Indian Consumer Goods - Resilience continues; sector update :: Edelweiss (pdf link)

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Q3FY12 key trends

Volume spurs :  Volume for 12 out of 13 companies in line or better than expectations; positive surprises: Asian Paints, Marico and Dabur. This is in sharp contrast to many media and street Q3FY12 forecasts of a sharp slowdown in rural demand and inventory pile up.

Ad spend remain soft, but some pick up: Six companies (out of 13) cut it in terms of % of sales (v/s. 10 out of 13 in Q2FY12). Four trimmed ad spends on absolute basis.

Strain on gross margin persist: Gross margins of 12 companies (out of 21) dipped significantly (except GCPL, Marico, Nestle, Emami, Britannia, Agro Tech and cigarette companies).

EBIDTA margin dips: EBITDA margin of 12 (out of 21) companies declined, though much lower than gross margin (Dabur, USL, Zydus Wellness, Pidilite and Bajaj Corp saw a high decline).

Pricing power rises: Majority took calibrated price hikes. Quality of sales growth was better with balanced blend of price and volume growth.

New launches pick up pace: Companies are persisting with innovations and product launches across segments, and pace seen improving from the previous quarter.

International businesses continue to bloom: In most cases, businesses reported healthy growth despite global economic pressures. Emami disappointed in Africa, Dabur in Turkey.

Q3FY12 results | Hits: GCPL, Marico, Colgate, Asian Paints, Dabur. Flops: USL.

Top picks: Dabur, Marico, GCPL and ITC.

Outlook

Volume: To remain healthy as penetration levels and per capita usage will remain attractive for years to come. Both rural and urban India to drive demand.

Ad spend: To see a slow revival.

Gross margin: Gross margin pressure likely peaked out. Coming quarters likely to see expansion in gross margins, part of which will be ploughed back into ad spends.

India growing much faster than world average: In Dec quarter, Indian volume growth continues to be much faster than the rest of the world, justifying premium multiples.

·       Colgate India reported ~15% YoY volume growth v/s parent company’s 4.0%.

·       HUL reported 9.1% YoY volume growth against parent company’s 0.1%.

·       Coca-Cola India reported a healthy 20% YoY volume growth v/s 3% for parent company.

Packaging law: The new packaging legislation could impact categories like biscuits, detergents, tea, coffee and soaps, which in turn could affect affordability and thereby overall sales.

Budget: Tax-free slabs are expected to be raised, which will aid consumption.

Indian Consumer Goods - Resilience continues; sector update