BNP Paribas' September India Consumer Report: Key Highlights
Kunal Vora shares key highlights from BNP Paribas' September India consumer report. #BQLive
Transcript
00:00 Hello and welcome to BQ prime. You are watching this special interaction on the Indian consumer
00:04 sector and joining me today is Kunal Vora, who is the head of India equity research at
00:08 BNP Paribas. Kunal, thank you very much for joining us in BQ prime. Let me start off with
00:15 the first thing. You know, last couple of days and I think couple of weeks we have seen
00:19 crude inching up to about 90, 95 dollars a barrel and it has a, you know, impact on the
00:25 entire consumer sector. How do you look at the entire scenario of how consumer companies
00:32 are going to manage this kind of raw material escalation as a result of crude price?
00:37 Yeah, hi Sajith. Thanks for having me. So, our view on the consumer sector has been a
00:44 little negative and this adds to the pain which we are seeing right now. So, if you
00:49 look at over the last few quarters, the revenue growth for the sector has been coming off.
00:55 If I look at like longer term, the sector has grown at about 8% in last decade. The
01:00 growth rate briefly inched up to double digits in that like high inflation period. But as
01:06 the inflation moderated in the last few quarters, the revenue growth has started coming off.
01:11 So, what you have now is pricing which is fading and volumes which are not really recovering
01:17 in a big way. And the volumes are not recovering significantly. The reason being that there
01:22 has been a sizable 30-40% price increase in many categories over the last few quarters
01:28 and the reversal has not happened. So, what we are seeing now is a fading pricing benefit
01:35 of weak volumes which are also partly caused by the rising competition, especially the
01:41 small players, regional players are making a comeback. And what was countering that was
01:46 the expansion in margins because RM cost had come off. But that tailwind also seems to
01:53 be going a bit away because the crude has started inching up. So, crude which went to
01:57 about 70 levels is now back to 95 plus levels. And crude is not the only one. We have also
02:03 seen some inflation in lab, seen some inflation in palm oil. So, RM inflation is making a
02:09 small comeback. It is still not a big worry. But yeah, if this continues, it is something
02:13 which can become a headwind. My FMCG report tells me that if you look
02:18 at the ground, on the ground, you are going to see, you are seeing a lot of small players
02:22 coming and taking away pie of the larger players, especially the unbranded players who were
02:30 in a sidelined when the prices were going up. And now there is a lot of demand has moved
02:38 to those unbranded players. Do you also agree to that, that there is a revival in the smaller
02:47 players, small and medium players who are chipping away the shares from the larger players?
02:55 Yeah, that is the normal course of action which we have seen historically also. Wherein
03:01 when the RM cost is inflating, there is very high volatility, these players find it difficult
03:06 to manage. But what we have seen in the last few quarters is RM cost has come off and the
03:12 larger players have not lowered prices. So, that really provides some space for smaller
03:17 regional players to increase the competitive intensity, gain some market share which they
03:22 might have lost during periods of high inflation. And we have seen that, this is something which
03:27 we highlighted in our last price tracker report. So, just a bit about our price tracker report,
03:32 we track products about 150 products across about 20 categories and we look at the monthly
03:36 prices and what is really happening over a period of time. So, what we observed last
03:41 time was that despite RM prices coming off, we did not really see much of an adjustment
03:47 to the prices. And we did not expect that competitive intensity will go up. And that
03:52 is something which was acknowledged during the earning season by a few companies like
03:55 when couple of companies did mention across the FMCG pack that the prices, unorganized
04:03 competition is being a comeback.
04:06 Give me a sense of why companies have not been able to pass through some of the corrections
04:11 in raw material prices in the last few quarters. Means ideally they should have gone for more
04:16 volume because volume have taken a hit because of the higher prices. And because many companies
04:22 have now moved on to the SKU models of smaller ones, volume has further taken a hit because
04:29 of that. So, why they are not being able to pass through, is it that they are looking
04:34 at maintaining margins or at the cost of volumes and market share?
