INDIAN FMCG: Met contract manufacturer of P&G; P&G targets to treble sales in 3 years; Competition to intensify
We met Mr Nikhil Nanda, Managing Director of JHS Svendgaard (JHS IN, MCap US$0.04b, CMP Rs116, Not Rated) to understand the FMCG outsourcing business model and implications of its tie-up with P&G. Following are the key takeaways:
- P&G targets to treble its sales from India (FY09 est at ~US$900m) over the next three years. Sales growth would be consequent to wider consumer base (expected to double from current ~450m), retail reach (from current ~3.75m outlets) and product portfolio (currently ~9 categories).
- The interaction with JHS management reinforced our strong belief in rising competitive intensity in FMCG space. JHS has recently tied up with P&G for exclusive contract manufacturing of detergents (Tide) and Toothpaste which indicates further increase in competitive intensity in these product segments.
About JHS: JHS has emerged as contract manufacturer in the FMCG space and currently supplies to Dabur, Cipla, Elder, Future Group, Wal-mart and Boots. Recently, it has tied-up with P&G to exclusively manufacture Tide detergents and toothpaste in India.
P&G aims to treble sales over CY10-13; HUL, Colgate to bear the brunt
- Our interaction with JHS management signaled P&G’s intent to treble topline of three Indian entities (FY09 est at US$900m). We note that Mr Robert McDonald, Chief Executive P&G Inc had earlier set the target to add 1b new consumers to its fold (current base of ~4b) with much of new addition to come from emerging markets like India and China.
- Per capita spend on P&G products in India stands at a dismal US$0.9, as against US$3 in China, US$20 in Mexico and US$100 in USA (global average of ~US$20). The company is present in 16 categories in China and 36 in USA as against 9 categories in India.
- P&G is likely to focus on widening consumer base, retail reach (more focus on small towns and interiors) and product portfolio (currently present in 9 segments). Although P&G has been a late entrant in India, it has been able to make a strong dent in categories like Shampoos (2ndlargest player with ~24% share) and Detergent (No2 with ~15% share).
- P&G has turned aggressive in categories like Detergents (Tide Naturals), Shampoo (15-20% price cuts), Feminine Hygiene (15% price cuts in Whisper), Baby Care (launch of Pampers), Male Grooming (price cut of 40% in Mach3, new Gillette Guard at Rs15), Skin Care (Rs15 sachet and small pack at Rs69 in Olay White), etc.
- As JHS has set up exclusive toothpaste facility for P&G, it is only a matter of time before P&G formally enters the Toothpaste category. Irrespective of brand (Crest or Oral-B), actions of the company in the past 12 months indicate fierce competitive intensity including aggressive advertising, sales promotions and price cuts.
- We believe increased aggression in Oral Care and Skin Care would have bearing on the performance of companies like HUL, Colgate and Dabur. Colgate will be impacted directly, it being pure Oral Care play; HUL will also suffer as Toothpaste is ~20% of personal care sales. In addition, aggression in skin creams can hurt the most profitable segment of HUL (est EBIDTA margin of 35%+ and 40% sales contribution in personal care).
Competitive pressure to intensify; consensus estimates and valuations leave little room for a likely margin contraction
- We note that most companies in our FMCG coverage universe are trading at 20-30% premium to their historical average valuations. While we are optimistic on the underlying opportunity in consumer space, current wave of rising competitive intensity can exert margin pressure in the coming quarters.
- We believe the consensus estimates (including ours) and valuations currently factor in a best case margins scenario for all FMCG companies and leave little room for negative surprise. Any disappointment on earnings momentum may lead to correction in stock prices.
- We highlight that in our recent sector update titled “Post Monsoon input prices & impact analysis” we had downgraded our rating on Colgate and Dabur on concerns of competitive intensity and expensive valuations. We continue to have a cautious view on the FMCG sector, and prefer ITC and Nestle over a longer term.
JHS: P&G to account for ~70% of FY12 sales; likely to emerge as a proxy on P&G’ strong growth
- JHS Svendgaard, being one of the foremost players in contract manufacturing is likely to emerge as a key beneficiary of rising trend of outsourcing by FMCG players. Management believes that the core competence of FMCG players is not manufacturing, but brand building and distribution. Hence, the trend of contract manufacturing is likely to pick-up, more so in case of MNC’s who prefer to avoid legal hassles and manpower issues in manufacturing.
- Recently, the company tied-up with P&G to exclusively manufacture detergents (entire Tide range) and toothpaste. In addition, the company has also secured contract for incremental production of Oral-B toothbrushes post capacity constraint in P&G’s plant.
- As per the agreement, P&G has co-invested in the detergent manufacturing unit to the tune of ~50% and has committed for annual volumes for next 5 years. JHS is the only new addition in the vendor’s list of P&G in the past 17 years. JHS aims to emerge as a preferred vendor to P&G for new/existing categories not only in India but also on a global basis.
- In FY10, JHS achieved sales of Rs685m and PAT of Rs80m; management has guided for sales of ~Rs1.6b, with ~70% of their sales coming from P&G.
- The company has also ventured into Dental care services under the brand T32. The management is optimistic of the opportunity in professional oral care given the low awareness of oral hygiene in India. The SBU currently has 4 operational clinics in NCR (capex of Rs5m/clinic and annual sales of Rs2m/clinic). Management targets to add ~100 clinics over the next 5 years at an investment of ~Rs500m.
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