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India Consumer
(Not a) Happy Halloween: More Tricks; Fewer Treats
2QFY11: a tad lower than forecasts — Jul-Sep Q results for the consumer sector
were ~2-3% below estimates. Key disappointments were: a) Asian Paints
(impacted by prolonged monsoons, festive timing mismatch) and b) United Spirits
(volumes lower than forecasts + higher ad spends). Of the 8 staples companies
under coverage, 4 missed numbers, 2 bettered estimates & 2 were in line.
Mounting margin pressures — Companies have started selectively increasing
product prices following the inflationary commodity cost environment (no
deceleration in competitive intensity). We reckon gross margins will continue to
deteriorate as pricing power may be limited in an environment of double-digit food
inflation. Firming input costs on last year’s low base, coupled with structurally
higher A&P, should keep operating margins under pressure going forward.
Macro impacts micro — Revenue growth for FMCG companies has moderated,
and there are signs of down-trading in a few categories as the consumer’s wallet
share increases towards the purchase of food items, rather than staples.
Admittedly, food inflation trends have moderated sequentially, but still remain
high (unlike trends seen in earlier good monsoon years). 3QFY11 is critical – and
will determine if 2Q was a blip, or beginning of a trend. Mgmts have noted in 2Q
results commentary that rural India demand should resurrect strongly in 3Q as
harvested crops are sold and the cash cycle is completed.
Valuations: expensive, but not yet at peak levels — The consumer sector is trading
at a one-year forward P/E of ~26x; ~15% lower than past decadal peak. Margin of
safety is better from a relative perspective – valuations are in line with the
historical premium (~50%) vs. market.
limited competition and better pricing power. We are more cautious on the sector,
given healthy sector outperformance (15% YTD vs. broad market), slightly
stretched valuations and looming margin pressures.
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