India Consumer: 2QF11e – Rising Input Costs and Ad Spend to Constrain Earnings Progression
Maintain Cautious sector view ahead of 2QF11
results: We expect Morgan Stanley India Consumer to
report revenue, operating profit and adjusted net profit
growth of 17.6%, 14.4% and 13.3% respectively. We
look for the operating profit margin for group of stocks
we cover to compress by around 65 bps, driven by a
combination of rising input costs and higher advertising
expenses. We believe Nestle, USL and GCPL will report
the strongest PAT growth whereas HUL and Marico may
disappoint for the quarter. We reiterate our OW rating on
USL and Nestle and retain UW on HUL & Marico.
HUL (UW) – 9.5% revenue growth; Input costs and
higher ad-spend to limit margin expansion: We
expect HUL to report revenue growth of 9.5% driven by
5% growth in soaps & detergents and 14% growth in
personal products. We forecast margin contraction of
140bps in 2Q, primarily from increasing input costs and
higher level of ad spend. Tax rate should be higher by
120bps, driving an adjusted net profit decline of 2.6%
yoy.
ITC (EW) – Strong growth across business
segments: ITC is likely to report a top line growth of
15% driven by a strong 14%, 28% and 21% revenue
growth in cigarettes, non-tobacco FMCG and hotels
businesses respectively. Cigarette volumes are likely to
be flat during the quarter even though we expect
cigarette EBIT growth of 14% yoy, largely on the back of
recent price hikes. We forecast non-tobacco FMCG
losses of Rs765mn compared to Rs850mn in Q2F10.
We expect ITC to report adjusted net profit growth of
14.7% for the quarter. While historical cigarette price
elasticity may have broken down, we do not expect
cigarette volume growth for F2011 to beat our estimate
of 1%.
USL (OW): We expect USL to report revenue, operating
profit and net profit growth of 17%, 26% and 25% yoy
respectively. Revenue growth of 17%, driven by a ~14%
volume growth and 3% price/mix impact. We expect
operating margins to expand by 140bps driven largely by
product mix improvement and to a smaller extent by lower
input costs. We forecast a net profit growth of 25% for
2QF11.
Nestle (OW) to report strong operating profit growth: We
expect Nestle to report revenue, operating profit and net profit
growth of 23%, 25% and 26% yoy respectively. We expect
operating margins to expand by 30bps following significant
alleviation of cost pressures in milk and sugar.
Marico (UW) operating profit growth will likely disappoint:
Marico is likely to report revenue growth of 13% led by 10%,
15%, 15% and 20% growth in coconut oil, edible oil, value
added oil and international businesses respectively. We expect
a 170bps margin compression in Q2F2011 due to a 13%
increase in input costs vs. 2QF10. We therefore forecast
operating profit growth to slow to 1%, the lowest in over 18
quarters. Tax rate is likely to be higher by around 430bps (at
18%), resulting in a 10% yoy decline in adjusted net profit.
GCPL (EW) – Godrej Household likely to drive strong
reported growth numbers: We expect GCPL to report 82%,
76% and 67% growth in revenues, operating profit and
adjusted net profit respectively for Q2F2011. Reported
numbers will include another strong quarter from consolidated
earnings from the former JV Godrej Sara Lee. However,
GCPL’s underlying business is likely to witness a slowdown in
revenue and profit growth due to relatively slower growth in hair
colors and a rise in competitive pressures in soaps.
Colgate’s (EW) operating margin expansion to decelerate:
We expect Colgate to report revenue growth of 13.5% driven
primarily by volumes. Colgate’s operating profit margins are
likely to expand by around 200bps despite higher input costs,
largely thanks to a benign competitive environment in oral care
in India. The Q2F2011 tax rate is likely to rise by 260bps yoy
resulting in earnings growth of 17.2% yoy.
Dabur (EW) – Strong growth across business segments:
We expect Dabur to report revenue growth of 20%, driven by
volume growth across business segments. Dabur continues to
benefit from its niche positioning on the herbal/natural platform
and is the least affected by the intense competitive activity that
is impacting the profitability of Indian consumer companies in
our coverage universe. However, they are facing input cost
headwinds and have also stepped up their advertising spend,
impacting their operating profit, we believe. We expect the OP
margin for 2Q to decline 40bps, leading to PAT growth of 16%.
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