Credit-Suisse -India Consumer Sector

FMCG outlook remains positive; discretionary
weakness to continue
The FMCG sector continues to demonstrate resilience in volume growth despite
the slowdown in the economy. Our analysis of results and management
commentary of a wide array of 30 consumer companies, reveals only marginal
moderation in overall FMCG revenue growth, with most companies seeing
stable or accelerating volume growth. In contrast there is a clear slowdown in
discretionary consumption, with management commentary indicating no
recovery in the near term..

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■ 4Q aggregate trends—FMCG volume growth accelerated, discretionary
consumption clearly in a cyclical slowdown. Revenue growth for the
domestic FMCG business of 15 companies was 15% YoY in 4Q FY13, a
marginal moderation over FY12 and 9M FY13 trends. The marginal
slowdown was driven entirely by lower price growth, while volume growth
was stable or accelerating. The strongest growth rates were for ITC’s FMCG
business, GCPL, Colgate and Emami while Nestle and Marico slowed.
Discretionary consumption was clearly in the midst of a cyclical slowdown,
and 4Q revenues of discretionary companies grew 13% YoY, way below
FY12 growth rate of 31%. Management commentary here indicates that a
recovery in the near term is unlikely.
■ Three critical drivers for FY14—market share, rural distribution and
margins—highest visibility for ITC, GCPL, Emami and GSK. The
companies that have a strong innovation build-up and increased ad spends
in FY13 and are expanding distribution meaningfully are likely to sustain
revenue growth. GCPL, GSK and Emami saw strong innovation activity in
FY13 backed by high ad spends and are also expanding rural distribution.
ITC’s expansion into the 64 mm segment should drive volume share. The
margin expansion visibility from lower commodity costs and pricing power are
also the highest for GCPL, Emami and GSK Consumer.
■ Valuations remain rich; ITC, Emami, GCPL our top picks. While
valuations for all FMCG stocks have increased, we prefer ITC, Emami and
GCPL as we have the highest visibility of revenue growth and margin
expansion and these stocks compare favourably on P/E and PEG ratio to
Indian and regional peers. The P/E re-rating of the stocks in the India FMCG
sector has not been in sync with earnings changes over the past three
months which we expect would change over a longer period. From that
perspective, too, we prefer stocks in which chances of earnings
disappointments are lower.