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FMCG
For 3QFY2011, we expect our FMCG universe to post steady
top-line growth of 20% yoy aided by robust volumes and
selective price hikes. While a buoyant economy, increased
demand owing to the festive season and sustained ad-spends
are expected to drive volumes, the impact of selective price
hikes taken by the companies in 2QFY2011 will also be felt
during the quarter under review. Godrej Consumer (GCPL) is
expected to post the highest top-line growth this quarter albeit
on a low base aided by the revenue traction from its recent
acquisitions. GSK Consumer (GSKCHL), Asian Paints, Dabur
and Marico are also expected to post strong top-line growth
for the quarter.
Erratic monsoons spell doom for crops
Erratic monsoons (23% above normal till third week of December
2010) have proved to be bad for crops in India as the raw
material prices have been spiraling. Currently, while the wheat
and rice prices are ruling firm, the potato and onion prices
have spiked and are in double digits. We believe that the same
will negatively impact input costs of the agri-dependent
companies like ITC, Marico, Nestle and GSK Consumer as the
increase in raw material prices will exert pressure on the margins
of these companies. Cooling demand due to the rise in food
inflation, which has increased in close succession over the last
three weeks (current food inflation stands at 12.1%) could also
impact HUL, Colgate and GCPL performance for the quarter
Input costs still a major concern
Among the agri-commodities, while the sugar and tobacco
prices are benign, milk has also finally started showing signs of
cooling. The tobacco prices have fallen (16% yoy and 6% qoq
decline) due to: 1) poor quality of tobacco leaves on account of
erratic rainfalls, 2) higher-than-expected tobacco output in
Karnataka resulting in higher arrivals at the auctions thereby
dragging the prices, and 3) global decline in prices resulting in
lack of fresh export orders. The wheat and barley prices are
however, ruling high on account of supply constraints.
All the vegetable oils and copra prices have increased
~20-30% qoq mirroring the global prices with groundnut and
rice bran oil being the only exceptions. Prices of crude-linked
raw materials such as caustic soda and soda ash have also
risen with crude touching ~US $90/barrel.
Growing inorganically to fill in portfolio gaps
FMCG majors have been focusing on expanding their global
footprint through acquisitions in niche segments to fill the gaps
in their product portfolio. In line with this, Dabur acquired
Namaste Laboratories LLC, a USA based ethnic hair colour
manufacturer. This acquisition marks Dabur's entry into the fastgrowing
US $1.5bn ethnic hair care product market in the US,
Europe and Africa.
In the domestic market, amidst much speculation Reckitt
Benckiser completed the acquisition of Paras Pharma. This deal
is touted to be the most expensive one being executed at
`3,260cr or ~8x sales. Among the other deals, GCPL acquired
Naturesse Consumer Care Products and Essence Consumer
Care Products from Muskan Projects (has the Genteel and
Swastik Shikakai soap brands) for an undisclosed amount. In
another event, the Oetker Group, Germany acquired Fun Foods
Pvt. Ltd.
New launches gather pace
FMCG companies maintained the momentum of launching new
products and re-launching existing products with new
formulations. The food and beverages category witnessed most
number of new product launches/re-launches during the quarter.
Heinz led the pack with maximum number of launches, followed
closely by Dabur India.
In beverages, HUL re-launched Brooke Bond Red Label tea,
while Dabur re-branded its Real Juice portfolio. Coca Cola
launched Nestea, a global brand of Beverage Partners
Worldwide (BPW), a joint venture between Coca Cola and
Nestle. In the food segment, Heinz expanded its portfolio with
the launch of Heinz Home Style Chutneys, Heinz Chef Style
Sauces, Heinz Kitchen Klassics ready-to-eat meals and instant
mixes, and Heinz Golden Circle Juices. Britannia entered the
diabetes management space with its first-ever diabetic friendly
snack under its NutriChoice brand. ITC relaunched Sunfeast
Dark Fantasy, the premium dark chocolate biscuits. CG Foods
rolled out two new flavours of Wai Wai Quick - Wai Wai Quick
Chicken Pizza and Wai Wai Quick Masala Curry with three
seasonings. Bambino launched Instant Pasta, the first-of-itskind
of product and manufactured using one-of-its kind
technology in Asia. During the quarter, Dabur launched different
product ranges targeting men and women along with two new
fruit flavours of its flagship healthcare brand, Dabur
Chyawanprash, viz. Dabur Chyawanprash Orange and Dabur
Chyawanprash Mango. The company also launched a health
supplement, Nutrigo. Through subsidiary, Dabur Nepal, the
company launched its first hair oil for men, viz. PROstyle
Dandruff Control Hair Oil.
