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For 4QFY2011, we expect our FMCG universe to report robust
top-line growth of 18% yoy. Earnings are also expected to grow
at 17% yoy. The unchanged excise duty post the Union Budget
provided a breather for FMCG companies, which were reeling
under high raw-material inflation. Better reach (significant
investments in distribution infrastructure) and support from rural
markets (higher MSPs, NREGS) will be the key drivers,
aiding modest volume growth for our FMCG universe.
Downside risks to our estimates include: 1) a lagged effect of
the economic slowdown on consumer spending (less likely);
and 2) down-trading to a cheaper brand (likely).
Budget brings smiles
The Union Budget 2011-12 continued with its thrust on rural
development. The government’s approach focuses on increasing
disposable income in the hands of people, by effecting reduction
in indirect taxes and by expanding public expenditure
on programmes such as NREGS and Bharat Nirman and on
rural infrastructure.
For the sector per se, the budget was a bundle of joy with an
exception of postponement of GST till April 2012. In terms of
tax rate, the much anticipated excise duty increase remained
unchanged at 10%, while the overall MAT rate remained at
~20%. No hike in the excise duty for cigarettes pleasantly
surprised ITC, which had taken a pre-budget price increase of
~4%. Soap manufacturing firms, HUL, GCPL and ITC, benefitted
from the exemption of custom duty for crude palm stearin (earlier
20%), a key component used in the manufacture of soaps.
Other benefit for the industry in the budget relates to a decrease
in central excise duty to 10% (earlier 30%) for bamboo for
aggarbati and a decrease in excise duty on sanitary napkins and
diapers by ~9%.
A marginal 1% increase in excise duty on select consumer goods,
like noodles, ready-to-eat packaged foods, ketchup, soups,
toothpowder and coffee/tea pre-mixes, would have a marginal
impact on companies such as HUL, GCPL, Dabur and Nestle.
Over the past one year, a sharp spike has been seen in almost
all agri commodities and crude and crude oil derivatives. The
price of sugar and rice bran oil show respite from their highs.
Expanding footprint to drive growth
FMCG majors are increasingly focusing on expanding
their footprints, either inorganically through strategic tie-ups
or widening their distribution reaches by setting up
Greenfield projects.
Jyothy Labaratories (JLL) has been very active in terms of
acquisitions, announcing the much-anticipated acquisition in
its JFSL arm towards the fag end of the quarter. JLL also acquired
a 15% stake in Henkel India in an all-cash deal, making it the
largest Indian shareholder of the company. Henkel is known
for its hair styling brand Schwarzkopf Professional, detergent
brands Henko Stain Champion and Mr White and home care
brand Pril. Other acquisitions that consummated this quarter
include Marico acquiring an 85% stake in a Vietnamese
company, International Consumer Product (ICP), engaged in
consumer products. ICP is known for brands such as X-men,
L'Ovite and Thuan Phat. Starbucks signed a non-binding MoU
Gross margins to remain range-bound
Prancing raw-material inflation has been a worry for all FMCG
companies for the past few quarters. As a result, margins are
expected to remain range-bound for the next couple of quarters.
with Tata Coffee to explore setting up stores in the Tata Group's
retail outlets and hotels, besides sourcing and roasting coffee
beans at Tata Coffee's Kodagu facility. Asian Paints formed a
second new 50:50 JV with PPG Industries, besides expanding
its existing JV in order to accelerate growth of the non-decorative
coatings business in India. The arrangement is subject to
regulatory approvals and will service the protective, industrial
powder, industrial containers and light industrial coatings
markets. Amrutanjan Health Care forayed into the beverages
business by acquiring Chennai-based Siva's Soft Drink' soft drink
and the fruit-based beverages business along with the brand
Fruitnik for ~`26cr.
As part of its expansion plans, CG Foods is scouting for
acquisition in the Southeast and domestic markets and has
chalked out a `100cr investment plan for expanding
manufacturing capabilities in India over three years. Moreover,
companies such as Parle Agro, Dabur and Nestle are building
up their distribution and manufacturing facilities to reach out to
a wider audience. Dabur is investing in its manufacturing
infrastructure and product development projects to promote its
brands Real and Active. Nestle plans to invest ~`1,500cr over
the next two-three years, which includes a `360cr investment
plan for its new factory at Nanjangud in Karnataka, `600cr in
Haryana for the Green Field facility and `200cr for
manufacturing chocolates in Punjab.
