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India Consumer - Introducing FY13 estimates
We introduce FY13 estimates for consumer companies under our coverage. Revenue growth for the sector is expected to be 15%, largely led by volume growth. Though we expect margins to remain at FY12 estimated levels, we expect tax rates to rise. We estimate net profit growth of 18% in FY13 vs. FY12.
n Expect revenue growth of 15%. We expect the consumer sector to see revenue growth of 15% in FY13e over FY12. Of this, volume growth will contribute 12% and price hikes the remaining. Rising income levels, distribution network expansion and launch of smaller SKUs would keep the revenue growth momentum intact.
n Ad-spend and higher taxes to impact earnings. We expect the ad-spend to increase for some companies in our coverage, given rising competition. With reducing tax sops, we expect the sector to register net profit growth of 18% in FY13e over FY12.
n Performance of acquisitions – Key to watch. Consumer companies such as Godrej Consumer, Dabur and Marico have acquired various domestic and international companies; also, Reckitt has acquired Paras in India. We expect performance of acquired companies, integration with parent company and synergies to be key triggers going forward.
n Competitiveness on the rise. Given aggressive strategies of MNCs such as P&G and domestic players such as ITC, we expect large consumer segments to face intensified competition. Impact of such pressure would be evidenced in FY13.
Introducing FY13 estimates
We introduce FY13 estimates and expect consumer sector
companies under our coverage to register revenue and PAT growths
of 15% and 18% respectively. While we expect margins to remain
steady, tax rates would expand.
Expect revenue growth to be led by volume growth
We expect consumer companies under our coverage to register growth
rate of 13-14%, mainly led by volume growth. Expansion of distribution
network as well as rollout of small SKUs is likely to drive revenues.
Further, we expect sub-segmentation strategies employed by consumer
companies such as Colgate and GSK Consumer to boost their growth.
However, we continue to expect HUL to still report single-digit growth
owing to competitive pressure.
We also expect recruiter packs (SKUs prices at MRP of `10 or below) will
drive the consumption faster in FY13. The ad-spend will also be driven to
promote such SKUs.
Rising income levels to drive consumption
With rising income levels, we expect the consumption-led growth to
continue even in FY13. Our Economist expects 14% growth in per-capita
income in FY13 over FY12. We expect higher disposal income and better
infrastructure to drive growth for various segments. We believe packaged
food and health food products would see healthy growth in FY13.
Expect no major change in FY13 margins vs. FY12
We do not see any major change in EBITDA margins in FY13 over FY12.
Though some raw material costs are rising, we do not expect margins to
be impacted by them owing to companies’ pricing power.
Rising WPI inflation
The wholesale price index (WPI) inflation is expected to increase in FY13.
However, we expect pricing power of consumer companies under our
coverage to aid pass on the additional raw material costs. Higher inflation
will, however, impact wallet share for consumer products.
Higher ad-spend to drive growth and protect brand strength
We expect the ad-spend to increase in FY13 from current levels as well.
The increase in ad-spend is attributable to higher competitive pressures.
The consumer companies are also launching new products. Launch of new
SKUs especially recruiter packs will require support of higher ad-spend.
Consumer companies are also looking at expanding distribution network.
Expansion of distribution results in increase in local ad-spend as well as
higher trade promotions.
Rising interest rates to expand other income
We expect other income to expand, given rising interest rates. As a result,
we expect other income to grow faster, with consumer companies
generating strong free cash flows. Some consumer players such as HUL
had adopted the policy to invest in bank deposits instead of liquid mutual
funds due to volatile markets. But, we believe that with markets now
stabilizing, consumer companies would change their investment policies in
favor of liquid investments, thereby leading to better returns.
Effective income tax rates to rise further
With most tax holidays over as well as rising production at taxable
manufacturing units, we expect effective income tax rates to move
upwards. Rising MAT rates is also key for the higher income tax rates.
Net profit growth to be slightly lower than EBITDA growth
Though we expect consumer sector to report steady revenue growth rate
of 15% in FY13e over FY12, net profit growth is likely to be 18%. Higher
tax rates will result in slightly lower growth in net profit than EBITDA
growth.
Performance of acquisitions – Key to watch
Some companies such as GCPL, Marico, Dabur have acquired various
companies globally. We reckon the performance of acquired companies
will be key to watch in FY13. Integration of acquired companies and
synergy benefits will play an important role going forward.
Impact of competitive pressure a major concern
Competitive pressure is rising across major consumer segments and is
likely to curb companies’ pricing power and result in rise in brand building
activities. Entry of new players in India and success of new products is
crucial going forward.
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