Discretionary cos to fare better in Q4

“Even as we note growth moderation in certain discretionary categories, we expect the discretionary pack to outperform staples on underlying three-year revenue CAGR (compound annual growth rate),” pointed out analysts from Kotak Institutional Equities. As Q4FY20 operations were impacted by the covid outbreak, a three-year CAGR facilitates better comparison instead of two-year average growth.

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Consumer discretionary companies in the paints and adhesives sector are expected to have a three-year revenue CAGR of 7-16%, according to analysts at Kotak.

These companies have effected sharp price hikes to counter increases in raw material cost, but demand is not expected to be hit badly. However, it would be interesting to see the extent of gross margin improvement for paint companies after the price hikes.

Last week, Titan Co. Ltd’s pre-quarter update showed its mainstay jewellery business revenues have increased by 15-16% on a three-year CAGR.

Further, with the easing of restrictions, Q4 earnings of quick service restaurants are expected to reflect the recovery seen in dine-in in the latter part of the quarter. Here, organized and trusted brands would be preferred because of increased awareness of hygiene. This bodes well for companies such as Westlife Development Ltd, which operates McDonald’s restaurants. “For Burger King India business, 3-year same-store sales growth CAGR momentum is growing sharply from Q3FY22 to Q4FY22, as the brand has the highest exposure to malls, which have seen stark improvement in footfall, according to our channel checks,” said analysts at Nirmal Bang Securities in a report on 11 April. These categories are also vulnerable to inflationary pressures but it is not as acute as seen in the consumer staple companies as the demand scenario is relatively better.

Meanwhile, the rural market accounts for a considerable portion of fast-moving consumer goods (FMCG) volumes where sentiment is weak. “There is down trading. Lower income people are switching to cheaper products,” said Varun Singh, analyst at IDBI Capital Markets & Securities Ltd.

With muted rural sentiment and sustained price increases, volume growth is expected to be subdued this time. Higher input costs are expected to hit gross margins of most consumer staples companies despite price hikes. Tata Consumer Products Ltd and Marico Ltd are expected to benefit from the moderation in tea prices and copra prices, respectively.

“In Q4FY22, we saw moderate price hikes in January-February but with a sharp increase in commodity costs in March, more price hikes have followed, and their impact will be evident in Q1FY23,” said a BNP Paribas report on 11 April, commenting on consumer staples.

Overall, savings over the last two years because of covid restrictions is expected to culminate in increased discretionary spending. “The consumption by urban India would be less impacted amid rising inflation in the economy as this hurts low-income consumers more than affluent Indians. This trend is likely to continue in the near-term as well,” said Kunal Vora, head of India equity research, BNP Paribas.