New launches pick pace
Keeping in pace with our expectation, most FMCG companies
continued their momentum in launching new products.
However, most product launches were limited to the processed
foods category.
Pepsico launched six new flavours of its popular Lays chips,
inspired by the top teams participating in the World Cup Cricket
Tournament. The six new flavours are named after India,
Sri Lanka, West Indies, Australia, England and South Africa.
Britannia forayed into the ready-to-eat breakfast food category
with the launch of Britannia Health Start, placing itself in the
league of ITC Foods, Nestle and MTR Foods, which have a
significant national presence in this segment. HUL has ventured
into the retail business by opening a Bru World Café outlet on a
pilot basis at Juhu Mumbai and has launched a new variant of
Bru, Bru Lite, with the classic mocha flavour. The company is
further mulling the test launch of a bread spread, Astra Gold,with
high level of nutritional fats in Karnataka. CG Foods launched
new flavours of Wai Wai, Wai Wai Chicken pizza and Wai Wai
quick masala curry. ITC launched its much-awaited handrolled
cigar, Armenteros, in the Indian market. The company also
expanded the Sunfeast biscuits range by launching two variants
of Dark Choco biscuits. Parle Agro launched Bailey soda.
Johnson & Johnson launched its nicotine gum brand, Nicorette,
in India to help reduce nicotine craving.
In the personal care segment, Emami launched Boroplus healthy
fair winter cream and Boroplus intensive skin therapy cream.
Nivea for men launched 2-in-1 shower gels in three variants,
Cool Kick, Energy and Sport. Dabur forayed into professional
beauty care with the launch of Oxylife, while Godrej Consumer
relaunched Fair Glow soap in a new pack and shape.
High inflation pressurises margins
The entire FMCG sector is reeling under an unnatural increase
in raw-material prices and food inflation, resulting in double
whammy for FMCG companies that were forced to pass on the
increase to end-consumers. Food inflation from 17.1% in the
first week of 3QFY2011 soared to 19.1% in first week of
4QFY2011. While inflation seems to have cooled down
(currently at 9.5%), prices of coffee, cocoa, milk, copra and
coconut oil seem unrelenting.
During the quarter, Britannia indirectly hiked price by 5-10%
by reducing grammage of its Milk Bikies and Digestive biscuit
brands and Amul increased milk prices by `1 and butter prices
by `10 for 1kg and `5 for half a kg. HUL increased the prices
of Lux, Liril and Lux International by 6%, 5% and 10%,
respectively. We recall, HUL had raised the price of Lifebuoy
soap by ~6% and reduced the grammage for Lux in August
2010. GCPL increased the price of its popular soap brand,
Godrej No.1 by 4% and other SKUs by 3-5%. With no let-up in
coconut oil prices, branded coconut oil makers are desperately
trying to hold on to their consumers. Marico's management
indicated a price increase of 7-8% in the offing. Similarly, ITC is
planning to hike prices of its packaged food products by 7-8%
to combat the increase in ingredient prices (up 30-35% in past
two years) and packaging costs of the company. Nestle India
will not only be undertaking selective price hikes but will also
be reducing the weight for its chocolate products to combat
rising raw-material costs. Grammage of Nestle's Kit Kat,
Milkybar and Munch chocolate bars is expected to be reduced
by around 5-7%, implying a price hike of ~7%. Nestle's move
follows market leader Cadbury India's 9% price hike of its
flagship brand, Cadbury Dairy Milk. While Asian Paints has
increased the prices of oil-bound paints by 1%, AkzoNobel India,
operating under the Dulux brand, has increased its prices by
1-2% in the enamels range.
On the other hand, Reckitt Benckiser has cut margins of its
major retailers to 14% from 16% on some of its products to
partly offset rising input costs and is getting severely punished
for the move with retailers boycotting the company's products.
