Indiabulls research: FMCG: 2QFY11 results preview Steady performance with better price mix

FMCG: 2QFY11 results preview Steady performance with better price mix


We expect FMCG companies to continue their steady revenue growth, driven by volume growth. Most of the companies have taken price hikes during the quarter, and it will be crucial to see if they can maintain the volume growth and to what extent they are able to improve gross margins. Furthermore, as we believe HUL should start to see earnings improvement from 3QFY11, we will look at whether it can sustain double-digit volume growth and the trend in its overheads. We will look closely at ITC’s cigarette volume growth, HUL’s and Marico’s EBITDA margins, and Colgate’s and Dabur’s gross margins during this quarter.
Robust revenue growth led by Dabur, GSK Consumer, and Nestle
We expect our universe of covered companies to report robust revenue growth of 13.1%, led by volume growth across companies except in ITC’s cigarette business. We expect GSK Consumer to witness ~21.5% growth driven by new launches of variants of Horlicks, etc. HUL should see 12.5% revenue growth despite minor price deflation impacting the overall revenue growth. Price hikes have been seen across companies, and this quarter would be crucial to see if they can maintain volume growth and to look at the extent of improvement in gross margins.
Colgate to lead margin expansion; HUL to lead in margin contraction
We believe Colgate will lead in operating margin expansion as seen in the previous quarter, as a result of benefits accruing from the merger of its contract manufacturing subsidiaries. Most other companies should see operating margin contraction due to lower gross margin, most significant being HUL where operating margins should contract by 108bps.
We find consensus estimates to be lower across companies
Our expectations are significantly higher than consensus on ITC, GSK Consumer, Dabur, and Colgate. We believe higher revenues would surprise in GSK Consumer while EBITDA surprises can be seen in Dabur and Colgate on higher gross margins or lower overheads. We will look for HUL’s soap and detergent business margins.
We recommend switch from ITC to HUL
We continue to like the earnings momentum and the improving business environment in the companies under our coverage, and therefore maintain our ratings until the results to analyse the best way forward. We retain our Underperform rating on ITC, as we see higher competitive risks for its cigarette business, and recommend switch to HUL where pricing power seems to be coming back.