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00:00We have Jignanshu Gaur of Bernstein Sockchain Group, he is the analyst who tracks FMCG came
00:15out with a note, you know, maybe a week or two back talking about how he sees the FMCG
00:23play in India.
00:25So Jignanshu let me keep it, keep my first question more broad based.
00:29You know, we know of the large market that India is in terms of FMCG.
00:36But if you could, if you can please talk to us about when is the inflection point going
00:42to come because you are waiting for volume growth to pick up.
00:47That doesn't seem to be happening at least any time soon.
00:50So when do you believe that the FMCG as a larger play will start unwinding and you start
00:59seeing a reflection of that on listed companies as well as the Indian economy?
01:05So Harsh, firstly, thank you so much for having me here.
01:10I initiated my coverage around a week ago, covering largely discretionary consumer spend,
01:17focusing on retail stocks and focusing on restaurant stocks.
01:22I think overall the large market is visible.
01:27The challenge has been for the last 10 or 20 years, most players in this industry have
01:33been focusing on catering to the top 10% of Indian consumers.
01:39This is visible in where their stores are located.
01:42This is visible in how the products are priced.
01:45We think the story for offline led distribution growth and catering to value buyers across
01:53the income pyramid is far from over and that forms one of the key thesis we have for identifying
02:00stocks which have the legs to grow for long term, grow faster for long term and justify
02:07the kind of valuation multiples that you see here.
02:11Specifically on demand revival, we believe that there are some lead indicators which
02:19will drive the demand for FMCG players going from Q3, probably Q4 onwards.
02:26While the FMCG players have in a way been growing their distribution for the last decade
02:33or so, for the retail stocks and for the restaurant stocks, that story is still not over.
02:39So I think there is a more harder work to do of both curating products and growing their
02:44distribution while maintaining margins.
02:48And I think companies who are able to demonstrate their ability to do that will be able to justify
02:55their growth potential and justify their valuation today.
02:58Right.
02:59Jignanshu, I understand in the medium term you have given us quite a good lens.
03:04But I am talking from a more longer term perspective.
03:08You know we have got GDP per capita at roughly $2500.
03:13Where does it have to go for the engine to kick-start?
03:18Traditionally, the transition from a middle-income country to an upper middle-income country
03:24is considered as the inflection point.
03:27In dollar per capita terms, roughly that comes at $4500 per capita.
03:33Okay.
03:34We just released.
03:35Yes.
03:36Sorry.
03:37Mahima.
03:38Yeah, continue.
03:39Continue.
03:40Go ahead.
03:41So we released a note yesterday talking about Bharat 1.0, which is co-authored by our Director
03:47of Research, Venugopal, where we have mentioned that we expect this to happen within the next
03:54five to seven years.
03:56And that should drive the real inflection point for many of the consumer stocks from
04:00a product perspective.
04:03Mr. Gaur, you know, I want to shift focus to the retail space.
04:08You know, since you have coverage on the retail space, I know and you know, you've said that
04:13you're more positive on the retail side rather than QSR, I'll come to that point, of course.
04:18But you know, right now the elephant in the room is Raymond Lifestyle, which has just
04:22got listed.
04:23And it did list at a premium, but right now the stock is down on 5%.
04:26But if you have that under your coverage, the kind of guidance that the management has
04:31given, do you think that it will be able to achieve that kind of guidance?
04:36So, Mahima, my apologies, right now Raymond is not under our official coverage.
04:41So I will have to refrain from commenting on that.
04:43All right.
04:44Okay.
04:45Then your perspective on trend, because you have an extremely good note that you've come
04:49out with on trend.
04:51Valuations are extremely expensive, of course, but the stock has seen a significant run up.
04:56So your perspective on trend?
05:00I think we need to fine tune the way that we look at some of these companies, given
05:06where they are in terms of their growth cycles.
05:10I think of comparing these companies more as a venture capital or a private equity fund.
05:16Globally speaking, the apparel leader in a country has between 5 to 7% market share.
05:25There is an outlier in Zara Inditex, where they have 9 plus percent market share in Spain.
05:32Today trend overall is starting with a market share of 1.5, 1.8%.
