The March quarter (Q4FY23) earnings for the consumer sector witnessed strong growth after several quarters of weakness, however, the trend has been a little uneven, a report by BofA Securities stated.
Looking at data for 50 major listed companies, the brokerage noted that at an aggregate level, median revenue growth was 13 percent YoY in Q4FY23, higher than the 11 percent growth in Q3FY23 (December quarter).
Contrary to earlier quarters of slowdown, the brokerage said that it witnessed a rebound in all discretionary sub-sectors versus the December quarter, except quick service restaurants (QSRs).
It also mentioned that the median revenue growth for discretionary companies came in at 15 percent YoY in Q4, up from 12 percent in Q3.
"With multiple variables at play including a varying impact of macro/inflation linked volatility, base effects, relevance and timing of festivals/weddings, etc., there is a divergence in growth between sub-sectors; that said, jewellery is a clear positive stand out, esp. the performance of larger names," observed the brokerage.
Meanwhile, it further informed the consumer staples pack delivered a steady median revenue growth of 11 percent YoY in the March quarter, led by the outperformance in the food and beverages (F&) space. The F&B space rose 19 percent YoY in Q4 driven by increasing penetration, pricing, and bottom-up factors like distribution expansion, portfolio expansion, etc.
It also noted that Cigarette's defensiveness is visible as larger names have maintained volume-led growth momentum while the HPC (health and personal care) sub-sector also witnessed an uptick in median growth (+9 percent YoY in 4Q vs 4 percent in 3Q). Meanwhile, alcoholic beverages dropped to 3 percent YoY given pricing and other specific issues, added BofA.
Going forward, it expects volume-driven staples growth as pricing tapers off. While rural volumes are starting to inch up, it is important to keep an eye on the impact of other factors including monsoons and govt spending, it said.
Analyzing the recent data, the brokerage also highlighted a wide divergence in the performance of individual names within the apparel, footwear and restaurants/QSR.
"In footwear, apparel, and watches, there is talk of K-shaped recovery with the premium end outperforming entry-level products of late. Moreover, we think names with a higher share of digital commerce may have seen some moderation as an upside during the COVID period normalizes. Even among QSRs, pizza names have shown same-store declines in the last two quarters, while the relatively under-penetrated chicken category grows. Also, commodity costs have a varying impact across sub-sectors - HPC, paints & adhesives benefit from raw material prices, while QSRs, alcobevs, and select F&B names are affected by high agri/dairy inflation," it explained.
It further pointed out that cutting through the quarterly volatility, on a 4-year CAGR basis, revenue trends appear relatively steady across sub-sectors.
With easing pressure on profitability amid the cooling off of commodity prices and initial signs of recovery in the rural market, the brokerage sees hope of volume-led revenue growth for the consumer staples companies in the ensuing quarters.
BofA also noted that the changes in consensus expectations over the earnings season have been modest, though bottom-up trends are mixed.
It believes that volatility is here to stay and we remain selective given where expectations and valuations are.
The brokerage Prefers Titan and Jubilant FoodWorks among discretionary names and likes ITC, Britannia, and Hindustan Unilever in staples.
Stock Picks
Britannia Industries: BofA has a price target of ₹5,540 for the stock, indicating an upside potential of 12 percent. The high absolute valuations are warranted, said BofA, given the long-term growth opportunity, particularly in the packaged F&B space. It added that For Britannia, BofA's multiple is at a 10-15 percent premium to the stock's 5-year average forward trading multiple, which is warranted, given the business outlook, competitive position, execution history, and possible likely upsides from portfolio diversification.
Hindustan Unilever: The brokerage has a target price of ₹3,000, indicating an upside potential of 12 percent. This is in line with its average forward trading multiple over the last 5 years, said BofA. It believes the multiple is warranted given the reasonably steady growth rates expected and improving competitive positioning.
ITC: BofA has a target price of ₹500 on the stock, implying a 12 percent upside. The brokerage has ascribed a 17x multiple on FY25E EBITDA for cigarettes, reflecting the company's solid market positioning and current business outlook. It also noted that other FMCG business is valued at 5x FY25E revenues benchmarked to the Indian F&B universe. Meanwhile, it has applied 8x, 17x, and 35x multiples on FY25E EBITDA for the agricultural, paperboard/paper/packaging business, and hotel businesses, respectively. It has also valued ITC Infotech on 17x FY25E earnings.
Jubilant FoodWorks: The brokerage has a price target of ₹555, indicating an upside of 14 percent. BofA believes this is justified given the strong growth headroom for the business over the medium-to-long term.
Titan: The brokerage has a target price of ₹3,200 for the stock, indicating an upside of 10 percent. Titan's execution track record has been good and BofA sees continued opportunity for market share gains. Like most prominent consumer businesses in India, absolute valuations remain high, given the solid positioning and long-term growth prospects, it added.
