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Consumer/ FMCG
Potential Outperformers: Godrej Consumers, Radico, Pantaloon, Titan
Potential Underperformers: HUL, Colgate
We believe in Dec Q as well the Liquor and Retail companies will significantly
outperform Staples in terms of earnings growth. Strong consumer demand for
discretionary items and favorable turn in terms of margins should support sharp
earnings growth for these sectors, in our view.
Staples
We forecast Dec Q profit growth of 19%. This is much better than the 14% growth
in Sept Q. We believe topline growth will pick up strongly to 19% as volume
growth revives and there would be added price hikes taken during the quarter in
some categories. Also, we believe that margins should largely remain flat as the
hit to gross margins from rising input costs could be compensated with A&P
spends coming off the highs – a trend seen in Sept Q as well.
Estimated Dec profit growth of 19% is expected to be led by sales growth of 19%
and EBITDA growth of 20%, with marginally higher taxation dampening the
bottom line growth a bit.
Key data points to look for: HUL – volume growth should moderate down to single
digits on unfavorable base and margin hit from rising input costs; ITC – cig
volume growth should turn positive, hotels should rebound and FMCG losses
should decline; Asian Paints – expect strong rebound in volumes after an
abysmal June Q; Godrej Consumers – strong revival in domestic business led by
revival in soaps volumes
HUL – We expect earnings to decline 4% yoy after marginal revival last
quarter. Key reason would be weak topline growth as volume growth
moderates on an unfavorable base and declining margins impacted by steep
price cuts and rising input costs. Margins should decline 160bps on rising
input costs, high A&P spends and royalty payments.
ITC – Strong earnings growth of 22% yoy is expected, led by positive
cigarette volumes. We estimate a topline growth of 14% yoy for cigarettes led
by ~12% price hikes and marginal volume growth. This quarter should mark
the sharp turnaround in Hotels on a weak base and improving business
environment. FMCG topline growth will remain strong and losses are
expected to come down. Paper should benefit from rising margins driven by
increase in selling price. Agri should do well in a seasonally strong quarter.
Asian Paints – We expect the Dec Q to show strong growth of 37% yoy. We
are building in a topline growth of 30% led by exceptionally strong volume
growth due to delayed Diwali and price hikes of ~8%. However, some margin
pressure could start reflecting from this quarter onwards due to continued
rise in input costs.
Godrej Consumer – Earnings growth should continue its strong pickup and
we expect a 65% yoy growth as soaps should rebound strongly on favorable
base and inventory refilling. International acquisitions should continue to
show strong growth with the exception of Keyline, which will not have last
year’s support of H1N1 flu epidemic led demand for hand sanitizers.
Dabur – We expect recovery in profits for Dabur with 23% yoy growth as
topline growth should move up to 18% yoy led by recovery in volume growth.
Also, margins should improve on a weak base, with lower A&P spends likely
to make up for weakness from fall in gross margins. This quarter should
show partial contribution from Hobby acquisition as well.
Nestle – Dec Q should see strong recovery with an estimated 58% yoy
growth on an exceptionally weak base of last year. We estimate topline
growth of 22% led by volume growth of mid teens and mid single digit of
price hikes. Margins should however remain under pressure as prices of key
raw materials like milk and coffee remain high.
Colgate – Operating performance should remain strong, with PBT growth
estimated at 20% yoy. However, higher tax rate will be a dampener as gains
at the operating level will be lost, leading to just 7% yoy growth. Sales growth
should remain strong at 14% yoy mostly contributed by volume growth.
Margins should improve on gross margin gains from backward integration
and lower A&P spends.
Liquor
United Spirits – We forecast a strong 42% earnings growth led by a strong
topline growth of 22%. We also expect a healthy margin gain led by lower
input costs and scale benefits for overhead and staff costs. However, A&P
spends are expected to continue to run high.
Radico Khaitan – We expect a healthy 155% earnings growth in Dec Q led
by strong topline growth set to benefit from revival in sales of 8PM and higher
growth in sales of premium brands like Magic Moments and Morpheus
brandy. Also, we expect strong margin gains from premiumization and some
decline in input costs.
Retailers
Pantaloon – Strong surge in profit growth should continue, led by strong
Same Store Sales growth in mid teens. Also, a key driver for growth should
be reduction in interest cost as Pantaloon has deleveraged using equity
infusion and internal accruals.
Titan – Dec Q should be a very strong quarter with estimated 77% profit
growth. We expect jewelry demand to continue its strong growth trajectory
with a ~30% volume growth; pickup in discretionary spending should help.
Also, watches should show double digit growth on strong consumer demand.
Topline growth is expected at 37% and a strong margin gain (due to shift in
festive sales to this quarter) should lead to 74% EBITDA growth.
Shoppers Stop – We forecast a profit of Rs214mn in Dec Q, implying 57%
yoy growth. Key driver for the revival would be a turnaround in consumer
spending and we expect sales per sqft to continue to improve in the Dec Q.
We believe Same Store Sales growth will be in mid teens. Also, margins
should improve on better mix and scale efficiencies from improved store
productivity.
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