Prefer midcaps to large caps
Q1FY15 results are expected to be moderate for our coverage universe
with mere 8.7% topline growth. Weak volume growth will continue to
impact all categories as consumers continue to cut discretionary
spends. While category leaders Colgate andGSK Consumer will expand
margins, Nestle’s margins will contract on the back of negative volume
growth. Midcap companies will continue to outperform large caps.
Operating profit and PAT are expected to grow by 7.9% YoY and 6.6%
respectively. We expect positive surprise from Colgate and La Opala
and negative surprise from Nestle.
$ Moderation in sales growth: We expect 8.7% YoY sales growth for our
coverage universe. Large cap MNC companies, Colgate and GSK Consumer,
are expected to report 9% volume growth while Nestle could report
negative volume growth. We believe midcap companies will grow faster
than large cap players with strong volume growth. La Opala would have
~20% volume growth while Speciality Restaurant and Talwalkars 17% &
21% growth respectively.
$ Operating margin to decline: We have modeled operating margin
compression of 15bps YoY for companies under coverage. GSK Consumer
and Colgate would post margin expansion despite high A&P spends on the
back of healthy volume growth while Nestle’s margins could compress on
the back of cost inflation and low single digit topline growth. La
Opala and Talwalkars’s margin will expand while Speciality Restaurants
will post a decline on the back of high RM and employee costs.
Operating profit will grow by 7.9% YoY for the coverage universe.
$ Profitability under pressure: PAT for our coverage universe is
expected to grow by mere 6.6% YoY. Colgate and GSK Consumer are
expected to post healthy PAT growth of 14.9% and 22.1% respectively on
the back of strong topline growth coupled with margin expansion.
Nestle’s PAT will decline by 4.4%YoY. Among small cap stocks,
Talwalkars is expected to grow by 25.3% while La Opala will grow by
42.4%YoY. Speciality Restaurant will continue to disappoint with PAT
decline of 10.7%.
$ Valuation & Risk: We downgrade GSK Consumer to Hold on the back of
steep valuations and believe the upside from healthy volume growth is
factored in the current stock price. We maintain Sell rating on
Colgate and Nestle due to increasing competitive intensity and down
trading by customers could impact volume growth and hence valuations.
In the current situation, we prefer midcap companies La Opala RG,
Talwalkars and Speciality Restaurants as they are market leaders in
their respective categories and any upswing in the economy will
benefit them first. Key risks to our call would be slowdown in rural
demand and higher than expected A&P spends impacting margins.
Thanks & Regards
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Q1FY15 results are expected to be moderate for our coverage universe
with mere 8.7% topline growth. Weak volume growth will continue to
impact all categories as consumers continue to cut discretionary
spends. While category leaders Colgate andGSK Consumer will expand
margins, Nestle’s margins will contract on the back of negative volume
growth. Midcap companies will continue to outperform large caps.
Operating profit and PAT are expected to grow by 7.9% YoY and 6.6%
respectively. We expect positive surprise from Colgate and La Opala
and negative surprise from Nestle.
$ Moderation in sales growth: We expect 8.7% YoY sales growth for our
coverage universe. Large cap MNC companies, Colgate and GSK Consumer,
are expected to report 9% volume growth while Nestle could report
negative volume growth. We believe midcap companies will grow faster
than large cap players with strong volume growth. La Opala would have
~20% volume growth while Speciality Restaurant and Talwalkars 17% &
21% growth respectively.
$ Operating margin to decline: We have modeled operating margin
compression of 15bps YoY for companies under coverage. GSK Consumer
and Colgate would post margin expansion despite high A&P spends on the
back of healthy volume growth while Nestle’s margins could compress on
the back of cost inflation and low single digit topline growth. La
Opala and Talwalkars’s margin will expand while Speciality Restaurants
will post a decline on the back of high RM and employee costs.
Operating profit will grow by 7.9% YoY for the coverage universe.
$ Profitability under pressure: PAT for our coverage universe is
expected to grow by mere 6.6% YoY. Colgate and GSK Consumer are
expected to post healthy PAT growth of 14.9% and 22.1% respectively on
the back of strong topline growth coupled with margin expansion.
Nestle’s PAT will decline by 4.4%YoY. Among small cap stocks,
Talwalkars is expected to grow by 25.3% while La Opala will grow by
42.4%YoY. Speciality Restaurant will continue to disappoint with PAT
decline of 10.7%.
$ Valuation & Risk: We downgrade GSK Consumer to Hold on the back of
steep valuations and believe the upside from healthy volume growth is
factored in the current stock price. We maintain Sell rating on
Colgate and Nestle due to increasing competitive intensity and down
trading by customers could impact volume growth and hence valuations.
In the current situation, we prefer midcap companies La Opala RG,
Talwalkars and Speciality Restaurants as they are market leaders in
their respective categories and any upswing in the economy will
benefit them first. Key risks to our call would be slowdown in rural
demand and higher than expected A&P spends impacting margins.
Thanks & Regards
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