INSTITUTIONAL EQUITY RESEARCH Consumer & Retail...

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

Consumer & Retail sector

COVID-19 played spoil sport

INDIA | CONSUMER & RETAIL| Q4FY20 Results Preview

13 April 2020

Estimating earnings for Q4FY20 for our coverage companies is challenging because they depends on the following: (1) how much primary sales happened before the lockdown – as some companies had ramped up production; and (2) were companies that produce essential products operational, despite challenges such as availability of labour? We have donned our thinking caps and are trying our best to put all the inputs collected from our channel checks, best of our learnings on consumer behaviour over a past decade, and intellectual capabilities – to crystal-gaze Q4FY20 results estimates. In Q4FY20, the FMCG sector was showing some green shoots in demand until early March, but the COVID-19 outbreak put complete brakes on this recovery. In the initial days of the lockdown, households upped their staples pantry supplies due to panic buying, but disruption in supply chain (unavailability of labour, forced shutdown by local authorities) slowed companies’ primary sales. Discretionary (paints, jewellery, QSR, non-essentials FMCG) have been hardest hit, since stores servicing consumer demand (except some Domino’s stores) are completely shut. We expect sales/EBITDA/PAT decline (aggregate) at 4%/13%/12% yoy for our coverage companies in 4QFY20. Companies that will take the most hit in Q4FY20 in our coverage universe:

Discretionary names – Asian Paints, Titan, Thangamayil and Jubilant Foodworks.

Summer season products to take the hardest knock – Dabur (glucose, juices), Emami (cooling oil) – since channel filling is done ahead of season.

Higher salience from non-essential portfolio: ITC (cigarette); Marico and Bajaj consumer (hair oils); GCPL (Hair colours and HI).

Larger exposure to international business: GCPL (c.50%), Dabur (c.27%), Marico (c.22%), as most of international markets were also in lockdown mode.

Key themes

Essentials to take preference: Indian households have loaded up stocks of essential products, while deferring purchase of non-essential HPC products on the assumption that the current national lockdown might last longer than 21 days. To maximize profits, semi-wholesalers/wholesalers (who deal with multiple companies) and distributors are allocating resources towards categories that are in high demand – packaged foods, hygiene-related products, thereby putting more strain on the sales of non-essential products.

Raw-material index – mixed trends: Prices of most crude-related derivatives (LLP, HDPE) have cooled-off in 4QFY20, which should aid margins of HPC companies. However, food companies may face margin pressure in Q4 because of continued inflationary pressure in milk, SMP, and edible oil. Though, off late, RM prices for most of the essential commodities are cooling-off (dairy c.30%, edible oil c.50%) and if they stay at current levels, it will help companies to mitigate the top-line pressure that could emerge in FY21.

Mixed outlook on margins (difficult to gauge): Most companies (GCPL, Marico, Titan), which have reported numbers for Q4, indicated they were taking an aggressive stance on operating cost efficiency to mitigate pressure on margins. Our margins estimates are based on a significant cut in ad-spends, operation shutdowns (plants, offices), and lower transportation costs. Apart from operating-cost efficiency, low RM index for HPCs will lead to better margin profiles.

Our top picks / avoids recommendations based on 4FY20 results ONLY: Top picks: HUL, Nestle and Britannia Avoids Remaining companies are expected to report weak performance owing to COVID-19 lockdown Vishal Gutka, Research Analyst (+ 9122 6246 4118) [email protected] Preeyam Tolia, Research Associate (+ 9122 6246 4129) [email protected]

mailto:[email protected]

mailto:[email protected]

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

FMCG Q4FY20 RESULTS PREVIEW

Quarterly snapshot

Volume __________Q4FY20E__________ ___________Q4FY19____________ _________yoy change (%)_________

