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FMCG
Acquisitions continue in this quarter too…
During 1QFY2012, Godrej Consumer (GCPL) continued its
global shopping spree and entered into an agreement for the
right to acquire 51% stake in Darling Group Holdings (DGH),
a company that operates in 14 countries in the sub-Saharan
African region. Darling Group is one of the largest players in
the hair care category in Africa with brands such as Darling
and Amigos, both market leaders in countries in which they are
present. Darling Group manufactures and distributes full range
of hair extension products in Africa. The acquisition will take
place in three phases.
In Phase I, GCPL will acquire operations of countries that
contribute ~45% to Darling Group's revenue. The phase will
be concluded in the next two months. In Phase II, which will be
concluded in nearly 12 months from then, GCPL will be
acquiring ~70% of the group's business. In Phase III, which will
be after another 12 months, GCPL will have the rights to own
100% of the business through a combination of call and put
options.
Going forward, GCPL may acquire the remaining 49% equity
stake in DGH in a period of 3-5 years, through a combination
of put and call options.
All the acquisitions are in line with the company's core strategy
of 3x3 (focus on the three markets of Asia, Africa and Latin
America on companies having a presence in the three categories
of personal wash, hair care and home care). Similar to most of
its past acquisitions, the current acquisition is also likely to add
value to GCPL's shareholders.
Dabur India acquired 30 Plus, an OTC energizer brand from
Ajanta Pharma during the quarter. The acquisition of 30-Plus is
part of the company's aggressive strategy to build capability in
the OTC healthcare business. The quarter also witnessed a deal
in which Jyothy Laboratories snapped a majority stake in Henkel
India. The deal includes Henkel's entire portfolio, including
Henko and Chek detergents, Pril dish cleaners and Fa deodorant,
and rights to the multinational's future launches. Amongst the
above-mentioned deals, rumours regarding P&G, Unilever and
Colgate also surfaced.
Lacklustre quarter in terms of new product launches…
During the quarter, companies under our coverage reported
fewer product launches as compared to the previous quarters.
Colgate launched Colgate Sensitive Pro-Relief Toothpaste in
India; and Britannia launched Tiger Krunch Chocochips.
Dabur India launched Hajmola Mint Masti and a hand sanitizer.
Marico's Saffola Arise launched premium basmati rice under
the brand Basmati Gold. According to the company, the rice is
100% natural and its pure goodness would nurture the health
of consumers. Kurkure launched three new products under the
Ingredients of India range. The variants include Mumbai
Chatpata Usal, Bengali Jhaal and South Spice Mix. ITC's Fiama
Di Wills forayed into the men's grooming segment.
Cadbury-Kraft Foods introduced refreshing Tang for children.
Perfetti Van Melle India, market leader in the Indian confectionery
industry with brands such as Alpenliebe, Center Fresh, Mentos
and Happydent, announced its entry into the salty snacks
business with the launch of STOP NOT range of snacks.
Del Monte launched Four Seasons Fusion drink. Mother Dairy
introduced Paan and Rose flavoured kulfis. GRB Dairy
Foods launched ice cream, ready-to-cook food, spice blends
and sweets mix.
Outperformance across the sector…
1QFY2012 witnessed a strong rally by all FMCG companies
(all stocks in our universe outperformed the Sensex) with the
BSE FMCG index outperforming the Sensex by 15.6% during
the quarter. The quarter under review witnessed lot of instability
and volatility both at the global and national level. The sector
being defensive in nature usually does well in conditions like
these. Apart from not so favouring macroeconomic scenario,
which led to the rally in FMCG stocks, rumours regarding deals
between global and local FMCG giants further fuelled the rally
in some stocks. Amongst heavyweights, HUL delivered strong
returns on the brink of strong earnings growth and cooling off
in palm oil prices, leading to better margins. In mid caps, while
Colgate registered significant outperformance, Britannia gained
on the back of impressive set of results and margin expansion.
Growth across the board…
For 1QFY2012, we expect our FMCG universe's revenue growth
to be at ~19% (mix of value and volume) and earnings growth
at ~18%. We expect margin expansion for HUL, ITC, Britannia,
Nestle, Dabur and GCPL; whereas for Asian Paints, Colgate,
GSK Consumer and Marico, we expect margin contraction.
Sector leader, HUL is expected to report 14% top-line growth,
despite high competitive intensity in the S&D segment. Earnings
are expected to grow by robust 18% yoy, primarily due to
operating margin expansion. ITC is expected to witness strong
volume growth, as there was no hike in excise duty on cigarettes
during Union Budget 2011-12. We expect ITC to register robust
18.2% yoy top-line growth and 22% yoy earnings growth, aided
by recent price hikes in cigarettes, strong performance of
non-cigarette FMCG and rebound in its hotels business.
Britannia, Colgate, Dabur, GCPL, GSK Consumer, Marico and
Nestle are expected to post impressive top-line growth.
OPM to be a mixed bag…
In 4QFY2011, FMCG companies saw robust top-line growth
despite the inflationary environment, but gross margins took a
hit due to very high raw-material costs. On the operating front,
companies clipped the slide in OPM by reduction in ad spends
and other expenditure. In 1QFY2012, though we witnessed a
downtrend in key raw-material prices, we expect mixed
performance on the operating front. We expect Asian Paints,
Colgate, GSK Consumer and Marico to witness operating
margin contraction. While Britannia, Dabur, GCPL, HUL, ITC
and Nestle are expected to post operating margin expansion.
Valuations at peak, Recommend Neutral
Most FMCG companies have witnessed a sharp rally during
1QFY2012 and are currently trading at peak valuations.
Moreover, we highlight that FMCG companies have significantly
outperformed the Sensex, widening the premium valuation gap.
While the long-term consumption story for the FMCG industry
remains intact due to rising consumer base and expanding rural
consumption, any further re-rating from current valuations
seems less likely given the near-term concerns over 1) strong
competitive intensity and 2) any spike in key raw-material prices.
Hence, we maintain our Neutral stance on the FMCG sector,
as we believe earnings upgrades and P/E re-ratings are likely
to take a breather from current levels.
Amongst heavyweights, post the significant rally in ITC and
HUL, we maintain our Neutral view on the stocks and wait for
better entry opportunities. In mid caps, we recommend Reduce
on GSK Consumer, Marico, Colgate and Nestle (reported a
significant rally during the quarter and are trading at a
14-43% premium to historical valuations) and recommend
Neutral on GCPL, Britannia and Asian Paints and wait for
better entry opportunities.
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