HSBC Research: Downgrade HUL, Nestlé, GCPL and Marico.

No incremental good news likely. We believe the India FMCG sector is unlikely to
receive any positive triggers. Over the last year, we have seen continuous earnings
upgrades in the sector on the back of benign commodity prices. But that story is now wellknown,
and factored into estimates and stock prices. Incrementally, we do not envisage
any good news. Potential concerns are risk of cost inflation and increased competition.
Valuations are reaching peak levels with the MSCI FMCG index trading currently at 96
percentile – ie, in the past 10 years, the index has traded at or at a multiple higher than
current valuation only 4% of the time. We cannot identify currently strong, obvious
downside catalysts, but the valuations make us uncomfortable and lead us to believe that
multiples may correct disproportionately if downside risks materialise.
Downgrade HUL, Nestlé, GCPL and Marico. We roll forward all our multiples from
March '12 to Sept '12, which has resulted in a change in target price for all our stocks and
a downgrade to HUL, Nestlé, GCPL and Marico. We downgrade HUL from N to UW on
the back of a sharp run up in the stock price. We believe that the optimism on a small
price increase is overdone and competition is still intense. We downgrade GCPL from
OW to N as the current valuations are fair and longer-term risk in the hair colours
business is increasing with P&G and Emami as new entrants. We downgrade Nestlé from
OW to N as it is trading near peak multiples and competitive risk is increasing, especially
in noodles. We downgrade Marico from N to UW on the back of good run in the stock
price and due to downside risk to EPS given high exposure to rising copra prices and
increase in product prices not offsetting cost pressures completely.
Subsequent to the changes mentioned, we are Neutral on all stocks in our coverage except
HUL and Marico where we are Underweight. Amongst our Neutral stocks we like ITC as
a defensive (up until the budget in Feb ’11) and we like GCPL and Asian Paints for
growth. However, upsides are limited.