Jubilant FoodWorks outpacing QSR sector as market share gains driving stock surge: Abneesh Roy

Also, the marriage season is going to be better and that will help a lot of the discretionary demand in terms of gifting, in terms of paints, etc.

So, we do see that volume growth for most companies in H2 should be better, plus pricing growth of 2% to 3% will gradually come back, says Abneesh Roy, Nuvama Institutional Equities.

How are you looking into the second quarter numbers that have come in for the consumption space and when it comes to outlook, do you think that the core FMCG companies are better placed or is it the high end discretionary companies that are better placed currently?Abneesh Roy: So, first is outlook is better.

Yes, currently there has been a demand slowdown in urban, especially at the lower end.

The urban slowdown is happening because of very high food inflation.

Currently, if you see most of the vegetables, perishables, a lot of the grains, etc, are very expensive.

So, obviously, customer does cut down and he moves to some of the maybe smaller brands, regional brands, or he cuts down on consumption.

Rural, there is a good recovery.

In terms of outlook, if I see in the H2, we do expect almost every company to take 2% to 3% price hike gradually, and that will help in operating leverage.

In Q2, if you see a lot of companies which disappointed, for example, Dabur, etc, they disappointed because in Q2 there was a big impact of high rains on the juice business, for example.

Even for paint company, if you see, there was an impact on the exterior paint, so that kind of adverse impact of the high rains would not be there.

Also, the marriage season is going to be better and that will help a lot of the discretionary demand in terms of gifting, in terms of paints, etc.

So, we do see that volume growth for most companies in H2 should be better, plus pricing growth of 2% to 3% will gradually come back.

Now, if I see the raw material scenario, frankly speaking, I do not see that as a big negative because one, it is not very alarming.

We have seen crude at $130, $140 also.

We have seen palm oil, for example, at $1800.

Palm oil has gone up and some of the other raw material has gone up, so not every company, every category, there is a problem.

There is sharp inflation in some of the segments.

But what happens is whenever sharp inflation happens, for example, in tea, palm oil, there is a sharp inflation, the market leaders always gain market share because the local players are not able to spend it on advertising, plus they go out of the market because they are not able to manage the working capital.

So, currently, our top picks will be essentially companies which are more rural, because rural there is a recovery and gradual recovery will sustain.

Next four years, the coalition government is there at the centre.

So, we expect MSP hikes, a lot of the NREGA support, a lot of the freebies to continue and the good part is, a lot of the state governments are also doing that.

So, we like rural-focused companies more.

Jubilant FoodWorks up 9%.

Do you really think it deserves that kind of uptick in the stock price, given its performance?Abneesh Roy: So, yes, we are positive on Jubilant Foods.

Yes, the numbers were decent in terms of delivery, very strong growth, clearly gaining market share.

So, I would say that sector, if you see, Domino's has been the best performer and that is why the stock is doing well and going ahead we see market share expansion clearly helping.

Plus, if you see, QSR sector has seen seven quarters of slowdown, so base is favourable.

But when I say urban demand, there is a slowdown.

Why is it happening? One is food inflation, second is very high rentals also, plus the bandwidth cost, the telecom costs have gone up.

So, it is more of a market share expansion rather than QSR story coming back.

So, net-net in that space, Jubilant Foods is seeing interest coming back.

But overall, it is a market share gain in the delivery format and that should continue.

So, we are we are positive on the company.

So, when it comes to Asian Paints now, earlier there were a few reports which suggested that competitive intensity has been coming down in the market, but definitely the Q2 numbers do not suggest that.

In fact, the management is also saying that the competitive intensity could continue to remain high at least for the next two years.

So, how are you reading into this Q2 numbers and do you even expect that there could be a single digit growth in volume number when it comes to the second half of this financial year?Abneesh Roy: So, currently, if you see in Q2, Asian Paints volume growth was zero.

I do expect that in H2, it should be a kind of 4% to 5% as a second half, Q3 being a bit lower than that, maybe 3-4% and Q4, my sense is they should be around 6-7%.

Berger should be growing faster.

So, Berger is growing faster than Asian Paints.

If you see on a four- to five-year basis, the growth of Asian and Berger are very similar.

But last three quarters, Berger is doing a good job, they are growing faster than Asian Paints.

Our sense is next two quarters, that will continue.

Asian Paints also need to resolve its smaller businesses.

So, there is some challenge there.

And coming to Grasim versus Akzo, see Grasim has come and now six months has happened, we have not seen too much of disruption there.

In the festival season, in fact, it was quite lukewarm, I would say in terms of their advertising, in terms of promotion.

So, I think they are also going for the long haul, gradual scale up of the business.

The good part is AkzoNobel is in the block.

Eventually, we see Grasim replacing AkzoNobel from overall intensity point of view.

Listen, no business in India competition is low, it is world's most attractive consumption market from medium, long-term perspective.

So, you will always have competition.

But we do see that eventually AkzoNobel will get replaced by Grasim in one form or the other.

So, we will prefer Berger Paints and Indigo Paints in paints versus Asian Paints.

Asian Paints will be a laggard from a next six months perspective.

Eventually, they will come back, it is more a base issue and currently they are grappling some of the issues in their smaller businesses, putty and some of the acquisitions also.

I know you said that you are a lot more positive on rural consumption rather than urban, but Britannia, I mean, is it a buy at some levels? What is your own recommendation and target price?Abneesh Roy: Yes, we are positive on Britannia.

It will be among our top picks along with Colgate, Marico, ITC, HUL, etc.

See, Britannia stock is correcting, yesterday it had corrected 5%, today more because of that.

Investors are a bit concerned on the raw material scenario because palm oil has gone up and cashew has gone up, cocoa has gone up.

My sense is the sharp government duty increase is not something which will remain always.

We do see that in the coming months that should get reversed.

These sharp increases and cutback by the government keeps happening.

So, it is not that the government duty will remain so high.

Second, of course, is definitely the pricing growth will come back.

So, Britannia also, if you see in Q2, the volume growth was 8%, but the pricing growth was negative.

I think H2 that should turn positive, company is planning to take 4% to 5% hike eventually, so that is on the positive side.

See, currently what is happening FMCG sector out of flavour from investors perspective because one, FII selling is happening, many results have been disappointing, but I would say Britannia should be in the top tier in terms of growth.

It will become a healthy balance of pricing and volume growth.

Margins, if you see gross margin, there will be some pressure but because the operating leverage coming back, I think EBITDA should be okay.

I do not think too much of compression on the EBITDA margin is likely.

But whenever inflation happens in palm oil, etc, the market share gain for Britannia happens, so that should also come back from a market share.

So, overall, we are positive on Britannia.

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