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Consumer Staples: Sector Outlook
Raw material inflation to be the key theme for 2011. We believe that managing raw
material inflation in 2011 will be a key challenge for the FMCG players and will also test their
pricing power. As the possibility of crude, palm oil and agri-commodity prices coming off is
remote, maintaining margins will be difficult. The current high valuations for the sector
increase the risks further; we remain cautious on consumer staples.
Gross margins likely to contract 100-300bp. We are cautious on FMCG players’
margins due to raw material cost pressure and high advertising and promotion (A&P)
spending due to intense competition in most categories. Key raw material costs such as
crude oil (↑22%, since January 2010), palm oil (↑50%), copra (↑80%) and agri product
inflation are scaling new highs. The existing high level of competition further prevents
companies from raising product prices in line with cost inflation.
Volume growth to moderate to 11%: We expect 11% volume growth for the sector in
2011, down from 15% in 2010, on price increases and the higher base of the previous 12
months. We expect volume growth will be driven by under-penetrated personal care
categories such as skincare, hair care, deodorants, household care and food categories. .
High food inflation – risk of down-trading. Food contributes ~50% to an Indian
household's consumption basket. As current domestic food inflation is above 18% on a
very high base effect of 2010, FMCG players, including categories like laundry, personal
wash, hair care, could see consumer down-trading to cheaper variants.
Global FMCG majors are getting aggressive in Indian market. Global Home and
Personal Care (HPC) companies P&G, L’Oreal, Shiseido, Estee Lauder, Revlon, Reckitt
Benckiser and SC Johnson are increasing their presence in India. The multinational
companies’ (MNCs) focus on the Indian market was highlighted by Reckitt’s aggressive
US$750m buyout of Paras Pharma (an Indian personal care company). Over the years,
L’Oreal (7.5% market share in skincare) and P&G have increased their product range in
the premium to mid-priced segments. We expect global majors will increase their presence
in India through new launches and expansion of distribution reach during 2011.
Rich valuations add to our concerns: One of the risks to our above investment
arguments is that if the broader market turns bearish, consumer staples tend to
outperform. However, we believe rich valuations provide limited scope for any upside for
Hindustan Unilever stock. We prefer ITC over Hindustan Unilever. Amongst midcaps, we
prefer Emami over Marico, where we believe the downside risk to margin is the highest.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Consumer Staples: Sector Outlook
Raw material inflation to be the key theme for 2011. We believe that managing raw
material inflation in 2011 will be a key challenge for the FMCG players and will also test their
pricing power. As the possibility of crude, palm oil and agri-commodity prices coming off is
remote, maintaining margins will be difficult. The current high valuations for the sector
increase the risks further; we remain cautious on consumer staples.
Gross margins likely to contract 100-300bp. We are cautious on FMCG players’
margins due to raw material cost pressure and high advertising and promotion (A&P)
spending due to intense competition in most categories. Key raw material costs such as
crude oil (↑22%, since January 2010), palm oil (↑50%), copra (↑80%) and agri product
inflation are scaling new highs. The existing high level of competition further prevents
companies from raising product prices in line with cost inflation.
Volume growth to moderate to 11%: We expect 11% volume growth for the sector in
2011, down from 15% in 2010, on price increases and the higher base of the previous 12
months. We expect volume growth will be driven by under-penetrated personal care
categories such as skincare, hair care, deodorants, household care and food categories. .
High food inflation – risk of down-trading. Food contributes ~50% to an Indian
household's consumption basket. As current domestic food inflation is above 18% on a
very high base effect of 2010, FMCG players, including categories like laundry, personal
wash, hair care, could see consumer down-trading to cheaper variants.
Global FMCG majors are getting aggressive in Indian market. Global Home and
Personal Care (HPC) companies P&G, L’Oreal, Shiseido, Estee Lauder, Revlon, Reckitt
Benckiser and SC Johnson are increasing their presence in India. The multinational
companies’ (MNCs) focus on the Indian market was highlighted by Reckitt’s aggressive
US$750m buyout of Paras Pharma (an Indian personal care company). Over the years,
L’Oreal (7.5% market share in skincare) and P&G have increased their product range in
the premium to mid-priced segments. We expect global majors will increase their presence
in India through new launches and expansion of distribution reach during 2011.
Rich valuations add to our concerns: One of the risks to our above investment
arguments is that if the broader market turns bearish, consumer staples tend to
outperform. However, we believe rich valuations provide limited scope for any upside for
Hindustan Unilever stock. We prefer ITC over Hindustan Unilever. Amongst midcaps, we
prefer Emami over Marico, where we believe the downside risk to margin is the highest.
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