05:38So when the market itself is growing at 10 to 12% conservatively, the ability for the
05:46market leader to emerge in India by F30 and for trend to be that leader is the only question
05:52that we need to answer.
05:54I feel confident that their operational excellence over the last decade or so, coupled with the
06:00corporate governance, coupled with the asset allocation, which comes from a Tata group,
06:08allows them to be that company.
06:10So if we believe that they are that company and we believe that they can get to a 5 to
06:136% market share, then I think the valuation is a second order question and not the first
06:19order question.
06:20Okay.
06:21Having said that, we've come out with a note yesterday on saying, how do you think of valuations?
06:27So if you consider trend as becoming a more stable company by F30 and giving it an FMCG
06:34sort of growth from there, if you discount those earnings today, then you need to expect
06:42a 50 PE then, which is similar to some of the FMCG names today.
06:45So I think that's the frame probably to look at the valuations as well.
06:49All right.
06:50And in terms of QSR, this thing has been in my mind since quite some time now, that a
06:57lot of these QSRs have given a guidance of increasing their stores.
07:02And from what I understand is that the revenue contribution from online sales is continuously
07:08rising and in-store sales has been declining.
07:11So I want to understand that this kind of guidance, first of all, why are the companies
07:15doing it?
07:16And second of all, do you think that the number of stores are increasing, but their per square
07:20feet value is decreasing?
07:23So a great question, Mahima.
07:25I think for QSR players, similar to retail players, there is a catchment area for servicing
07:32a customer.
07:33So you need stores if you want to service more customers and especially given the preference
07:39that customers seem to have for QSR food, which is delivery, if you want to do that
07:45delivery faster.
07:46So I think store growth is still necessary.
07:49We have done proprietary work here to understand where the stores exist for which QSR brand.
07:55And we feel confident that most of the forecasts or guidances that the companies have given
08:01are well within the realms of a short to medium term possibility.
08:08As you open more stores, especially when you open stores outside of dense metro cities
08:14tier 1, tier 2, tier 3, tier 4 cities, as some of the companies are doing, your revenue
08:18per store will definitely fall.
08:21I think whether your revenue per square feet falls or not is a strategic choice, whether
08:26you are building stores for delivery, whether you are building stores for dine-in and whether
08:31the companies have gotten that mix of what customer demand to expect.
08:37I think there is a clear divergence happening here where Jubilant seems to believe that
08:45delivery is the future for Domino's and hence they are building a great tech stack, delivery
08:53expertise as well as store economics to align with that, whereas both McDonald's, KFC and
08:59Pizza Hut seem to cater to slightly more aspirational audience and inviting more dine-in customers
09:06with their store and operating structure.
09:09I think that choice is what will define how companies are behaving.
09:14I am not too worried if when they open stores, their revenue per store or revenue per square
09:20feet falls.
09:22I am more worried about their margin per store.
09:25Alright, very interesting.
09:30And if I were to ask you your view with regard to whether delivery will be the future or
09:36whether coming and dining-in will be the future, what model would you prefer to pick, both
09:44from a margin perspective as well as from a value creation perspective because there
09:49is a larger need for deeper penetration but at the same time there is also a larger need
09:54for balanced penetration to ensure that you are doing profitable growth.
10:02Again, Harsh, thank you, that's a great question.
10:06What I would do is figure out segmentation of the Indian consumer.
10:11If you have a product, the segmentation will be by two axes.
10:17One axis is the metro versus tier one cities, the second axis is the income pyramid.
10:24If your product is catering to the top 10% of income pyramid, you would rather want to
10:30have dine-in as the preferred option because you want to give people experience.
10:39And the choice that most companies have to face is the reality that for QSR brands, pizza
10:47has already become a delivery category.
10:52The pizza that QSR firms offer is a delivery category.
10:56I do not think anybody can fight against that going forward.
11:01Ghoor mein pizza will remain a dine-in category but the brand association does not allow the
11:09QSR firms to really profit from it.
11:11So I think if your pizza is a category, you need to be delivery focused.
11:16It's unlikely that dine-in will come back strongly at these price points, it might come
11:22back at much higher average order value or pizza price points.
11:27Burger I think is up for grabs.
