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Consumer Discretionary Preview: Unfavourable base, high inflation weigh on Q4...
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.
Disclaimer – I ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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