Nomura: 2011 Update- Consumer/ FMCG

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Consumer
 Action
With input cost pressures rising, competition continuing to remain strong and sector
valuations towards the top end of the long-term average, we are cautious on the
sector into 2011. However, we believe there is value in select stocks such as ITC,
Asian Paints and Pantaloon, where we see pick-up in operational performance in
H2FY11. Hindustan Unilever and Marico are our top REDUCE calls.
 Catalysts
Longer-term opportunity in the sector will be driven by robust GDP growth, rising
incomes and wider product availability.
Anchor themes
The Indian consumer sector remains attractive in the long term, given favourable
demographics, rising disposable income and increasing urbanisation. With
penetration levels still low across several categories, we are positive on the sector
in the longer term. We prefer food names vs HPC.

Near-term concerns outweigh longterm
attractions
 Tough operating environment …
Operational environment remains tough for consumer companies going into 2011,
as rising commodity costs and continuing competitive pressures are likely to put
pressure on profitability. With valuations towards the top end of the long-term
average, we remain cautious on the sector.
 … however, long-term attractions do remain
The industry growth rate has averaged 11% over the past decade (Booz and Co.
estimates); however, the industry has the opportunity to grow at a much faster
trajectory over the next decade, in our view. An aggressive management mindset,
opportunity to convert non-users into consumers, the creation of newer
categories, resolution of supply-chain issues and growth of modern retail could
strengthen the growth trajectory of the industry to ~17% over the next decade,
according to our estimates.
 Inorganic is the way to grow
Over the past few months, we have witnessed a trend of companies looking
aggressively at overseas markets for acquisitions: Dabur has done two, GCPL
four and Marico one. We believe that this trend is likely to continue over the
medium term, as consumer assets in India continue to remain expensive.
Moreover, we see this as consumer companies preparing for the second leg of
growth 5-10 years down the line by venturing into emerging markets such as
Africa and South Asia. This may be positive in the longer term; however,
integration may be a risk.
 ITC, Asian Paints and Pantaloon are high conviction BUY ideas
We maintain ITC, Asian Paints and Pantaloon as our top BUY ideas post this
results season. For ITC, we believe cigarette business volume growth will trend
back into positive territory in H2, which will help improve profitability. We expect
Asian Paints to see a strong recovery after a one-off weak Q2FY11 and
Pantaloon to benefit from robust festive season demand. Valuations are more
supportive on these stocks as well vs FMCG and retail universe.