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Consumer products
India
Stay with the leaders – part II. We reiterate our sector view highlighted in a note
dated Aug 30, 2011 that in the backdrop of sustaining high food inflation, incremental
rural spends, including NREGA, have likely plateaued for the time being—a short-term
negative for rural spends and for the sector. However, government’s spending spree
aiding rural consumption is a multi-year story to play (though in a calibrated fashion
similar to the likely low-points in the near term); CY2012E is likely a case of demand
deceleration providing buying opportunities. Our preferred picks are GSK, HUL, ITC,
Marico and Titan. We recommend investors to sell Asian Paints, Colgate, Jubilant
Foodworks and Nestle. We have a neutral view with a negative bias on Dabur.
Expect some moderation in demand, could well be a short-term blip
We advise investors to remain selective in the consumer sector. We reiterate the view from our
sector note dated August 30, 2011 that the past three years have seen a confluence of factors
which have likely aided incremental spends on consumer products, (1) higher outlay on NREGA,
(2) wealth effect due to higher land prices, (3) benefits of farm loan waiver and (4) some 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.
However, we believe that Government’s spending spree aiding rural consumption is a multi-year
story to play (though in a calibrated fashion similar to the likely low-points in the near term);
CY2012E is likely a case of short-term demand deceleration.
When facts (or stock prices!) change, we change (estimates, ratings)
Asian Paints (SELL) – The past may not be a reflection of the future; SELL
Colgate (SELL) – Robust sales growth; adspends at elevated levels triggered by competition
Dabur (REDUCE) – Not out of the woods, as yet
Godrej Consumer (ADD) – Keep faith
GSK Consumer (ADD) – The best is yet to come
Hindustan Unilever (ADD) – Potential for earnings upgrade exists
ITC (ADD) – Event risk exists; potential for higher dividend payout is a buffer
Jubilant Foodworks (SELL) – The crust could potentially crack
Jyothy Laboratories (ADD) – Early signs of turnaround visible
Marico (upgrade to BUY) – All is well, almost
Nestle (SELL) – Price-led profit management deserves a lower multiple
Titan (upgrade to BUY) – Uncertain outlook provides entry-point
Tata Global Beverages (upgrade to BUY) – Margins have likely bottomed out
United Spirits (upgrade to BUY) – In the balance
Asian Paints (SELL)
We reiterate SELL on Asian Paints as we see it facing multiple headwinds, (1) likely
deceleration in volume growth due to lower GDP growth and its linkages, (2) accelerated
input cost pressure—both crude-linked inputs as well as titanium dioxide.
Industry experts suggest that major producers of TiO2 prices have hiked prices by ~5-7%
effective January 1, 2012 (due to higher prices of feedstock ilmenite ore and titanium slag).
We have cut our earnings estimates for FY2012E and FY2013E by 4% to Rs94.4 and
Rs106.9, respectively. Our revised target price on APNT is Rs2, 500 (Rs2, 900 earlier). We
assign a lower multiple of 22XFY2013E for domestic business (23X earlier), we continue to
value international business at a moderate 6X EV/EBITDA. We reiterate that the stock
continues to trading close to its highest-ever relative P/E versus BSE-30 index since 1993.
Most of our worries about APNT are intact, (1) uncertainty in international operations,
particularly Middle East and Egypt operations, (2) scope to take further price hikes is limited
and (3) likely moderation in decoratives paint demand, auto and industry may not provide
buffer. We remain bullish on the medium-term (2-3 years) prospects of the paint industry.
However, we believe expensive valuations and near-term earnings risk could provide better
entry points. Key upside risks include higher-than-expected demand conditions and
significant correction in input costs providing opportunity for APNT to improve margins.
Godrej Consumer (ADD)
We retain ADD rating on GCPL with a lower target price of Rs460 (Rs510 earlier). We have
cut earnings estimates for FY2012E and FY2013E by 4% and 3%, respectively. We model
lower margins for household insecticides business as we expect higher competitive activity
driving increase in advertisement (modest) and promotional spends (significant). We
continue to value GCPL on an SOTP basis as the company operates in multiple categories
with varying growth characteristics and multiple geographies (India, Indonesia, Africa, UK
and Latin America).
Jyothy Laboratories (ADD)
We reiterate ADD rating on JYL with a revised target price of Rs190 (Rs200 earlier) as we
continue to see early signs of turnaround. However, the continuing input cost inflation and
challenges in integration with Henkel is likely to impact JYL’s performance in the interim.
