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FMCG: Key drivers in 2011
Price increases insufficient to offset commodity cost pressures: Key inputs such as milk, palm oil, coffee and copra
are at all time highs. Further, rising crude prices is also putting upward pressure on packaging costs, logistics and
crude related raw materials. Increase in competitive intensity and slowdown in volumes are expected to limit pricing
power. Thus gross profit margin is expected to decline
Volume growth momentum will slow down slightly in 2011 due to the second consecutive year of high food and nonfood
inflation, which is prompting consumers to seek better value and even shift to unbranded products. Mass
market products such as shampoo, toothpaste and hair oils are showing lower volume growth. Rural markets
continue to grow faster (at 18% in CY09) than urban markets (at 11% in CY09)
Rising brand investments: Advertisement and promotional expenses have moved up by 50bps yoy in H1FY11 to
13.6% (aggregate of 9 companies). Higher promotional spend by new entrants and new & re-launches by
incumbents will drive up the marketing expenses
Limited upside on current valuations: FMCG’s valuation premium relative to Sensex is at 50% vs. median of 40%.
This premium is shy of Oct-2008 levels which commanded the highest defensive premium to Sensex. In addition,
FMCG sector valuation on 1-yr fwd earnings is at 26x, which is well above the historical median of 21.5x. Thus we
believe absolute valuations offer less comfort given the softening fundamentals
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