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Indian FMCG & Retail
Dec quarter results preview
FMCG: top-line growth strong, but cost pressure will
manifest (gross margin down 44 bps y-o-y)
Retail: strong same store sales growth, margins slightly up
(35 bps)
Valuations full for both FMCG and retail, results unlikely to
be stock moving in general
FMCG Dec Q results: We expect top-line growth to remain robust (19% y-o-y, for our
coverage universe). While food price inflation has spiked in the last three weeks and is of
concern if it continues, the impact (in terms of reduced purchasing power) will not be visible in
Q3 and we expect business as usual. However, on the raw materials front, we expect pressures
to build – we anticipate gross margin contraction of 44 bps for our coverage universe.
Operating margin contraction is however lower at 30 bps as there is control of overheads and
ad spends. Net profit margins are expected to be higher by 28 bps, mainly due to higher other
income. We believe that HUL could correct on the back of poor profit delivery and GCPL
could go up as the margin hit may be lesser than anticipated.
Retail Dec Q results: This year the festive season has better consumer sentiment than the
last; hence SSS growth in high teens is expected to continue. This will drive top-line
growth for our coverage universe at 36%. Operating margins are likely to benefit from the
buoyant sales and post a modest expansion of 35 bps for our coverage universe. Net
margins are likely to expand by 65bps, higher than operating margins on account of
operating leverage. Gitanjali is likely to go up on the back of good results (134% EPS
growth) and while results for other companies are not likely to disappoint, steep
valuations are unlikely to impact stocks positively.
Valuations full; major movements unlikely: Both the FMCG and Retail sectors are
trading at rich multiples. Hence even if results are good, stocks are unlikely to react
positively. On the other hand, barring a few exceptions, stocks for which results could be
a bit weak have already corrected from their peaks. Going into the results, we believe that
investors should be neutral on both sectors.
Company-specific comments
HUL: Volume and sales growth estimated at c12-13% but cost pressures likely to result in gross margin
decline of 50 bps. Ad spend estimated at 15% of sales, up 90 bps y-o-y. EBITDA growth at 4.7%; PAT
growth 4.5%
FMCG sales growth at 30% losses at INR750m, hotels business sales growth 25%, operating profit
growth of 35%.
UNSP: Volume growth of 13% expected, sales growth of 26.7% (change in accounting for tie up units
increases sales 5-7%). EBITDA growth of 21.3% is expected, but PAT growth of 16.8% due to adverse
financial leverage.
Dabur: Volume growth 12-13%, value growth 17%. Gross margin to decline by 210 bps but EBITDA
margin almost flat (20 bps decline) due to reduction in ad spends. Net profit growth 15%, slightly lower
than EBITDA growth due to higher tax rate y-o-y.
Marico: Sales growth of c17% driven by volume growth of 12%. However, gross margins likely to be
down by 370 bps on the back of copra cost inflation. EBITDA likely to only grow by 1.9% due to cost
pressure and adverse operating leverage. Net profit growth higher at 12.5% due to lower tax rate.
Colgate: Sales and volume growth expected at 13%, nothing noteworthy at gross profit and EBITDA
level but PAT will be flat y-o-y due to lower tax rate last year (adverse comps).
Nestle: Q4 (Dec year ending) derived as full year estimates minus YTD actuals. Note that there are one-off
expenses/losses (quantum undisclosed by company) last year due to which y-o-y growth numbers look large.
Asian Paints: High sales growth of 25% (28-30% domestic) driven by postponement of sales from Q2 to
Q3 due to delayed festive season and prolonged monsoons. Gross margin contraction of 120 bps expected
due to material cost pressure, but at EBITDA level compression only 30 bps due to operating leverage.
Net profit growth of 28% expected.
GCPL: Sales growth of 64%. Soaps likely to stop the volume decline in soaps this quarter. Gross margin likely
to be down 200 bps on account of palm oil inflation. Expect 74% EBITDA growth and 48% PAT growth.
Pantaloon: Good SSS growth and store additions to drive topline growth of 35%. Gross margins to be
flattish at 30% and EBITDA margins at 10%. PAT growth of 43% expected due to financial leverage.
(Please note these estimates include only value+lifestyles businesses and not home business as data for
previous year is not available).
Shoppers Stop: Increase in discretionary spends likely to drive revenue growth of 25%. Gross margins
lower by 140 bps due to one time benefit last year. EBITDA margins down by 170 bps for the same
reason. PAT growth of 54% expected
Titan: Expect sales growth of 41% (20% on watches and 45% on jewellery) on strong discretionary
demand. Operating margins to expand 45 bps (82 bps on watches and flat on jewellery). PAT growth at
38% lower than EBITDA growth due to a higher tax rate.
Gitanjali: Estimated sales growth of 36% (30% on diamond and 40% on jewellery segment). Operating
margins on diamond segment at 4.3%, ie expansion of 160 bps y-o-y due to better prices. Jewellery
segment margins at 7.5% likely to expand 240 bps as company recovers from the recession. PAT growth
at 135%, higher than EBITDA growth of 81% due to financial leverage.
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