Reckitt has also cut general trade margins from 12% to 10% for
brands such as Harpic and Cherry shoe polish and distributor's
margins to 5% from 7.5% for Dettol antiseptic lotion.
Benefitting from the excise duty cut of 9% in the budget, P&G
slashed prices of Whisper and Pampers by 3% and 15%,
respectively, during the quarter.
Mid caps to outperform heavyweights
For 4QFY2011, we expect our FMCG universe to report robust
top-line growth of 18% yoy. Earnings are also expected to grow
at 17% yoy, despite margin contraction for most companies (on
account of gross margin pressures). Sector leader, HUL is
expected to report top-line growth of 12.2%, despite high base
in personal care portfolio, driven by both value and volume
growth. Earnings (recurring) are expected grow at a robust pace
of 18%, aided by high other income. ITC is expected to report
sales growth of 18.9%, driven by price hikes on anticipation of
a likely increase in excise duty; the excise duty was, however,
not hiked in the budget. The company’s earnings are expected
to increase by ~29%, driven by robust sales and margin
expansion (mainly in the cigarette business, led by price hikes).
Valuations appear rich, Stay selective
The ensuing volatility in the international business of select FMCG
companies and high inflationary situation on the domestic
bourses (both raw-material inflation and food inflation) render
us cautious on the sector as a whole. Moreover, in terms of
valuation, one-year forward P/Es for most companies are in
line with their five-year averages. While the long-term
consumption story for the FMCG industry remains intact, any
further re-rating from current valuations seems less likely.
We continue to emphasise selective stock picking and prefer a
set of companies having a diverse product portfolio and with
strong pricing power, which are better placed to combat the
vagaries of inflation.
Among heavyweights, we maintain our Accumulate view on
ITC and Asian Paints (factored a 360bp yoy decrease in EBIT
margins from the Middle East region on account of Egypt crisis),
on the back of improving margins. In mid caps, we maintain a
Buy view on GCPL (GSL consolidation to address portfolio
concerns) and Dabur (a play on the valuation gap). We upgrade
our rating on HUL to Accumulate on account of its strong
earnings growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
For 4QFY2011, we expect our FMCG universe to report robust
top-line growth of 18% yoy. Earnings are also expected to grow
at 17% yoy. The unchanged excise duty post the Union Budget
provided a breather for FMCG companies, which were reeling
under high raw-material inflation. Better reach (significant
investments in distribution infrastructure) and support from rural
markets (higher MSPs, NREGS) will be the key drivers,
aiding modest volume growth for our FMCG universe.
Downside risks to our estimates include: 1) a lagged effect of
the economic slowdown on consumer spending (less likely);
and 2) down-trading to a cheaper brand (likely).
Budget brings smiles
The Union Budget 2011-12 continued with its thrust on rural
development. The government’s approach focuses on increasing
disposable income in the hands of people, by effecting reduction
in indirect taxes and by expanding public expenditure
on programmes such as NREGS and Bharat Nirman and on
rural infrastructure.
For the sector per se, the budget was a bundle of joy with an
exception of postponement of GST till April 2012. In terms of
tax rate, the much anticipated excise duty increase remained
unchanged at 10%, while the overall MAT rate remained at
~20%. No hike in the excise duty for cigarettes pleasantly
surprised ITC, which had taken a pre-budget price increase of
~4%. Soap manufacturing firms, HUL, GCPL and ITC, benefitted
from the exemption of custom duty for crude palm stearin (earlier
20%), a key component used in the manufacture of soaps.
Other benefit for the industry in the budget relates to a decrease
in central excise duty to 10% (earlier 30%) for bamboo for
aggarbati and a decrease in excise duty on sanitary napkins and
diapers by ~9%.
A marginal 1% increase in excise duty on select consumer goods,
like noodles, ready-to-eat packaged foods, ketchup, soups,
toothpowder and coffee/tea pre-mixes, would have a marginal
impact on companies such as HUL, GCPL, Dabur and Nestle.
Over the past one year, a sharp spike has been seen in almost
all agri commodities and crude and crude oil derivatives. The
price of sugar and rice bran oil show respite from their highs.
