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Key themes for 2011
Consumption trends in India will continue to be
influenced by wage growth, rising aspirational levels and
wealth creation from higher land prices. In India, percapita
consumption in several categories is still quite
low, and there is scope for further penetration and
uptrading, particularly in the rural markets. Therefore we
do not expect any major cyclicality in consumption
patterns, although there could be some moderation in
growth. We expect volume growth to be resilient in the
home and personal care and processed foods sectors.
Unlike 2010, we expect price rises to play a key role in
top-line growth and margin sustenence in 2011.
Marketing spends could be managed in the wake of input
cost pressures in order to limit margin erosion for staples
sector.
Retail sector should see a rebuild in confidence with
improved discretionary spends, consolidation and
improvement in reported earnings.
High levels of inflation, if sustained, remain the key risk
to overall consumption growth.
How the business is expected to evolve through the
year
Pricing to be an important top-line/margin driver:
We expect companies to resort to price rises more
aggressively in 2011 than last year in the wake of sharp
increases in RM costs. Stable volume growth trends
would support price hike decisions and this should also
help contain gross margin erosion.
2011 likely to be quieter in terms of promotional
activities: While last year witnessed all-time high levels
of advertising and promotion spend in the FMCG space,
we expect 2011 to be bit quieter in this regard
considering the significant push on the input cost front.
Domestic companies eyeing overseas growth
aggressively: This should be an important determinant of
their growth and valuation growing forward. While
overseas operations do provide revenue growth
opportunities we believe they may not merit similar
valuations as Indian operations, given the lower
margin/return profile and risks (currency, political,
execution etc) associated with them.
Sector view
We expect volume growth trends to hold up (high single
digit to low double digit for most companies), however
we believe margins will at best be flattish during 1H
FY12 in most cases on account of high input cost
pressures which will likely be partially mitigated by price
increases. ITC and United Spirits should, however,
benefit from input cost deflation in FY12 and should see
good margin expansion. While promotional activities
may be lower than last year we expect advertising spends
to be sustained. On average we estimate staples earnings
to grow at 19%. Rich sector valuations (above last 3- and
5-year averages) offer limited room for absolute upside
potential, though choppy market conditions could
provide support to this defensive sector in relative terms.
Stock recommendations
After a strong stock performance last year, we would
now be selective. We prefer companies with dominant
market shares, pricing power/entry barriers and limited
competitive risks. ITC remains our top pick in the staples
space. We are also Overweight on United Spirits. We
would prefer Nestle India and Dabur India on declines.
We are positive on the retail sector and like Pantaloon
(OW) and Titan Industries (N).
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