Channel checks suggest that sales of Henkel India’s detergents portfolio during 3QFY12E
have likely declined due to stock outs at the point of purchase. Likely high employee
turnover, sales integration issues and a labor strike at the Karaikal factory of Henkel are
possible reasons.
Our TP of Rs190 implies P/E of 17X FY2013E for JYL standalone (1.8X EV/Sales for JYL + HIL
proforma; sector multiple of b3.4X). We have reduced our earnings estimates as we model
lower sales and margins due to the distribution integration with HIL. Our EPS estimates are
Rs8.4 (Rs8.5 earlier) and Rs10.8 (Rs11.2 earlier) for FY2012E and FY2013E. While we remain
believers in the JYL story in the long term, we continue to expect significant challenges in
JYL’s existing portfolio and integration issues with HIL; though most of the negatives are
currently in the price, in our view. Key risks to our rating are (1) continued inflation in raw
material prices, (2) longer-than-expected time taken to integrate HIL with JYL, (3) lowerthan-
expected benefits from the realignment of the distribution process.
Marico (upgrade to BUY)
We upgrade Marico to BUY (ADD earlier) and retain earnings estimates and TP of Rs175.
Our BUY rating is underpinned on the back of (1) value-added hair oil continues to
outperform coconut oil in volume terms (2) continuing market share gain from Dabur in
Amla segment (3) initiatives to drive higher rural penetration and expanding its direct
distribution reach. We note that any correction in copra prices could potentially lead to
margin expansion (which we do not model) as the company will likely retain some benefits.
Key risks are (1) higher-than-expected input cost inflation, (2) exposure to currency risk and
(3) lack of meaningful success in new ventures.
Titan (upgrade to BUY)
We upgrade Titan to BUY (ADD earlier) with a revised TP of Rs210 (valued at 26X FY2013E
P/E). Our earlier TP was Rs240. Concerns over near-term demand deceleration and volatility
in gold prices have resulted in the stock underperforming the BSE-30 index by 17% and
22% over the past one month and three months, respectively. While we see likely impact on
company’s 2HFY12E performance on account of volatility in gold price, discretionary
purchases are likely to be postponed given the muted macro-economic environment
(including eyewear business); the stock correction is overdone, in our view. Most of the
worries are well priced in, in our view.
At current price, the stock trades at 19XFY2013E consensus P/E (consensus EPS of Rs8.2).
We have tweaked earnings estimates building in lower sales growth in jewelry—our revised
EPS estimates are Rs6.5 and Rs7.9 for FY2012E and FY2013E, respectively. Key risks are
(1) any potential government regulation to curb probable money laundering through gold,
(2) any higher-than-expected slowdown in discretionary spending, (3) higher gold leasing
costs, and (4) losses in the eyewear business.
Tata Global Beverages (upgrade to BUY)
We upgrade TGB to BUY (ADD earlier) and retain TP of Rs110. After posting weak 1HFY12
numbers, we expect improvement in margins in 2HFY12E on the back of correction in tea
and coffee prices and benefit of price hikes taken during the year. Cheap valuations provide
support as well, in our view—the stock trades at 12.9X FY2013E P/E.
While fundamental worries regarding demonstrated execution capabilities of management
and TGB’s predominant presence in low-growth markets remain, cheap valuations likely
captures most of the negatives. Key triggers are (1) potential of ‘Himalayan’ under TGB-Pepsi
JV, (2) media reports suggest likely stake sale in Tetley and (3) potential of ‘Activate’. Key
risks are reversal in input cost trends (inflation) not neutralized by price increases and
increase in competitive activity.
United Spirits (upgrade to BUY)
We upgrade UNSP to BUY (ADD earlier) with a revised TP of Rs900 (Rs950 earlier) as we cut
earnings by 5%—we now model higher adspends as UNSP is likely to increase the spends
on recent launches and newer price-points in CY2012E, in our view. We continue to value
the domestic business at 11X FY2013E EV/EBITDA and W&M business at 9X FY2013E
EV/EBITDA. In our view, the recent debt crisis of Kingfisher Airlines may potentially have
bearing on the UNSP stock price till the matter is resolved; however it is difficult to build in
any such eventuality at this stage. Key risks to our rating are (1) higher-than-expected input
costs (2) potential impact of higher interest rates, (3) higher net debt position as of 2QFY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Consumer products
India
Stay with the leaders – part II. We reiterate our sector view highlighted in a note
dated Aug 30, 2011 that in the backdrop of sustaining high food inflation, incremental
rural spends, including NREGA, have likely plateaued for the time being—a short-term
negative for rural spends and for the sector. However, government’s spending spree
aiding rural consumption is a multi-year story to play (though in a calibrated fashion
similar to the likely low-points in the near term); CY2012E is likely a case of demand
deceleration providing buying opportunities. Our preferred picks are GSK, HUL, ITC,
Marico and Titan. We recommend investors to sell Asian Paints, Colgate, Jubilant
Foodworks and Nestle. We have a neutral view with a negative bias on Dabur.