11:28It's in the flux but I think increasingly as it becomes from an aspirational product
11:37which it was earlier to a usual product in metros, it will become a delivery product
11:44as well.
11:45But as you go deeper into India, when you are competing against unorganized players,
11:51then your dine-in experience becomes a structural advantage.
11:57But then when those stores mature and the customers are mature, there also the split
12:02will start happening.
12:03So I think what we have seen to summarize, including what we have seen in global markets,
12:08what we have seen from your metro versus tier 1, tier 3, pizza seems to be a delivery category
12:17in a mature situation and so is Burger for most cases.
12:23And that I think is something that QSR companies will not be able to, in my view, fight against.
12:30And Mr. Gaur, I also want to understand, you also have coverage on DMART.
12:36Now DMART is a different ballgame altogether but there are a lot of instances where players
12:44like Blinket, Zepto, etc. are always compared to DMART.
12:49So your view as to whether, at least in tier 1 cities right now, do you think that food
12:57delivery platforms like Blinket, Zepto, Swiggy, Instamart are eating away market share for DMART?
13:06My short answer is I don't think so right now.
13:09The rationale for this is that they broadly cater to two different strata of population in India.
13:17Typically, retailers compete on one of the three aspects of cost, convenience and catalog
13:25or variety of products that you have.
13:28DMART is very clearly focused on the cost, QuickCommerce is very clearly focused on convenience.
13:36I think today they have a divergent target group there.
13:42Longer term, the way I would think of it is in terms of the income pyramid.
13:46Let's say, consider DMART as targeting the second, third and fourth decile of the income pyramid.
13:54If we believe that, the question for DMART is, in any given city or tier 1, whether the
14:00inflow of customers who are transitioning from unorganized players to DMART, is it broader
14:07than the outflow of customers who are transitioning out of DMART with affluence to QuickCommerce?
14:13I think for the medium term, that inflow will be higher than outflow, leading to limited
14:20impact on DMART.
14:23So opportunity size, not really common is what I seem to be understanding.
14:31But just in terms of scale, as QuickCommerce scales, do you believe that they will be able
14:37to compete more effectively with someone like a DMART just on the basis of the fact that
14:42they are doing larger volume more conveniently?
14:49I think it is possible.
14:52There are leaps of faith that we need to take to figure out how they will do it, which is
15:00having very large volumes in dry groceries, which is DMART's core advantage.
15:07Having the negotiating power with the FMCG brands to get the pricing, one of the lowest
15:14and offer that grocery basket for a customer cheaper than what is available elsewhere.
15:20They are broadly the same as elsewhere with added convenience and possibly introducing
15:26private label brands.
15:28So it's not impossible, I just feel that today the priority for QuickCommerce is not targeting
15:37that customer.
15:38They have still not tapped out the top 10% of customers.
15:41So getting greater wallet share there by expanding their categories seems to be their approach,
15:47which I think is also in alignment with my colleague Rahul Malhotra who covers Zomato
15:53as a stock.
15:54All right.
15:55And Mr. Gaur, in terms of textile companies, because you also cover the ABFRL part, there
16:02is a lot of headwinds right now in the sector, there is China plus one, there is Bangladesh
16:06plus one, there is also UKFTA.
16:09So I want to understand from a broader perspective that how can all of these benefit the textile
16:15companies?
16:16And also in terms of quantification, do you think that the revenues plus the margins for
16:21these companies will significantly improve on the back of this opportunity?
16:27I think revenue improvement is more easy to think of and more immediate to think of.
16:35Margin will depend on what mix they end up with for which client from a textile perspective.
16:41But I think if you look at the downstream of textile, which is Aditya Birla or Trent,
16:48then they don't need to play on the global market to capture the opportunity which is
16:55present in India.
16:56In fact, I think companies going outside of India today would be a distraction given the
17:01amount of opportunity which is available in India itself.
17:04I'm not talking textile, I'm talking textile or apparel retail specifically.
17:11Jignanshu, thank you so much.
17:13It's been an absolute pleasure interacting, diving deeper into FMCG.
17:16It's been a deep conversation actually, more than just a conversation around names and
17:23just about themes, but it's been deeper.
17:26So thank you so much for this.
17:27It's been fun.