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00:00We are joined by Mr. Kaustubh Pawaskar, Deputy VP Research at Shere Khan by BNP Paribas who
00:06joins us now.
00:07Welcome to the show, Kaustubh.
00:09My first question to you is that, you know, QSR volumes overall have not been very impressive
00:16in FY24, but going forward in FY25 overall as well as Q1 FY25, how do you see the volumes
00:25to be like and what is going to aid the growth?
00:28See, QSR sector as a whole didn't do very well in FY24 and there were reasons like there
00:39was inflation had an impact on the consumption, especially at the QSR space.
00:48We have seen, you know, strong growth coming up for the QSR companies post the COVID.
00:55There were a lot of shift happening to the branded, you know, players.
01:01We have seen delivery model working well for most of the companies during the COVID and
01:08also post the COVID.
01:10So these were some of the drivers for the QSR space.
01:12QSR companies started adding, you know, stores in various markets in India and they continue
01:20to do that.
01:21These were some of the reasons which helped QSR companies to post good performance in
01:25FY23.
01:26FY24 was impacted by, you know, a lot of competition coming up on various platforms and also the
01:37inflation.
01:38So these are two of the reasons which had an impact on the same store sales of most
01:43of the companies, especially in the category such as PISA, which is a high value category.
01:50So that had an impact on the same store sales, but we believe that over the period of time,
01:56you know, growth should come back on track for these QSR companies and we should expect
02:02something from H2 of FY2025 that, you know, QSR players should see a good, you know,
02:11gradual recovery in terms of same store sales for most of the companies, what we are, under
02:17our coverage.
02:18Got it.
02:19Kaustubh, you know, I just mentioned about a Bain note, which was a very interesting
02:24note where they've said that, you know, they're expecting that Gen Z will take the stride
02:30and they will be the one who will be ordering in rather than going into restaurants.
02:34So what are the kind of trends that you're observing in terms of online ordering and
02:39how will this aid QSR as a whole?
02:41Yeah, so as I said, the delivery online is a big shift what we have seen post COVID and
02:48I think that will continue because it is a convenience, you know, strategy, what most
02:56of the companies are focusing on and we have seen online delivery as a big factor coming
03:01during the COVID times and it, you know, most of the companies have seen, you know, improvement
03:08into their deliveries since.
03:11But having said that, going out and, you know, trying to, you know, the new restaurants is
03:16not going to stop.
03:17I think that was the scenario earlier and I think it should, that would continue, especially
03:24in the Indian market.
03:25But the only thing what I can say is that there is a shift which is happening from,
03:30you know, a standalone restaurant to, you know, brands which are happening and as we
03:36can see the per capita consumption improving more and more, the aspirational levels improving,
03:43Gen Z's are, you know, focusing more on the brands.
03:47I think we should see most of these QSR players, you know, getting good turnout because of
03:55it.
03:56And that is the main reason why we are seeing most of these companies, you know, are adding
04:01more and more stores into the Indian market.
04:04So last year also we have seen they're continuing with their store addition plan despite the
04:09fact that they have seen slowdown in the same store sales, but I think the same store sales
04:16should come back on track.
04:18But store addition plan will continue for most of these players who are there in the
04:24Indian market.
04:25Got it.
04:26And, you know, in terms of the raw material prices, you know, recently the government
04:33has, the GST council did recommend a decline in the GST for corrugated boxes, which is,
04:40you know, which constitutes a major raw material constituent when it comes to QSR, right?
04:47So how does this impact QSRs?
04:49Will this benefit, will this aid their margins?
04:52I think it is one of the factors, but the main raw material is like, for example, if
04:58we look at companies for, for companies like Burger King or restaurant pride Asia, Devyani
05:04or pizza, jubilant food works, I think chicken, cheese, these are some of the, or, you know,
05:11dairy products, these are some of the major raw material, you know, elements for them.
05:16And I think we have seen prices softening for most of these raw materials.
05:22I think the benefit of it would start flowing in for the companies in the coming quarters.
05:30Important factor is the competition, which has built up because of the various platforms
05:36like Zomato, Swiggy, which are there in the market.
05:38So there are a lot of regional, you know, players or, you know, standalone players you
05:43have come up with, and they have started competing with these, you know, major brands.
05:48And that is what something which is hurting most of these players.