04:39 Yeah, so, what we saw during the high inflation time was the margins have taken a hit, gross
04:45 margins have taken a hit. To an extent they tried to protect it by lowering adjustment
04:51 spent but having said that the margins had come off. So, when the RMCOS started moderating
04:57 the question was like, do you really pass on the entire benefit to the customers? And
05:02 the companies who decided that they also need to recoup some of the lost margins. And those
05:06 what we are seeing in the last few quarters is a significant recovery in gross margin
05:10 for most companies. And part of that will get reinvested ad spend. They are all talking
05:15 about raising ad spend. But having said that you are seeing an improvement in gross margins
05:20 and some improvement in EBITDA margins. But again, it comes at the cost, like volumes
05:25 could remain a little weak, you could also see slightly higher competition as a result
05:28 of this strategy.
05:32 What about the SKU sizes because we had seen, you know, 5 rupees SKU then going up to 10.
05:39 Now we are seeing HUL and others looking and pushing distributors for 20 rupees SKUs. Is
05:46 that going to help in some way for the companies, consumer companies?
05:50 We had seen this shrink inflation phenomenon in the last few quarters, especially during
05:56 the high inflation time. Having said that once the prices are taken up, they do not
06:01 really come down. Like what you could see is some increase in gram margins in certain
06:06 packs. Having said that, we are seeing more of that happening at the value segment because
06:11 value segment is where you see higher competition from regional and unorganized players. But
06:17 on the premium side, we have not seen any reversal. So in large categories like SOAPs,
06:22 Redigins, what we have seen is some changes in the prices in the value segment. But we
06:27 have not seen that happening in the case of the premium. And also where you have seen
06:31 some price adjustments are categories which are more linked with commodities like edible
06:36 oil, like coconut oil, but not really in case of some of the large categories like SOAPs
06:43 and Redigins, especially in the premium side.
06:46 Do you still see some pressure building up in the edible oil side because we have seen
06:51 a lot of price cuts happening in that segment compared to others. You still see that there
06:57 is room for a price cut or companies may look at further price cuts?
07:05 Our price checker indicates that this segment has already seen a large amount of price cuts.
07:10 Having said that, when we also look at raw material costs, raw material costs have come
07:14 up even more. So what we are seeing is some margin expansion. It's a category in which
07:22 making large margins, especially at the value segment, is very difficult. But you are looking
07:29 at the cost and you will keep on adjusting your pricing accordingly. It's not a segment
07:33 in which you can make supernova margins.
07:39 You are underweight on the Indian FMCG sector. Is it only because valuations are rich or
07:46 are there any other reasons why?
07:48 It's a combination of both valuation as well as growth. What you have is a sector which
07:54 is growing at maybe 7-8% revenue growth. Even if I look at EBITDA growth, earnings growth,
07:59 they have been just about low double digits. So for the kind of growth which the sector
08:04 offers, we find the valuations to be rich. If I look at the progression over the last
08:08 decade, the revenue growth in the period 2011 to 2015, these companies were comfortably
08:13 growing at mid-teens. Now that seems to be a distant dream. Coming back to double digit
08:20 growth seems difficult. We saw that briefly during the period of high inflation. But again,
08:26 when I look at street estimates in FY25-26, the market is expecting that these companies
08:31 will continue to report double digit revenue growth of 11-12%, which we believe will be
08:35 difficult. Our estimates for most companies are below consensus. We are at mostly high
08:40 single digits and not double digits.
08:43 And that's only primarily driven by price hikes or volume growth, both of them?
08:48 Price hikes will be having a very, very limited role from here unless inflation really becomes
08:53 a bigger issue going forward. Bulk of the heavy lifting will have to be done by the
08:57 volumes. And we have concerns on volumes because the mass market is not really doing well.
09:03 You have affluent which are doing well, but mass market is still not doing as well. And
09:08 with that, driving mid to high single digit volumes will be difficult. And if pricing
09:13 is not contributing, getting to double digit revenue growth will be a challenge.
09:17 That's interesting that the street is expecting that demand may come back from the roof. So
09:23 rural markets or semi-urban markets in the second half of the year, you don't foresee
09:28 that happening?
