Goldman Sachs, FMCG::Rupee depreciation to potentially increase costs; HUL most affected

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Rupee depreciation to potentially increase costs; HUL most affected
More than 75% of HUL raw materials linked to global prices
INR has depreciated by 5% vs the USD in the past month and is currently
close to its two-year low. We believe that rupee depreciation will further
increase input costs, particularly for commodities linked to global prices.
While about 20% of raw materials consumed by HUL is imported, an
additional 55% or more is sourced from local suppliers but linked to global
prices. We believe the rupee depreciation, if sustained, could lead to a 6%-
8% increase in HUL’s input costs. HUL had a gross margin of 47% in FY11.
Most ITC raw materials sourced domestically, least affected by
rupee depreciation
More than 80% of ITC’s raw materials (primarily tobacco) are linked to
domestic prices. This protects the company from rupee depreciation, and
ITC’s margins remain most insulated from global commodity costs.
Currently, cigarettes contribute 80% to company EBIT.
Marico and Dabur affected too, but currency impact offset by
international revenues
Marico and Dabur get about a fourth of their revenues from their overseas
businesses, which would offset the currency impact of raw materials
denominated in foreign currency. With a depreciation in the rupee, the
rupee amount of international sales reported would be higher.
Sell Hindustan Unilever, Buy Marico
We have a Sell rating on Hindustan Unilever with a 12-month target price
of Rs274. Our target price is set at a P/E of 22X FY13E EPS. We believe, at
29X 1-yr fwd EPS, that current valuations are implying high volume growth
and margin expansion simultaneously, a scenario unlikely to pan out given
the current competitive environment. We have a Buy rating on Marico with
a 12-month FY13E P/E-based target price of Rs163. We believe that the
recent correction in the stock price offers an attractive entry point as the
volume growth potential of the franchise brands and the international
business remains intact.
Key risks
Easing of input cost inflation, lower competitive intensity, continued fiscal
stimulus, increase in tax incidence through implementation of GST, and
sustained crude-led input price inflation.