Q2FY20 preview: Consumer staples likely to report weak earnings; HUL, Marico top picks

Consumer staples are likely to report a weak set of earnings in the Q2FY20 (July-September), with the above-average-monsoon this season causing floods in many part of the country.

Sluggish rural demand, tight liquidity and muted response to the festival season could add to the slowdown in staples’ demand.

Consumer companies are unlikely to benefit from the corporate tax cut in this quarter, as most have paid their advance tax.

Companies’ revenues are expected to grow at more than 7 percent (YoY), experts says. EBITDA/PAT growth is likely to be 10.2%-15%/7.4%-29%, respectively.

Companies—such as HUL, ITC and Britannia—that saw growth moderate in the June quarter will likely report a stable quarter. On the other hand, companies like Dabur, which delivered robust growth in Q1FY20, will likely see their growth taper a bit, Kotak Institutional Equities has said in a report.

Ind AS 116 and reduction in the marginal tax rate will skew EBITDA growth and earnings growth comps of a few companies and sector aggregates, it said.

Margin prognosis is relatively sanguine, with lower crude and other key RM prices starting to fully reflect in consumption costs across companies, the report said.

In a weak demand environment, promotions and price-offs are intensifying, which means that benefits of the low-material costs will be nowhere as high as it they could have been in a more favourable operating environment. On the other hand, ad spends and new launches will continue to be lower than usual as companies await signs of revival, said Motilal Oswal.

Motilal Oswal prefers Hindustan Unilever (HUL) as its large-cap pick and elevated Britannia Industries and Colgate to the list of preferred picks. It continues to be positive on Marico and United Spirits.