Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Q-Series®: India Consumer Sector
Qualifying the view that consumer staples are a good inflation hedge
Inflation in 2011-12 will be driven by supply and demand factors, putting pressure
on companies’ volume and profit growth. The view that consumer staples
companies are a good inflation hedge needs to be qualified. To do this, we built a
proprietary database on the top 15 companies (43% of sector revenue) to study the
impact of inflation and their performance in an inflationary environment.
Proprietary database to identify issues, & winners, survivors and laggards
Based on our proprietary database, which to the best of our knowledge is a first in
the industry, we analyse the volumes, prices and income statements of the 15
companies to identify the winners, survivors and laggards in inflation cycles. We
also take the opportunity to enumerate on some sector myths.
Our conclusion: companies react differently in inflation cycles
We use five metrics—volumes, ASPs, COGS, advertising & promotion costs, and
PAT margins—to analyse the impact of inflation on consumer companies and the
sector. We conclude: 1) the sector is not a clear inflation hedge; 2) the sector’s PE
premium to the BSE Sensex expands when inflation is high, and then contracts as
sales volumes decline. We expect sales volume growth to decline 4% in FY12; and
3) the correlation of inflation and profit growth supports our stock picks.
Analysis supports our stock preference
Inflation winners (ITC and United Spirits) remain our top sector picks. Our
analysis suggests Marico, Titan Industries, Nestle India and Dabur could
outperform in periods of high inflation. Hindustan Unilever (HUL), Godrej
Consumer Products and Asian Paints are inflation laggards. On 29 March, we
downgraded Asian Paints and HUL from Buy to Sell because of the impact of
inflation of their sales volume and profit growth.
Executive summary
India has been through three inflationary cycles—in 2000-01, 2008-09 and the
current one (2011-12E). Inflation in 2000-01 was due to high fuel prices; in
2008-09, it was driven by high prices for mineral and non-food items; and the
ongoing cycle is driven by primary products (food, non food, and minerals) and
fuel. The inclusion of rising food prices in the current inflation cycle is the
major differentiator from previous ones.
We analyse the impact of inflation on the financials of the top 15 consumer
companies (43% of the consumer sector) in India.
We have tried to clear certain myths that prevail in the sector.
Myth 1: inflation is good for the consumer sector
The general investor perception is that inflation is good for the consumer sector.
This view is based on the sector’s PE premium to the BSE Sensex expanding in
inflationary periods.
This is also because consumer companies are able to raise their prices more
easily during an inflation cycle, as their products do not seem very expensive,
given that the prices of all consumer products are rising. We believe inflation of
less than 6% will generally not have a major impact on the consumer sector, but
when it more than that, as in the past three periods we have highlight above, the
sector has de-rated.
The absolute PE of the sector falls during these periods, as even the consumer
sector is de-rated. Compared with the de-rating of the market, the de-rating of
the consumer sector has been lower. In the inflationary period of 2000-01, the
consumer sector PE fell to 18.9x from 28.9x in 1999-00. In 2008-09, the sector
PE dropped to 21.3x from 24.3x in 2007-08. However, the premium to the BSE
Sensex increased to 61.5% in 2008-09 from 24.3% in 2007-08.
Myth 2: Sales volumes are the sole driver of stock price performance
Sales volumes are key to sector growth, and high inflation affects sales volume
growth in the sector. The PE of the consumer sector is driven by expectations of
sales volume growth.
Sector PEs rise when volumes increase. The EBITDA margin, even of
companies with the highest pricing power, come under pressure as operating
leverage eases when sales volumes decline. However, when companies are
competing for market share by raising unit sales to levels that are not viable,
they would be in a position to increase volumes, but this would come at the cost
of profitability
What is unique and proprietary about our report?
To gain a proper insight into the sector, we have built a financial and
operating metric database of 15 companies since 2001. We have analysed the
following metrics with respect to the Wholesale Price Index (WPI):
(1) Volumes and ASPs
(2) COGS and advertising expenses
(3) Gross margins and operating margins
(4) Capex and working capital
(5) PAT margins
We believe this is the first database of its kind to have been used to analyse
the performance of consumer companies in previous inflationary periods. We
also think the metrics we use to classify companies are robust and
fundamentally sound.
Based on our proprietary database, we have analysed 1) the correlation of
inflation with volumes, 2) operating margins, and 3) profit growth of
consumer companies under our coverage. We believe the three baskets we
have arrived at will be sound under any inflation scenario, even in future
inflationary periods.
