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Consumer products
India
4QFY11E preview: Profit-less growth in staples. The March quarter will likely be
marked with extreme results within the consumer sector, in our view—excellent results
from companies operating in discretionary categories and/or having limited competition
(ITC, GSK, Titan, United Spirits, Jubilant Foodworks, Nestle) whereas inability to mitigate
input cost inflation in a scenario of increasing market fragmentation hurting core
consumer staples (HUL, Dabur, Jyothy). We forecast 15% sales growth and 1% EBITDA
growth for staples. We expect volume growth to decelerate for staples as base effect
catches up and due to impact of food inflation on consumer wallet, particularly urban
poor (~25% of sector demand). Our CAUTIOUS sector view since October 2010 is
intact. Our preferred picks are ITC and GSK. Top sells are HUL and Colgate.
The story is intact – discretionary likely to outperform staples
Key considerations for March 2011 quarter would be (1) good growth in discretionary segments
and companies operating in near-monopolistic categories, (2) deceleration in volume growth in
consumer staples and (3) significant gross margin pressure in staples.
The March quarter will likely be marked with extreme results within the sector, in our view—
excellent results from companies operating in discretionary categories and/or having limited
competition (ITC, GSK, Titan, United Spirits, Jubilant Foodworks, Nestle) whereas inability to
mitigate input cost inflation in a scenario of increasing market fragmentation hurting core
consumer staples (Colgate, HUL, Dabur, Jyothy). Exhibits 1-3 give the performance of the industry
as a whole, staples and discretionary, respectively.
We expect sector sales growth of 17% yoy (15% for staples), flat EBITDA margins (contraction of
180 bps for staples) and earnings growth of 19% (just 3% for staples).
Good results expected from GSK, ITC, Jubilant Foodworks, Nestle and Titan. Weak results
expected from Colgate, Dabur, HUL and Jyothy Labs.
Important variables to watch
Deceleration in volume growth. We expect volume growth to decelerate for most companies as
base effect catches up and due to near-term impact of food inflation on consumer wallet
(Exhibit 5 gives detailed break-up of company-wise volume growth for the past two years).
Where are the (meaningful) price increases? While the Street was expecting price increases by
consumer companies in 2HFY11E, we highlight that the increases has been far and few. Few
examples are the ~32% price hike in Parachute by Marico, ~7% increase in Rin by HUL (in
South and West India) and ~4-5% hike in HUL and GCPL soaps portfolio.
Pressure on EBITDA margins (led by gross margin pressure) is a reality as companies are finding
it increasingly difficult to implement price increases due to worries on (1) impact of food
inflation on consumer demand, particularly for the urban poor, in our view, (2) continued
interest of MNCs in India with stated objective of acquiring meaningful market shares and
market positions. However, cut in adspends could likely support margins, but not enough to
support earnings growth, in our view.
HUL is expected to report ~12% volume growth. While the headline number of doubledigit
growth is impressive, we highlight that the current quarter (still) has favorable base
effect (decline of 5% in 4QFY09 and growth of 11% in 4QFY10).
Quote from HUL’s results press release post 3QFY11 results:
“Input cost inflation continued to rise during the quarter. Cost of goods sold went up by 220
bps, as a result of steep rise in material costs, especially in commodity sensitive categories.”
We expect the trend to remain the same in 4QFY11E as well. While most of HUL’s input
costs have witnessed significant inflation in 4QFY11E (palm oil 44%, LAB 12%), we find
increasing willingness by the company to absorb the cost pressures. The reluctance to
implement price increases is due to fear of (further) market share losses and higher
competitive activity, in our view.
Growth in Amla benefits Dabur disproportionately. The biggest beneficiaries of the
narrowing of retail price between coconut and other sub-segments have been amla hair
oil (Dabur Amla) and light hair oil (Bajaj Almond Drops). The increase in copra price has
forced Marico to effect a 32% price increase in the Parachute portfolio (including the key
100 ml pack to Rs25 from Rs21). Dabur Amla has substantially higher EBITDA margins
than the average margins for the company, in our view, and any disproportionate growth
in it would help it manage the portfolio profitability.
Watch for low volume growth (<5%, in our view) in Parachute as full impact of price
increases could deter consumers trading up from loose oil to branded oil.
FMCG losses in ITC are a monitorable (estimate of Rs741 mn loss for 4QFY11E; an
improvement of 6% yoy). We have modeled ‘Other FMCG’ loss of Rs1,221 mn
(improvement of 60% over FY2011E) and profit of Rs1,339 mn for FY2012E and
FY2013E, respectively. However, losses could potentially be higher given that the
company may need to incur expenses to relaunch its shampoo portfolio and the Fiama Di
Wills brand. Moreover, launch expenses for Yippee noodles may be higher than budgeted
due to the increased activity in this segment by new entrants (GSK, HUL) as well as the
market leader (Nestle).
Ramp-up in Foodles by GSK. Street will closely monitor the data-points on ramp-up in the
Foodles brand including any potential capex plans.