09:29 So volume growth will come back. But finally, what we are looking for is revenue growth.
09:37 And we believe that that might be a challenge. Inflation is still having an impact while
09:42 RM costs have come up. You have vegetable inflation, which is still hurting the masses.
09:47 If I look at the rural wage growth, that's still in mid single digits, not really increasing
09:51 much. If I look at agro-commodity price increases, that's again mid single digit. It's not the
09:56 time. Historically in election years, we've seen much larger MSP increases, but we haven't
10:02 seen that kind of a large MSP increase. And there is additional worry which is coming
10:07 in if the RM costs remain elevated, like crude price starts inching up. That becomes an additional
10:12 worry.
10:13 So in the second half, volumes could increase a bit, but not enough to take the revenue
10:19 growth to double digits, which is what the market is expecting.
10:22 Two concerns which one we spoke about is crude prices, which is going up about $95. That
10:30 could have a cascading effect. The other one is about the monsoon, which again people are
10:36 talking about that it's not been as per expectation. And that could also have an impact on the
10:42 rural demand going forward. Have you factored in both of these? Or is there further, you
10:49 know, downside to what you have pencilled in as of now?
10:54 Yeah. So historically, if you see how the consensus estimates have moved, not only for
11:00 consumer, but overall for the Nifty, they typically come down. Wherever you start, you
11:05 typically end at a lower level. So these risks, both the sharp increase in crude price, as
11:15 well as the monsoon, which has been a little weaker, like you had four consecutive good
11:18 monsoons and this year we might end up with a weaker monsoon. I think the latest data
11:22 indicates we are about 6% lower compared to long term average. So these are incremental
11:27 concerns. Our estimates have been below state even without factoring in these concerns.
11:36 Give me a sense within the FMCG sector, there is, you have the home and personal care, then
11:41 you have oral care is separate, then you have, you know, what you call the oil, edible oil
11:52 and other segments which are coming in. Which are the segments which you think may be able
11:58 to stem all those headwinds and may be able to perform as compared to others?
12:05 So growth across consumer staples are not dramatically different. So if I look at longer
12:11 term trends, like HPC companies might have grown at 8%, maybe food companies have gone
12:17 down a percent more, 9 or 10%. But where you can see difference is not within staples,
12:23 but like, see, if you look at staples versus discretionary, whatever categories are being
12:27 driven by the affluent consumption, which is like really the top 10% of households,
12:31 those are the ones which are doing well. And they are not really in staples. In staples,
12:35 you have like food businesses, which are doing slightly better compared to HPC. But at the
12:41 same time, you see much higher growth in discretionary compared to staples right now.
12:46 And within discretionary also, within discretionary also to add, again, we can split into mass
12:51 discretionary and the affluent really. And like what we are really seeing is the affluent
12:56 consumption, which is driving consumption right now. And even for FMCG companies, which
13:02 are more aligned to premiumization, they are likely to outperform.
13:07 Biscuits also for food and biscuit segments as well, you will see the same kind of growth,
13:14 8 to 9%.
13:16 So even in that segment, if I look at near term, there are concerns. This is one segment
13:22 which are which the companies have highlighted that an organized competition is making a
13:27 comeback. It is also a category in which price hikes have been meaningful. So while our longer
13:33 term view on the food business remains positive, but the near term concern is that they also
13:38 have a high base to deal with.
13:41 I know you have an underweight on the entire FMCG sector, but within the sector, which
13:47 are the companies that you like?
13:53 So without getting into specific names, we like certain companies from the food business.
13:58 We also like the tobacco space, conglomerates which are operating in tobacco plus FMCG.
14:05 So we have a few preferences, but again, that's within the sector. But if I look at from a
14:09 strategy perspective, which is a different other hat which I wear, consumer staples is
14:15 underweight for me.
14:16 Kunal, it was a pleasure talking to you today. Thank you very much for joining us today on
14:20 BQ prime.
14:21 Thank you, Sajith. Thank you.
14:23 Thank you.
14:24 Thank you.
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14:35 Thank you.
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