Based on our analysis, we conclude that different sub-segments of companies
fare differently in inflationary periods.
— The inflation winners’ (ITC and United Spirits) performance will be
supported by favourable demographics and rising disposable incomes.
Their products are also addictive.
— The inflation survivors (Titan, Marico, Nestle, and Dabur) are companies
that have strong brands and therefore can increase sales volume and
profits, by passing on rising costs to consumers despite adverse
conditions.
— The inflation laggards (HUL, GCPL and Asian Paints) are companies that
either operate in highly competitive segments or have branded products in
highly penetrated categories, and are therefore adversely affected in
inflation cycles.
A study of the correlation of PAT growth of each of these groups with the WPI
indicates a greater negative correlation for inflation laggards (-0.42) than the
correlation of survivors (-0.31) and winners (-0.28).
Our database findings correlate with our preferred
Buy—ITC and our preferred Sell—HUL
ITC
ITC is our top pick for 2011. Our database analysis supports our view and
classifies ITC as an inflation winner in 2011. Positive volume growth in its
filtered cigarette portfolio will result in better operating metrics, in our view.
Recent launches and price increases in the king-size cigarette segment have
helped uptrading, improving revenue and profit mix. We estimate ITC’s
volumes will increase 6% in FY12. It is unlikely to raise prices significantly,
as there was no excise hike in the FY12 Budget. Also, India’s young
demographics and rising income levels should support volume growth, in our
view.
We derive our price target of Rs220.00 from a DCF-based methodology,
explicitly forecasting long-term valuation drivers using UBS’s VCAM tool.
We assume WACC of 10.53%, a terminal growth rate of 4.5% and beta of
0.49.
Hindustan Unilever
HUL, the largest consumer company in India has adopted a strategy to
increase volumes by raising its advertising and promotion expenses at the
cost of profitability. We had supported this strategy, as it was effective in
increasing its market share. However, while most companies in an
environment of rising costs are trying to rationalise their A&P expenses and
pass on increasing costs by raising prices, we believe HUL continues with its
aggressive share-accretion and volume-growth approach. With limited
pricing power in a highly commoditised market, we think HUL is in a
difficult situation. Management focus of acquiring market share could be
detrimental to minority shareholder interest in the near term.
Passing on all higher input costs to consumers by increasing prices will
likely impact HUL’s sales volume growth, as its product categories are
highly penetrated and there are many generic substitutes available to
consumers. Management has indicated that it will focus on volume growth,
which we believe in this period high commodity inflation will mean a loss in
profitability. We estimate HUL’s sales volume growth will dip from 12% in
FY11 to 8% in FY12.
For FY12, we think profits could decline because of higher A&P expenses
and COGS. We expect EBITDA and PAT margins to decline by 70bp in
FY12. In the inflation cycle of 2008-09, HUL’s PAT margin narrowed by
170bp.
We derive our price target from a DCF based methodology and explicitly
forecast long term valuation drivers using UBS’s VCAM tool. We assume
WACC of 10.84%, a terminal growth rate of 2%, and beta of 0.55.
Implications for the other companies
United Spirits
United Spirits (USL) is a market leader in the Indian made foreign liquor
(IMFL, includes whiskies, brandies, rums, vodka and gins) market. We think
it will continue to benefit from India’s growing young population and rising
discretionary spending.
Its strategy of acquiring raw material processors to save on service tax and
expand processing margins should help it benefit from higher ROIC and
improved margins, in our view.
Recent increases in state taxes will provide opportunities for ASP hikes as
prices will rise.
Pledging of the majority shareholders’ shares as collateral has been the
reason for the stock’s recent underperformance, in our view. When the group
companies’ funding concerns are addressed, this overhang should be
removed from the underlying fundamentals, which we believe robust.
We derive our price target of Rs1,550 for USL from a DCF-based
methodology, and explicitly forecast long-term valuation drivers using
UBS’s VCAM tool. We assume WACC of 10.53%, a terminal growth rate of
5% and beta of 0.77.
Titan Industries
We believe Titan Industries (Titan) provides exposure to the rapid growth in
discretionary consumption in India. Strong brand recognition in the jewellery
and watch segment, coupled with a strong distribution network, qualifies the
company as a survivor in an inflation cycle.