(Rs mn) est. (%) Revenue EBITDA PAT Revenue EBITDA PAT Revenue EBITDA PAT

Large caps

ITC (15.0) 1,09,274 33,331 26,776 1,20,642 45,717 34,819 -9.4% -27.1% -23.1%

HUL 1.5 1,00,721 24,731 17,146 98,090 23,210 15,900 2.7% 6.6% 7.8%

Asian Paints (5.0) 47,531 8,222 4,946 50,182 8,838 4,717 -5.3% -7.0% 4.9%

Total 2,57,526 66,284 48,868 2,68,914 77,764 55,436 -4.2% -14.8% -11.8%

Mid-caps Colgate - 11,433 2,793 1,723 11,466 3,104 2,012 -0.3% -10.0% -14.4%

Marico (5.0) 15,862 2,694 1,907 16,090 2,950 2,130 -1.4% -8.7% -10.5%

Emami (12.5) 5,442 1,168 318 6,396 1,547 561 -14.9% -24.5% -43.3%

Dabur (5.0) 20,215 4,177 3,583 21,282 4,572 4,458 -5.0% -8.7% -19.6%

GCPL (15.0) 21,057 4,645 3,181 24,297 5,796 3,960 -13.3% -19.8% -19.7%

Total 74,009 15,478 10,712 79,531 17,969 13,121 -6.9% -13.9% -18.4%

Food’s companies Nestle - 30,754 6,988 4,697 29,824 7,377 4,633 3.1% -5.3% 1.4%

Britannia (5.0) 26,186 4,414 3,280 27,640 4,366 2,972 -5.3% 1.1% 10.4%

Total 56,939 11,402 7,977 57,464 11,743 7,605 -0.9% -2.9% 4.9%

Retail Titan 45,226 3,821 2,167 46,721 4,556 3,468 -3.2% -16.1% -37.5%

Jubilant Foods (5.0) 8,927 1,143 652 8,652 1,476 819 3.2% -22.6% -20.4%

Thangamayil 3,827 209 134 3,522 182 72 8.7% 15.0% 86.8%

Total 57,980 5,173 2,953 58,894 6,214 4,358 -1.6% -16.7% -32.2%

Small caps Bajaj Corp (5.0) 2,113 612 528 2,383 777 606 -11.3% -21.2% -12.9%

Agro Tech Foods 2,150 168 95 2,000 146 84 7.5% 14.6% 13.2%

Total 4,263 780 623 4,383 923 690 -2.7% -15.5% -9.8%

Total Consumer & Retail 4,50,718 99,117 71,132 4,69,186 1,14,613 81,209 -3.9% -13.5% -12.4%

Source: PhillipCapital India Research ; ITC – Cigarette volume growth ; Marico – overall volume growth

(including international) ;GCPL – Domestic volume growth ; Jubilant Foodworks – SSS growth



Commodity snapshot

Commodities Base Unit INR Unit Q4FY20 Q4FY19 yoy (%) Q3FY20 qoq (%)

