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Consumer Discretionary Preview: Unfavourable base, high inflation weigh on Q4...

ICICI Securities 11 Apr 2022

What’s Buzzing:

The I-direct consumer discretionary (CD) universe is likely to report a subdued performance in Q4FY22 on the back of an unfavourable base and high cost inflation.

Context:

The key raw material prices of our coverage companies such as titanium dioxide, vinyl acetate monomer, aluminium, high density polyethylene are up in the range of 9-60% YoY. We believe limited price hike against the steep rise in raw material prices is likely to weigh on gross margins. This, coupled with low operating leverage, are expected to drag down EBITDA margins of our coverage companies by ~245 bps YoY. Revenue growth is expected to be price led while volumes remain subdued.

Our perspective:

We believe our CD universe will report slower revenue growth of ~8% YoY in Q4FY22 on a high base (+41% in Q4FY21) and lower volume offtakes. Volumes are likely to decline in the range of 7-12% YoY on account of high pent up demand in the base quarter, inventory build by dealers in Q3 and lower demand amid pandemic led disruption. On the margin front, against a sharp increase in raw material prices, companies have taken limited price hike (in the range of 15-21%). This is likely to drag EBITDA margin by 245 bps YoY. However, on a sequential basis, margins are likely to remain flat supported by price hikes in 9MFY22. We believe the YoY numbers are likely to be muted but on a two-year basis, revenue, PAT CAGR is expected at 23%, 35%, respectively, supported by robust demand and market share gains. Over the longer term, we remain positive on the CD universe, as companies are well placed to reap the benefits of a revival in real estate demand, market share gains from unorganised players and improved government spending on infrastructure.

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