Weak sentiment to keep consumer staples' volume growth under 5% in Q4: Jefferies

In the earnings call, investors should watch out for commentary on rural recovery, competitive activity, balance between volume push and margin recovery, the brokerage's report stated. (Representational image)

Consumer staples companies continue to highlight weak sentiments during the quarter ended March 2024 (Q4FY24) because companies under their coverage is likely to report less than five percent year-on-year (YoY) aggregate volume growth, said Jefferies in their latest report on the sector.

The brokerage added that there will be a few outliers in the segment to this trend. Jefferies has HUL, ITC, Nestle, Varun Beverages, Britannia, Godrej Consumer Products, Dabur, Tata Consumer, Marico, Colgate, Emami and Honasa under its coverage.

Demand trend in the quarter will be largely similar to the last few quarters, with subdued operating environment and volume traction at an overall level, wrote Jefferies' analysts.

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"Rural remains weaker than urban, although Marico and Dabur have highlighted a convergence between rural and urban growth in 4Q. Some companies are likely to see slight sequential vol. growth uptick due to company-specific factors like GCPL, Colgate, Marico, Nestle and ITC (cigs)," they wrote.

"Overall, coverage vol. growth remains <5%, with Nestle (+6%), Britannia (+6%) and VBL (+13%) the only outliers," they added.

The stocks under their coverage is likely to see a modest four percent YoY growth with slight decline in product pricing due to price cuts in categories such as soaps, detergents, edible oil and so on. This pace is still better than recent quarter in which the revenue growth was at 3 percent YoY, the analysts wrote.

In revenue growth, they expect the outliers to be VBL, Colgate and Tata Consumer (incl Capital Foods acquisition), who are likely to see double-digit growth. Revenue growth for the others are expected to be less than five percent YoY.

On margins, the analysts said that despite the expansion of around 300 bps YoY, the fourth quarter gross margin will be slightly lower quarter-on-quarter (QoQ) partly because of seasonality.

They wrote, "Ad-spends will likely remain elevated, partly due to increase in competitive intensity as well as plough back of GM (gross margin). This would restrict Ebitda margin expansion to 70bps YoY. With the base normalising now, tailwinds from margin expansion are waning and hence coverage Ebitda growth should grow 7% YoY, similar to 3Q but lower than 16% in 1HFY24."

They added, "Ebitda growth would still be in double-digits for most companies except HUL, ITC, Britannia and Emami."

In the earnings call, investors should watch out for commentary on rural recovery, competitive activity, balance between volume push and margin recovery, the brokerage's report stated.

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