What Are The Key Trends In FMCG Earnings Indicating?

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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.

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