Insights On FMCG Ahead Of Q2 Results | NDTV Profit
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00:00Kaustubh Pawaskar, Deputy VP of Research at Sher Khan at BNP Paribas joins in.
00:04Kaustubh, I don't think anyone knows this sector as well as you, so I'm going to keep
00:08this almost open-ended so you can walk me through what's most important.
00:13But like I said, a whole host of numbers will be declared later this week from the FMCG
00:19pack, starting with Nestle today.
00:22So within the FMCG basket, what is it that you're watching out for?
00:25We'll talk about specific companies as we go along, but begin with the sector expectation
00:31in terms of earnings.
00:32Yeah, hi.
00:33Good morning.
00:34Thanks for having me on the show.
00:35We expect, you know, revenue growth of most of the FMCG companies into mid- to high-sensitivity.
00:45This quarter, you know, because of the high rains and flood-like situation in most part
00:50of India, out-of-home consumption category got impacted and some of the food categories
00:56and out-of-home categories impacted because of it.
01:00Also, as we know, that because of the geopolitical scenario globally, the currency impact is
01:10there for most of the companies, and because of the currency devaluation, it had impact
01:15on the international business of most of the companies.
01:19So overall, we are expecting mid- to high-sensitivity revenue growth for the consumable companies.
01:24This will be largely volume-led growth, you know, while we're talking about, you know,
01:30our out-of-home consumption categories getting impacted, there is a currency impact on the
01:35international business.
01:36The domestic demand was quite stable, where rural is improving, urban demand is quite
01:43stable.
01:44But thus, there is no significant improvement in terms of the rural demand that most of
01:53the companies are expecting in the second half of the year.
01:57So overall, mid- to high-single-digit kind of a revenue growth, revenues will be largely
02:02driven by, you know, mid-single-digit kind of a volume growth, while there will be some
02:07impact of, you know, pricing growth for some companies because most of the companies have
02:12started gradually making the, you know, price increases because there was inflation seen
02:17in some of the commodities such as cobra, vegetable oil, and because of that, you know,
02:22companies have gradually started taking the, you know, pricing action.
02:26So overall, mid-to-high-single-digit growth with, you know, volume growth remaining, you
02:33know, predominantly driven by the volumes.
02:36We expect gross margins to be, you know, flat or a decline on a y-y basis for some
02:42companies because of the input cost inflation, and EBITDA margins to be lower on a y-y basis
02:47mainly because of higher commodity prices for some, and also, we have seen, you know,
02:52most of these companies, you know, having higher advertisement and promotional spread
02:55because the large focus is on improving the volumes.
02:58And we have heard from many companies that the focus is on, you know, recovering the
03:04volume growth, you know, rather than maintaining the margins.
03:07So I think in that context, you know, ad spends will continue to remain high and that will
03:11have an impact on the margins.
03:12So we are expecting margins on a y-y basis to be lower.
03:16So pad growth will be lower than what the revenue growth, what we are anticipating.
03:22So this is the overall, you know, kind of a preview for the sector this quarter.
03:28Right.
03:29Kausub, let's start breaking this down, and I want to start with a sector where you had
03:33a reporting that already came through from DMART.
03:35Now, the retail sector is, we were hoping would show some signs of recovery, but were
03:40failed.
03:41DMART earnings were very disappointing, and it's on back of what we are seeing with the
03:45online players, right?
03:46So your Zeptos of the world are taking over old school retail.
03:51What did you make of DMART and what do you feel about that small vertical, even though
03:54such few listed players, it'd be good to get some perspective.
03:57See, DMART is not under our coverage, but as you correctly said, that, you know, the
04:05quick commerce is having an impact on the large formats.
04:11And that is what it is not like modern trades are not doing good.
04:14Modern trade are doing exceptionally well for the FMCG companies, but some, you know,
04:20segments in the modern trade are, especially for DMART, I would say that, you know, they're
04:27some FMCG segments are not doing well for them.
04:31And we have also seen this quarter margins, you know, lower on YY basis.
04:37So, you know, so quick commerce is really putting impact on DMART and some of the discretionary
04:45items in the DMART stores are yet to see, you know, material recovery.
04:50And I guess that is what really having an impact on the DMART performance.
04:56Yeah.
04:57Kasturp, consumer staples have started showing some signs of recovery last quarter, right?
05:03I mean, we've had many months of low inflation, but of course, with the higher minimum support
05:10prices, rather normal monsoon, I know we had some unacceptable rains that happened, which
05:16have impacted a few verticals, but generally the monsoon was okay.
05:20There has been an increase in minimum support prices.
05:23There's been a lot of consumption incentives going out and even more will go out over the
05:26next few months, given that we've got elections too.
05:29Do you still not feel that consumer staples could be a good sort of reporting or do you
05:34think we'd have to wait for the next quarter to see that?
05:37And in the consumer staple pack, where does your bias or preference sit, if there is any?
05:42Yeah.
05:43So, you rightly said that, you know, it is better to look into the second half of the
05:49year because monsoons are good.
