Markets
The Q1 crystal ball for consumer companies
Summary
Jewellery retailers such as Titan Co. Ltd and Kalyan Jewellers India Ltd are expected to put up a good show. The Q1 business updates of both these companies show revenue growth has been strong.
Within consumer companies, the recovery in discretionary demand has not been uniform across the board. This trend is seen playing out in the June quarter (Q1FY24) as well with some companies faring better than others.
Jewellery retailers such as Titan Co. Ltd and Kalyan Jewellers India Ltd are expected to put up a good show. The Q1 business updates of both these companies show revenue growth has been strong. Titan’s standalone jewellery revenue has increased by 21% year-on-year (y-o-y) last quarter, and Kalyan’s India jewellery revenue has seen 34% growth. This is despite 17% increase in average gold prices. Akshaya Tritiya sales in April and robust wedding purchases in June helped demand. ICICI Securities Ltd expects Kalyan’s revenue growth in FY24 to beat Titan’s, helped by faster store additions.
While demand for jewellery has been resilient, other sectors have not been that fortunate. These include quick service restaurant (QSR) operators, footwear and apparel companies. Demand has not picked up adequately and so Q1 results are likely to be underwhelming.
“Apparel continues to see weakness at the mass end," said analysts at Prabhudas Lilladher. The brokerage also notes that QSRs saw a seasonal uptick in demand on the back of the Indian Premier League, and followed by the holiday season. “However, a broad-based demand recovery is yet to set in amidst the fading impact of last year’s 10-12% price hikes," said the analysts in a report on 6 July. Recall that same store sales growth performance across KFC and Pizza Hut in Devyani International Ltd had been muted in Q4FY23. Sapphire Foods India Ltd too saw similar trends. What’s more, adding to the woes on margin front are the elevated price of chicken and cheese.
“Devyani revenues should grow 18% year-on-year, lower than 30% growth in average store count on account of lower per-store revenues y-o-y, due to tough macro and new store dilution," Jefferies India analysts said in a 9 July report. The broking firm added Reliance Retail’s core retail revenue per square feet may decline y-o-y due to dilution from a relatively sharper more than 50% area addition y-o-y, which should still be strong revenue growth. Meanwhile, for paint companies, the drop in titanium dioxide prices bodes well for margin performance.
Coming to consumer staples, the ground seems steady. Even though demand isn’t particularly striking for fast-moving consumer goods (FMCG) companies, CY23 stock performance of most companies suggests investors are excited about potential gross margin expansion on lower costs of commodities such as palm oil. As the chart alongside shows, the average price of this raw material was down by 39% y-o-y in Q1. Wheat prices, which are relevant for Nestle India Ltd and Britannia Industries Ltd, are up by 6% year-on-year, but have declined sequentially.
Overall, managements’ comments on rural markets will be key when Q1 results are announced. In the past few quarters, rural demand has lagged urban. In the recently released Q1 pre-quarter business update, Dabur India Ltd noted signs of improvement in both rural and urban India backed by moderation in inflation. However, interestingly, Marico Ltd and Godrej Consumer Products Ltd said demand was stable. “A few other companies we interacted with also suggested that pace of recovery has not been up to the mark," JM Financial Institutional Securities said in a 7 July report. To be sure, underlying demand trends are paramount. According to Jefferies, some factors to watch out for are commentary on rural recovery given ongoing monsoons; competitive trends as inflation cools off; balance between volume push and margin recovery.
