Consumer: Return of smaller, regional players

16 Nov 2023 , 11:35 AM

Return of smaller, regional players

Many companies have been calling out increased competition from smaller, regional players in Q2FY24. Analysts at IIFL Capital Services believe that this is just a normalization of a past disruption playing out at a time when conditions are most favorable and is likely to stabilize in the coming quarters.

Nykaa – operating leverage benefits

Nykaa has been able to maintain its EBITDA margin in recent quarters, despite increase in competitive intensity and weakness in ad-revenues. Apart from improving contribution margin in fashion and others segment, leverage in common costs from a solid top-line growth are also playing a part in driving margin stability.

ITC – growth is good considering overall demand and base effects

ITC’s volume growth in cigarettes in Q2FY24 at 4% was lower than IIFL’s estimate by 100-150 basis points and versus the previous quarter (~8%). Analysts at IIFL Capital Services explore the impact of base effects, and how they will pan out in future, as well as comparison of cigarettes sales growth with the rest of the FMCG universe.

Pizza – no recovery in Dominos, but PH worse

LFL performance for Jubilant Foodworks has not worsened versus Q1FY24 which may indicate the demand has stabilized. However, the sales per store performance on a QoQ basis is still tracking below pre-COVID levels. In Pizza Hut, while the SSS performance (10-20% decline this quarter) indicates a wide divergence versus Dominos, the QoQ sales per store are weaker than Dominos, but not as bad as YoY numbers.

Paints – Q2 impacted by late Diwali

Paint companies have reported a material slowdown in sales growth trajectory in Q2 and have attributed the slowdown to a late Diwali this year. 

Jyothy Labs – can margins sustain?

Jyothy Labs reported EBIT margin of 16.8% in Q2 (highest in its history) and adjusted for losses in HI segment, the EBIT margin would be even higher at 19.2%. 

Tea – price increase despite pressure on volumes

There is a positive gap between value and volume growth reported by HUL and Tata Consumer in tea category in Q2FY24. This is perplexing in an environment where demand is weak and input tea prices are also benign. 

Go Fashion – Margin resilience? Not really

Go Fashion reported a flattish EBITDA margin despite a decline in same store sales. However, adjusted for rental costs and ad-spends, the contraction in EBITDA margin is quite sharp.

Nestle – QoQ margin expansion

Nestle’s gross margin expanded 182 basis points QoQ in Q2FY24 which analysts at IIFL Capital Services believe is largely driven by incremental pricing. The pricing growth is impacting volumes in noodles where smaller players are gaining share, and unless overall volumes pick up materially, overall Sales/EBITDA growth are likely to slow down.

HUL- HFD pulls down volume growth

HUL reported an overall volume growth of 2% in Q2FY24, dragged down by a mid-single digit decline in foods and refreshments segment. Analysts at IIFL Capital Services estimate volume decline in HFD at ~7-8% and explore the possible reasons of continued weakness in this category.

Dabur – margins managed despite legal costs

Dabur’s EBITDA margin has witnessed a modest expansion of ~50 basis points YoY despite a 120 basis points drag from increased legal costs. While gross margin expansion has contributed, other expenses excluding legal costs are growing in low single digits, which is also aiding the margin performance.