05:51In fact, if you compare it with last four years average, monsoons are good, well spread
05:56out.
05:57So, agri-production is expected to be good.
05:58We have seen government supporting farmers with higher MSPs.
06:02Also, we should expect more incentives coming up with election round the corner.
06:06So, I think, you know, the impact of same would start going in from the second half
06:12of the year.
06:13So, most of the companies have indicated in their pre-quarter update that they are expecting
06:18volume growth to be much better in the second half of the year and that will really drive
06:22the performance.
06:23Also, we have seen, also we expect that increase in the agriculture production, some of the
06:31agri-inflation to tone down, you know, in the coming months and that will also help,
06:38you know, consumer volume to open up, especially prior to the festive season.
06:42So, I guess that might help, you know, FMCG companies to see, you know, good growth.
06:48But overall, if we look into the commodity inflation, commodities have remained volatile
06:54and, you know, that is something we believe is the risk on the profitability in the near
07:00term.
07:01But barring that, I believe that if, you know, rural demand continues to pick up from current
07:06level, we have seen most of the FMCG companies focusing on expanding their reach into the
07:11rural market.
07:12You know, I guess that will help, you know, the companies to see, you know, good growth
07:18in the quarters ahead.
07:19I guess the medium to long-term perspective for the FMCG sector is intact.
07:24In the near term, we expect growth momentum to improve considering, you know, considering
07:31the good recovery in the rural market.
07:34But from the margin point of view, I think the current volatility in the commodity prices
07:39and also the currency headwinds, I think that will have, you know, some impact on the
07:45margins in the near term.
07:47To answer your question about the peaks, I think in the current environment, it is always
07:52better to have large emphasis on some of the large FMCG companies who have the ability,
07:58you know, to, you know, play well when the situation is kind of volatile.
08:06And, you know, we have already seen most of these large companies, they are gaining
08:11in terms of market share, though the demand was lower, though there was an impact on the
08:17rural consumption.
08:18Most of these companies, you know, I've seen good, you know, market share gains in some
08:22of their categories.
08:23So, I guess in the current environment, it is better we should focus on the large companies
08:29like HUL.
08:30ITC is one of our peak because of their discounted valuation.
08:33HUL, I believe that some companies like HUL, Dabur, Imami, they will do well if rural is
08:40back on track.
08:41And we have seen for last year, two years, rural has been underperforming and this year
08:46most of the companies have, you know, have their expectation on the rural market to help
08:51them to see a good volume growth.
08:53So, if rural is back, I think HUL, Dabur, Imami, who has large presence in the rural
08:59market might see a good recovery in terms of growth.
09:03In the mid to large, we continue to like Tata Consumer Products or companies like Jyoti
09:09Labs, you know, which have performed well in the recent past.
09:13And Tata, you know, they have done, you know, recent acquisitions, which is bridging the
09:18gap in their product portfolio and which will help them to achieve, you know, consistent
09:22kind of growth in the medium to long run.
09:24Jyoti Labs has been performing reasonably well compared to other large players for past
09:29few quarters.
09:30And I think this company will continue to do well in the coming quarter.
09:35So, these are some of the companies which we believe, you know, looks good in the current
09:40environment.
09:41Right.
09:42Kaustubh, would you also be interested in getting some of these value retailers?
09:45Because they are also some kind of a proxy to consumers at the bottom end in some sense,
09:50right?
09:51So, if rural recovery is underway, then Tier 2, Tier 3 will also contribute to value retailers.
09:56Absolutely.
09:57So, we believe that V2 Retail, you know, it is part of our coverage.
10:02It is one of the value retailing play which we have, you know, been observing for past
10:09two quarters.
10:10They have been consistently achieving strong double-digit sales growth.
10:15They have changed their business model, which is really helping them.
10:19Their balance sheet is quite strong.
10:21And we have seen that among the value retail play after trend, V2 Retail has a much better,
10:29you know, business model compared to some of the other, you know, value retailing companies.
10:37And they have been consistently performing well, both in terms of, you know, revenue
10:42growth as well as in terms of profitability.
10:44So, I think V2 Retail is a company which will do well.
10:46And we have seen for last five quarters, value retail companies are consistently delivering
10:51good performance in terms of assistance.
10:53Now, rural coming back on track, the, you know, overall disposable income increasing,
11:00you know, more and more Tier 2, Tier 3 town consumers are getting, you know, brand savvy.
11:06I think it should help value fashion companies to do well in the coming years.
11:12Trend is, you know, focusing on the same model.
11:15And we have seen studios doing extremely well for them.
11:19So, I think most of these value retail and value fashion companies will definitely do
11:23well in the coming years.
11:25Kaustubh, Maggie, Instant Noodle Maker, Nestle will report numbers today.
11:29And I believe, from what I understand, margins could come under pressure again for them due
11:33to high coffee and coca prices.
11:36What are the factors that you think will drive earnings for Nestle today?
11:41And what will you watch out for in terms of commentary?
11:43Because I think that becomes very important to determine if the second half becomes good
11:46for these guys too, right?
11:48Absolutely.
