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India Equity Research Reports, IPO and Stock News
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Consumer products
India
Stay with the leaders. We advise investors to remain selective in the consumer sector.
In an uncertain macro-economic environment—persistent food inflation and volatile
input costs—we prefer companies with pricing power and/or turnaround stories. We
continue to see companies moderate adspends to manage input cost inflation and
could see a deceleration in discretionary consumption. Our preferred picks remain HUL,
ITC, GCPL, GSK and Marico. We upgrade Titan and Jyothy (both to ADD from REDUCE)
after the recent steep correction. We remain cautious on Asian Paints, Nestle—both
trading at near all-time-high relative valuations.
The past three years have seen a confluence of factors which have likely aided incremental
spends on consumer products:
Higher outlay on NREGA
Wealth effect due to higher land prices
Benefits of farm loan waiver
Benefits from the Sixth Pay Commission.
As we look into medium term, we highlight that most of these positive factors are in the
base and lower incremental spends have the potential to hurt demand for consumer
products.
Recent correction warrants an upgrade in Titan and Jyothy
Titan (Rs206, upgrade to ADD from REDUCE, TP Rs240)
We upgrade Titan to ADD as the stock has corrected 13% since our downgrade in June
2011. We present a status update on some of the perceived concerns discussed in our June
14 note:
Recent CBDT notification to quote income tax PAN for purchase of bullion or jewelry
against a bill of Rs0.5 mn or more could impact organised players like Titan
disproportionately – On-the-ground checks suggest that consumers are in fact splitting
the bills and only marginal impact seen on the organised jewelers
Lower GDP growth rate in FY2012E (relative to FY2011) could impact watches sales
growth – this concern remains; however, roll-out of new stores (under the Helios brand)
has the potential to mitigate any slowdown impact
We retain earnings estimates and our target price of Rs240. We note that inflation in gold
prices is a tailwind for Titan’s jewelry business (gold commodity prices are up ~50% Apr-
Aug 2011 yoy and 20% in July-Aug 2011 versus 1QFY12). A key risk is higher volatility in
gold commodity prices which could potentially impact consumer demand.
Jyothy Laboratories (Rs170, upgrade to ADD from REDUCE, TP Rs220)
We upgrade Jyothy to ADD as the stock has corrected ~30% since our downgrade on July
26th 2011. At the current price, JYL stock trades at 1.8X FY2013E standalone sales (sector
multiple of 3.2X FY2013E). Assuming flat growth for Henkel portfolio, the stock now trades
at ~1.5X FY2013E consolidated sales (proforma). We have reduced our FY2012E and
FY2013E standalone earnings estimates by 19% and 12%, respectively, as we model lower
sales and margins due to (1) price hike in Ujala and Maxo likely impacting volume growth
and (2) process of realignment of distribution network with Henkel India likely impacting
primary sales. We remain believers in the JYL story in the long term even while we expect
significant challenges in JYL’s existing portfolio and integration issues with Henkel India.
However, most of the negatives are currently in the price, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Consumer products
India
Stay with the leaders. We advise investors to remain selective in the consumer sector.
In an uncertain macro-economic environment—persistent food inflation and volatile
input costs—we prefer companies with pricing power and/or turnaround stories. We
continue to see companies moderate adspends to manage input cost inflation and
could see a deceleration in discretionary consumption. Our preferred picks remain HUL,
ITC, GCPL, GSK and Marico. We upgrade Titan and Jyothy (both to ADD from REDUCE)
after the recent steep correction. We remain cautious on Asian Paints, Nestle—both
trading at near all-time-high relative valuations.
The past three years have seen a confluence of factors which have likely aided incremental
spends on consumer products:
Higher outlay on NREGA
Wealth effect due to higher land prices
Benefits of farm loan waiver
Benefits from the Sixth Pay Commission.
As we look into medium term, we highlight that most of these positive factors are in the
base and lower incremental spends have the potential to hurt demand for consumer
products.
Recent correction warrants an upgrade in Titan and Jyothy
Titan (Rs206, upgrade to ADD from REDUCE, TP Rs240)
We upgrade Titan to ADD as the stock has corrected 13% since our downgrade in June
2011. We present a status update on some of the perceived concerns discussed in our June
14 note:
Recent CBDT notification to quote income tax PAN for purchase of bullion or jewelry
against a bill of Rs0.5 mn or more could impact organised players like Titan
disproportionately – On-the-ground checks suggest that consumers are in fact splitting
the bills and only marginal impact seen on the organised jewelers
Lower GDP growth rate in FY2012E (relative to FY2011) could impact watches sales
growth – this concern remains; however, roll-out of new stores (under the Helios brand)
has the potential to mitigate any slowdown impact
We retain earnings estimates and our target price of Rs240. We note that inflation in gold
prices is a tailwind for Titan’s jewelry business (gold commodity prices are up ~50% Apr-
Aug 2011 yoy and 20% in July-Aug 2011 versus 1QFY12). A key risk is higher volatility in
gold commodity prices which could potentially impact consumer demand.
Jyothy Laboratories (Rs170, upgrade to ADD from REDUCE, TP Rs220)
We upgrade Jyothy to ADD as the stock has corrected ~30% since our downgrade on July
26th 2011. At the current price, JYL stock trades at 1.8X FY2013E standalone sales (sector
multiple of 3.2X FY2013E). Assuming flat growth for Henkel portfolio, the stock now trades
at ~1.5X FY2013E consolidated sales (proforma). We have reduced our FY2012E and
FY2013E standalone earnings estimates by 19% and 12%, respectively, as we model lower
sales and margins due to (1) price hike in Ujala and Maxo likely impacting volume growth
and (2) process of realignment of distribution network with Henkel India likely impacting
primary sales. We remain believers in the JYL story in the long term even while we expect
significant challenges in JYL’s existing portfolio and integration issues with Henkel India.
However, most of the negatives are currently in the price, in our view.
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