Home / Markets / Mark To Market /  Consumer staples cos put up a resilient show in June quarter

Indian consumer staples companies put up a good show for the quarter ended June on the revenue front. A favourable base helped, as the relatively stringent pandemic restrictions last year had weighed heavily on demand in Q1FY21. Companies also used their learnings from the previous year’s lockdown to minimize disruptions in production and supply chain this time around. What’s more, rural demand was strong despite being adversely impacted. A combination of these factors boosted their revenue growth.

“Staples pack revenues grew 16% yoy (organic) and +7% on a two-year CAGR basis," Kotak Institutional Equities analysts said in a report on 20 August. CAGR is compounded annual growth rate. According to the broker, this growth was led by Britannia Industries Ltd, Godrej Consumer Products Ltd (GCPL), Jyothy Labs Ltd, Dabur India Ltd and Marico Ltd, registering +12.3%, 11%, 11.5%, 7.2% and 8% two-year CAGR, respectively.

Note that Britannia’s Q1FY22 operating revenues exceeded analysts’ estimates, even though the tailwinds from the pandemic were not expected to be as high as last year’s. GCPL’s home care segment did well, with the household insecticides portfolio putting up a strong show. India’s largest fast-moving consumer goods (FMCG) firm, Hindustan Unilever Ltd (HUL), marginally missed some analysts’ expectations on revenue, posting nearly 13% year-on-year growth in standalone revenues. Within the segments, HUL’s home care business performed well, helped by double-digit growth in fabric wash.

For the sector, higher input costs played spoilsport on margins. “Raw material inflation was more than expected for the second consecutive quarter," wrote analysts from Jefferies India Pvt. Ltd in a report on 13 August. “Coverage (universe) gross margin (excluding ITC, Varun Beverages) contracted 220 basis points (bps) quarter-on-quarter (versus our estimate of 40bps decline) to 49.6%, lowest in at least five years. This follows a 1.6 percentage point quarter-on-quarter moderation already seen in the last quarter," they added. One basis point is one-hundredth of a percentage point. Here, GCPL and Marico’s sequential gross margin declines were higher at 370bps and 310bps, respectively.

Needless to say, to cope with higher costs, many firms have taken calibrated price hikes across categories in the past few months. With the second wave ebbing, investors can anticipate a good recovery in Q2FY22. While that augurs well, it’s worth noting that valuations of consumer staples’ firms don’t offer scope for meaningful upsides hereon.

On Monday, shares of HUL, GCPL and Dabur touched new 52-week highs on the NSE. Based on Bloomberg data, HUL stock trades at 57 times estimated earnings for FY23. This measure for Marico, Britannia, GCPL and Dabur stocks stands at 44 times, 45 times, 46 times and 49 times, respectively. As such, valuations are not cheap.

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