HPC

Soda Ash INR/50kg INR/50kg 1,151 1,316 -12.5% 1,230 -6.4%

PFAD USD/mt INR/mt 46,621 30,961 50.6% 36,827 26.6%

Copra INR/qt INR/qt 15,200 15,722 -3.3% 14,653 3.7%

Mentha oil INR/kg INR/kg 1,375 1,768 -22.2% 1,429 -3.7%

Corn (Sorbitol) USD/bu INR/bu 27,137 26,317 3.1% 27,085 0.2%

Palm oil (India) INR INR 729 542 34.5% 643 13.3%

Food & Beverages

Barley INR/qt INR/qt 1,790 1,739 3.0% 2,101 -14.8%

Maize USD/bu INR/bu 27,137 26,317 3.1% 27,085 0.2%

Coffee Robusta USD/mt INR/mt 92,084 1,06,743 -13.7% 94,262 -2.3%

Coffee Arabica USD/lb INR/lb 8,036 7,005 14.7% 7,986 0.6%

Skimmed Milk Powder EUR/mt INR/mt 1,98,997 1,55,030 28.4% 1,96,961 1.0%

Wheat INR/qt INR/qt 2,229 2,091 6.6% 2,250 -1.0%

Milk Powder INR/ltr INR/ltr 45 34 32.8% 46 -0.5%

Gur & Sugar INR/qt INR/qt 3,551 3,453 2.8% 3,664 -3.1%

Sunflower INR/10kg INR/10kg 874 766 14.0% 838 4.3%

Safflower INR/10kg INR/10kg 2,023 1,570 28.8% 1,973 2.5%

Rice Bran INR/10kg INR/10kg 651 597 8.9% 644 1.1%

Packing materials

HDPE INR INR 87 103 -15.3% 85 1.9%

LLP INR INR 46 47 -2.0% 45 2.4%

Other data

TiO2 INR/kg INR/kg 248 274 -9.4% 257 -3.4%

Vinyl Acetate Monomor USD/mt INR/mt 61,374 73,571 -16.6% 64,424 -4.7%

Brent Crude USD/bbl INR/bbl 3,743 4,482 -16.5% 4,457 -16.0%

Gold spot (MCX) INR/10g INR/10g 40,951 32,481 26.1% 38,162 7.3%

Diamond USD/carat INR/carat 8,296 8,507 -2.5% 8,212 1.0%

Currency

USD INR INR – US Dollar

72.36 70.50 2.6% 71.23 1.6%

EUR INR INR – Euro

79.78 80.11 -0.4% 78.91 1.1%

CNY INR INR - China Yuan

10.37 10.44 -0.7% 10.11 2.6%

INR BDT INR-Bangladesh

1.17 1.19 -1.5% 1.19 -1.5%

INR BRL INR-Brazilian

0.06 0.05 14.7% 0.06 6.2%

INR EGP INR-Egyptian Pound

0.22 0.25 -12.9% 0.23 -3.9%

INR IDR INR-Indonesia

196.40 200.59 -2.1% 197.41 -0.5%

INR KES INR-Kenya shilling

1.41 1.43 -1.6% 1.44 -2.2%

INR NGN INR-Nigerian Naira

5.06 5.14 -1.6% 5.09 -0.6%

INR SAR INR-Saudi Riyal

0.21 0.20 6.3% 0.21 2.5%

INR AED INR-UAE Dirham

0.05 0.05 -2.6% 0.05 -1.6%

INR MYR INR-Malaysia Ringgit

17.33 17.22 0.6% 17.11 1.3%

INR VND INR-Vietnam Dong

321.27 329.17 -2.4% 325.70 -1.4%

Source: PhillipCapital India Research



Raw material composition – company wise

Company Raw material % of total RM Company Raw material % of total RM

HUL Palm Oil/PFAD 25 Nestle Milk 25

LAB 10

SMP 7

Tea/coffee 10

Palm oil 10

Packaging/HDPE 10

Sugar 5

Caustic Soda 5

Wheat 9

Soda Ash 5

Coffee 9

LLP 5

Cocoa 5

Other crude derivatives 5

Packaging/HDPE 10

Asian Paints Tio2 20 Marico Copra 35

Solvents 20

Coconut oil 5

PAN/PENTA/Resins 10

Rice Bran Oil 15

Packaging/HDPE 10

Safflower oil 5

Monomers 8

LLP 10

Vegetable oils 5

Packaging/HDPE 15

Dabur Sugar 5 GCPL Caustic Soda 5

Coconut oil 5

Palm Oil/PFAD 20

Groundnut oil 5

Other crude derivatives 10

LLP 5

Packaging/HDPE 15

Juice concentrate 5

Packaging/HDPE 20

Colgate Sorbitol 10 Britannia Wheat 25

Mentha oil 10

Palm oil 15

Packaging/HDPE 20

Sugar 20

Milk 10

Packaging/HDPE 15

Source: PhillipCapital India Research



Valuation snapshot

Mcap

Target ______P/E (x)_____ _____EV/Ebitda______ __% Cagr ( FY19-FY22__ ROE

Large Caps (Rs bn) Rating P/E (x) FY19 FY20 FY21 FY22 FY19 FY20 FY21 FY22 Rev Ebitda PAT FY22

Large Caps

ITC 2,278 BUY 15 18 16 17 14 9 9 9 8 6 4 9 25

HUL 5,136 BUY 50 85 73 60 52 45 41 32 28 13 17 21 10

Asian Paints 1,585 BUY 50 73 57 54 45 44 39 37 32 7 11 18 24

Food companies Nestle 1,624 BUY 55 101 86 78 66 52 50 47 40 10 9 15 72

Britannia 674 NEU 40 58 48 44 39 34 32 30 26 8 9 14 27

Indian companies Colgate ** 370 SELL 30 49 46 44 41 25 24 23 21 6 5 7 56

Marico 383 NEU 30 41 37 37 33 23 20 20 18 5 9 8 30

Emami 104 NEU 15 21 19 20 18 11 11 11 10 3 3 6 18

Dabur 857 BUY 50 59 53 50 45 40 37 35 31 7 9 8 23

GCPL 608 SELL 30 41 40 37 33 25 23 22 20 4 7 7 22

Retail & Discretionary Titan 901 NEU 45 63 65 61 47 46 42 39 31 11 14 10 22

Jubilant Foods 187 BUY 40 57 50 52 37 27 27 28 20 11 9 16 23

Thangamayil 3 BUY 10 11 7 6 5 9 7 7 6 8 10 19 19

Small - Caps Bajaj Corp 20 NEU 10 9 9 10 9 6 7 8 7 1 -4 -0 49

Agro Tech Foods 12 BUY 30 35 30 32 23 17 17 17 13 6 11 15 11

Source: Company, PhillipCapital India Research * We value Jubilant Foodworks on EV / EBITDA basis ** Colgate is a MNC



