India HPC/Foods Mar'13 qtr: Revenue/earnings growth rates held up well despite weak macro

 Domestic revenue growth rates have held up well. Barring a few
discretionary segments, most of the companies that have reported so far
fared better/in-line with expectations on the revenue growth front during
the Mar’13 qtr. Volume growth trends for most companies were in-line
or better than estimates. Key drivers for growth were: 1) sustained brand
investment coupled with increased promotions in a few categories, 2)
consistent investment behind product innovation, and 3) aggressive
distribution push in rural markets. While Dabur, GSK Consumer and
Emami posted healthy volume growth of 12% (domestic), 8% and 13%,
respectively, Nestle India and Marico posted subdued growth. HUL’s
5.5% volume growth was marginally better than expectations. CSD
channel sales witnessed recovery for most companies. Modern retail
sales growth was good for most except HUL. Rural sales continued to
grow ahead of urban regions.
 Overseas operations underperformed for most companies. While
weak sales and margin performance for the Africa region weighed on
GCPL’s earnings growth, Dabur continued to register sluggish growth
rates for their Namaste operations. Marico reported subdued growth for
its MENA operations. Emami’s exports suffered due to discontinuation
of low margin products and inventory correction (at the distributor level)
for their overseas (CIS) operations.
 Gross margin expansion surprised on the upside … Benign raw
material inflation (steep decline for palm oil and largely stable crude oil
prices) supported healthy gross margin expansion across most
companies. Margins for food companies (Nestle India and GSK
Consumer) further benefited from higher realisations. We expect GM
expansion to continue in the near term supported by a moderate RM
inflation outlook.
 … however higher A&P spend/other expenses offset much of these
gains. Much of the gross margin gains were utilised for higher brand
investments, thereby limiting EBITDA margin expansion. Dabur was the
exception as A&P/Sales declined -80bps y/y coming off the high base.
Higher staff and/or other expenses negated some of the GM gains for
Dabur, GCPL, Marico and GSK Consumer.
 Further re-rating unlikely; focus on volume growth and earnings
momentum. The Indian staples sector trades at the higher end of its
valuation range (31x P/E, 25/35% premium to its past 3/5 yr-average).
The sector has outperformed the broader market by 14% YTD given high
quality earnings delivery and a flight to quality. We believe further
re-rating is unlikely from current levels and we prefer companies with
higher earnings surprise prospects, pricing power and/or limited
competitive risks. Our preferred picks are ITC (OW), Dabur (OW),
UNSP (OW) and GCPL (OW).

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