Morgan Stanley Research: FMCG: Margin Pressure from Rising Input Costs

India Consumer
Margin Pressure from Rising Input Costs
 MS Input Cost Index (ICX) up 9.5% in F2Q11 vs. F2Q10 with palm oil and
copra prices both up 25% YoY. Cost index is currently up 7.4% YTD. If MS ICX
remains unchanged at Sep-10 levels, it is likely to be up 5.6% YoY in FY11e.
Interestingly, soda ash prices are down 24% YoY.
 MS ICX for all consumer companies is now up between 5% and 13% over
the past 3 months. Sequentially in Sep-10 vs. Jun-10 quarter, Nestle input costs
rose the least among our coverage (Nestle MS ICX +2.5%), while the input cost
index for Marico increased the most (Marico MS ICX +8.2%). HUL MS ICX
(+5.5%), GCPL MS ICX (+4.8%),), Colgate MS ICX (+2.9%) & Dabur MS ICX
(+3.1%) were also up YoY.
 Rising input costs may add pressure on margins for FMCG companies in an
intensely competitive environment: In FY10, lower input costs provided the
consumer companies with a buffer for re-investment in the business. While the
ongoing competitive activity is likely to be sustained, input costs are now turning
into a headwind for the industry, leading to margin compression, in our view.
Though some companies have implemented input-cost led price hikes in 2Q in
certain categories, we believe only a part of the overall cost inflation has been
passed on to the end-consumer.
 We reiterate our OW on Nestle, UW rating on HUL and Marico, and maintain our
EW ratings on GCPL, Colgate, and Dabur.