India Consumer 3QFY11 – Revenue growth intact; margins lower :: Anand Rathi

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India Consumer
3QFY11 – Revenue growth intact; margins lower
Our consumer universe posted a 14% yoy net profit growth on a
21% yoy rise in revenue. Volumes drove revenue growth despite
limited price-led growth. EBITDA margins were lower due to an
increase in raw material costs, and higher taxes resulted in lower
net profit growth.

 Dec ’10 price hikes. To pass on rising raw material prices, in Dec
’10 consumer companies hiked product prices. The impact was
limited in 3QFY11 and a large part of revenue growth was volume
led. We expect the impact of price hikes to be seen from 4QFY11.
 EBITDA margin lower. The consumer sector EBITDA margin
has come down 100-200bps due to higher raw material prices.
However, the ad-spend-to-sales ratio has also fallen. With the
major cricket season spread over 4QFY11 and 1QFY12, we
believe that ad-spend would rise.
 Outlook. With food prices falling, we expect the share of wallet
for consumer products to increase. Price hikes would help retain
margins as well as increase brand-building activities. However, we
expect income tax rates to rise and trim net profit growth.
 Stock calls. We have a Buy on ITC, Asian Paints, Colgate,
Marico, GCP, GSK-CH, Emami, Agro Tech, Zydus Wellness and
VST Industries; a Hold on Dabur, Jyothy Labs, and Bajaj Corp.
and a Sell on HUL, Nestle India and Britannia.