CY23 will see a recovery in low-income consumption: IIFL Capital Services

13 Dec 2022 , 10:09 AM

QSR companies are likely to face headwinds from increased competition, price increase and high base. While other discretionary companies may do well, the past 12 months have also been good. FMCG, on the other hand, can witness a turnaround in volume combined with margin expansion, although already built into estimates. Small cap FMCG names will give better returns if FMCG demand recovery is robust.
Within large caps analysts at IIFL Capital Services prefer HUL, Dabur, Titan, in midcaps Vedant Fashions (VFL) and Emami and in small caps Sapphire, BBQ nation, Mrs. Bectors (MBFSL) and V-Mart. They have downgraded Varun Beverages (VBL) to Add from Buy, on account of valuation.
 
FMCG: Hope to recover

While it is early to call out definitively, macro indicators point to a revival in low-income consumption. Unemployment is inching down, wage growth inching up (very slightly) and demand for NREGA jobs is moderating. With Crude-based inflation coming down and agri inflation moderating, all that is needed for FMCG to revive is some growth in wage rate, which is likely as economic revival absorbs excess labor supply. Analysts at IIFL Capital Services expect volume growth to revive, although sales growth will moderate as pricing comes down. Fall in commodity prices will drive margin expansion. In the event of a strong consumption revival, small cap stocks will give better returns as valuation discount narrows besides growth differential narrowing, given higher proportion of low-income discretionary portfolio in some cases.

IIFL Capital Services’ top picks are HUL, Dabur and MBFSL. Emami and Bajaj consumer too could do well if the consumption recovery is strong.

QSR: A tough year ahead

QSR companies could face headwinds from: (1) Increased competitive activity within the organized as well as unorganized space with store expansion of listed players increasing to high teens versus ~12% pre-COVID. (2) High base from a good FY23. (3) Effect of sustained price increases.

IIFL Capital Services’ top picks in this space are Sapphire (similar growth versus Devyani, ~40% discount) followed by BBQ Nation (moderate growth and return ratios, low valuation). Analysts at IIFL Capital Services are not very positive on the two larger companies, namely, Devyani and Jubilant, nor do they have a strong preference between the two, given that Devyani’s better growth is already commanding premium valuation.

Paints: volume growth may moderate, but margins expand

On the back of strong demand over past two years, analysts at IIFL Capital Services believe that volume growth may moderate in FY24 with low-hanging fruit on market share from unorganized market and higher demand during work from home period being plucked. Mix effect would still be negative, and with pricing muted, overall sales growth will come down to low double digit. With a fall in Crude price, margins are set to expand.

Within the space, analysts at IIFL Capital Services prefer Asian Paints (great execution), followed by Kansai (margin revival), but are wary of competitive risk posed by Grasim when it launches in late FY24.

Other discretionary

Titan can continue to delivery high teens sales growth as volume per store in FY23 is still ~14% below long-term average; however, given the strong FY23, there is a risk that recovery is not linear and FY24 may see a pause. V-Mart is a play on low-income discretionary consumption revival and a good tactical buy, whereas VFL is a strong secular growth story with optionality from growth in Women’s Wear. DMart seems to be priced reasonably, though needs sales per store to accelerate for becoming one of IIFL Capital Services’ preferred picks.