Earnings Estimates

(Rs mn) Mar 20E Dec 19 qoq (%) Mar 19 yoy (%) Key expectations

ITC

Volume growth (est.) (15.0) 2.5 8.0 Cigarettes to see significant volume de-growth due to lockdown and

loss of market share to GPI and VST

Ebitda margins to impact on account of subdued performance across

segments.

Revenues 1,09,274 1,19,122 -8.3% 1,20,642 -9.4%

Gross Profit 60,981 73,657 -17.2% 74,486 -18.1%

Gross margin (%) 55.8 61.8 -603bps 61.7 -594bps

EBITDA 33,331 46,127 -27.7% 45,717 -27.1%

EBITDA margin (%) 30.5 38.7 -822bps 37.9 -739bps

PBT 36,184 51,676 -30.0% 49,539 -27.0%

PAT 26,776 42,740 -37.4% 34,819 -23.1%

EPS (Rs) 2.2 3.5 -37.4% 2.85 -23.1%

Hindustan Unilever

Volume growth (est.) 2 5 7 Expect 2-3% vol growth owing to ongoing crisis - supply chain

disruption, while soaps to strong growth

Gross margin to see moderate expansion due to inflation in key RM

(PFAD) and lower salience of high margin products

Ebitda margin expansion to continue yoy on back of stringent cost

control, operation shutdown and lower transportation cost

Net income growth will be in line with Ebitda growth

Revenues 1,00,721 96,960 3.9% 98,090 2.7%

Gross Profit 52,412 52,060 0.7% 50,660 3.5%

Gross margin (%) 52.0 53.7 -166bps 51.6 39bps

EBITDA 24,731 24,450 1.1% 23,210 6.6%

EBITDA margin (%) 24.6 25.2 -66bps 23.7 89bps

PBT 23,487 22,290 5.4% 22,270 5.5%

PAT 17,146 16,910 1.4% 15,900 7.8%

EPS (Rs) 7.9 7.8 1.4% 7.4 7.8%

Asian Paints

Volume growth (est.) (5.0) 11.0 11.0 Volume growth to subside to negative on back of mix marriage season

and lockdown

Gross margin to decline yoy due to subdued performance and

unfavourable mix

EBITDA margins moderate decline due to f gradual shutdown of

factories and decline in freight cost

Net income growth to higher than EBITDA growth due to lower tax

rate

Revenues 47,531 54,203 -12.3% 50,182 -5.3%

Gross Profit 19,150 23,313 -17.9% 20,856 -8.2%


EBITDA 8,222 11,894 -30.9% 8,838 -7.0%


PBT 6,694 10,381 -35.5% 7,318 -8.5%

PAT 4,946 7,644 -35.3% 4,717 4.9%

EPS (Rs) 5.2 8.0 -35.3% 4.9 4.9%

Colgate

Volume growth 0.0 2.3 5.0 Increased competition and market share loss will weigh on volume

growth

Gross margins to decline on account of subdued performance - higher

discounting to further weigh on margins

Revenues 11433 11360 1% 11466 0%

Gross Profit 7260 7429 -2% 7378 -2%


EBITDA 2793 3161 -12% 3104 -10%


PBT 2316 2674 -13% 2805 -17%

PAT 1723 2094 -18% 2012 -14%

EPS (Rs) 6.3 7.7 -18% 7.4 -14%

Marico Industries

Volume growth (est.) (5) 2 8 India (ex. Saffola) and International business (country lockdown) to

