FMCG: Quarterly show mixed: Alchemy

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Quarterly show mixed
♦ The results declared by FMCG companies were a mixed bag. The volume growth for
most companies was strong, led by HUL posting 14% YoY volume growth. However,
margins have come under pressure with the increase in the cost of input materials. Most
FMCG companies have reduced their advertising and promotion (A&P) spends (as a
percentage of net sales) to offset margin pressure. Jyothy Labs, though, had higher A&P
spends during the quarter, owing to the launch of its Ujala Techno Bright detergent
during the quarter.


♦ Categories such as shampoos (10.8% growth YoY) and soaps (3% growth YoY)
continue to witness slack growth. Also, intense competition in the segment failed to
drive volume in the categories. However, companies have raised prices in select soap
brands to offset the increasing input cost (the three-month average palm oil price is up
23%), which should help in value growth of the category. Detergents continue to
witness intense competition, although promotional spends in the segment have declined.


♦ Most domestic FMCG companies enjoyed reasonably good international business,
though they were affected by the appreciating rupee. Asian Paints continued to witness
challenging conditions in its international business in the Middle East and the Caribbean.
♦ Inflation: Prices of key raw materials such as palm oil and copra remained higher YoY.
Food inflation declined MoM to 13.75% for the week ending 23 October 2010. Prices
still remain high owing to continued high prices of milk, tea, coffee, eggs and fish.

NEWS


♦ Godfrey Philips India (GPI) launched a 69-mm-long cigarette brand called Marlboro
Gold Advance Compact, in Mumbai and Pune, for `3.50 a stick. A pack of 10 has been
priced at `35. The company already has a popular king-size variant, which it wishes to
extend into a regular segment for higher sales. Rival ITC, the leader in the overall
cigarette market (including regular-filter), is also launching a new product called Players
Gold Leaf, for `3 a stick. A pack of 10 therefore costs `30. (Business Standard)
Our take: GPI seeks to increase sales by gaining market share in the large regular
segment (~75% of the cigarettes market). However, the company has limited presence
in South and East India markets. Additionally, newer ITC brands could counter the
threat of GPI’s Marlboro Gold Advance.
♦ The board of Godrej Consumer Products Ltd (GCPL) approved the merging of its unit
Godrej Household Products Ltd with itself. The firm said merger was effective 01 April
2010, post the acquisition of the remaining 51% stake in Godrej Sara Lee, owned by its
joint venture partner Sara Lee Corp. (BSE announcement)
♦ The Association of Manufacturers of Ayurvedic Medicines (AMAM), which represents
200 companies including Dabur, Himalaya, Hamdard and Baidyanath, has accused
American personal care giant Colgate of patenting Lal Dant Manjan, or ‘red herbal
dentifrice’, an Indian traditional knowledge in the US, India and elsewhere. (Business
Standard)
♦ Hindustan Unilever (HUL) pipped arch rival Tata Global Beverages (TGBL) to become
the market leader in the `75bn branded tea market in September 2010. According to
data provided by Nielsen, HUL has a value share of 22.8% and volume share of 18.4%
compared with TGBL’s 20.2% and 18.3%, respectively. (Financial Express)
♦ Jyothy Laboratories is in advanced talks with a West Bengal-based detergents and
allied products company, Safechem Industries, to buy the latter's flagship laundry
detergent brand, Safed. The deal is estimated to be worth `700mn, the report said.
(Economic Times)
♦ Emami received board approval to raise up to `50bn through debt and equity dilution.
The company also cleared a special resolution to make an investment of up to `50bn in
one or more domestic or overseas companies. (BSE announcement)

LAUNCHES

♦ ITC launched an anti-hairfall shampoo and conditioner under the Fiama Di Wills brand
in Tamil Nadu.
♦ Kerastase, a L’Oreal brand, announced the launch of Kerachromie Ritual for coloured
hair. The product is designed for frequent colour users.
♦ Jolen, the world leader in skin care, introduced a special cream bleach for extrasensitive
skin, with antiseptic properties and the goodness of aloe vera.
♦ Emami Limited announced the launch of a cream-based hair-colour range called
Emami Hair Life Crème Hair Colour and a powder-based hair colour called Emami Hair
Life Powder Hair Colour. Emami is eyeing a portion of the `10bn hair-colour market in
India with these launches.
♦ ITC is test marketing its noodle foray under Sunfeast Noodles. The company is
understood to have set up a facility in Maharashtra to manufacture noodles; the wider
launch is expected within a few months.
♦ Godrej consumer product (GCPL) plans to launch Megasari’s Stella brand of air
fresheners in India.
♦ Gillete India launched Gillette Guard, a razor specially designed for the Indian market.
The introductory price for the Gillette Guard reusable razor is `15 with blades priced at
`5.
♦ GSK Consumer Healthcare India launched a sports drink called Lucozade, priced at
`40 for a 500ml bottle. The drink competes with PepsiCo’s Gatorade, priced at `35 for
a 500ml bottle.


SECTOR OUTLOOK


Revenue growth in the next few quarters can expect a boost from the price hikes
implemented in select categories by FMCG companies. Furthermore, a good monsoon could
boost rural demand, while urban demand has already shown signs of improvement.
Competitive intensity, though high across the laundry and shampoo segments, witnessed
some moderation after the price hike in soaps and a reduction in trade promotions in the
laundry segment. We remain optimistic that the industry will maintain steady growth in
volume.
Raw material prices have been a mixed bag, with a few inputs showing signs of inflation.
High food inflation and higher copra (three-month average price up 26% YoY) and palm oil
prices (three-month average price up 23% YoY) should keep margins under pressure. Prices
of tea and coffee are also rising, while HDPE prices remain benign. We expect EBITDA
margins to be subdued on gross margin pressure and competition-led higher A&P spend.

Recommendation
The current prices of most FMCG stocks look fairly valued, with little upside left on their
valuations. We remain optimistic on select FMCG mid-caps, with Jyothy Labs being our
preferred pick. We have downgraded Colgate to Reduce from Accumulate, owing to rich
valuation and slowing earnings growth. We maintain our Reduce recommendation on Nestlé
and Dabur India, owing to their expensive relative valuation, despite an expectation of
reasonably strong growth. HUL looks fully valued at current prices and we maintain our
Reduce recommendation for it.