Johnson & Johnson launched the nicotine gum. A new variant
of Alpenliebe and Alpenliebe Eclairs was introduced by Perfetti
VanMelle. Emami launched two new products under the Boroplus
brand, namely Boroplus Healthy & Fair Winter Cream and
Boroplus Intensive Skin Therapy Cream. Godfrey Philips launched
variants in its seven-year old brand, Marlboro, in the king-size
or 84-mm segment.
Quarter all about garnering volumes
In a bid to cash in on the festive season, the FMCG players
wooed customers with attractive discounts, contests and
innovative packaging. Going ahead, we expect most of the
FMCG companies to continue re-investing their margin gains
in an attempt to enhance their ad-spend to support volume
growth.
Currently, while Asian Paints is running a contest, Surprise your
Spouse, Nestle is wooing consumers with Santa Dreamz contest.
Colgate is promoting its Max Fresh gel toothpaste by giving
free toothbrush and an 80gm tube with the purchase of every
150gm tube. PepsiCo and Coca Cola were in a race of sorts to
garner higher number of customers through innovative
advertisements, special festive packs (PepsiCo) and special Warli
bottles (Coca Cola).
The rural theme continues to be a focus area for most of the
FMCG companies, who have been undertaking various rural
activation programs to garner higher volumes. Thus, HUL
launched its multi-brand rural activation program, Khushiyon
ki Doli in the three states of Uttar Pradesh, Andhra Pradesh and
Maharashtra to educate consumers about personal hygiene.
Dabur launched a rural campaign for its brand Dabur Lal Tail
in Chattisgarh and Madhya Pradesh.
Heavyweights ITC and HUL drag FMCG index
During the quarter, the BSE FMCG Index posted 5%
underperformance vis-à-vis the Sensex, in line with our
expectations. ITC, which witnessed a sharp rally in 2QFY2011,
came off its highs during the quarter. HUL continued to
underperform, even though the competitive pressures have been
easing and pricing power slowly returning. Concerns persisted
about HUL not being able to salvage lost market share (faced
aggressive price war with P&G in 2QFY2011) and a higher
input cost environment, which has impacted its profitability.
During the quarter, Asian Paints was the biggest outperformer
following high demand for paints on account of the festive
season.
Midcaps to outshine heavyweights
With most festivals falling in 3QFY2011, we expect our FMCG
universe to report robust top-line growth of 20% yoy and
earnings growth of 19% yoy. Most of the companies are expected
to register margin expansion largely aided by robust top-line
growth. Sector leader, HUL, is expected to report robust 11.5%
yoy growth in top-line driven by both value and volume growth.
The company is expected to post 7.7% yoy growth in earnings
(recurring) despite margin contraction. We expect ITC to deliver
18.9% yoy growth in revenues during the quarter and 17.2%
yoy growth in earnings, aided by margin expansion. Overall,
the company's margins would largely receive a fillip aided by
the cigarette division on account of the absorption of earlier
rate hikes and benign tobacco price environment.
Valuations rich, recommend stock-specific approach
Post the recent rally in most FMCG stocks on the back of steady
earnings growth, significant margin expansion and sustained
volume growth, they are currently trading at rich valuations. In
terms of their one-year forward P/Es, most of the FMCG
companies are trading in line with their five-year averages. While
the long-term consumption story for the FMCG industry remains
intact, any further re-rating hereon seems less likely owing to
concerns over high input costs.
Remain equal-weight on sector
We continue to emphasise on selective stock picking and prefer
companies with a leadership position in their product categories,
a diverse product portfolio and with stronger pricing power, as
we believe they are better placed to combat the vagaries of
high input costs.
In mid-caps, we maintain an Accumulate on GCPL (due to
significant margin expansion and GSL consolidation would
address portfolio concerns), and Marico (a play on the valuation
gap). We upgrade Dabur to a Buy post integrating its recent
acquisitions.
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