Rising aspirations of the middle class and growth in branded retail (despite
inflation) should play a pivotal role in Titan’s sales volume growth, in our
view. We expect Titan’s volumes to increase 10% in FY12.
Its jewellery segment, which dominates the branded jewellery market, we
believe will be little affected by the inflationary cycle in terms of sales
volumes as Indian tradition of buying jewellery on many occasions,
irrespective of prices, will drive sales volumes.
We base our price target of Rs4,100 on a DCF methodology, assuming
WACC of 12.28%, terminal growth rate of 5% and beta of 0.87.
Nestle India
We believe Nestle India’s fundamentals are robust and its strategy should
help the company drive growth sales volumes in all its product segments.
Nestle is 1) focusing on catering to the low end of the F&B segment; and
2) increasing its products in the mid-market and premium segments.
The company has pricing power in most of its product categories, placing it
in the inflation survivor basket. We believe its pricing power will enable the
company to pass on rising input costs to customers without a significant
impact on volumes. We estimate the company has raised its prices 10% over
January to March 2011.
But near-term uncertainty on earnings (due to the lag effect of passing on
cost increases to consumers) is the reason for our Neutral rating on the stock.
We derive our price target of Rs4,200 from a DCF-based methodology, and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Our
key assumptions are WACC of 9.82%, a terminal growth rate of 3% and
company beta of 0.34.
Dabur India
We believe Dabur has a very loyal customer base, which makes it a survivor
in an inflation cycle. We think it will also be a potential beneficiary of the
increasing penetration of consumer goods in rural markets.
The company has used its traditional ‘ayurvedic’ platform to penetrate and
expand in rural markets. We believe Dabur will be able to maintain its
growth through the current inflation cycle. Management’s strategy of
expanding the over-the-counter product range should allow Dabur to grow
from the highly competitive FMCG segment to a niche and profitable
segment.
We derive our price target of Rs110.00 from a DCF-based methodology, and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Our
key assumptions are a WACC of 11.1%, terminal growth rate of 3% and
company beta of 0.61.
Marico
Marico’s product categories do not compete with multinational corporations’
products. This enables it to avoid disruptive competition for market share.
Marico is evolving into a broad-based FMCG company. It is focusing on its
skincare Kaya business, which is in turnaround mode, and its international
businesses, with a recent acquisition in Vietnam. Marico’s continued focus
on expanding its distribution reach should enable it to increase in sales
volumes in the hinterland.
We believe the raw material price pressure on Marico is likely to ease with
the softening of copra prices, its major raw material (40%), the price of
which has fallen from Rs6,300/tn to Rs5,800/tn in February 2011. Our
analysis suggests that a fall in the copra price would yield higher margins
and a re-rating of Marico.
We have a Buy rating and a price target of Rs160.00. We derive our price
target from a DCF-based methodology, and explicitly forecast long-term
valuation drivers using UBS’s VCAM tool. We assume a WACC of 10.6%.
Godrej Consumer Products
Godrej Consumer Products (GCPL) manufactures products that are highly
penetrated and have generic substitutes. Management has acknowledged
market share loss in the soap segment to ITC and HUL. We believe GCPL’s
domestic product portfolio (65% of revenue) will be adversely affected in
inflationary periods.
We have a Buy rating and a price target of Rs425.00, which is derived from a
sum-of-the-part analysis of each of its businesses.
Asian Paints
Asian Paints is a discretionary consumption story. We believe its gross
margin will be compressed by high inflation. The presence of a large
informal regional market makes for easy substitution.
While Asian Paints is the market leader in its segment and should be able to
increase prices to maintain volume growth, its profitability will likely suffer.
Hence, our analysis categorises it as an inflation laggard, and we expect a
significant impact on its sales volumes from inflationary pressure in FY12.
We forecast volumes to increase only 8% in FY12, the lowest in eight years.
As its raw material costs are linked to crude oil prices, Asian Paints’ gross
margin narrows in all inflation cycles that are driven by rising raw material
prices. The UBS global oil team forecasts Brent crude oil prices to remain
above US$100/bbl in 2011 and at around US$95/bbl in 2012; oils prices at
these levels are unlikely to provide any relief to Asian Paints on the raw
material front.
