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Input cost inflation's larger impact would be witnessed during 3QFY11
We believe that the price hikes during 2QFY11 would provide cushion to gross margins
during 3QFY11, despite higher pressure from input cost inflation during the quarter. We
expect that majority of impact caused by input cost inflation would be visible in 4QFY11 as
the companies would be holding low cost inventory of the last three months. Going ahead,
increasingly, we expect to see FMCG companies recording higher raw material cost and
muted ad-spends, as price hikes would be difficult to initiate in an inflationary scenario. This
phenomenon would be particularly true for soap manufacturers as its key raw material, palm
oil has witnessed steep increase during the quarter ended Dec 2010. Average prices of palm
oil (RM for soap manufacturers) have increased by 43% YoY during the period (Oct-Dec
2010) reaching close to the highest price levels during the last five years. However, the
relevant inflation for 3QFY11 would be the 16% growth in palm oil prices during the quarter
ended October 2010.
HUL (Hindustan Unilever) is primarily focusing on regaining market share from its smaller
competitors, and hence, is not expected to stress on price hikes to protect margins in an
inflationary environment. Therefore, smaller players like GCPL are expected to find it difficult
to pass on cost increases. However, with GCPL's exposure to soaps reducing to 23% of total
sales post the international acquisitions, the impact of the input inflation has reduced.
Paint companies to witness revival but input cost inflation to impact margins
Our industry interactions suggest that paint industry has witnessed a recovery during
3QFY11. Owing to the same, we expect Asian Paints to witness a sales growth of 27%
during 3QFY11, taking the 9 month FY11 growth to 19%. According to our estimates,
growth in realisations arising from price hikes would be to the tune of 5%. KNPL is expected
to continue with 22% growth in sales during the quarter due to consistent volume growth in
the auto paints segment led by its key client, Maruti.
However, we believe that the profitability for the paint industry would be under pressure
during the quarter due to the continued rise in prices of its key raw materials like, Titanium
dioxide, Pthalic Anhydride and MTO. Titanium dioxide prices rose by about 6% during
1HFY11, while during 2QFY11, prices of the commodity have moved up by 16%. Prices of
Pthalic Anhydride had risen by about 17% during 1HFY11, while during 2QFY11, the
commodity witnessed an increase in prices of about 11%. One of the most important raw
materials, MTO (Mineral Turpentine Oil), has increased roughly by about 20% during the
current quarter. We expect Asian Paints to witness nearly 156bps drop in gross margins
during the quarter due to the increase in input cost.
Festive season modest for retailers
We expect Titan Industries’ outperformance to continue during the quarter even over a
higher base of the previous fiscal. As we had highlighted in our earlier update on Titan
Industries, the specialty retailer performance has been in line with the management
expectations. PRIL is expected to post continued improvement in same store growth during
the quarter. However, we do not expect any major acceleration in growth accruing from the
festive season for Pantaloon and other hyper market retailers
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