11:49So, we are expecting around, you know, 5% kind of a revenue growth and 3% kind of a
11:55bottom line growth.
11:56And as you correctly said, margins will remain under pressure because of the higher commodity
12:01prices.
12:02You know, we have always seen Nestle has been, you know, consistently delivering high single
12:10digit kind of growth in its domestic business.
12:13So, you know, the commentary in terms of how the domestic business environment, because
12:18this quarter, especially we should see some bit of impact on the out-of-home consumption
12:22categories, as most of the companies have stated.
12:25So, that might have impact on the Nestle performance.
12:28But from Q3, especially, you know, prior to the festive season, how the environment is
12:33shaping up for the company and, you know, what will be their strategy to deliver a consistent
12:39kind of growth in the coming years?
12:41What kind of, you know, portfolio mix they will be looking at in the long term, which
12:47will help them to achieve, not only achieve good growth, but also gain market share and
12:52which will also help them to, you know, drive the growth in the coming years.
12:56So, that is something which we need to understand from the company.
13:00Kaustubh, I know we've covered a bunch of the stocks in that conversation, but just
13:06as we try to get a little more consolidated in terms of stocks that you like, what I want
13:10to understand from you is, keeping the valuations, the price movement in mind, the recovery that
13:15we are talking about in the second half, what is your pecking order of stocks, keeping in
13:22mind the risk-reward and the fact that some of these counters may not do too much in this
13:27quarter earnings?
13:30Absolutely.
13:31So, in terms of pecking order, ITC would be number one because, as you know, the valuations
13:38are still very attractive.
13:40We have seen its cigarette and non-cigarette FMCG business doing reasonably well.
13:46So, I think once the demand recovery is good, we should expect even ITC to perform well
13:54for its non-cigarette FMCG business.
13:56So, I think, and its paperboard packaging business, which was the underperformer for
14:01a while, I think the business is on the recovery mode and from this quarter or maybe from the
14:09second half of the year, that business should again start adding value to the overall performance
14:14of the company.
14:15So, I think ITC is number one in terms of preferred picks.
14:21Second, as I said, HUL, mainly because of the fact that we should expect now HUL to
14:26start showing good performance if Rural is back on track.
14:30In terms of relative performance, the stock has not done well in the last month or two
14:35years, but I think if we compare it with the broader indices, but I think if Rural is back
14:42on track and performance improves from here, I think that should add value to the stock
14:48as well in the near term.
14:51Dabur is another stock which has corrected and I think with Rural recovery, I think it
14:56looks good.
14:57Imami is another stock which is part of our coverage.
15:00We should expect to do well with Rural recovery and the second half of the year, quarter three
15:06is one of the important quarters from the seasonality perspective.
15:10So, I think Imami looks good.
15:13Winters are expected to be much better this year and Jyoti Labs is another stock which
15:20in these smaller players has been performing really well compared to some of the large
15:25companies for the past few quarters and I think the company will continue to perform
15:30well.
15:31So, I think these are my five preferred picks in this space.
15:36Very lastly, I don't know whether you track this closely, but the jewelry space is what
15:40I want to get your view on.
15:41With gold prices moving up, for some reason retail investors believe that it's a good
15:45proxy to play gold is to buy gold companies.
15:49So, Titan, Akalyan, Asenco for that matter have done really well even though they don't
15:54gain too much in that sense.
15:56In fact, I'd imagine demand would be impacted due to high gold prices.
15:59Do you track this space?
16:00If yes, any sort of ideas here that you like?
16:05See, we have Titan under our coverage and if we look into Titan's quarter 2 performance,
16:11it was much, much better.
16:12In fact, better than what we anticipated after the Dell quarter 1.
16:19So, and they've already indicated that most of these companies have indicated that Festool's
16:25demand is looking good.
16:27So, now Festool falling in the quarter 3 of this year, I think we should be looking at
16:35more from the quarter 3 performance because Festool will give us the clear indication
16:39despite the fact that the gold prices have gone up, whether the demand has been, you
16:45know, the demand is there or not.
16:47And then it will be followed by the Amaris season.
16:50So, I think, you know, most of these jewelry stocks should do well from the demand perspective.
16:57Important factor over here is that there is a lot of shift which is happening from
17:01unorganized to organized play and most of these jewelry players are gaining because of it.
17:06Most of these players are focusing on, you know, getting into the tier 2, tier 3 markets
17:11where they are, you know, trying to gain market share from this, you know, small jeweler
17:19or, you know, who has a standalone jeweler.
17:24So, I think that is something which will help most of these jewelry players in the near
17:28term.
17:29But in the near term, obviously, the gold prices, though the demand is there, I think
17:36there would be some kind of cap in terms of the purchase value or the ticket value for
17:40the jewelry companies because of the higher gold prices.
17:43But obviously, demand, most of these players have indicated that it is good.
17:48Right.
17:49Demand is looking good.
17:50And it's, of course, just sort of the festive season.
17:52Thank you, Kostav.
17:53Always great talking to you.
17:54And thank you for all those great ideas for our viewers.