CLSA’s Top Consumption Themes And Stock Picks For 2021

Here are CLSA’s top 10 themes for the consumption space in 2021...

Organised Firms

Companies have seen a surge in migration towards organised players post Covid-19. “Unorganised players are struggling with working capital and supply chain pressures, now also from inflationary input price,” CLSA said.

Asian Paints, it said, reported one of the fastest recoveries from the crisis — not only gaining market share from the informal sector, but also from its peer group.

“Durable companies are also observing faster recovery, given consumer and trade preference for branded offerings,” CLSA said. “We see this trend sustaining over the long-term.”

Modern Retail

Modern trade and e-commerce have been an area of concern for fast-moving consumer goods companies. This has been diminishing the general trade, kirana, mom & pop stores supply chain moat, CLSA said in the note. Several startups in the fast-moving consumer goods sector have succeeded on the back of modern retail. The preference for online channel, according to the research firm, has accelerated during Covid-19.

“This has not only made e-commerce relevant, but converted consumers to omni-shoppers,” it said. “This, along with retail consolidation, is likely to have a bearing on the entire supply chain moat.”

Retail Consolidation

CLSA sees key threats for FMCG companies from organised retail consolidation in the form of the following:

• New-age companies can place offerings with the offline network (for large FMCG, offline channel has been a key moat).

• With wider retail base, mega retailers can seek more margin/better terms from FMCG companies (current distributor margin at 5-7%).

• Private labels could expand

• FMCG will also have to brace for a complete supply-chain reinvention with multiple startups emerging to address supply chain and procurement challenges.

Health & Hygiene

CLSA’s channel checks suggested that hygiene needs have led to improved penetration for hand wash, toilet cleaner and floor cleaner, and these are expected to benefit from per capita consumption. Soaps have seen per capita expansion, while competition within this segment has intensified.

New hygiene segments during the pandemic, however, have seen deceleration in momentum, dragged by their inability to gauge sustainable market size. Also, entry of multiple players has reduced margin profile and category attractiveness.

CLSA expects HUL to benefit given its strong brand equity, while ITC can leverage Savlon’s brand equity.

Home Improvement

There has been a surge in demand for in-home utility and improvement products, according to CLSA. Relevance for home improvement and need for durables, it said, have heightened from comfort and convenience perspective due to work from home setting.

“Durable players are seeing increased demand for better utility products. Incremental new lifestyle is been centred on home and safety with more acceptance of the products delivering better health, hygiene, convenience, in the form of storage or reduced time and effort on household chores,” CLSA said in the note. “Penetration levels have accelerated, adoption of premium utility has heightened and consolidation has increased — these three themes are helping in recovery for durable companies.”

Asian Paints is looking to aggressively leverage on the home improvement trend.

Store Expansion

Jubilant Foodworks and Titan have increased their store expansion guidance to leverage on better real estate deals. CLSA expects other retail companies to follow suit. “With normalcy in operation and scale-up of business in FY22, operating leverage would return.”

Delivery Convenience

The pandemic, CLSA said, has boosted the prospects of e-commerce and online channel. Quick-service restaurants have seen a boost in business towards takeaway and delivery. “Delivery and DIY trends have boosted online prospects for paints companies.”

With increased consumer penetration to online, the research firm said, the omni-channel has gained the needed push. “Large branded players are placed well to extract better growth with customised consumer offerings. Startup culture is been adopted by players to leverage on the e-commerce opportunity,” it said. “Kirana adoption of digital has also expanded.”

Rural Penetration

Better monsoon, increased central allocation for Mahatma Gandhi National Rural Employment Guarantee Act, reverse migration and sustained supplies of food are some of the tailwinds at play for the rural customer, CLSA said. “With 40% of consumer demand in rural, and relatively low penetration and per capita spends, rural remains the key driver of growth.”

The recent rally in stock prices across consumer stocks, according to the research firm, is capturing the effect of sustainability in demand in rural and semi-urban markets. It expects urban markets to see a gradual recovery.

CLSA also sees this as an apt setting for big organised companies to garner market share, drive penetration and create brand awareness.

Commodity Inflation

In staples, inflationary trends have emerged in categories like soap, dairy, tea and other food categories. Inflation in crude is likely to affect all consumer firms. In the durable space, inflation is seen in chipset, copper, steel, polystyrene prices. Paintmakers are seeing inflation in titanium dioxide and vinyl acetate monomer prices, which is likely to reverse gross margin benefits. Gold prices are settling at elevated levels.

“From a near-term perspective, we see inflation as positive for the companies as it will aid in price growth and margin, but could be margin dilutive if it accelerates further or the company takes call to pursue a volume over margin strategy,” the note said.

Optionality Landscape

Valuation was a factor in top line-driven earnings momentum till 2015 and margin-driven earnings momentum over 2015-2020. While there are opportunities to expand margin further, companies are sceptical to call out the same. Rather companies are exploring opportunities to add new top line verticals, CLSA said. “Across consumer companies, there is an urgency to strengthen the top line.”

Valuation expansion across consumer companies, it said, is a reflection of added optionality in the business, where in a rebooted setting, companies are looking to expand their landscape. Among discretionary companies, Asian Paints is at the forefront followed by Jubilant Foodworks.

In staples, HUL is prioritising volume over margin to drive brand penetration. Dabur is trying to position healthcare offerings at an accelerated pace. Hygiene as a segment is been lapped up by all companies. In durables, focus has been to benefit from confined settings, which has given perspective to equip homes with utility offerings, the note said.