. PAT is thus expected to witness 16.5% yoy growth.
ITC Q2FY19E YoY (%) QoQ (%)
Sales (Rs cr) 11,054.4 8.1 4.7
EBITDA (Rs cr) 4,245.6 12.9 1.0
EBITDA margin (%) 38.4 162 bps -141 bps
PAT (Rs cr) 2,945.0 11.6 4.5

ITC's revenue would be moderate at 8.1% yoy supported by cigarette volume growth of ~7% yoy (against decline of 6% in Q2FY18) and strong growth in the FMCG segment (~15% yoy). Paperboard and hotel segments are expected to grow at 8% and 6% yoy respectively. We expect agri segment to remain under pressure. EBITDA and PAT are estimated to grow at 12.9% and 11.6% yoy respectively.
Jyothy Laboratories Ltd. (JLL) Q2FY19E YoY (%) QoQ (%)
Sales (Rs cr) 440.2 5.0 8.6
EBITDA (Rs cr) 74.0 2.1 21.3
EBITDA margin (%) 16.8 -48 bps -30 bps
PAT (Rs cr) 42.5 0.5 31.2

JLL’s performance is expected to be impacted by the Kerela flood (contributing 15-20% to the revenue). Revenue for the quarter is expected to witness muted growth of 5% yoy. Also, rising cost pressure will impact the EBITDA growth, which is expected at 2.1% yoy. PAT for the quarter is estimated to remain flat.
Marico Ltd. Q2FY19E YoY (%) QoQ (%)
Sales (Rs cr) 1,791.8 16.6 -11.6
EBITDA (Rs cr) 292.9 13.0 -17.5
EBITDA margin (%) 16.3 -52 bps -116 bps
PAT (Rs cr) 210.9 16.2 -17.5

Marico is expected to clock 16.6% yoy growth in revenue led by strong domestic performance (volume growth of ~6% yoy and ~25% yoy hike in Parachute portfolio). We expect some pick-up in the international business as well. EBITDA margin is expected to remain under pressure due to raw material inflation (mainly copra, rice bran, HDPE and LLP prices). PAT is expected to clock 16.2% yoy growth.
Nestle India Q3CY18E YoY (%) QoQ (%)
Sales (Rs cr) 2,822.4 12.9 5.4
EBITDA (Rs cr) 682.3 15.8 3.7
EBITDA margin (%) 24.2 61 bps -38 bps
PAT (Rs cr) 408.5 19.0 3.4

Nestle is expected to report 12.9% yoy revenue growth led by volume as company’s focus remains on driving volumes and penetration through its cluster-based approach. Benign milk prices would aid gross margin. EBITDA and PAT are expected to report 15.8% and 19% yoy growth respectively.
Tata Global Beverages Ltd. (TGBL) Q1FY19E YoY (%) QoQ (%)
Sales (Rs cr) 1,778.8 5.1 -1.3
EBITDA (Rs cr) 229.5 7.3 -7.7
EBITDA margin (%) 12.9 26 bps -90 bps
PAT (Rs cr) 146.3 0.7 18.7

TGBL is expected to report muted sales growth of 5.1% yoy driven by domestic growth (~8% yoy growth in India Tea business) and Eight O’çlock coffee revenue. Higher input costs in the India tea business are expected to be largely offset by lower ad-spends, resulting in 7.3% yoy EBITDA growth. However, due to the divestment of Sri Lankan associate, EMSPL, PAT is expected to remain flat on yoy basis.
Varun Beverages Ltd. (VBL) Q3CY18E YoY (%) QoQ (%)
Sales (Rs cr) 1,156.1 20.0 -43.9
EBITDA (Rs cr) 206.0 11.1 -64.2
EBITDA margin (%) 17.8 -143 bps -1010 bps
PAT (Rs cr) 39.8 21.0 -87.0

VBL is expected to clock a sales growth of 20% yoy led by inorganic growth (new geographies and Tropicana portfolio). Gross margin is expected to contract due to revenues from Tropicana juices, which is currently a distribution-only arrangement, and hence entailing lower margins. Consequently, EBITDA growth is expected to be lower than sales growth and EBITDA margin would contract by 143bps yoy. Leverage in depreciation and interest costs would result in higher PAT growth of 21% yoy.
Jubilant FoodWorks Ltd. (JFL) Q2FY19E YoY (%) QoQ (%)
Sales (Rs cr) 875.0 20.4 2.3
EBITDA (Rs cr) 147.4 44.2 3.8
EBITDA margin (%) 16.8 278 bps 23 bps
PAT (Rs cr) 77.2 59.3 3.4

JFL is expected to report 20.4% yoy growth in revenue led by ~20% SSS growth (on favourable base and Every Day Value offers). Strong revenue growth and cost saving initiatives would lead to EBITDA growth of 44.2% yoy with EBITDA margin expansion of 278bps yoy. PAT is expected to clock 59.3% yoy growth.

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