We have a Sell rating and a price target of Rs2,500 on Asia Paints. We
derive our price target from a DCF-based methodology, and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. Our key
assumptions are a WACC of 10.16%, a terminal growth rate of 2% and beta
of 0.41.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Q-Series®: India Consumer Sector
Qualifying the view that consumer staples are a good inflation hedge
Inflation in 2011-12 will be driven by supply and demand factors, putting pressure
on companies’ volume and profit growth. The view that consumer staples
companies are a good inflation hedge needs to be qualified. To do this, we built a
proprietary database on the top 15 companies (43% of sector revenue) to study the
impact of inflation and their performance in an inflationary environment.
Proprietary database to identify issues, & winners, survivors and laggards
Based on our proprietary database, which to the best of our knowledge is a first in
the industry, we analyse the volumes, prices and income statements of the 15
companies to identify the winners, survivors and laggards in inflation cycles. We
also take the opportunity to enumerate on some sector myths.
Our conclusion: companies react differently in inflation cycles
We use five metrics—volumes, ASPs, COGS, advertising & promotion costs, and
PAT margins—to analyse the impact of inflation on consumer companies and the
sector. We conclude: 1) the sector is not a clear inflation hedge; 2) the sector’s PE
premium to the BSE Sensex expands when inflation is high, and then contracts as
sales volumes decline. We expect sales volume growth to decline 4% in FY12; and
3) the correlation of inflation and profit growth supports our stock picks.
Analysis supports our stock preference
Inflation winners (ITC and United Spirits) remain our top sector picks. Our
analysis suggests Marico, Titan Industries, Nestle India and Dabur could
outperform in periods of high inflation. Hindustan Unilever (HUL), Godrej
Consumer Products and Asian Paints are inflation laggards. On 29 March, we
downgraded Asian Paints and HUL from Buy to Sell because of the impact of
inflation of their sales volume and profit growth.
Executive summary
India has been through three inflationary cycles—in 2000-01, 2008-09 and the
current one (2011-12E). Inflation in 2000-01 was due to high fuel prices; in
2008-09, it was driven by high prices for mineral and non-food items; and the
ongoing cycle is driven by primary products (food, non food, and minerals) and
fuel. The inclusion of rising food prices in the current inflation cycle is the
major differentiator from previous ones.
We analyse the impact of inflation on the financials of the top 15 consumer
companies (43% of the consumer sector) in India.
We have tried to clear certain myths that prevail in the sector.
Myth 1: inflation is good for the consumer sector
The general investor perception is that inflation is good for the consumer sector.
This view is based on the sector’s PE premium to the BSE Sensex expanding in
inflationary periods.
This is also because consumer companies are able to raise their prices more
easily during an inflation cycle, as their products do not seem very expensive,
given that the prices of all consumer products are rising. We believe inflation of
less than 6% will generally not have a major impact on the consumer sector, but
when it more than that, as in the past three periods we have highlight above, the
sector has de-rated.
The absolute PE of the sector falls during these periods, as even the consumer
sector is de-rated. Compared with the de-rating of the market, the de-rating of
the consumer sector has been lower. In the inflationary period of 2000-01, the
consumer sector PE fell to 18.9x from 28.9x in 1999-00. In 2008-09, the sector
PE dropped to 21.3x from 24.3x in 2007-08. However, the premium to the BSE
Sensex increased to 61.5% in 2008-09 from 24.3% in 2007-08.
Myth 2: Sales volumes are the sole driver of stock price performance
Sales volumes are key to sector growth, and high inflation affects sales volume
growth in the sector. The PE of the consumer sector is driven by expectations of
sales volume growth.
Sector PEs rise when volumes increase. The EBITDA margin, even of
companies with the highest pricing power, come under pressure as operating
leverage eases when sales volumes decline. However, when companies are
competing for market share by raising unit sales to levels that are not viable,
they would be in a position to increase volumes, but this would come at the cost
of profitability
What is unique and proprietary about our report?
To gain a proper insight into the sector, we have built a financial and
operating metric database of 15 companies since 2001. We have analysed the
following metrics with respect to the Wholesale Price Index (WPI):
(1) Volumes and ASPs
(2) COGS and advertising expenses
(3) Gross margins and operating margins
(4) Capex and working capital
(5) PAT margins
We believe this is the first database of its kind to have been used to analyse
the performance of consumer companies in previous inflationary periods. We
also think the metrics we use to classify companies are robust and
fundamentally sound.
Based on our proprietary database, we have analysed 1) the correlation of
inflation with volumes, 2) operating margins, and 3) profit growth of
consumer companies under our coverage. We believe the three baskets we
have arrived at will be sound under any inflation scenario, even in future
inflationary periods.
