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India Consumer
3QFY11 – Steady performance
We expect consumer companies in our coverage to report steady
revenue growth, largely driven by volume. We expect the higher adspend
due to rising competition to trim margin a tad. Further, given
the higher taxes, we expect yoy net profit growth in the sector at 16%.
Steady revenue growth. Revenue growth for the sector is likely to be
17%, mainly led by volume growth. The impact of price hikes would
be higher in 3QFY11 than in earlier quarters. The full impact of price
hikes in 3QFY10 would be seen in 4QFY11.
EBITDA margin slightly lower. EBITDA margin of some
consumer companies would slightly reduce due to higher ad spend and
raw material prices. This margin decline would be on account of
removal of excess and return to normalcy and is not a trend.
Rising competition. With aggressive ad spend by Hindustan UniLever
(HUL) to regain lost market share, Procter & Gamble India (P&G)
introducing products at lower prices and domestic players (ITC)
aggressively launching products, we expect sector revenues to be
squeezed by the lower prices. Higher ad spend and promotions would
also curtail margin.
Stock calls. We retain Buy on ITC, Asian Paints, Colgate, Godrej
Consumer Products (GCPL), Marico, GlaxoSmithKline Consumer
Healthcare (GSK-CH) and Emami; Hold on Dabur; and Sell on HUL,
Nestlé India and Britannia. For mid caps, we have Buy on Agro Tech,
Zydus Wellness and VST Industries; and Hold on Bajaj Corp and
Jyothy Labs.
3QFY11 results preview
We expect consumer companies to report steady revenue growth,
largely driven by volume. Also, price hikes are likely to have
impacted revenue growth in the quarter. We expect yoy EBITDA
margin to be slightly lower that earlier quarters. Further, given the
higher taxes, we expect yoy net profit growth to be 16%.
Expect volume-led revenue growth
Consumer companies are expected to have seen steady revenue growth in
3QFY11, largely driven by volume. Some companies have hiked prices of
their products. We expect the proportion of price hikes in revenue growth
to continue rising from 3QFY11. At present, we do not see volume being
substantially hit by the price hikes in the past 3-4 months.
Pricing moves by consumer companies in 3QFY11
Most price hikes by consumer companies in 3QFY11 were to counter the
effects of earlier price cuts or the cutting down of promotional schemes.
Marico increased prices of its products by 8-10%. Agro Tech increased
prices of its Sundrop edible oil products by 15-25%. Britannia continued
to increase prices or reduce grammage even in 3QFY11. GSK-CH
increased prices of Horlicks by 5%. We expect the steadily rising food
inflation to result in price hikes continuing, even in 4QFY11. We have not
seen any price cuts in 4QFY11.
Fresh launches and re-launches during 3QFY11
With the uptrend in the economy, consumer companies are launching
various products. HUL launched Ponds Gold Radiance and introduced
Vaseline winter cream. Britannia introduced a new range of biscuits under
Nutrichoice. GSK-CH expanded its portfolio of biscuits under the
Horlicks brand. ITC introduced a new cigarette brand – Players. P&G
extended its offerings in India by introducing Wella hair color
Inflation steadily moving up
Inflation, especially in prices of food, is steadily rising in India (crops were
damaged from unseasonal rains during Oct-Nov ’10). We expect the sharp
upswing in food inflation to impact consumer companies. It would impact
margins of food companies and the share of wallet for consumer
products. We see only marginal impact in 3QFY11, although the real
impact of inflation, especially in food, would be felt in 4QFY11.
Raw material prices
Most raw material prices are moving up and are near peak levels of
1QFY09. Almost all raw materials are quoting at prices higher than in
3QFY10. Copra prices have shot up 62% and are expected to severely hit
Marico. The prices of the edible oil basket have also increased
substantially. Though the trend is up, average sugar and wheat prices were
lower in 3QFY11 than 3QFY10.
EBITDA margin to be slightly lower
We expect the EBITDA margin to be slightly lower in 3QFY11 than
3QFY10. We believe that the margin correction would be mainly owing to
margin returning to normal and does not indicate a sustained declining
trend. We expect the margin to be mainly triggered by higher ad spend and
some upswing in raw material prices.
Steady net profit growth
Though EBITDA margin is likely to be slightly lower, higher revenue
growth will drive net profit upwards. Higher interest rates are likely to lead
to higher ‘other income’. Also, we believe that the effective tax rate would
move up 100-200bps. Though net profit growth could be steady, it would
be lower than EBITDA growth.
Expect higher effective tax rates
We expect the effective tax rate during 2QFY11 to increase 50-200bps.
Some companies have exhausted their income-tax exemptions. The MAT
rate has moved up, from 15% to 18%. We expect HUL, Dabur and GCPL
to report higher effective income-tax rates. However, some companies
such as Marico and Emami would enjoy the benefit of MAT credit and
report tax rates below the MAT rate of 20%.
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