Front-ended margin expansion likely for Consumer companies: IIFL Capital Services

1 Jun 2023 , 10:51 AM

 

• Front ended margin expansion

With input cost deflation playing out, some FMCG and Paint companies witnessed a sharper-than- expected margin expansion in Q4FY23. Analysts at IIFL Capital Services expect margin expansion to play out largely in FY24 itself with modest margin expansion in FY25.

 

• KFC subsidizing Pizza Hut?

Despite softening of key input (chicken) prices and an uncertain demand environment, KFC is the only QSR format which has taken a price hike in CY23 YTD. On the other hand, Pizza Hut margins have suffered on account of continued inflation in cheese prices.

• Dabur – a bad quarter

Dabur reported weak sales growth (5.9%) and 271 bps contraction in EBITDA margin. These can be partly explained by certain one-offs affecting the sales growth and EBITDA margin separately.

• Varun Beverages (VBL): Is high capex justified?

VBL has announced large capex plans in CY23 (Rs. 15 billion), which is coming on the back of a heavy capex year (Rs. 18 billion in CY22). However, despite large capex, VBL is expected to generate positive free cashflow cumulatively in CY22+CY23, coupled with improvement in ROIC.

• United Spirits – Sharp margin expansion

Despite being a seasonally weak quarter, United Spirits reported a 40bps EBITDA margin expansion in Q4FY23. While there are certain one-off elements, the current EBITDA margin looks broadly sustainable.

• Dissecting VAHO growth in Marico

As a segment, Hair Oil has done well in Q4FY23 and Marico has outperformed peers on a 4-year CAGR basis. Analysts at IIFL Capital Services have evaluated the possible factors behind this outperformance.

• Tata Consumer – GM decline despite tea deflation

Tata Consumer’s standalone gross margin contracted by 148bps/30bps on a YoY/QoQ basis in Q4FY23. 

• Westlife – Spurt in capex per store highest in the industry

Westlife Foodworld witnessed a capex per store of Rs. 71 million in FY23 – significantly higher than peers and highest vs its own history. Even adjusting for factors such as renovation capex, technology, etc., capex per store turns out to be Rs. 46 million; still on the higher side.

• Go Fashion – volume/value growth mismatch in LFS channel

Go Fashion reported a 61% growth in sales pertaining to its LFS channel (~20% salience) on a volume decline of 35%. Analysts at IIFL Capital Services have reconciled the bridge between volume and the reported value growth.

• Reliance Retail – High growth in major segments

Reliance Retail’s gross sales (ex-connectivity) grew 24% in Q4FY23, but sharply higher growth in Grocery at 66% and consumer electronics (ex-devices) at 37% which form a very large part of its sales. Even Fashion & Lifestyle, which forms the remaining portion, grew 19%.

• Westlife – Gross margin expands; other QSRs still grappling with inflation

Westlife Foodworld reported a gross margin expansion of 320bps YoY and 130bps QoQ, while gross margins for other QSR players were flattish or witnessed a decline. 

• Nykaa – Higher order returns keep fulfilment cost per order in Fashion elevated

Nykaa’s fulfilment cost per order in BPC segment declined by 19% to Rs. 100 whereas, it increased 6% to Rs. 134 in the Fashion segment. Strategic interventions in BPC and higher order returns in Fashion may have caused the dichotomy.