FMCG: Q3 FY2011 Earnings Preview: Dolat Capital

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FMCG
• We expect volume growth to continue to driver earnings for our universe and sector at large during 3QFY11. Demand
from rural area continues to grow higher than urban area. We estimate a 15% revenue growth for our universe
• However, prices of all the key raw material have witnessed a sharp uptick last few months ‐‐ Palm Oil is higher by 40%,
while Copra and Coconut Oil prices have also been on the uptrend p p p during the quarter. We also apprehend that
sustained increase in crude price would have an impact the packaging cost sooner or later
• Operating margins are expected to remain under pressure during the quarter. We estimate a 15% growth in EBITDA for
our universe. Significant decline in EBITDA margins is expected to be witnessed by Marico (165bps YoY) and HUL
(122bps YoY). Better performance from hotel and other business could result in a 122bps YoY increase in EBITDA margin
for ITC
• We estimate a PAT growth of 13% for our universe during the quarter
• On back of rising raw material price companies have begun to take price increases in select product segment. We
believe significant increase in prices could impact the volume growth going forward
FMCG – Top Pick
Dabur India

• Historically, Dabur India has been able to maintain volume growth and margins during the rising raw material scenario
• Wide product range ensures sustain overall growth for the company
• International business to grow at 20% CAGR FY10‐12E and is expected to witness improvement in operating margins
• Recent acquisition of Namaste Group EPS accretive
• Stock trades at 30x FY11 EPS of Rs.3.3 and 23.5x FY12 EPS of Rs.4.4 (including EPS of Rs.0.18 from Namaste acquisition)
• We value the stock at 25x FY12 EPS and arrive at a price target of Rs.110