Q3 Preview - Consumer Goods & Retail: Slowdown in staples

Discretionary names are expected to continue with strong growth momentum in Q3, led by a good festive season and pent-up demand after the second wave, as per an analysis by research company Emkay Global. 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. Earnings growth is likely to be muted, with a decline in paints and BRIT, and single-digit growth across staples due to margin pressures from higher input prices. Alcobev and Retail are expected to see strong earnings, with higher growth and lower margin pressures. Emkay maintains its overweight stance on Alcobev and Retail/QSR names and expects further outperformance.

Staples are expected to see volume slowdown due to weak rural demand: Emkay expects staples to report slower volume growth and muted earnings on account of weak rural demand and high margin pressures. As Covid tailwinds fade, growth in health and hygiene categories is likely to remain soft on a high base. BRIT is expected to record an improvement in growth, driven by a soft base and high pricing; however, earnings will be lower. HUVR, NEST and ITC are expected to report a relatively better performance, with double-digit sales and earnings growth.

Paints volume growth remains strong; margin decline to impact earnings: Despite high comparables, estimate Paints and PIDI are estimated to record mid-teens volume growth, led by strong consumer spends on home improvement, pent-up demand and likely upstocking ahead of price increase. Pricing growth is expected to be higher at ~8-12%, resulting in a 23-26% topline growth. However, margin pressure will remain high given high comparables and the sharp rise in the prices of crude and other inputs. A slight improvement is estimated in margins QoQ, but operating margins will be lower by 400-900 bps YoY, resulting in earnings decline. Crude/Tio2 are up ~60% and VAM is up by 175% YoY.

Expect Alcobev growth to outperform staples; margins to expand YoY for UNSP/UBBL: Faster unlocking and re-opening of the on-premise channel have resulted in a faster recovery in alcobev. Emkay estimates growth for IMFL companies to surpass pre-Covid levels and expect the beer category to reach pre-Covid levels. UNSP/ RDCK/ UBBL are expected to record 10%/ 14%/ 22% sales growth, respectively. We estimate VBL to clock 20% sales growth (2-year CAGR of 14%).

Strong festive sales drives strong turnaround for retailers: TTAN remains the fastest-growing company within our coverage with a 2-year CAGR of 24%. Emkay also expects a significant recovery in QSR, with JUBI surpassing pre-Covid revenue levels (10% 2-year CAGR) and WLDL reaching pre-Covid levels. Apparel retailers are also expected to see a much stronger recovery compared to last year. PAG is expected to report healthy ~20% revenue CAGR and expect ABFRL/ TCNS to reach 110%/ 95% of pre-Covid levels, respectively.