FMCG - Q3FY14 Results Preview - Poised for strong performance :Centrum

Poised for strong performance



We expect strong Q3FY14 results for our coverage universe with topline
growth at 14% on the back of steady price hikes coupled with volume
growth. Operating margins are expected to compress by 21bps with
operating profit growth at 12.8%. Despite gross margin expansion, we
expect operating margin compression for Colgate and Nestle. PAT should
grow by 10% YoY. We expect positive surprise from GSK Consumer and
negative surprise from Colgate.

$ Double digit topline growth expected: We expect 14% YoY sales growth
for our coverage universe. Large cap MNC companies, Colgate and GSK
Consumer, are expected to report 11% and 8% volume growth while
pricing growth would be 7% and 8% respectively. Nestle will continue
to have price-led revenue growth. For Talwalkars, value added services
will add traction to sales growth while Speciality Restaurants will
post marginal pricing growth on the back of price hikes taken in the
month of August and December.

$ Operating margin to be under pressure: We have modelled operating
margin compression of 21bps YoY for companies under coverage. Despite
gross margin expansion of 57bps and 85bps for Nestle and Colgate
respectively, we believe operating margins will compress on the back
of higher A&P and other expenses. Among large cap stocks, GSK Consumer
is expected to expand operating margins by 200bps on the back of lower
other expenditure. Talwalkars will post operating margin expansion of
26bps on the back of significant operating leverage from the launch of
Zumba & Reduce while Speciality Restaurants will post a decrease of
136bps due to high A&P and lease expenses during the quarter.
Operating profit will grow by 12.8% YoY for the coverage universe.

$ Profits to grow at a slower pace: PAT for our coverage universe is
expected to grow by 10% YoY. While Colgate and Nestle are expected to
post single digit PAT growth, we expect a healthy 34% growth for GSK
Consumer.  Among small cap stocks, Talwalkars is expected to grow at
19.7% while Speciality will decline by 7%YoY.

$ Valuation & Risk: We upgrade Nestle to Hold and believe the worst is
behind for the company and it can expect volume growth in H1CY14. We
are increasing our target price for Speciality Restaurant on the back
of two menu price hikes and traction in restaurant opening. We
continue to retain Hold rating on Colgate and GSK Consumer and Buy on
Talwalkars Better Value Fitness and Speciality Restaurant. In large
caps, we prefer Glaxo Consumer followed by Nestle and Colgate. Key
risk to our call would be cut in discretionary spends due to the
economic slowdown and gross margin compression.



Thanks & Regards

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