see subdued performance due to ongoing crisis

Subdued top line to weigh on margins

Revenues 15,862 18,240 -13.0% 16,090 -1.4%

Gross Profit 7,762 8,960 -13.4% 7,890 -1.6%


EBITDA 2,694 3,730 -27.8% 2,950 -8.7%


PBT 2,528 3,580 -29.4% 2,730 -7.4%

PAT 1,907 2,720 -29.9% 2,130 -10.5%

EPS (Rs) 1.5 2.1 -29.9% 1.7 -10.5%

Emami

Volume growth (est.) (12.5) (2.0) 2.0 Emami to witness solid volume de-growth on account of lock down,

lower offtake of discretionary products and low salience of summer

portfolio

Subdued top line to weigh on margins

Revenues 5,442 8,126 -33.0% 6,396 -14.9%

Gross Profit 3,301 5,545 -40.5% 3,889 -15.1%


EBITDA 1,168 2,640 -55.8% 1,547 -24.5%


PBT 403 1,891 -78.7% 847 -52.5%

PAT 318 1,493 -78.7% 561 -43.3%

EPS (Rs) 0.7 3.2 -78.2% 1.2 -43.8%




Dabur India Ltd

Volume growth (5.0) 4.8 4.3 Apart from Health supplement and OTC, all segment, mainly juices to

see a pressure

Slight improvement in gross margins due to benign input cost

Revenues 20,215 22,120 -8.6% 21,282 -5.0%

Gross Profit 10,154 11,235 -9.6% 10,589 -4.1%

Gross margin (%) 50.2 50.8 -56bps 49.8 48bps

EBITDA 4,177 4,895 -14.7% 4,572 -8.7%


PBT 4,317 5,016 -13.9% 4,647 -7.1%

PAT 3,583 4,430 -19.1% 4,458 -19.6%

EPS (Rs) 2.0 2.3 -11.1% 2.1 -3.3%

Godrej Cons. Products

Revenues 21,057 27,551 -23.6% 24,297 -13.3% India business (ex Soaps) and International business to see subdued

performance

Higher promotion in soaps, higher input cost and subdued topline

growth to weigh on margins

Gross Profit 12,214 15,528 -21.3% 14,166 -13.8%

Gross margin (%) 58.0 56.4 164bps 58.3 -30bps

EBITDA 4,645 6,313 -26.4% 5,796 -19.8%


PBT 3,951 5,574 -29.1% 5,070 -22.1%

PAT 3,181 4,230 -24.8% 3,960 -19.7%

EPS (Rs) 4.7 6.2 -24.8% 5.8 -19.7%

Nestle

Volume growth Nestle to see minimal impact of COVID-19

Margins to see pressure due to higher food inflation Revenues 30,754 31,307 -2% 29824 3.1%

Gross Profit 17,683 17,693 -0.1% 17371 1.8%


EBITDA 6988 6779 3.1% 7377 -5.3%

EBITDA margin (%) 22.7 21.7 107bps 24.7 -201bps

PBT 6279 6146 2% 7013 -10.5%

PAT 4697 4730 -1% 4633 1.4%

EPS (Rs) 48.7 49.1 -0.7% 48.0 1.4%

Jubilant Foodworks

SSSG -5.0 5.9 6.0 Store closures due to COVID-19 will have major impact

Higher RM cost, subdued topline led to Gross margin pressure

Negative operating leverage

Revenues 8,927 10596 -15.8% 8652 3.2%

Gross Profit 6,758 7937 -14.9% 6581 2.7%


EBITDA 1,143 2087 -45.2% 1476 -22.6%


PBT 872 1857 -53.1% 1227 -29.0%

PAT 652 1428 -54.4% 819 -20.4%

EPS (Rs) 7.3 13.5 -45.8% 8.5 -14.6%

Thangamayil

Revenues 3,827 4,912 -22.1% 3,522 8.7% Tamil Nadu witnessed lesser COVID-19 impact during the qtr, as

closure came towards the end of qtr

Gross margin to see substantial improvement due to low-cost

inventory and improved product mix

Gross Profit 449 453 -0.8% 357 25.7%

Gross margin (%) 11.7 9.2 252bps 10.1 159bps

EBITDA 209 263 -20.6% 182 15.0%

EBITDA margin (%) 5.5 5.4 10bps 5.2 30bps

PBT 124 199 -37.5% 108 14.8%

PAT 134 129 4.3% 72 86.8%

EPS (Rs) 6.8 9.4 -27.6% 5.2 29.7%

Bajaj Corp

Volume growth -5.0 -8.6 5.5 Expect volume decline of 5% owing to challenging environment