We expect Jubilant Foodworks to post 60% sales growth aided by the Cricket World Cup
(Indian team lasting the entire tournament duration of 43 days and winning it!)
Exhibit 11 gives the summary of change in earnings and target price. We have cut earnings
of Colgate by 5% as we account for higher tax rates (25% in FY2012E and 27% in
FY2013E). We have cut earnings of Jyothy by 7% in FY2012E and 9% in FY2013E as we
model lower volume growth in Ujala and impact of crude-linked input cost inflation.
Continued buoyant demand conditions, particularly in discretionary spending, augur well for
Titan. Every 10% increase in gold price increases Titan’s margins by 50 bps. Accordingly, we
have increased our earnings estimate by ~14% for FY2012E and FY2013E. We have cut our
earnings estimate in UNSP by ~14% for FY2012E and FY2013E as the fall in raw material
cost (spirit and molasses) was lower than expected.
There is no change to our rating on any stock. Our CAUTIOUS sector view since October
2010 is intact. Our preferred picks are ITC and GSK. Top sells are HUL and Colgate.
Consumer demand is not parabolic!
We highlight that the past three years have seen a confluence of factors which have likely
aided incremental spends on consumer products, (1) higher outlay on NREGA, (2) wealth
effect due to higher land prices, (3) benefits of farm loan waiver, (4) some benefits of the
sixth pay commission and (5) higher minimum support prices for agricultural produce. As we
look into FY2012E, we highlight that most of these positive factors are in the base and
lower incremental spends have a potential to hurt demand for consumer products.
Consumer market is fragmenting...
Given the long-term attractiveness of Indian consumer categories, brand proliferation has
been accelerating, in our view. There are ~5, 000 new Home & Personal Care brands
(including variants) and ~900 new Food & Beverage brands launched in the past two years.
In turn, this proliferation raises adspends (Exhibit 8). Incumbents, particularly, are compelled
to spend more to maintain their market shares and relative market positions.
Relative price/relative performance of the sector makes us cautious
Our analysis of relative earnings and the relative price between the sector and BSE-30 Index
indicates that either the sector valuations are running ahead of fundamentals or we could
see significant earnings upgrades. We believe it is the former. Exhibit 12 shows the
consumer sector (KIE coverage universe) relative price and earnings momentum versus BSE-
30 Index. Relative price is the index of our consumer sector coverage versus BSE-30 Index;
relative earnings are the indexed earnings of our consumer sector coverage versus BSE-30
Index (with April 1993 as Base 100).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Consumer products
India
4QFY11E preview: Profit-less growth in staples. The March quarter will likely be
marked with extreme results within the consumer sector, in our view—excellent results
from companies operating in discretionary categories and/or having limited competition
(ITC, GSK, Titan, United Spirits, Jubilant Foodworks, Nestle) whereas inability to mitigate
input cost inflation in a scenario of increasing market fragmentation hurting core
consumer staples (HUL, Dabur, Jyothy). We forecast 15% sales growth and 1% EBITDA
growth for staples. We expect volume growth to decelerate for staples as base effect
catches up and due to impact of food inflation on consumer wallet, particularly urban
poor (~25% of sector demand). Our CAUTIOUS sector view since October 2010 is
intact. Our preferred picks are ITC and GSK. Top sells are HUL and Colgate.
The story is intact – discretionary likely to outperform staples
Key considerations for March 2011 quarter would be (1) good growth in discretionary segments
and companies operating in near-monopolistic categories, (2) deceleration in volume growth in
consumer staples and (3) significant gross margin pressure in staples.
The March quarter will likely be marked with extreme results within the sector, in our view—
excellent results from companies operating in discretionary categories and/or having limited
competition (ITC, GSK, Titan, United Spirits, Jubilant Foodworks, Nestle) whereas inability to
mitigate input cost inflation in a scenario of increasing market fragmentation hurting core
consumer staples (Colgate, HUL, Dabur, Jyothy). Exhibits 1-3 give the performance of the industry
as a whole, staples and discretionary, respectively.
We expect sector sales growth of 17% yoy (15% for staples), flat EBITDA margins (contraction of
180 bps for staples) and earnings growth of 19% (just 3% for staples).
Good results expected from GSK, ITC, Jubilant Foodworks, Nestle and Titan. Weak results
expected from Colgate, Dabur, HUL and Jyothy Labs.
Important variables to watch
Deceleration in volume growth. We expect volume growth to decelerate for most companies as
base effect catches up and due to near-term impact of food inflation on consumer wallet
(Exhibit 5 gives detailed break-up of company-wise volume growth for the past two years).
Where are the (meaningful) price increases? While the Street was expecting price increases by
consumer companies in 2HFY11E, we highlight that the increases has been far and few. Few
examples are the ~32% price hike in Parachute by Marico, ~7% increase in Rin by HUL (in
South and West India) and ~4-5% hike in HUL and GCPL soaps portfolio.
