FY22 has been a difficult financial year for corporate India. Companies across most sectors saw their margins come under pressure as India Inc felt the double-punch of higher inflation and supply chain shortages.
Commodity prices jumped with the conflict in Europe. As a result, agencies like Fitch, ICRA, and Morgan Stanley have slashed India’s FY23 GDP growth estimates by over 100 bps, to 7.9% on average.
Are things going to get better in FY23?
In this week’s Analyticks, we look back on the performance of major consumption-driven sectors in FY22 and discuss what we can expect from them in FY23.
- Seeing red: Paint makers’ margins may stay under pressure even as demand jumps
- People are packing bags: Hotels expect a bumper 'Summer of '22' with strong bookings for next 100 days
- Unlocking profits: Fashion retailers plan for growth as shoppers return
- The cookie crumbles: FMCG companies hit by rising input costs, which see no signs of ebbing
Paint makers’ margins under pressure, even as demand looks positive
Cost pressures for paints companies began in Q2FY22, and EBITDA margins of the top players contracted by over six percentage points YoY that quarter. The prices of inputs like crude oil and titanium dioxide (TiO2) were up 40-50% YoY in Q2FY22. And it continued to rise, as titanium dioxide costs spiked another 29.5% QoQ in Q3FY22.
The paints sector (top 6 companies) underperformed the Nifty 500 by 9.56% in FY22. Only one paint stock made it to the relative outperformance screener.
These inflationary trends have caused paint makers to undertake double-digit price hikes, of 18-27% in the nine months ended December 2021. In fact, according to ICICIDirect, paint makers will have to raise prices by another 5-6% to offset the 30% QoQ rise in price of crude oil derivatives in Q4FY22.
However, there is a silver lining. Sales jumped, as the festival season had people sprucing up their homes for visiting family and friends. Paint makers like Asian Paints and Berger Paints reported double-digit rise in sales volumes in Q2FY22 and Q3FY22, driven by decorative paints. Asian Paintsexpects to maintain its volume growth trajectory in Q4FY22 as consumer demand revived February 2022 onwards.
But current inflationary trends have led analysts to cut FY23 earnings estimates for paint makers by 13-16%. This might be the first of many cuts in estimates if crude oil levels continue to hover near $110/bbl levels.
Sunny outlook for hotels, as summer travel jumps
We are pretty sure that almost everyone you know is planning a holiday. After a long, lean time, when you could book a room in the ITC Gardenia for under Rs, 5000, the hospitality sector finally raked in some profits in Q3FY22. This came after six back-to-back quarters of net losses.
Market leader Indian Hotels saw its occupancy levels for domestic properties rise to 94% of FY20 levels due to higher leisure travel. The hotels sector (top 10 listed players) outperformed the Nifty 500 by 83.6% in FY22. Two hotel stocks made it to the relative outperformance screener.
Both Indian Hotels and EIH reported a profit for the first time after six quarters in Q3FY22.
Interestingly, revenues generated from Indian Hotels’ properties in Goa and Rajasthan in Q3FY22 exceeded Q3FY20 levels.
For EIH, hotels in Udaipur, Chandigarh, Shimla and Bengaluru grew by over 35% on an average over Q3FY20 levels.
While January was a washout month for the sector, it saw a swift recovery from February 2022 onward. In fact according to Indian Hotels, travel bookings for March to May 2022 have surpassed March to May 2019 levels. It's not just leisure travel that is seeing strong traction - corporate bookings are also up with a rise in offsite events and conferences.
The quality of holidays is also a focus for Indian travelers now. According to Easy Trip Planners, bookings for business class seats on flights and five-star hotels for the summer of 2022 have doubled compared to pre-pandemic levels.
According to a recent survey by Deloitte, pretty much no one is planning on staying home in April. Over 80% of Indian consumers plan to undertake leisure/business travel in the next 3-4 weeks. With international travel opened up from March 27, 2022, hotels certainly await a bright summer in 2022.