Gross margins to see improvement on account of benign input cost

Ebitda margin to see pressure on account of higher ad-spends

Revenues 2,113 2,055 2.8% 2,383 -11.3%

Gross Profit 1,372 1,371 0.0% 1,554 -11.7%


EBITDA 612 543 12.8% 777 -21.2%

EBITDA margin (%) 29.0 26.4 257bps 32.6 -362bps

PBT 640 607 5.5% 773 -17.1%

PAT 528 501 5.4% 606 -12.9%

EPS (Rs) 3.4 3.9 -12.6% 4.1 -16.6%




Britannia

Volume growth (est.) -5.0 2.0 7.0 Britannia to have minimal impact, however operation shutdown post

lock down will see inventory pressure

Gross margins to see moderate decline

Ebitda margin will expand due to ongoing cost efficiencies program,

operation shut down (plant, offices)

PAT growth higher on account of lower tax rate

Revenues 26,186 29,360 -10.8% 27,640 -5.3%

Gross Profit 10,577 11,718 -9.7% 11,182 -5.4%


EBITDA 4414 5020 -12.1% 4366 1.1%

EBITDA margin (%) 16.9 17.1 -24bps 15.8 106bps

PBT 4368 4969 -12.1% 4502 -3.0%

PAT 3280 3726 -12.0% 2972 10.4%

EPS (Rs) 13.7 15.5 -12.0% 12.4 10.4%

Agro Tech Foods

Revenues 2,150 2,283 -5.8% 2,000 7.5% COVID-19 will have lesser impact on sales as most of the up stocking

should happen in mid qtr

Gross margins to see pressure on account of higher vegetable oil

prices

Ebitda margin to see slight improvement on account of cut down in

ad-spends and cost efficiency program

PAT growth higher on account of lower tax rate

Gross Profit 639 685 -6.7% 649 -1.5%


EBITDA 168 145 15.9% 146 14.6%

EBITDA margin (%) 7.8 6.3 146bps 7.3 48bps

PBT 127 100 26.4% 119 6.5%

PAT 95 75 26.3% 84 13.2%

EPS (Rs) 3.9 3.1 26.3% 3.4 13.2%

Titan

Revenues 45,226 49,397 -8.4% 46,721 -3.2% Sales declined across all segments, with major tremor felt in jewellery

segment as the Titan had voluntarily decided to shut all its retail

stores

Gross margin to see substantial improvement due to low-cost

inventory and improved product mix

Negative operating leverage

Gross Profit 15,435 12,972 19.0% 14,246 8.3%

Gross margin (%) 34.1 26.3 787bps 30.5 364bps

EBITDA 3,821 5,653 -32.4% 4,556 -16.1%


PBT 2,929 5,229 -44.0% 4,650 -37.0%

PAT 2,167 3,707 -41.5% 3,468 -37.5%

EPS (Rs) 2.4 4.2 -41.5% 3.9 -37.5%

Source: Company, PhillipCapital India Research



What trends are likely to play out in a post COVID-19 world? Consumption of essential products will be top-of-mind: We believe until economic activity comes back to normal levels, CPG companies with higher essential products (packaged foods, health, and hygiene) will get maximum customer priority. HUL, Nestle, and Britannia fit very well into this theme. Hygiene related categories / immunity boosting categories to get a leg-up: CPG companies have a golden opportunity to accelerate and develop ‘categories of tomorrow’ such as hand sanitizers, hand washes, and even health-based soaps to capitalise on the change in consumer behaviour because of the COVID-19 breakout. Demand for floor cleaners, disinfectants, and a toilet cleaner (the implementation of the Swacch Bharat mission had already given these a shot in the arm) is likely to move up, as consumers look at more ways to eradicate viruses. With the emergence of Patanjali, consumers had already shown a higher inclination towards natural (chemical-free) and immunity-boosting products, so we believe Dabur is rightly positioned to capture this trend from its plethora of health-based products such as Chyawanprash, Ratnaprash, and Tulsi Drops. Modern trade to suffer; e-commerce to gain: In our opinion, modern trade players who are only doing offline sales (with minimal online presence) are likely to suffer (contrary to market expectations), even if social distancing norms are followed even for next six months. Abeyance to social distancing norms, along with consumer resistance in highly congested areas, can significantly impact flow of customer traffic Moreover, consumers are likely to show higher resistance in purchasing large or jumbo packs (which is the USP of MT players) in times of economic slowdown; this can significantly hurt margins of companies. However, MT players such as Dmart, who have shown greater adaptability, bringing their Omni-channel capabilities at play, are likely to win the game. D-mart has allowed its customers to book orders on the D-mart Ready App, even if there is no D-mart Ready store located in the same vicinity, and customers can pick-up orders at from large-format Dmart stores. In order to comply with social distancing norms, it has decided to open outlets 24*7 in selected areas. Dmart has started ‘store on wheels’ — a service that will facilitate DMart trucks carrying essential grocery items to be parked in residential societies for three hours. Residents can come out a buy these items, thus obeying social distancing norms.



