Prefer HUL, Britannia, Nestle over alcobev firms now: Abneesh Roy

"HUL, Britannia, Nestle should start seeing expansion in margins. GCPL will also see expansion in gross margins but their ad spends will go up," says Abneesh Roy, Executive Director, Institutional Equities, Nuvama Wealth Management

Let us start with the FMCG space. There’s a deal in the brewery space in Bira. What does that mean for the valuation of listed companies and what does this tell us about the sector?
This shows that the alcobev sector will see good interest. We have also seen that in Q1, the beer industry saw normalisation of demand and it was a very harsh summer also after two years of very big Covid impact. So, it is a good industry.

Of course, the pricing power is limited when compared to say HUL, which has taken 12-13% price hike in the last one year or Asian Paints, that has taken 18-20% price hike. In the beer and liquor industry, the issue is they have to go to the government and so there is always a delay and purchasing power and pricing power does get impacted because of sudden decisions by the state government.

Yes prices and the key raw material for beer companies was impacted because of the Ukraine crisis but we are seeing that prices in H2 will go up further because there has been a 60% inflation in gas prices which is used in the glass bottles. Of course, a lot of the glass bottles will be recycled. So on a medium to long term, it is a good industry to be in.

I am sure the listed players will also see the good scale up which Bira has done. Bira has created a tremendous niche and doubled the market share which is quite positive. I am sure the listed players have also seen this opportunity and they will be capitalising. What works for Bira is clearly they are going into the front end. They bought out the beer cafe and that should help them, but overall it is a competitive field and the pricing is based on the government’s action rather than too much of freedom from the company front.

We would prefer staples like HUL, Britannia, Nestle over alcobev firms at this juncture.

Coming to the multiplexes business, we spoke with the PVR management yesterday who talked about how there has been a sharp recovery in this quarter and they are expecting 2023 will perhaps be equal or better than the highs that we had seen in 2018, 2019. Is this something that you would concur with?
October has been quite strong for the multiplexes. PS1 and Kantara did quite well in the regional languages and in fact Kantara in Hindi has also done amazingly well. It has already made around Rs 80-90 crore.

Also Uunchai, a Hindi movie has done reasonably well. It is not a big budget and a big revenue movies. Drishyam 2 with 65% occupancy on the first three days and has scaled up starting with Rs 15 crore on Friday, Rs 21 crore on Saturday and Rs 26 crore on Sunday . Weekdays also are working out well. Drishyam 2 will be a big hit.

While Brahmastra, which did well because of the VFX and very strong marketing, Drishyam 2 is doing well because of the content and in terms of opening on Friday also, in Hindi this was the second biggest hit this year. It is a bit early to call out that the full reversal of has happened but I think Hindi movie industry has to make course correction.

In terms of content, clearly just having a big star is not enough. If you see, the regional content is still working. When OTT competition is there, most of the regional movies which have good content have worked but in Hindi, 80% of the budget is going towards the big star and very little money is left for marketing and screenplay. So, a course correction is needed.

Second, in terms of ticket pricing also, the multiplexes will have to be more agile. There is a feedback that it is becoming too expensive. Of course, movies like Avatar 2 which is coming next month will have very high pricing but whenever the occupancy goes down in terms of threshold level, I think the multiplexes will have to be more agile in terms of the marketing campaigns and promotions to get back the customer because it has become quite expensive.

What about the entire FMCG sector? In Q2, margins got eroded for all of these companies. Crude has come off substantially but if you look at the palm oil prices, they are not at three week high levels because there is a concern about a fall in production. How do you see the margin pressure panning out for the FMCG companies in the coming quarter?
I see the worst is over for the FMCG industry in terms of margin pressure and rural volumes. It will be a gradual recovery. In terms of palm oil, it is down almost 50% from the peak and we should not see a three week high or a four week high that would be a wrong way to look at the number because year-on-year, biscuit and soap companies will see good benefits starting in Q3 in terms of margins.

They will claw back partly towards more grammage, more promotions, higher ad spends but on an overall basis, HUL, Britannia, Nestle should start seeing expansion in margins. GCPL will also see expansion in gross margins but their ad spends will go up.

Packaging cost is linked to the crude oil prices as it is 15-20% of the raw material. There again we will see some benefit. Rupee depreciation is a concern because it is all imported but on an overall basis, the worst of the rural slowdown and margin pressure is behind us. The winter demand has picked up well. These are the initial days and definitely chyawanprash, honey in terms of the hot beverages and even for Unilever the skin creams are picking up.

But we need to see the winter how it pans out.