05:52I think we should expect, you know, this to continue, but we all, all these players, jubilant
06:01food works, restaurant pride Asia or Devyani international, KFC or Pizzart, these are formidable
06:07brands.
06:08And I think definitely they will see a good push in the sales over the period of time.
06:15And Kaustubh, you know, like you mentioned that these guys are also facing a lot of competition
06:20from the local brands, especially in the pizza space that we're seeing that brands like jubilant
06:27food works are facing intense competition when it comes to local chains making those
06:31pizzas.
06:32So, do you expect that these companies will take some kind of price cuts going forward
06:38in order to, you know, aid their business?
06:41See, we have already seen jubilant food work, you know, they have stopped charging delivery,
06:49you know, charges to their customer.
06:51So I think that is one of the important strategy and I think that strategy is working well
06:55for them.
06:56We have seen the curve shifting for them because they have seen good performance in, you know,
07:04relatively better performance, part of four and management is targeting around, you know,
07:09two to three percent, like for like growth.
07:12So if that happens, I think we should see a good recovery in terms of, you know, performance
07:17for jubilant.
07:18And quarter one, I believe that it is one of the good quarters for the pizza companies
07:23because we have IPL season after that, there was, you know, cricket World Cup, T20 World
07:30Cup.
07:31And during that period, I think, you know, this delivery model works very well and for
07:38jubilant, large part of its revenues comes from the delivery model.
07:42So I think it should do well in quarter one and because of the intensity to where people
07:48didn't go, ventured out and I think there was more prominence of ordering food in-house.
07:54So I think players having good high delivery model, I think, a good delivery model, I think
08:01they will do well in quarter one.
08:03Absolutely.
08:04And Kaustubh, so considering all of these things, where do you see value when it comes
08:08to QSR stocks?
08:10You know, we don't have a lot of stocks, but a couple of stocks that you are, you know,
08:16tracking and what are your top picks then, top three picks?
08:20I think Jubilant Foodworks is our, you know, Jubilant Foodworks and Restaurant and Bread
08:25Asia.
08:26These are our preferred pick in the space.
08:28Jubilant Foodworks, I think we should see a good recovery in terms of sales.
08:34I think their margins are also bottom up.
08:37We should expect margins to improve from the current level and I think the stock has corrected
08:43a lot.
08:44And I think from here, if the performance continues to improve, I think we should see
08:48a good recovery, you know, for Jubilant Foodworks.
08:52Restaurant and Bread Asia, I think it's Indonesia business is recovering and it is, you know,
09:01it will add to the overall consolidated business of the company.
09:05But India business is also doing good and they have guided for, you know, a mid-single
09:12digit kind of a sales growth for this year.
09:17I think if they manage to do that, I think they are even Restaurant and Bread Asia as
09:23a company will do well because Indonesia is something which was laggard for them.
09:28I think it has recovered well for them.
09:30Right, right.
09:31Kaustubh, we'll come back to you again, but it's time for a quick break.
09:35On the other side, we'll speak about FMCG sectors, budget wishlist and more.
09:40So stay tuned.
09:42Welcome back, you're watching NDTV Profit.
09:50We're in conversation with Kaustubh Pawaskar of Sheikh Khan by BNP Paribas.
09:54But before we speak to Kaustubh, my colleague Puneet is joining us now with Jeffries on
09:59budget expectation for the consumption sector and which stocks are on Jeffries watch list.
10:05Puneet, take it away.
10:06Yeah, thanks for that.
10:07So Jeffries has written a very comprehensive note on government spending as well as budget
10:11expectations.
10:12And the key takeaways are that governments push on higher capex as well as social benefits
10:17could please everyone in this particular budget.
10:20They've also mentioned that this should bring a positive sentiment to several domestic sectors.
10:25IT and pharma, they have mentioned that could be a couple of which could be lagging any
10:30kind of specific trigger in this particular budget that they will be on a lookout for
10:33it.
10:34When you look at the fiscal outlook, according to Jeffries, they have mentioned they are
10:37expecting the fiscal deficit target around the 5% range for FY25.
10:42They've also mentioned that buoyant tax collection could lead to income tax cuts eventually,
10:47as well as seeing the sectors like discretionary, telecom, as well as retail could be a key
10:51beneficiary of any kind of income tax cuts.
