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Q4 volumes low; GPM expanded due to lower input costs


Q4FY2015 results review

Muted revenue growth continues; no volume spark yet: During Q4FY2015, most of the fast-moving consumer goods (FMCG) companies under our coverage reported a mid-single digit volume growth (excluding ITC), resulting in a single-digit revenue growth. Few companies (particularly Jyothy Laboratories [Jyothy Lab] and Marico) reported a low double-digit revenue growth due to price hikes during the quarter. Consequently, the overall revenue growth for the FMCG universe under our coverage was 6.4% in Q4FY2015. The consumer discretionary companies have seen moderate growth in consumer spending in spite of signs of the revival in the urban consumer confidence (as indicated by the Reserve Bank of India [RBI] in its recent macro update).

GPM expansion led by softening input prices; high ad spend continues: It was another good quarter for the FMCG companies in terms of gross profit margin (GPM) expansion on account of declining commodity prices. Highlighted below in the table – “Lower input costs aided GPM expansion on both Y-o-Y and Q-o-Q basis.” While the operating profit margin (OPM) was not much encouraging (particularly for Marico and Zydus Wellness) due to high ad spends on branding and promotional activities during the quarter. The overall operating profit growth of FMCG companies stood at 10.6% aided by strong operating performance of Hindustan Unilever Ltd (HUL; up by 31.7%), Godrej Consumer Products Ltd (GCPL; up by 13.3%) and Jyothy Lab (up by 38.9%).

Outlook

Near-term pain persists; better H2FY2016 aided by urban consumer spending: Though most of the companies witnessed improving demand scenarios and consumer sentiments on the wake of lower food inflation, we believe the pace of translation in spending would take at least one to two quarters. As highlighted in our most of the stock update reports, we continue to believe that improving urban sentiments (consumer confidence almost at a three-year high as per the RBI data) and rising job opportunities would act as a key catalyst for higher spending and urban consumption. On the contrary, the overhang of the delay in monsoon and anticipated drought situation could act as a constraint to rural consumer demand, which may affect volume growth and margins in H1FY2016. However, we believe a faster-than-expected strong recovery in the urban consumer sentiments would benefit the consumer discretionary companies.

Valuation

High valuation unsustainable with low performance; remain selective: Though there has been an improvement in volume growth and GPM expansion, we believe a gradual improvement in the financial performance would not help the company to sustain the premium valuation. Therefore, we remain very selective on the companies, such as Marico and Jyothy Lab (well capitalised companies with a strong product portfolio and market share with a long-term visible business prospects) in the FMCG space while in the urban discretionary space, we prefer Cox & Kings and Thomas Cook India as a good bet due to its long-term growth prospect and strong fundamentals.

Leaders in Q4FY2015: HUL, GCPL, Jyothy Lab, Britannia, Dabur

Laggards in Q4FY2015: ITC, Zydus Wellness

Preferred picks: Marico, Jyothy Lab, Cox & Kings, Thomas Cook

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