Visit http://indiaer.blogspot.com/ for complete details FMCG: 2QFY11 Preview; Volume growth steady; Normal monsoon improves pricing power; Valuations challenging
- We expect our FMCG universe to continue its streak of steady volume growth in 2QFY11. The key highlight is the revival of pricing power as most price increases by FMCG companies have been fairly absorbed at retail level.
- Competition remains intense, led by high-decibel entry of players in new categories.
- We believe sector valuations are challenging with most stocks trading at/above their 3-year peak multiples as the street is likely discounting the best case margin scenario.
- We remain cautious on the sector with ITC and Nestle as our preferred bets.
Our expectation for key large caps
- ITC: We expect PAT to grow 17.9% on back of lower volume contraction in cigarettes (2.5% in 2QFY11E v/s 3.5% in 1QFY11) and higher margins in the paper business. Decline in New FMCG losses is likely to continue, while Agri business margins are likely to be lower on account of change in product mix.
- HUL: We believe volume growth has started plateau-ing as the company exits various trade promotions; we expect 10% volume growth in 2QFY11E (10.3% in 1QFY11). We model 170bp EBITDA margin contraction on account of higher input cost and ad-spend. We estimate HUL’s PAT to be flat YoY.
- United Spirits: We estimate 53% PAT growth led by 20% volume growth (1QFY11 volume growth was 6% due to de-stocking in Andhra Pradesh) and 6% lower ENA prices.
FMCG coverage universe sales to grow 18.2%; PAT growth 15.3%
- We estimate our FMCG coverage universe will post 2QFY11 sales growth of 18.2% YoY, higher than the 16.2% growth posted in 1QFY11.
- Volume growth for most FMCG companies is likely to be steady as price increase taken in the past 2-3 months have not dented retail offtake significantly.
- We estimate 16.9% growth in EBITDA (13.8% in 1QFY11), EBITDA margins are expected to decline 20bp YoY (in 1QFY11 they had declined 40bp) as selective price increases and lower prices of a few inputs will improve margins.
- We estimate PAT growth of 15.3%, 180bp higher than 13.5% PAT growth in 1QFY11.
Volume growth can surprise; prefer ITC, Nestle
- We believe a buoyant rural economy will support higher volume growth in the coming quarters and margin pressure in agri commodities should ease.
- However, we are cautious on the sector as most companies in our coverage universe trade at 10-25% premium to their historical multiples.
- ITC and Nestle are our preferred bets in the space.
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