10:54When you look at which stocks would be a key beneficiary of this within the consumer discretionary
10:58space, they have mentioned Jubilant, Devyani International, Zomato, Nike, as well as Hunasa
11:03Consumers is one of the key beneficiaries.
11:06Amongst the telecom space, they are very bullish on Bharti Airtel.
11:10When you look at the other sectors, such as retail, they are very bullish on Trent, as
11:14well as Reliance Industries, and within the consumer discretionary space, they prefer
11:19stocks such as WeGuard, Crompton Consumers, as well as Havels.
11:24Among the passenger vehicle and automobile space, they are very positive on Maruti, and
11:28they mentioned that, you know, in the housing finance space, you know, government is likely
11:32to bring an interest subsidy for urban housing specifically.
11:36They have mentioned that reduction in any kind of borrowing target could also be a positive
11:40for developers, as well as NBFCs.
11:42Now, within this, they have mentioned a few stocks as well, Avas Finance, Home First Finance,
11:47Lodha, as well as Suntech Realty are some of the stocks that they are very positive
11:51on.
11:52And finally, on CAPEX, as well as welfare schemes, they have mentioned that they are
11:56expecting a 20% growth in this particular space and are expecting companies such as
12:00L&T to be one of the key beneficiaries.
12:03In the health insurance, also expansion will be one of the key things that they'll be watching
12:06out for.
12:07And finally, on Rural Infra and schemes, could benefit stocks such as TVS, Hero, Mahindra
12:12Mahindra and HUL.
12:13Back to you.
12:14Right.
12:15Thank you so much, Puneet, for breaking down that for us so comprehensively.
12:19Kaustubh, you know, I want to come to you, you know, post the elections, there have been
12:24talks around that, you know, we will be expecting some kind of populist schemes in the budget.
12:31Going forward.
12:32And this will for sure aid the FMCG companies.
12:34What is your view on that?
12:36And what are the kind of companies that you think will benefit?
12:39Certainly.
12:40So there is an expectation that, you know, there might be some income tax cuts, which
12:46will be available for the middle income group and also a lot of welfare schemes or incentives
12:53might come up for the rural India as well.
12:56So if it happens in the budget, I think it is going to be positive for the FMCG companies.
13:03I think more from the rural perspective, because rural has been laggard for, you know, FMCG
13:09sector for past one, one and a half years.
13:13And I think if monsoons are good, there are some incentives in budget, production, battery
13:19production is good.
13:20I think that augurs well for rural and we should see a good recovery in rural market
13:24from the second half of the year.
13:26For mass consumption, if income tax cuts are there, I think, you know, the lower end of
13:32the discretionary space, including QSRs and apparels, I think they might see a good recovery
13:38in terms of, you know, sales in the quarters ahead.
13:44So I think if there are good schemes coming out of the budget, I think most of these QSR
13:51players or retail players, or even the rural centric FMCG companies might, you know, see
13:57or perform well and those are the companies one should look upon.
14:02So in that context, I think Hindustan Unilever, Dabur India are our preferred pick in the
14:09FMCG space.
14:10In QSRs, I have already spoken about Jubilant Foodworks or Restaurant Bradish and the retail
14:20space.
14:21We continue to like Trent, Titan, these are our picks in the retail space.
14:27And you know, in terms of ITC, there has been a lot, if you track this company, there has
14:32been a lot of buzz around the taxes around cigarettes, you know, and we're expecting
14:36that with the budget coming in, there will be some kind of hikes in terms of taxes for
14:42cigarettes.
14:43What do you expect in the budget, one thing, and how do you think will this impact the
14:47volume growth for cigarettes for ITC?
14:52So it depends on the quantum of the hike, because for the last few years, we have not
14:56seen a significant increase in the tax rate on cigarettes for cigarettes.
15:03And the more focus was on, you know, reducing the percentage of illicit, you know, cigarettes
15:13which are available on the market.
15:15So if the tax rate hike is more than, you know, isn't high, single digit to lower digit,
15:23I think that might have some kind of impact on the volumes, but, and if it is lower than
15:295%, I think, I don't think it will have any significant impact on the volumes, because
15:35the price increases for the companies will be taken, it will be get absorbed in the market
15:39over the period of time.
15:41But if the tax rate hike is more than 8%, 8 to 10%, I think that will have some bit
15:46of impact on the volumes, you know, of the cigarettes.
