Consumer will continue to be king
Valuations likely to remain at a
premium; Prefer ITC and GCPL
within our coverage
Action: Prefer ITC in large caps and GCPL in midcap space
In the current environment, we prefer companies with a history of
consistent delivery. ITC is our top Buy in the large cap space where we see
mid-teens EBIT growth in the key cigarette business continuing in the next
few years. We have upgraded HUVR to a Neutral on the back of continued
strong operational performance.
Among the midcap names, we prefer GCPL, as its performance across
geographies has been robust. We also like Jubilant Foodworks despite its
high relative valuations. We believe its earnings will continue to surprise the
street positively.
Strong growth outlook
We believe that over the next few quarters, the growth outlook continues to
remain strong for consumer companies in India. Unlike our previous
expectations, we are yet to witness any meaningful slowdown or trading
down in the staples sector. Our on-the-ground feedback and company
commentary suggest that volumes are likely to remain buoyant in the
medium term, concerns such as delay in monsoons and economic
slowdown notwithstanding.
Catalyst: Watch out for margins
While we expect growth to continue, we believe margin pressure may be
imminent for some of the consumer names. Rising commodity prices
(especially benzene and food products) along with rupee depreciation may
pressure gross margins. We expect this to play out in 2HFY13F.
Valuations: Strong growth and defensive bias likely to keep
valuations elevated
Consumer stocks are trading currently at an average of 27x FY14F P/E,
higher than the long-term average of around 24x. We expect valuations to
remain at current elevated levels in the near to medium term due to: a)
continued strong growth, and b) prevailing risk-off environment.
Our key recommendations
We have reviewed the performance of companies across the sector in 1QFY13 and, with
a view towards the next year or so, have made several changes to our earnings
estimates, target prices and ratings. We believe that, over the next year or so, the area
within the consumer sector that will be relatively defensive is the staples sub-segment,
with the consumer discretionary segment likely to come under some pressure.
We believe that, given the environment, stable and predictable cash flow generating
companies will command a premium.
ITC is our top Buy in the sector, where predictability of cash flows is very high, despite
several noises which have been made around packaging norms, changes in tax
structure and competition from the illicit segment.
We are also upgrading HUVR to Neutral from Reduce, given the defensive nature of the
stock as well as the turnaround in operations seen over the past few quarters. We have
analysed how the changing portfolio mix is likely to help both volume growth trajectory as
well as profitability in the medium term. However, we believe current valuations are too
rich to build a Buy case and we would wait for a better entry point.
Within the midcap space, we prefer GCPL, where delivery on both domestic and
international business has been consistently good and, with synergies from acquisitions
continuing to accrue, we believe GCPL is in a sweet spot. In our view, valuations will
continue to inch up to sector average multiples as investors continue to gain confidence
on the company’s international portfolio.
Within the consumer discretionary segment, we prefer Jubilant Foodworks, as its same
store sales growth (SSSG) has held at 20%+ vs. company guidance of 18-20% for
FY13F. Given the low ticket size, low levels of penetration, smaller price increases this
year and innovation on the portfolio, we believe the company will be able to deliver 20%
SSSG in FY13F. Management has also guided for 100 store openings this year, which
again signals its confidence that demand will sustain. Its Dunkin’ Donuts business will
not be a big contributor this year, but going forward it has the potential to be a success.
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