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FMCG
Cost pressures the dominant theme in CY11 – we see no
significant pressure on sales growth
Competition unlikely to ease, but that’s factored into expectations
Dabur is our preferred play in the sector
2011 sector outlook
We expect cost pressures to be the dominant
theme in CY11. We have already seen cost
pressures result in gross margin contraction for
some companies in the September quarter; we
expect this to continue for the next few quarters as
price increases either lag cost inflation, or are less
than what is required to offset cost pressures.
We do not expect any significant pressure on the
top line. There is a concern that food inflation
could impact purchasing power and hence depress
sales, but we believe the likelihood of that
happening is low given staples consumption is the
last to get cut and moderate price increases should
actually boost top line growth.
Competitive pressure, notably from P&G, is likely
to continue – we do not expect any let up.
However, this has been continuing for the last 3-4
quarters and has become business as usual. Even
so, we believe that relatively mature categories
such as soaps and detergents are unlikely to
deliver exciting performance on the back of
competition and cost pressures combined.
We expect the sector to remain range-bound over
the next 6-9 months due to high valuations
combined with concern on gross margins. The
sector is currently trading at a forward PE of 24x
vs historic average of 21x. Given sector EPS
growth at 23%, is in line with historical trend, we
believe this premium is not justified.
2011 top pick
Dabur, OW, TP INR114
The stock has corrected by 10% since the peak on
20 September. Q2 results disappointed as gross
margin was under pressure and shampoos
experienced heightened competition. However,
what the street is missing is that these are
temporary issues and will not extend beyond two
quarters (on the back of selective price increases
and rejuvenation of the shampoo portfolio). The
recent acquisition of Namaste Labs is 5% EPS
accretive, and hence provides downside protection
to earnings from weakness in domestic business.
Upcoming catalysts are possible new product
launches in the healthcare space and improvement
in domestic business over the next 3-6 months on
the back of renewed activation efforts by Dabur.
Dabur is a niche player on the herbal / ayurvedic
platform, which generally does not take large
MNC competition head on. We believe the stock
can deliver c20% EPS CAGR over the next 2-3
years. It currently trades at 24.7x 12-mth forward
EPS, slightly below our target multiple of 25x.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
FMCG
Cost pressures the dominant theme in CY11 – we see no
significant pressure on sales growth
Competition unlikely to ease, but that’s factored into expectations
Dabur is our preferred play in the sector
2011 sector outlook
We expect cost pressures to be the dominant
theme in CY11. We have already seen cost
pressures result in gross margin contraction for
some companies in the September quarter; we
expect this to continue for the next few quarters as
price increases either lag cost inflation, or are less
than what is required to offset cost pressures.
We do not expect any significant pressure on the
top line. There is a concern that food inflation
could impact purchasing power and hence depress
sales, but we believe the likelihood of that
happening is low given staples consumption is the
last to get cut and moderate price increases should
actually boost top line growth.
Competitive pressure, notably from P&G, is likely
to continue – we do not expect any let up.
However, this has been continuing for the last 3-4
quarters and has become business as usual. Even
so, we believe that relatively mature categories
such as soaps and detergents are unlikely to
deliver exciting performance on the back of
competition and cost pressures combined.
We expect the sector to remain range-bound over
the next 6-9 months due to high valuations
combined with concern on gross margins. The
sector is currently trading at a forward PE of 24x
vs historic average of 21x. Given sector EPS
growth at 23%, is in line with historical trend, we
believe this premium is not justified.
Dabur, OW, TP INR114
The stock has corrected by 10% since the peak on
20 September. Q2 results disappointed as gross
margin was under pressure and shampoos
experienced heightened competition. However,
what the street is missing is that these are
temporary issues and will not extend beyond two
quarters (on the back of selective price increases
and rejuvenation of the shampoo portfolio). The
recent acquisition of Namaste Labs is 5% EPS
accretive, and hence provides downside protection
to earnings from weakness in domestic business.
Upcoming catalysts are possible new product
launches in the healthcare space and improvement
in domestic business over the next 3-6 months on
the back of renewed activation efforts by Dabur.
Dabur is a niche player on the herbal / ayurvedic
platform, which generally does not take large
MNC competition head on. We believe the stock
can deliver c20% EPS CAGR over the next 2-3
years. It currently trades at 24.7x 12-mth forward
EPS, slightly below our target multiple of 25x.
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