Consumer Goods - Demand Deceleration Ebbing; Margins to Improve - Result Preview Q3FY15 :: Edelweiss

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For Q3FY15, we expect our consumer goods universe to register revenue, EBITDA and PAT growth of 11.8%, 12.8% and 10.2% YoY (12.4%, 10.6%, 7.1% growth in Q2FY15), respectively. Delayed winters in Q3FY15 contributed to the slight moderation in sales growth. Bigger benefits of low commodity prices will reflect in Q4FY15. The gap in urban/rural growth continues to shrink for most companies. International business sales will also continue to see translational impact though not as severe as in Q2FY15. Ad intensity will be slightly soft in Q3FY15. EBITDA growth is likely to outpace revenue growth due to benign commodity scenario.

Volume slowdown continues for most companies

ITC’s cigarette volumes are likely to decline 7-8% YoY owing to price hikes/regulatory uncertainty.  Pidilite’s volume growth is also likely to slow down to ~8% YoY impacted by muted demand in October (due to many holidays and preponement). We expect Asian Paints to clock 8-9% YoY volume growth. Delayed winters will hit winter portfolio of companies like Emami and Dabur for which we expect volume growth of 9% (11% YoY in Q2FY15) and 7% YoY (8.7% YoY in Q2FY15), respectively. We expect HUL’s demand trajectory to improve slightly and register ~6% YoY growth in volumes.

Margins to start improving; Q4FY15 to be meaningful

We expect most companies in our universe to see expansion in gross margins gaining from cooling commodity prices. However, only partial benefits of the same will flow in Q3FY15 as companies are holding inventory. As per our channel checks with media companies, ad spends have moderated slightly which will aid EBITDA margin expansion. Dabur launched its new light non-stick coconut hair oil, 'Dabur Anmol Coconut Hair Oil with Jasmine'. ITC introduced mid-premium cookies, Sunfeast Mom’s Magic and also launched a new cigarette, Classic Ice Burst. ITC also extended Engage deodorants to cologne. Heightened ad intensity in liquor space was fuelled not only by United Spirits (USL), Diageo and Pernod Ricard, but by the smaller players too.

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