Expanding footprint to drive growth
FMCG majors are increasingly focusing on expanding
their footprints, either inorganically through strategic tie-ups
or widening their distribution reaches by setting up
Greenfield projects.
Jyothy Labaratories (JLL) has been very active in terms of
acquisitions, announcing the much-anticipated acquisition in
its JFSL arm towards the fag end of the quarter. JLL also acquired
a 15% stake in Henkel India in an all-cash deal, making it the
largest Indian shareholder of the company. Henkel is known
for its hair styling brand Schwarzkopf Professional, detergent
brands Henko Stain Champion and Mr White and home care
brand Pril. Other acquisitions that consummated this quarter
include Marico acquiring an 85% stake in a Vietnamese
company, International Consumer Product (ICP), engaged in
consumer products. ICP is known for brands such as X-men,
L'Ovite and Thuan Phat. Starbucks signed a non-binding MoU
Gross margins to remain range-bound
Prancing raw-material inflation has been a worry for all FMCG
companies for the past few quarters. As a result, margins are
expected to remain range-bound for the next couple of quarters.
with Tata Coffee to explore setting up stores in the Tata Group's
retail outlets and hotels, besides sourcing and roasting coffee
beans at Tata Coffee's Kodagu facility. Asian Paints formed a
second new 50:50 JV with PPG Industries, besides expanding
its existing JV in order to accelerate growth of the non-decorative
coatings business in India. The arrangement is subject to
regulatory approvals and will service the protective, industrial
powder, industrial containers and light industrial coatings
markets. Amrutanjan Health Care forayed into the beverages
business by acquiring Chennai-based Siva's Soft Drink' soft drink
and the fruit-based beverages business along with the brand
Fruitnik for ~`26cr.
As part of its expansion plans, CG Foods is scouting for
acquisition in the Southeast and domestic markets and has
chalked out a `100cr investment plan for expanding
manufacturing capabilities in India over three years. Moreover,
companies such as Parle Agro, Dabur and Nestle are building
up their distribution and manufacturing facilities to reach out to
a wider audience. Dabur is investing in its manufacturing
infrastructure and product development projects to promote its
brands Real and Active. Nestle plans to invest ~`1,500cr over
the next two-three years, which includes a `360cr investment
plan for its new factory at Nanjangud in Karnataka, `600cr in
Haryana for the Green Field facility and `200cr for
manufacturing chocolates in Punjab.
New launches pick pace
Keeping in pace with our expectation, most FMCG companies
continued their momentum in launching new products.
However, most product launches were limited to the processed
foods category.
Pepsico launched six new flavours of its popular Lays chips,
inspired by the top teams participating in the World Cup Cricket
Tournament. The six new flavours are named after India,
Sri Lanka, West Indies, Australia, England and South Africa.
Britannia forayed into the ready-to-eat breakfast food category
with the launch of Britannia Health Start, placing itself in the
league of ITC Foods, Nestle and MTR Foods, which have a
significant national presence in this segment. HUL has ventured
into the retail business by opening a Bru World Café outlet on a
pilot basis at Juhu Mumbai and has launched a new variant of
Bru, Bru Lite, with the classic mocha flavour. The company is
further mulling the test launch of a bread spread, Astra Gold,with
high level of nutritional fats in Karnataka. CG Foods launched
new flavours of Wai Wai, Wai Wai Chicken pizza and Wai Wai
quick masala curry. ITC launched its much-awaited handrolled
cigar, Armenteros, in the Indian market. The company also
expanded the Sunfeast biscuits range by launching two variants
of Dark Choco biscuits. Parle Agro launched Bailey soda.
Johnson & Johnson launched its nicotine gum brand, Nicorette,
in India to help reduce nicotine craving.
In the personal care segment, Emami launched Boroplus healthy
fair winter cream and Boroplus intensive skin therapy cream.
Nivea for men launched 2-in-1 shower gels in three variants,
Cool Kick, Energy and Sport. Dabur forayed into professional
beauty care with the launch of Oxylife, while Godrej Consumer
relaunched Fair Glow soap in a new pack and shape.
