Here’s what UBS expects from consumer staples in Q3 FY22

UBS expects the HPC industry to face increased competition from new regional brands / brands, given the backdrop of declining commodity prices.

(Representative image) | Photo credit: iStock images

Highlights

  • Price and leverage to increase margins
  • Staples for displaying lower volumes; discretionary likely to outperform
  • Outlook Volume, Pricing, and Execution Key

Profit season has arrived and consumer staples companies are expected to release their numbers from next week. In the second quarter, corporate margins were clearly under pressure due to high commodity inflation. This quarter, UBS expects home and personal care companies to see their gross margins improve on a quarterly basis (QoQ), but on an annual basis (YoY) they will continue to be lower. However, we expect the EBITDA margin of these companies to remain stable QoQ.

Brokerage firm UBS estimates that income for discretionary / retail firms will grow by around 28% year-on-year, compared to around 10% year-on-year for HPC companies. They expect commodities to show lower volumes and discretionary products to be likely to outperform. UBS expects Titan to be an outlier with jewelry segment revenue growth of around 37% year-on-year and Asian Paints to show volume growth of around 15% despite an effective price increase about 15% for the quarter. On the other hand, they believe that volumes for most home and personal care businesses are expected to grow single or single digits, and revenue growth will be largely price driven. They believe the home and personal care industry may face increased competition from new regional brands, given the drop in commodity prices.

To reiterate during the call for results of T2FY22, HUL management and Marico had stressed that there were signs of slowing rural growth by the end of September. Even in the Q3FY22 quarterly update, Marico pointed out that rural demand was sluggish. With that in mind, UBS believes management’s comments on the continued rural slowdown in T4FY22 will be a key factor to watch.

UBS says medium-term plans for improving rural spending are:

  1. Support of agricultural income;
  2. Capital expenditure in addition to income; and
  3. Solid social spending outlook for the next 1-2 years.

UBS’s top picks are Nykaa, Hindustan Unilever, Asian Paints, and Dabur.

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