Based on our analysis, we conclude that different sub-segments of companies
fare differently in inflationary periods.
— The inflation winners’ (ITC and United Spirits) performance will be
supported by favourable demographics and rising disposable incomes.
Their products are also addictive.
— The inflation survivors (Titan, Marico, Nestle, and Dabur) are companies
that have strong brands and therefore can increase sales volume and
profits, by passing on rising costs to consumers despite adverse
conditions.
— The inflation laggards (HUL, GCPL and Asian Paints) are companies that
either operate in highly competitive segments or have branded products in
highly penetrated categories, and are therefore adversely affected in
inflation cycles.
A study of the correlation of PAT growth of each of these groups with the WPI
indicates a greater negative correlation for inflation laggards (-0.42) than the
correlation of survivors (-0.31) and winners (-0.28).
Our database findings correlate with our preferred
Buy—ITC and our preferred Sell—HUL
ITC
ITC is our top pick for 2011. Our database analysis supports our view and
classifies ITC as an inflation winner in 2011. Positive volume growth in its
filtered cigarette portfolio will result in better operating metrics, in our view.
Recent launches and price increases in the king-size cigarette segment have
helped uptrading, improving revenue and profit mix. We estimate ITC’s
volumes will increase 6% in FY12. It is unlikely to raise prices significantly,
as there was no excise hike in the FY12 Budget. Also, India’s young
demographics and rising income levels should support volume growth, in our
view.
We derive our price target of Rs220.00 from a DCF-based methodology,
explicitly forecasting long-term valuation drivers using UBS’s VCAM tool.
We assume WACC of 10.53%, a terminal growth rate of 4.5% and beta of
0.49.
Hindustan Unilever
HUL, the largest consumer company in India has adopted a strategy to
increase volumes by raising its advertising and promotion expenses at the
cost of profitability. We had supported this strategy, as it was effective in
increasing its market share. However, while most companies in an
environment of rising costs are trying to rationalise their A&P expenses and
pass on increasing costs by raising prices, we believe HUL continues with its
aggressive share-accretion and volume-growth approach. With limited
pricing power in a highly commoditised market, we think HUL is in a
difficult situation. Management focus of acquiring market share could be
detrimental to minority shareholder interest in the near term.
Passing on all higher input costs to consumers by increasing prices will
likely impact HUL’s sales volume growth, as its product categories are
highly penetrated and there are many generic substitutes available to
consumers. Management has indicated that it will focus on volume growth,
which we believe in this period high commodity inflation will mean a loss in
profitability. We estimate HUL’s sales volume growth will dip from 12% in
FY11 to 8% in FY12.
For FY12, we think profits could decline because of higher A&P expenses
and COGS. We expect EBITDA and PAT margins to decline by 70bp in
FY12. In the inflation cycle of 2008-09, HUL’s PAT margin narrowed by
170bp.
We derive our price target from a DCF based methodology and explicitly
forecast long term valuation drivers using UBS’s VCAM tool. We assume
WACC of 10.84%, a terminal growth rate of 2%, and beta of 0.55.
Implications for the other companies
United Spirits
United Spirits (USL) is a market leader in the Indian made foreign liquor
(IMFL, includes whiskies, brandies, rums, vodka and gins) market. We think
it will continue to benefit from India’s growing young population and rising
discretionary spending.
Its strategy of acquiring raw material processors to save on service tax and
expand processing margins should help it benefit from higher ROIC and
improved margins, in our view.
Recent increases in state taxes will provide opportunities for ASP hikes as
prices will rise.
Pledging of the majority shareholders’ shares as collateral has been the
reason for the stock’s recent underperformance, in our view. When the group
companies’ funding concerns are addressed, this overhang should be
removed from the underlying fundamentals, which we believe robust.
We derive our price target of Rs1,550 for USL from a DCF-based
methodology, and explicitly forecast long-term valuation drivers using
UBS’s VCAM tool. We assume WACC of 10.53%, a terminal growth rate of
5% and beta of 0.77.
Titan Industries
We believe Titan Industries (Titan) provides exposure to the rapid growth in
discretionary consumption in India. Strong brand recognition in the jewellery
and watch segment, coupled with a strong distribution network, qualifies the
company as a survivor in an inflation cycle.