High inflation pressurises margins
The entire FMCG sector is reeling under an unnatural increase
in raw-material prices and food inflation, resulting in double
whammy for FMCG companies that were forced to pass on the
increase to end-consumers. Food inflation from 17.1% in the
first week of 3QFY2011 soared to 19.1% in first week of
4QFY2011. While inflation seems to have cooled down
(currently at 9.5%), prices of coffee, cocoa, milk, copra and
coconut oil seem unrelenting.
During the quarter, Britannia indirectly hiked price by 5-10%
by reducing grammage of its Milk Bikies and Digestive biscuit
brands and Amul increased milk prices by `1 and butter prices
by `10 for 1kg and `5 for half a kg. HUL increased the prices
of Lux, Liril and Lux International by 6%, 5% and 10%,
respectively. We recall, HUL had raised the price of Lifebuoy
soap by ~6% and reduced the grammage for Lux in August
2010. GCPL increased the price of its popular soap brand,
Godrej No.1 by 4% and other SKUs by 3-5%. With no let-up in
coconut oil prices, branded coconut oil makers are desperately
trying to hold on to their consumers. Marico's management
indicated a price increase of 7-8% in the offing. Similarly, ITC is
planning to hike prices of its packaged food products by 7-8%
to combat the increase in ingredient prices (up 30-35% in past
two years) and packaging costs of the company. Nestle India
will not only be undertaking selective price hikes but will also
be reducing the weight for its chocolate products to combat
rising raw-material costs. Grammage of Nestle's Kit Kat,
Milkybar and Munch chocolate bars is expected to be reduced
by around 5-7%, implying a price hike of ~7%. Nestle's move
follows market leader Cadbury India's 9% price hike of its
flagship brand, Cadbury Dairy Milk. While Asian Paints has
increased the prices of oil-bound paints by 1%, AkzoNobel India,
operating under the Dulux brand, has increased its prices by
1-2% in the enamels range.
On the other hand, Reckitt Benckiser has cut margins of its
major retailers to 14% from 16% on some of its products to
partly offset rising input costs and is getting severely punished
for the move with retailers boycotting the company's products.
Reckitt has also cut general trade margins from 12% to 10% for
brands such as Harpic and Cherry shoe polish and distributor's
margins to 5% from 7.5% for Dettol antiseptic lotion.
Benefitting from the excise duty cut of 9% in the budget, P&G
slashed prices of Whisper and Pampers by 3% and 15%,
respectively, during the quarter.
Mid caps to outperform heavyweights
For 4QFY2011, we expect our FMCG universe to report robust
top-line growth of 18% yoy. Earnings are also expected to grow
at 17% yoy, despite margin contraction for most companies (on
account of gross margin pressures). Sector leader, HUL is
expected to report top-line growth of 12.2%, despite high base
in personal care portfolio, driven by both value and volume
growth. Earnings (recurring) are expected grow at a robust pace
of 18%, aided by high other income. ITC is expected to report
sales growth of 18.9%, driven by price hikes on anticipation of
a likely increase in excise duty; the excise duty was, however,
not hiked in the budget. The company’s earnings are expected
to increase by ~29%, driven by robust sales and margin
expansion (mainly in the cigarette business, led by price hikes).
Valuations appear rich, Stay selective
The ensuing volatility in the international business of select FMCG
companies and high inflationary situation on the domestic
bourses (both raw-material inflation and food inflation) render
us cautious on the sector as a whole. Moreover, in terms of
valuation, one-year forward P/Es for most companies are in
line with their five-year averages. While the long-term
consumption story for the FMCG industry remains intact, any
further re-rating from current valuations seems less likely.
We continue to emphasise selective stock picking and prefer a
set of companies having a diverse product portfolio and with
strong pricing power, which are better placed to combat the
vagaries of inflation.
Among heavyweights, we maintain our Accumulate view on
ITC and Asian Paints (factored a 360bp yoy decrease in EBIT
margins from the Middle East region on account of Egypt crisis),
on the back of improving margins. In mid caps, we maintain a
Buy view on GCPL (GSL consolidation to address portfolio
concerns) and Dabur (a play on the valuation gap). We upgrade
our rating on HUL to Accumulate on account of its strong
earnings growth.
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