Pressure on EBITDA margins (led by gross margin pressure) is a reality as companies are finding
it increasingly difficult to implement price increases due to worries on (1) impact of food
inflation on consumer demand, particularly for the urban poor, in our view, (2) continued
interest of MNCs in India with stated objective of acquiring meaningful market shares and
market positions. However, cut in adspends could likely support margins, but not enough to
support earnings growth, in our view.
HUL is expected to report ~12% volume growth. While the headline number of doubledigit
growth is impressive, we highlight that the current quarter (still) has favorable base
effect (decline of 5% in 4QFY09 and growth of 11% in 4QFY10).
Quote from HUL’s results press release post 3QFY11 results:
“Input cost inflation continued to rise during the quarter. Cost of goods sold went up by 220
bps, as a result of steep rise in material costs, especially in commodity sensitive categories.”
We expect the trend to remain the same in 4QFY11E as well. While most of HUL’s input
costs have witnessed significant inflation in 4QFY11E (palm oil 44%, LAB 12%), we find
increasing willingness by the company to absorb the cost pressures. The reluctance to
implement price increases is due to fear of (further) market share losses and higher
competitive activity, in our view.
Growth in Amla benefits Dabur disproportionately. The biggest beneficiaries of the
narrowing of retail price between coconut and other sub-segments have been amla hair
oil (Dabur Amla) and light hair oil (Bajaj Almond Drops). The increase in copra price has
forced Marico to effect a 32% price increase in the Parachute portfolio (including the key
100 ml pack to Rs25 from Rs21). Dabur Amla has substantially higher EBITDA margins
than the average margins for the company, in our view, and any disproportionate growth
in it would help it manage the portfolio profitability.
Watch for low volume growth (<5%, in our view) in Parachute as full impact of price
increases could deter consumers trading up from loose oil to branded oil.
FMCG losses in ITC are a monitorable (estimate of Rs741 mn loss for 4QFY11E; an
improvement of 6% yoy). We have modeled ‘Other FMCG’ loss of Rs1,221 mn
(improvement of 60% over FY2011E) and profit of Rs1,339 mn for FY2012E and
FY2013E, respectively. However, losses could potentially be higher given that the
company may need to incur expenses to relaunch its shampoo portfolio and the Fiama Di
Wills brand. Moreover, launch expenses for Yippee noodles may be higher than budgeted
due to the increased activity in this segment by new entrants (GSK, HUL) as well as the
market leader (Nestle).
Ramp-up in Foodles by GSK. Street will closely monitor the data-points on ramp-up in the
Foodles brand including any potential capex plans.
We expect Jubilant Foodworks to post 60% sales growth aided by the Cricket World Cup
(Indian team lasting the entire tournament duration of 43 days and winning it!)
Exhibit 11 gives the summary of change in earnings and target price. We have cut earnings
of Colgate by 5% as we account for higher tax rates (25% in FY2012E and 27% in
FY2013E). We have cut earnings of Jyothy by 7% in FY2012E and 9% in FY2013E as we
model lower volume growth in Ujala and impact of crude-linked input cost inflation.
Continued buoyant demand conditions, particularly in discretionary spending, augur well for
Titan. Every 10% increase in gold price increases Titan’s margins by 50 bps. Accordingly, we
have increased our earnings estimate by ~14% for FY2012E and FY2013E. We have cut our
earnings estimate in UNSP by ~14% for FY2012E and FY2013E as the fall in raw material
cost (spirit and molasses) was lower than expected.
There is no change to our rating on any stock. Our CAUTIOUS sector view since October
2010 is intact. Our preferred picks are ITC and GSK. Top sells are HUL and Colgate.
Consumer demand is not parabolic!
We highlight that the past three years have seen a confluence of factors which have likely
aided incremental spends on consumer products, (1) higher outlay on NREGA, (2) wealth
effect due to higher land prices, (3) benefits of farm loan waiver, (4) some benefits of the
sixth pay commission and (5) higher minimum support prices for agricultural produce. As we
look into FY2012E, we highlight that most of these positive factors are in the base and
lower incremental spends have a potential to hurt demand for consumer products.
Consumer market is fragmenting...
Given the long-term attractiveness of Indian consumer categories, brand proliferation has
been accelerating, in our view. There are ~5, 000 new Home & Personal Care brands
(including variants) and ~900 new Food & Beverage brands launched in the past two years.
In turn, this proliferation raises adspends (Exhibit 8). Incumbents, particularly, are compelled
to spend more to maintain their market shares and relative market positions.
Relative price/relative performance of the sector makes us cautious
Our analysis of relative earnings and the relative price between the sector and BSE-30 Index
indicates that either the sector valuations are running ahead of fundamentals or we could
see significant earnings upgrades. We believe it is the former. Exhibit 12 shows the
consumer sector (KIE coverage universe) relative price and earnings momentum versus BSE-
30 Index. Relative price is the index of our consumer sector coverage versus BSE-30 Index;
relative earnings are the indexed earnings of our consumer sector coverage versus BSE-30
Index (with April 1993 as Base 100).
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