GCPL and Varun Beverages are defying the trends observed in the FMCG sector, says Sharekhan by BNP Paribas' Kaustubh Pawaskar.
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00:00Kaustubh Pawaskar, Deputy VP Research of Sher Khan by BNP Paribas, joins us.
00:04Kaustubh, good morning.
00:05Thanks for joining us.
00:06Kaustubh, you've tracked the sector for decades.
00:10You know, at the start of the year, we talked about how rural demand would come in and support
00:13the sector.
00:14While that's happening, urban consumption has given way.
00:17Volumes have declined across the board.
00:20And I think the joke in the sector is that either you're negative one or you're positive
00:25five in terms of revenue, right?
00:27That's pretty much been the range.
00:28What do you feel?
00:29The worst is behind the sector and the second half is set to get better.
00:33Good morning and good morning to all my viewers.
00:40See, I guess I spoke on your channel that this quarter, the revenue growth would be
00:46in single digit with volume growth expected to be in low to mid single digit and margins
00:52are expected to be lower and because of the input cost inflation and on a y-y basis, fad
00:58growth will be lower compared to what the revenue growth will be.
01:01I think this trend would continue in the quarters ahead.
01:06We expect margins to remain lower because raw material price inflation is there.
01:11However, on the revenue front, we might expect revenue growth to inch up a bit, mainly because
01:17of the fact that the companies would be taking price increase in their portfolio because
01:22inflation has gone up substantially.
01:25If you take the case of rotting prices, it has gone almost by 25 percent, palm oil prices
01:30have gone up in double digits.
01:32So company has to take price increase and it will be across the board.
01:38Even the loose and unbinded players, they have to take price because they cannot sustain
01:42in the market.
01:43So in this scenario, when you know, raw material prices go up, price increases are there in
01:49the market.
01:50Large companies tend to gain share because the pricing premium between the large and
01:55small reduces and that way and that is a time where, you know, FMCG companies, branded players,
02:02you know, gain market share.
02:04So that is what we have been hearing from most of the management, you know, in the conference
02:10call.
02:11However, in terms of demand, rural is gradually picking up.
02:15It is not a significant uptick in demand.
02:18Urban is moderating, but there is a sense that, you know, even rural demand should see
02:25a further pickup considering the good monsoon agriculture output is expected to be good.
02:31So that should help rural demand to continue to see a good run.
02:36Urban demand is expected to be quite stable in the quarter.
02:39So in terms of demand, it is rural to pick up, urban would remain more or less stable
02:45or a little moderated and that is how we are expecting revenue growth to be better
02:50compared to what it was in H1, slightly driven up by, you know, price increases, what the
02:56companies are planning to take.
02:59Right.
03:00Kaustubh, the other concern in this industry is the rising raw material prices.
03:06We've seen that for tea, we've seen that for salt.
03:09I did talk to Tata Consumer and they said that they don't really aggressively hike prices
03:15or have the ability to pass on the price hike because this is a price sensitive industry.
03:19And once you lose a customer, bringing them back becomes a challenge.
03:24Do you feel like given that margins will continue to remain under pressure, stay this way at
03:30best or decline maybe in the second half of the year?
03:33Certainly.
03:34So we don't expect, you know, price increases in line with what the commodity inflation
03:41is.
03:42There will be definitely a gap between the commodity inflation and the price increases
03:47what the companies will be taking because it is going to happen in a gradual manner.
03:51And because of that, I believe, you know, the margins would continue to remain under
03:56pressure in the quarters ahead.
04:01I think once there is a clear stability in the raw material prices, we should expect,
04:06you know, raw material pricing stabilising and then we should expect gradual improvement.
04:12But over the next two quarters, that scenario, you know, seems to be a little difficult.
04:17We should expect margins to remain lower.
04:18We should expect pad growth to be lower compared to the revenue growth.
04:22Revenue growth could be in high single digit to low double digit, but pad growth would
04:26be lower compared to what the revenue growth is mainly because of the low margins.
04:31Kaustubh, just one question from mine.
04:33Good morning, Neeraj here.
04:35We know that there is slack out there.
04:40Where is it that you found a hint of optimism?
04:43Because I, for example, GCPL may not have passed on the entire cost and therefore maybe
04:48there are some margin levers ahead or something else.
04:50I saw Bikaji delivering a half decent quarter too.
04:53Where is the outlier here this quarter thus far?
04:56See, if you look at GCPL's performance, I think it was much better compared to what
05:01the other FMCG companies were, especially at the India business level.
05:04They achieved high single digit volume growth.
05:07That is mainly because of the fact that whatever strategic initiatives they have done in past
05:12few quarters in terms of reformulating their HI business, not taking price increases in
05:20the soaps, but focusing on gradually increasing it, launching, getting into the high growth
05:28categories such as liquid detergents.
05:30I think that is helping GCPL and they have seen an excellent set of volume growth of
05:357% compared to what the other FMCG companies have done in this quarter.
05:41Yet, there are a lot of companies yet to come out with the result, but whatever companies
05:44results have announced, if we compare to that GCPL, India business performance was good.
05:49They also seen a pressure on the margins, but in terms of outlook, they are expecting
05:53volume growth to further improve.
05:55They are expecting revenue growth to get back into the double digit growth trajectory.
05:59And that is, I think, a good commentary.
06:02The companies who have done a lot of launches, focusing on expanding reach in the rural market,
06:08expanding their distribution in the domestic as well as international market, I think these
06:12companies are doing much, much better compared to what the other companies are doing.
06:16And I think GCPL, Varun Beverages is a classic example of it, where these companies are not
06:24doing good only in the domestic market, but even their international businesses are doing
06:27good, especially for GCPL.
06:29We have seen sharp improvement in the EBITDA margins of the Africa business, and that is
06:33expected to continue.
06:34Gradually, we should start seeing pickup in the revenue growth of the Africa business.
06:38So these are some of the drivers which will help GCPL to achieve consistent growth in
06:43the coming years.
06:44So I think they have done well, and we believe that the consistency is going to be there
06:49in terms of GCPL in the quarters ahead.
06:52Same is the case with Varun Beverages because of the distribution expansion.
06:56Also, the international business, they have recently acquired, are doing extremely well.
07:03Integration is happening well.
07:04I think even Varun Beverages will do well in the quarters ahead.
07:08GCPL and Varun Beverages is what Kaustubh likes, constructive on both those stocks from
07:15the medium term.
07:16Global business also for both those companies looking good.