Rising aspirations of the middle class and growth in branded retail (despite
inflation) should play a pivotal role in Titan’s sales volume growth, in our
view. We expect Titan’s volumes to increase 10% in FY12.
Its jewellery segment, which dominates the branded jewellery market, we
believe will be little affected by the inflationary cycle in terms of sales
volumes as Indian tradition of buying jewellery on many occasions,
irrespective of prices, will drive sales volumes.
We base our price target of Rs4,100 on a DCF methodology, assuming
WACC of 12.28%, terminal growth rate of 5% and beta of 0.87.
Nestle India
We believe Nestle India’s fundamentals are robust and its strategy should
help the company drive growth sales volumes in all its product segments.
Nestle is 1) focusing on catering to the low end of the F&B segment; and
2) increasing its products in the mid-market and premium segments.
The company has pricing power in most of its product categories, placing it
in the inflation survivor basket. We believe its pricing power will enable the
company to pass on rising input costs to customers without a significant
impact on volumes. We estimate the company has raised its prices 10% over
January to March 2011.
But near-term uncertainty on earnings (due to the lag effect of passing on
cost increases to consumers) is the reason for our Neutral rating on the stock.
We derive our price target of Rs4,200 from a DCF-based methodology, and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Our
key assumptions are WACC of 9.82%, a terminal growth rate of 3% and
company beta of 0.34.
Dabur India
We believe Dabur has a very loyal customer base, which makes it a survivor
in an inflation cycle. We think it will also be a potential beneficiary of the
increasing penetration of consumer goods in rural markets.
The company has used its traditional ‘ayurvedic’ platform to penetrate and
expand in rural markets. We believe Dabur will be able to maintain its
growth through the current inflation cycle. Management’s strategy of
expanding the over-the-counter product range should allow Dabur to grow
from the highly competitive FMCG segment to a niche and profitable
segment.
We derive our price target of Rs110.00 from a DCF-based methodology, and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Our
key assumptions are a WACC of 11.1%, terminal growth rate of 3% and
company beta of 0.61.
Marico
Marico’s product categories do not compete with multinational corporations’
products. This enables it to avoid disruptive competition for market share.
Marico is evolving into a broad-based FMCG company. It is focusing on its
skincare Kaya business, which is in turnaround mode, and its international
businesses, with a recent acquisition in Vietnam. Marico’s continued focus
on expanding its distribution reach should enable it to increase in sales
volumes in the hinterland.
We believe the raw material price pressure on Marico is likely to ease with
the softening of copra prices, its major raw material (40%), the price of
which has fallen from Rs6,300/tn to Rs5,800/tn in February 2011. Our
analysis suggests that a fall in the copra price would yield higher margins
and a re-rating of Marico.
We have a Buy rating and a price target of Rs160.00. We derive our price
target from a DCF-based methodology, and explicitly forecast long-term
valuation drivers using UBS’s VCAM tool. We assume a WACC of 10.6%.
Godrej Consumer Products
Godrej Consumer Products (GCPL) manufactures products that are highly
penetrated and have generic substitutes. Management has acknowledged
market share loss in the soap segment to ITC and HUL. We believe GCPL’s
domestic product portfolio (65% of revenue) will be adversely affected in
inflationary periods.
We have a Buy rating and a price target of Rs425.00, which is derived from a
sum-of-the-part analysis of each of its businesses.
Asian Paints
Asian Paints is a discretionary consumption story. We believe its gross
margin will be compressed by high inflation. The presence of a large
informal regional market makes for easy substitution.
While Asian Paints is the market leader in its segment and should be able to
increase prices to maintain volume growth, its profitability will likely suffer.
Hence, our analysis categorises it as an inflation laggard, and we expect a
significant impact on its sales volumes from inflationary pressure in FY12.
We forecast volumes to increase only 8% in FY12, the lowest in eight years.
As its raw material costs are linked to crude oil prices, Asian Paints’ gross
margin narrows in all inflation cycles that are driven by rising raw material
prices. The UBS global oil team forecasts Brent crude oil prices to remain
above US$100/bbl in 2011 and at around US$95/bbl in 2012; oils prices at
these levels are unlikely to provide any relief to Asian Paints on the raw
material front.
We have a Sell rating and a price target of Rs2,500 on Asia Paints. We
derive our price target from a DCF-based methodology, and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. Our key
assumptions are a WACC of 10.16%, a terminal growth rate of 2% and beta
of 0.41.
No comments:
Post a Comment