The Edelweiss consumer pack’s (excluding Nestle and United Spirits) revenue growth, as per IND-AS, tapered to 6.4% YoY (7.8% YoY in Q4FY16 as per I-GAAP). Price cuts by Dabur, Marico, Pidilite and impact of seasonality on Godrej Consumer’s household insecticides (HI) dented growth. Gross margins tapered QoQ, but YoY expansion sustained for 17 of 21 companies (expanded for 16 of 21 in Q4FY16). EBITDA grew 11% YoY (15% in Q4FY16) despite HUL, Dabur and GCPL pruning ad spends on absolute basis. We anticipate price growth to return in H2FY17 following increase in raw material prices (milk, wheat, copra, palm oil etc., prices are up; food inflation at 11% plus a near-term concern for lower end of urban). Good monsoon, 7th Pay Commission payout and GST are key positives.
Monsoon to ease rural distress ; urban growth perking up
Rural growth tapered further in Q1FY17, however, likely to improve in H2FY17 led by strong monsoon. Urban growth, especially in general trade, remains soft, but modern trade is growing at a faster clip—a green shoot. While paint companies—Asian Paints, Berger Paints—sustained double digit volume growth at ~11% YoY each, Pidilite’s volumes jumped 9% YoY. ITC’s cigarette business clocked 3% YoY volume growth (positive after 12 quarters). In staples, while Marico and Emami posted strong domestic volume growth of 8% and 6.4% YoY, respectively, the same was soft for HUL and Dabur at ~4% YoY each. With demand likely to improve gradually, step up in innovations will be the key differentiator (Nestle stands out with ~25 innovations in past few quarters).
Softer ad spends boost margins; price hikes anticipated
Though gross margin growth tapered QoQ, it expanded YoY. However, rise in prices of palm oil, crude & crude-linked raw materials, sugar, flour etc., and likely bottoming out of copra led to some price hikes. While Britannia hiked prices ~5% YoY in the later part of Q1FY17, Marico raised prices of Parachute 5% in July 2016. PFAD prices have risen , which will trigger reversal of promotion/price cuts in soaps. Ad spends as a percentage of sales for HUL, Dabur, GCPL and Jyothy Labs dipped and hence aided some margin expansion—ad spends of Marico, Emami and Colgate remain robust which was validated by better volumes. Intense competition from Patanjali is prompting players like Dabur to step-up promotions, Anniversarisation of phasing off of excise benefit impact for most players will lead to pricing-led growth in FY17. GST rates will be a key monitorable for most consumer companies especially ITC.