15:53And Kaustubh, you know, do you track Alcobev companies as well?
15:58Yes.
15:59Yeah.
16:00So for Alcobev companies, what is your outlook for FY25?
16:06You see Alcobev companies, the companies having portfolio in the prestige and above category,
16:13that particular space is doing extremely well, we have seen Radipo Ketan, you know, continuously
16:17achieving more than 15% volume growth for US and also it is doing good.
16:23I think quarter one would be one of quarter for the Alcobev companies, we might see lower
16:29volume growth in Q1 mainly because of the fact that election was there in this particular
16:35quarter and there were a lot of, you know, days where the liquor consumption was not
16:42allowed.
16:43But barring quarter one, I think we should see a good growth for all these liquor companies
16:49and they are doing extremely well in the P&A category, we have recently come out with coverage
16:56on Allied Blenders and Distilleries, which was listed on the Exchanger Studios back.
17:05I think that company is also focusing on improving their presence in the P&A category and with
17:12reduction in the debt, I think their own more focus will be on expanding their portfolio
17:17in this space and also improving the margins.
17:20So, I think Radipo Ketan, Allied Blenders and Distilleries, these are two of the companies
17:28under our coverage and we believe that the overall momentum for Alcobev companies will
17:36continue also in terms of the profitability or margins if, you know, E&A prices reduces
17:45in the quarters, which most of these companies are talking about.
17:48So, I think second half would be much, much better for these companies in terms of margins
17:53as well.
17:54Right.
17:55I take your point, Kaustubh.
17:56You know, one question on Patanjali, I don't know whether you track it or not, but the
17:59recent acquisition of its non-food business, what are your views on that?
18:04Because, you know, in the past one year, the HPC category, that is the Home and Personal
18:08Care category has taken over the Food and Beverage category and something like this
18:13would definitely help Patanjali, Patanjali's revenues as well as its bottom line.
18:19So, what are your views on that?
18:20See, I don't have coverage on Patanjali, but on the overall acquisition, I can say
18:25that they are focusing on building up their portfolio, they are trying to become a, you
18:31know, a core FMCG player, they have done acquisition in Foods and now HPC is also under their portfolio.
18:39So, let us see how this overall portfolio is doing for them over the period of time.
18:46Okay, Kaustubh, and one last quick question, you know, in terms of FMCG companies, you
18:51know, we always talk about valuations being extremely high.
18:55So, for you, where do you see the value when it comes to FMCG companies?
18:59Is it the large cap, mid cap or the small cap?
19:02And your top five picks from the FMCG space?
19:07See, we have a selective stance in this space.
19:11We believe that, we have seen that for last three to four quarters, small packs are doing
19:17much better than the large packs.
19:18So, for example, companies like Jyoti Laboratories, you know, Vector Foods, you know, Varun Beverages,
19:25you know, these are some of the companies that have done extremely well in terms of
19:30revenue growth and in terms of profitability as well.
19:36I think these small companies will continue to do well, considering the fact that their
19:41more focus is on, you know, expanding their, you know, base in most of the markets.
19:49So, they are coming up with the capacities, they are entering into new geographies to
19:53gain share.
19:54And I think that will help them to achieve good growth and also once they see a good
19:59scale up in terms of volume and in terms of the revenues, I think that will add on to
20:04their profitability.
20:05Varun Beverages is one company which we do, which we believe that will do extremely well
20:10in quarter one as well.
20:12So I think that is one part of our preferred pick.
20:15We have Jyoti Laboratories as well, which has done well and it is part of our preferred
20:21pick.
20:22In the large packs, we continue to like HUNITC and Godrej Consumers and Darbar India is also,
20:31you know, our preferred pick in the end of the year, because these are companies which
20:35we believe or where we see a good earning visibility over the next two to three years.
20:41Okay, so Varun Beverages and Jyoti Labs in the small cap space is something that you
20:46are looking at and in the large cap HUL, Darbar and GCPR is something that you are looking
20:51at.
20:52Well, Kaustubh, thank you so much for giving us those insights on the entire FMCG and QSR
20:56space.
20:57Thank you for chatting with you.
20:58But with that, we're completely out of time on this show.
21:02Stay tuned to NDTV Profit for more news and updates on the other side.