Rural demand is poised to fall: Majority of market participants believe rural demand is not likely to be impacted in a meaningful manner since COVID-19 is more of urban phenomenon. However, we believe the urban to rural migration of workers will result in a sharp fall in remittances, thereby impacting consumption demand. Moreover, migrant workers are likely to return to urban areas after the monsoon only since they have a natural tendency of going back to villages for farm work during the rainy season. With excess supply of manpower in rural areas, rural wages are headed down; the government’s announcement of welfare measures are too little to move the needle. Demand of consumer goods will take a hit. Rural recovery on bumper rabi crop harvest and higher milk prices – in vain! Farmers have not been able to export their agricultural produce due to COVID-19-related challenges in the developed world. We believe that a majority of farmers are finding it difficult to reap their harvests due to non-availability of labour / machines, and lack of public transport that would have otherwise facilitated migrant workers in reaching farms. Even if farmers are able to reap their harvest, they have not been able to realize proceeds from the sale of agricultural produce, as most of the mandis (agricultural markets) are not operating. Procurement prices for milk, the largest agricultural-based commodity, have declined c.30% since March 2020. The HORECA segment (sweet shops, tea stalls, etc.) have completely stopped milk purchases. Moreover, we believe full recovery of milk prices in a post COVID-19 world is an unlikely scenario because farmers’ realisations are likely to be lower – prices of cattle-feed, a key raw material for producing milk, have seen a steep decline due to a sharp fall in demand from the poultry sector and bumper crop harvests, which is why milk co-operatives and companies will procure from farmers at lower rates. HORECA demand will take its own time some to come back to normal. Non-availability of migrant workers will hit distributors’ supply chains system; will not work at optimum levels: Distributors’ operations might get affected due to non-availability of low-cost migrant laborers; generally, local population in most key cities show unwillingness to toil hard at low wages. Cutback in global remittances to cast a shadow on urban demand: We believe major remittances that come to India via Middle East countries is likely to suffer a meaningful blow because of the outbreak, lower oil prices (crude prices have fallen c.50% in the last 3 months), and job losses. Downtrading is “eminent”: With consumer income under severe stress, Indian households are likely to shift to economy products within a category. However, CPG companies are likely to use windfall from benign raw-material prices, at least in pushing “recruiter packs” of premium products, thereby keeping the flag of premiumization flying high. “Wealth effect” is showing divergence, based on geographies: We believe companies with a higher contribution from south India, with the right product portfolio mix, are likely to show much better resilience. This is because of major investments of south India households are in gold (where price have risen c.28% yoy in past one year – more financial comfort). Companies with higher contribution from north India are likely to take a bigger hit, given real estate being a major investment in the north, where price are likely to crack because of the pandemic (less financial comfort).

https://economictimes.indiatimes.com/news/economy/policy/fm-nirmala-sitharaman-announces-rs-1-7-lakh-crore-relief-package-for-poor/articleshow/74825054.cms?from=mdr

https://www.business-standard.com/article/economy-policy/farm-exports-take-a-dip-due-to-covid-19-scare-may-take-months-to-recover-120040100482_1.html



Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. We have different threshold for large market capitalisation stock and Mid/small market capitalisation stock. The categorisation of stock based on market capitalisation is as per the SEBI requirement.

Large cap stocks Rating Criteria Definition

BUY >= +10% Target price is equal to or more than 10% of current market price

NEUTRAL -10% > to < +10% Target price is less than +10% but more than -10%

SELL <= -10% Target price is less than or equal to -10%.

Mid cap and Small cap stocks Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%

SELL <= -15% Target price is less than or equal to -15%.

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INSTITUTIONAL EQUITY RESEARCH Consumer & Retail...

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