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The research firm expects Asian Paints, Titan Company, United Breweries, Pidilite Industries, Marico and Nestle India to outperform peers
Continued margin expansion in consumer staple companies should lead to strong profit growth in the fourth quarter of FY19, Kotak Institutional Equities said in a report.
Consistent with recent commentary from some of the large companies in the sector, the research firm expects some moderation in volume growth for most firms. Unexpected slowdown in rural volume growth seems to be the primary reason for slowing growth.
The government’s fiscal stimulus and pre-election spending surge were expected to mitigate the continued headwinds of low real income growth for rural households, and drive acceleration.
Even as volume growth deceleration is built in for all the staples names except Marico (benefits from a very soft base), the research firm expects some uptick in pricing growth as well as mix benefits (higher urban share of incremental growth) to drive improvement in realization growth.
Within the pack, Kotak expects Marico and Nestle India to report the highest volume/value growth. It expects the discretionary names to report significantly better earnings prints than the staples names.
Urban low/mid-ticket discretionary basket seems to be sustaining solid growth momentum. At an aggregate level, the research firm expects the discretionary pack (excluding-ITC; names like Asian Paints, Pidilite Industries, Titan Company, Jubilant Foodworks, United Breweries, United Spirits, etc.) to report topline growth of 18.4 percent YoY, marginally below the 20.3 percent levels reported in 3Q but materially ahead of the staples pack.
Kotak estimates 20 percent+ value growth for Titan Company, PAGE Industries and Asian Paints’ decoratives business.
Margins are expected to expand further on the back of still-benign competitive intensity.
This theme has proven itself to be independent of the underlying demand environment—slow, modest, great, stable, accelerating or decelerating. It is amusing how satisfied companies seem to be with their relative market shares in various categories.
In select categories like detergents, soaps, household insecticides, hair colours, etc., the same has either been funded from raw material tailwinds or cut in advertising spends. Companies seem intent on sustaining what has now become a multi-year trend of consistent margin expansion. Higher the margins enjoyed by established branded products, higher should be the opportunity for new brands or private labels to disrupt.
Numbers-wise, we bake in 87 bps YoY expansion in EBITDA margin for the aggregate universe, 117 bps for staples and 55 bps for the discretionary pack, Kotak Institutional Equities said.
Stocks to watch out for:The research firm expects Asian Paints, Titan Company, United Breweries, Pidilite Industries, Marico and Nestle India to outperform peers.
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