Expect some moderation in demand, could well be a short-term blip
We advise investors to remain selective in the consumer sector. We reiterate the view from our
sector note dated August 30, 2011 that the past three years have seen a confluence of factors
which have likely aided incremental spends on consumer products, (1) higher outlay on NREGA,
(2) wealth effect due to higher land prices, (3) benefits of farm loan waiver and (4) some 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.
However, we believe that Government’s spending spree aiding rural consumption is a multi-year
story to play (though in a calibrated fashion similar to the likely low-points in the near term);
CY2012E is likely a case of short-term demand deceleration.
When facts (or stock prices!) change, we change (estimates, ratings)
Asian Paints (SELL) – The past may not be a reflection of the future; SELL
Colgate (SELL) – Robust sales growth; adspends at elevated levels triggered by competition
Dabur (REDUCE) – Not out of the woods, as yet
Godrej Consumer (ADD) – Keep faith
GSK Consumer (ADD) – The best is yet to come
Hindustan Unilever (ADD) – Potential for earnings upgrade exists
ITC (ADD) – Event risk exists; potential for higher dividend payout is a buffer
Jubilant Foodworks (SELL) – The crust could potentially crack
Jyothy Laboratories (ADD) – Early signs of turnaround visible
Marico (upgrade to BUY) – All is well, almost
Nestle (SELL) – Price-led profit management deserves a lower multiple
Titan (upgrade to BUY) – Uncertain outlook provides entry-point
Tata Global Beverages (upgrade to BUY) – Margins have likely bottomed out
United Spirits (upgrade to BUY) – In the balance
Asian Paints (SELL)
We reiterate SELL on Asian Paints as we see it facing multiple headwinds, (1) likely
deceleration in volume growth due to lower GDP growth and its linkages, (2) accelerated
input cost pressure—both crude-linked inputs as well as titanium dioxide.
Industry experts suggest that major producers of TiO2 prices have hiked prices by ~5-7%
effective January 1, 2012 (due to higher prices of feedstock ilmenite ore and titanium slag).
We have cut our earnings estimates for FY2012E and FY2013E by 4% to Rs94.4 and
Rs106.9, respectively. Our revised target price on APNT is Rs2, 500 (Rs2, 900 earlier). We
assign a lower multiple of 22XFY2013E for domestic business (23X earlier), we continue to
value international business at a moderate 6X EV/EBITDA. We reiterate that the stock
continues to trading close to its highest-ever relative P/E versus BSE-30 index since 1993.
Most of our worries about APNT are intact, (1) uncertainty in international operations,
particularly Middle East and Egypt operations, (2) scope to take further price hikes is limited
and (3) likely moderation in decoratives paint demand, auto and industry may not provide
buffer. We remain bullish on the medium-term (2-3 years) prospects of the paint industry.
However, we believe expensive valuations and near-term earnings risk could provide better
entry points. Key upside risks include higher-than-expected demand conditions and
significant correction in input costs providing opportunity for APNT to improve margins.
Godrej Consumer (ADD)
We retain ADD rating on GCPL with a lower target price of Rs460 (Rs510 earlier). We have
cut earnings estimates for FY2012E and FY2013E by 4% and 3%, respectively. We model
lower margins for household insecticides business as we expect higher competitive activity
driving increase in advertisement (modest) and promotional spends (significant). We
continue to value GCPL on an SOTP basis as the company operates in multiple categories
with varying growth characteristics and multiple geographies (India, Indonesia, Africa, UK
and Latin America).
Jyothy Laboratories (ADD)
We reiterate ADD rating on JYL with a revised target price of Rs190 (Rs200 earlier) as we
continue to see early signs of turnaround. However, the continuing input cost inflation and
challenges in integration with Henkel is likely to impact JYL’s performance in the interim.
