Consumer goods Q3 preview: Discretionary to outperform staples, peg analysts

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Companies operating in consumer staples are expected to report moderate growth in the third-quarter ended December, while discretionary will outperform the consumer goods pack backed by festive demand, project analysts. According to analysts, a slowdown in rural demand coupled with high inflation as FMCG companies battle raw material costs will impact their performance in Q3.

“Consumer staples are likely to record slower growth, with volume growth across most firms in the low single-digits, impacted by the rural demand slowdown and the reversal of Covid-related tailwinds,” said a recent report by Emkay Global.

However, an increase in sales and a rise in footfalls due to festivities in October and November are supposed to have aided the discretionary universe.

“Jewellery retail should see strong underlying revenue momentum aided by share gains. Alcoholic beverage companies should see continued recovery with on-trade channel normalisation and wedding/functions led demand uptick,” said a note from Kotak Institutional Equities.

FMCG: Rural growth story tapers off

A slowdown in rural India coupled with inflationary pressure is expected to have impacted the performance of FMCG companies in the third quarter. Companies such as Hindustan Unilever, Marico, Tata Consumer Products, and Dabur had reported early signs of a rural slowdown in October last year.

Rural demand in the past few quarters has been resilient thanks to government initiatives such as higher spending on the Mahatma Gandhi National Rural Employment Guarantee Scheme, food subsidies, direct cash transfers to farmers, and a “decent harvest,” said Sanjiv Mehta, chairman and managing director of Hindustan Unilever, India’s largest FMCG company.

“Now, as mobility improves and urban markets see a pickup, rural centres, though they are still growing, their growth rates have moderated,” he said.

A report by data, insights and consulting company Kantar confirmed the trend. Rural areas, according to data released by the company, reported 1.5 percent growth in the September quarter compared to 4.5 percent growth in the year-ago period.

Analysts expect the rural growth to have further slowed down in the October-December period impacting their performance during the quarter.

“In Q3FY22, the rural slowdown will be a key issue due to grammage cuts, inflation hurting consumers’ pockets, high base, an uneven monsoon and delay in winter,” said a note by Edelweiss Research.

Besides rural slowdown, inflation, a worry for FMCG companies since the onset of the pandemic, would also weigh in their performance in Q3.

“Significant inflation across raw materials implies the pressure on gross margins will persist, which would start easing off Q4FY22 onwards. Companies have taken aggressive price hikes and grammage cuts—and that would impact volumes,” added Edelweiss Research.

Discretionary to outperform

Discretionary consumer products after struggling with sluggish sales in the first quarter and then gradual recovery in the second quarter as the second wave of the COVID-19 ebbed, are expected to have clocked growth in the third quarter.

Earlier this month, Titan Company in a quarterly update reported to have witnessed strong demand across its consumer businesses of jewellery, watches and wearables, eye wear, and clocked 36 percent growth over the festive quarter last year.

A note by Kotak Institutional Equities, too, pegs discretionary (ex-ITC) will outperform staples pack on underlying (two-year CAGR) revenues. It expects companies in staples to register 9.8 percent revenue CAGR while discretionary to report 16 percent revenue CAGR.

“We expect continued strong growth in paints (decorative)/adhesive companies led by share gains from smaller players and good construction led demand, despite some drag from unseasonal rains,” the brokerage added.

According to Kotak Institutional Equities, jewellery retail should see strong underlying revenue momentum aided by share gains, and alcoholic beverage companies should see continued recovery with on-trade channel normalisation and wedding/functions-led demand uptick.