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Tepid Q3 for consumer discretionary companies
What's Buzzing
Consumer discretionary companies are likely to report muted volume offtake in Q3FY23 amid weak rural demand and an unfavourable base.
Context
The I-direct consumer discretionary (CD) universe is likely to report muted volume offtake of ~2-8% (barring pipe companies) in Q3FY23. The lower volume offtake of paints and fast moving electrical goods (FMEG) is attributable to an unfavourable base, weak rural demand and slow inventory build-up of winter related home appliances. The EBITDA margin is likely to remain under pressure (down 100 bps YoY) due to higher advertisement expenses and lower operating leverage. However, sequentially, the EBITDA margin is likely to recover by ~300 bps, supported by a sharp decline in raw material prices from their peak.
Our Perspective
We believe Q3FY23 will be a challenging quarter for FMEG companies as slowdown in rural demand and focus on rationalisation of high cost inventories will lead to muted volume growth of ~2%. On the paint front, decorative paints demand is likely to be muted owing to an unfavourable base and extended monsoons. The paint volume growth (of 3-8%) is mainly attributable to strong industrial paint demand led by both automotive and non-automotive segments. We expect the demand recovery for the coverage universe to kick in from Q4 onwards on easing inflationary pressure and fresh inventory build-up of seasonal products. On the margin front, the EBITDA margin of the coverage is likely to expand by 300 bps QoQ led by easing raw material prices and subsiding inventory losses. Key raw materials like PVC, TiO2 and VAM prices have corrected between 12% and 20% from Q2FY23 level. We believe, under our coverage, Supreme Industries, Astral Poly and Pidilite will see a sharp recovery in EBITDA margin in the range of 280-755 bps QoQ.
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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