Channel checks suggest that sales of Henkel India’s detergents portfolio during 3QFY12E
have likely declined due to stock outs at the point of purchase. Likely high employee
turnover, sales integration issues and a labor strike at the Karaikal factory of Henkel are
possible reasons.
Our TP of Rs190 implies P/E of 17X FY2013E for JYL standalone (1.8X EV/Sales for JYL + HIL
proforma; sector multiple of b3.4X). We have reduced our earnings estimates as we model
lower sales and margins due to the distribution integration with HIL. Our EPS estimates are
Rs8.4 (Rs8.5 earlier) and Rs10.8 (Rs11.2 earlier) for FY2012E and FY2013E. While we remain
believers in the JYL story in the long term, we continue to expect significant challenges in
JYL’s existing portfolio and integration issues with HIL; though most of the negatives are
currently in the price, in our view. Key risks to our rating are (1) continued inflation in raw
material prices, (2) longer-than-expected time taken to integrate HIL with JYL, (3) lowerthan-
expected benefits from the realignment of the distribution process.
Marico (upgrade to BUY)
We upgrade Marico to BUY (ADD earlier) and retain earnings estimates and TP of Rs175.
Our BUY rating is underpinned on the back of (1) value-added hair oil continues to
outperform coconut oil in volume terms (2) continuing market share gain from Dabur in
Amla segment (3) initiatives to drive higher rural penetration and expanding its direct
distribution reach. We note that any correction in copra prices could potentially lead to
margin expansion (which we do not model) as the company will likely retain some benefits.
Key risks are (1) higher-than-expected input cost inflation, (2) exposure to currency risk and
(3) lack of meaningful success in new ventures.
Titan (upgrade to BUY)
We upgrade Titan to BUY (ADD earlier) with a revised TP of Rs210 (valued at 26X FY2013E
P/E). Our earlier TP was Rs240. Concerns over near-term demand deceleration and volatility
in gold prices have resulted in the stock underperforming the BSE-30 index by 17% and
22% over the past one month and three months, respectively. While we see likely impact on
company’s 2HFY12E performance on account of volatility in gold price, discretionary
purchases are likely to be postponed given the muted macro-economic environment
(including eyewear business); the stock correction is overdone, in our view. Most of the
worries are well priced in, in our view.
At current price, the stock trades at 19XFY2013E consensus P/E (consensus EPS of Rs8.2).
We have tweaked earnings estimates building in lower sales growth in jewelry—our revised
EPS estimates are Rs6.5 and Rs7.9 for FY2012E and FY2013E, respectively. Key risks are
(1) any potential government regulation to curb probable money laundering through gold,
(2) any higher-than-expected slowdown in discretionary spending, (3) higher gold leasing
costs, and (4) losses in the eyewear business.
Tata Global Beverages (upgrade to BUY)
We upgrade TGB to BUY (ADD earlier) and retain TP of Rs110. After posting weak 1HFY12
numbers, we expect improvement in margins in 2HFY12E on the back of correction in tea
and coffee prices and benefit of price hikes taken during the year. Cheap valuations provide
support as well, in our view—the stock trades at 12.9X FY2013E P/E.
While fundamental worries regarding demonstrated execution capabilities of management
and TGB’s predominant presence in low-growth markets remain, cheap valuations likely
captures most of the negatives. Key triggers are (1) potential of ‘Himalayan’ under TGB-Pepsi
JV, (2) media reports suggest likely stake sale in Tetley and (3) potential of ‘Activate’. Key
risks are reversal in input cost trends (inflation) not neutralized by price increases and
increase in competitive activity.
United Spirits (upgrade to BUY)
We upgrade UNSP to BUY (ADD earlier) with a revised TP of Rs900 (Rs950 earlier) as we cut
earnings by 5%—we now model higher adspends as UNSP is likely to increase the spends
on recent launches and newer price-points in CY2012E, in our view. We continue to value
the domestic business at 11X FY2013E EV/EBITDA and W&M business at 9X FY2013E
EV/EBITDA. In our view, the recent debt crisis of Kingfisher Airlines may potentially have
bearing on the UNSP stock price till the matter is resolved; however it is difficult to build in
any such eventuality at this stage. Key risks to our rating are (1) higher-than-expected input
costs (2) potential impact of higher interest rates, (3) higher net debt position as of 2QFY12.
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