Fashion retailers see growth on the horizon
After two forgettable quarters, the festive and wedding season brought some shine back for fashion retailers in Q3FY22. The retailing sector outperformed the Nifty 500 by 25.48% in FY22. One stock made it to the relative outperformance screener.
Trent and Shoppers Stop saw strong traction in the beauty, personal care and innerwear segments in Q3. According to Motilal Oswal, Q3FY22 revenues from Trent’s value format ‘Zudio’ grew almost 3.7X over FY20 levels.
Aditya Birla Fashion’s Madura segment or lifestyle brands’ Q3 revenue grew over 20% compared to FY20. Pantaloons’ revenues reached 98% of pre-Covid levels and athleisure brands saw over 30% YoY jump in Q3 sales.
Although January was disappointing for the retailers, demand revived from February according to Shoppers Stop’s management. Shoppers Stop has claimed that its March 2022 revenues are likely to cross the pre-pandemic levels, seeing early trends.
Shoppers Stop aims to double its revenues in the next 3-4 years. This sales growth CAGR of 19% will be driven by the high-margin private labels segment and by achieving same store sales growth of 9-11% for existing outlets.
Aditya Birla Fashion, on the other hand, not only has aggressive store expansion plans, but is also looking to build a separate digital platform for its direct-to-consumer (D2C) business.
ABFRL is looking to have around 25-30 D2C brands in its digital portfolio over the next 3-5 years which will contribute over 10% share to its top line. The company sees a market opportunity of $100 billion in the D2C business by FY25.
ABFRL investedin four companies between January 2021 and January 2022 to strengthen its ethnic wear, sports and athleisure business segments. It plans to scale up the annual revenues of its ethnic wear subsidiaries to Rs 1,500 crore from Rs 400 crore on a trailing 12-month basis in next 4-5 years.
All in all, Indian fashion retailers are set to begin FY23 on a highly positive note.
FMCG sector struggles, as costs pinch hard
If those Good Day biscuits have been tasting more like Ok Day biscuits recently, you can blame rising costs of inputs like vegetable and palm oil. The FMCG space has been dealing with rising raw material costs since the start of FY22.
In Q1FY22 the sector was battling not just raw material cost inflation but also the second wave of pandemic. There was some improvement in Q2FY22. According to Prabhudas Lilladher, FMCG sales grew 2.95% YoY to Rs 4,040 crore in Q2FY22, with EBITDA growing 2.2% YoY to Rs 4,020 crore. EBITDA margins averaged around 15-20%.
This was because of stabilizing sales of consumer staples like packaged foods, biscuits and beverages, as the pandemic waned.
Hindustan Unilever(HUL) and Tata Consumer Products’ (TCPL) EBITDA margins rose 40 and 70 bps to 25.4% and 14.6%, respectively, in Q3FY22. Nestle and Dabur’s Q3 margins were impacted because of an increase in staff costs. Britannia’s rise in other expenses by 7.3% QoQ to Rs 687.75 crore affected its margins.
Input costs pressures may shrink margins
Q3FY22 showed signs of improvement as the festive season boosted demand. HUL and Britannia captured this as their gross margins improved that quarter.
As crude oil, vegetable, and palm oil prices cooled down in December 2021 because of import duty reduction, the cost of raw materials fell for most companies.
TCPL and Dabur’s cost of raw materials fell 10% QoQ and 9% QoQ, respectively. Nestle’s raw material cost increased in Q3FY22 by 11% QoQ to Rs 1,662 crore because of commodity price inflation.
Most companies are now hiking prices to offset the margin hit. Companies have hinted at further price hikes in Q4FY22. Britannia might hike prices by 10-11% in Q4FY22 to offset inflation. The management of these companies expects inflation woes to wane in FY23, depending on the global supply available to meet rising demand.
Two stocks in the FMCG sector made it to this relative outperformance screener. Nifty FMCGunderperformed Nifty 500 by 15.3% in FY22.
We'll visit a second set of sectors in the next Analyticks instalment.
Signing off this week,
The Trendlyne Team
