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India Equity Research Reports, IPO and Stock News
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FMCG stocks outperformed the BSE Sensex 13-15% during the July-September quarter. With
macro growth drivers largely intact and mild monsoons in 2011, we expect sustained earnings
momentum over the next few quarters. Valuations look rich and we see only modest absolute
upside potential at current levels.
July-September quarter: robust volume growth to drive revenue growth
We expect growth to have continued this quarter with 17% yoy revenue growth for stocks in our
Household Products coverage universe. We believe consumer demand across the sector has
remained largely intact with cost increases during the quarter largely passed through to
consumers. For ITC, we forecast 7-8% yoy volume growth to drive a rise in cigarette revenues
and the other FMCG business to post robust revenue growth. We expect Hindustan Unilever
(HUVR) to post 8% volume growth, leading to 14% yoy growth. Strong momentum in the personal
products segment should continue this quarter. We expect Nestle India (NI) to post 22% yoy
revenue growth. It has increased prices of its dairy portfolio and coffee products to pass on milk
and coffee inflation. We expect Asian Paints’ (AP) sales to have been impacted by a prolonged
monsoon, leading to a sequential decline of 7% qoq.
FMCG stocks could remain in a sweet spot given the macro environment
In the past two years, FMCG companies such as HUVR have faced the combined impact of
greater competition and higher raw material costs. Competition remains intense but we see no
further intensification, and companies have gradually passed on a large proportion of cost
inflation in the past two to three quarters. Commodity prices remain volatile, but we expect no
incremental escalation in prices. Hence, we are likely to see stable to gradually improving
margins in the next few quarters. FMCG stocks continued to outperform the BSE Sensex – ITC
by 15% and HUVR by 13% during the July-September quarter – and their valuations appear rich
compared to the BSE Sensex PE of 13.8x FY12 (source: Bloomberg consensus). Hence we
expect only modest absolute returns from current levels. However, we think earnings growth
remains sustainable, driven by un-leveraged domestic consumption.
Buy Asian Paints, Hindustan Unilever and ITC; Hold Nestle
We recently downgraded our rating on Nestle India to Hold. The company seems best placed to
sustain more than 20% revenue growth (given that the markets it caters to are under-penetrated),
but we remain concerned about its rich valuations. The stock trades at 44.9x our FY11F EPS of
Rs93.5. Hence, we recommend buying the stock only on declines. ITC and HUVR are our top
picks among the FMCG companies in our coverage universe. We see HUVR as one of the best
positioned companies to capitalise on improving rural spending, given its increased focus on
strengthening an already strong distribution network. Visibility for ITC’s growth remains strong, in
our view; we estimate 6-7% volume growth in FY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
FMCG stocks outperformed the BSE Sensex 13-15% during the July-September quarter. With
macro growth drivers largely intact and mild monsoons in 2011, we expect sustained earnings
momentum over the next few quarters. Valuations look rich and we see only modest absolute
upside potential at current levels.
July-September quarter: robust volume growth to drive revenue growth
We expect growth to have continued this quarter with 17% yoy revenue growth for stocks in our
Household Products coverage universe. We believe consumer demand across the sector has
remained largely intact with cost increases during the quarter largely passed through to
consumers. For ITC, we forecast 7-8% yoy volume growth to drive a rise in cigarette revenues
and the other FMCG business to post robust revenue growth. We expect Hindustan Unilever
(HUVR) to post 8% volume growth, leading to 14% yoy growth. Strong momentum in the personal
products segment should continue this quarter. We expect Nestle India (NI) to post 22% yoy
revenue growth. It has increased prices of its dairy portfolio and coffee products to pass on milk
and coffee inflation. We expect Asian Paints’ (AP) sales to have been impacted by a prolonged
monsoon, leading to a sequential decline of 7% qoq.
FMCG stocks could remain in a sweet spot given the macro environment
In the past two years, FMCG companies such as HUVR have faced the combined impact of
greater competition and higher raw material costs. Competition remains intense but we see no
further intensification, and companies have gradually passed on a large proportion of cost
inflation in the past two to three quarters. Commodity prices remain volatile, but we expect no
incremental escalation in prices. Hence, we are likely to see stable to gradually improving
margins in the next few quarters. FMCG stocks continued to outperform the BSE Sensex – ITC
by 15% and HUVR by 13% during the July-September quarter – and their valuations appear rich
compared to the BSE Sensex PE of 13.8x FY12 (source: Bloomberg consensus). Hence we
expect only modest absolute returns from current levels. However, we think earnings growth
remains sustainable, driven by un-leveraged domestic consumption.
Buy Asian Paints, Hindustan Unilever and ITC; Hold Nestle
We recently downgraded our rating on Nestle India to Hold. The company seems best placed to
sustain more than 20% revenue growth (given that the markets it caters to are under-penetrated),
but we remain concerned about its rich valuations. The stock trades at 44.9x our FY11F EPS of
Rs93.5. Hence, we recommend buying the stock only on declines. ITC and HUVR are our top
picks among the FMCG companies in our coverage universe. We see HUVR as one of the best
positioned companies to capitalise on improving rural spending, given its increased focus on
strengthening an already strong distribution network. Visibility for ITC’s growth remains strong, in
our view; we estimate 6-7% volume growth in FY12.
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