India Consumer Q2F14 Earnings: Remain Selective :: Morgan Stanley Research

India Consumer
Q2F14 Earnings: Remain
Selective
Quick Comment: We expect our India consumer
coverage to report revenue, operating profit, and net
profit growth of 13%, 14%, and 13%, respectively. We
expect some moderation in volume growth across
consumer segments, especially in discretionary product
categories even as companies re-invest part of their
gross margin flexibility in ad-spends to support volume
growth. Higher tax rates will impact earnings growth for
most of the consumer companies in our coverage. We
expect United Spirits, Tata Global Beverages, Marico,
ITC and Dabur to report the strongest Q2F14 PAT
growth. Investors will likely to reward companies with
operating margin expansion this quarter.
HUL – Expect 4-5% volume growth: We expect HUL
to report revenue, operating profit and PAT growth of
9%, 9.9% and 4.8%, respectively. We forecast 7% and
8% volume led growth in soaps & detergents and
personal products, respectively. Operating margins will
likely remain flat in Q2, due to 80bps decline in soaps &
detergents offset by a similar increase Personal Product
margins. Key risk is sluggish volume growth across
business segments.
ITC – Cigarette EBIT growth to remain strong: We
expect ITC to report top-line growth of 15%, driven by
16%, 16% and 15% revenue growth in cigarettes,
non-tobacco FMCG, and agri businesses, respectively.
We forecast (-)2% cigarette volume growth and cigarette
EBIT growth of 18.1% YoY. ITC’s hotel business should
remain sluggish in Q2F14. We expect Q2F14 net profit
growth of 15.2%. The key metric to track this quarter is
non-tobacco FMCG business growth and profitability.
USL – Subdued quarter: We expect USL to report
revenue, operating profit and net profit growth of 8%, 1%
and 79% yoy, respectively. Revenue growth will likely be
driven by price/mix. We expect operating margins to
decline by 70bps yoy, driven by rising spirit costs. Lower
interest cost will drive net profit growth of 79% for the
quarter, we believe.

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Marico – Sluggish volume growth: We expect Marico to
report revenue growth of 10%, led by 2% growth in coconut oil
(in rigid packs), 18% growth in value-added oils, and 7%
growth in edible oils. Copra prices are now up 30% on a YoY
basis, which combined with higher promotions, will likely result
in 120bps gross margin decline for Q2F14, we believe. We
expect Marico to report 14% growth in operating profit driven by
lower advertising expenses and the demerger of Kaya
business. Lower interest cost and higher other income will lead
to 23% growth in net profit, we believe.
GCPL – Strong growth across business segments: We
expect GCPL to report 21%, 16% and 11% growth in revenues,
operating profit and adjusted net profit, respectively, for Q2F14.
Revenue growth of 21% will be driven by 19% growth in the
domestic business and 24% growth in international business.
Currency translation will crimp revenue growth by 1-2%, we
believe. Gross margins will likely expand by ~40bps led by
superior product mix in the domestic business – strong growth
in high margin hair Color and Household insecticide business,
offset partly by rising input costs. However, we expect
operating margins to decline by 60bps due to increased staff
costs, impact of zero-margin food business in Indonesia and
continuing high advertisement expenses. We forecast 16%
growth in operating profit and 11% growth in adjusted PAT.
Dabur – Strong volume growth momentum likely to
continue: We expect Dabur to report revenue growth of 14%
for the quarter, driven largely by strong organic volume growth.
We forecast domestic revenue growth of 11% in Q1F13 with
~9% volume growth. Dabur is likely to witness good all round
growth across product categories. INR depreciation will impact
the fruit juice business and likely crimp 30-50bps of operating
margins for the company. That notwithstanding, we forecast
margins at 17.8%, largely flat YoY, driving 15% growth in
operating profit and 13% growth in adjusted PAT. There may
be upside risks to our operating margin estimates, we believe.
Colgate – Higher tax rate to arrest earnings growth:
Colgate will likely report revenue growth of 15%, driven by
9-10% toothpaste volume growth. Colgate’s operating profit
margins are likely to decline by ~200bps, on account of
increased ad spends and promotions during the quarter. We
forecast adjusted net profit growth of 3%, on account of
~180bps YoY increase in tax rate.
TGBL – FX and Input cost tailwinds to the fore: We expect
TGBL to report 12%, 39% and 28% growth in revenues,
operating profit and adjusted net profit, respectively, for Q2F14.
We expect FX tailwinds to contribute more than half of TGBL’s
topline growth. Moderation in prices of International tea, coffee
and benign domestic tea prices should drive ~200bps gross
margin expansion. This in addition with TGBL’s ongoing cost
management initiatives would likely lead to 39% operating
profit growth. Higher tax rates and adjusting for minority
interest would result in 28% net profit growth for the quarter.
Asian Paints – Operating margins likely to be under
pressure: We expect Asian Paints to report revenue, operating
profit and adjusted net profit growth of 13%, 6% and 0% YoY,
respectively. We expect domestic revenue growth of 13%,
driven by 7-8% volume growth. We expect overall gross
margins to remain flat, primarily driven by INR depreciation
which is likely to offset gains from price hikes and product mix
improvement. Operating margins are likely to decline by 90bps
primarily driven by higher operating expenses (higher freight
costs and fixed costs absorption of new capacity).
Nestle – Muted volume growth to continue: We expect
Nestle to report revenue, operating profit and adjusted net
profit growth of 13%, 14% and 11% YoY, respectively. We
expect operating margins to remain flat at 21.5%, for the
quarter. Higher interest cost and depreciation could arrest PAT
growth for Nestle, we believe.
Titan Industries – Low gold imports to impact quarter: We
expect the recent RBI policy action on constraining gold
imports to impact Titan’s results for the quarter. We expect
Titan to report 11%, 8% and 6% growth in revenues, operating
profit and adjusted net profit, respectively, for Q2F14. We
expect Jewellery and watches segment to report 10% and 12%
revenue growth respectively with jewellery reporting a 20bps
margin decline YoY driven by poor mix and watches reporting a
margin decline of ~60bps due to rupee depreciation impacting
input costs. Higher interest and hedging costs along with
~30bps decline in overall business margins will likely result in
6% growth in adjusted net profit.
Jubilant Foodworks – SSG to be weak; Margins to be
weaker: We expect JUBI to report 27%, 20% and 12% growth
in revenues, operating profit and adjusted net profit,
respectively, for Q2F14. We expect 7-8% SSG for JUBI this
quarter and operating margins to be down ~100bps on account
of continuing sluggish SSG and Dunkin Donuts store rollout
expenses. We continue to hold the view that margins in this
business can expand meaningfully only if SSG trends are
above overall cost inflation.