Goldman Sachs:: Chasing Consumers 2: Coimbatore - better rural growth than urban

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India: Consumer Staples
Equity Research
Chasing Consumers 2: Coimbatore - better rural growth than urban
Rural demand stronger than urban demand
In our continuing series ‘Chasing Consumers’ we visited Coimbatore, a city
in Tamil Nadu focused on education, textiles, and trade. We visited
distributors, stores (city as well as rural), government officials and a real
estate broker. Overall, we found rural demand to be stronger than urban
driven by: (1) continued strong demand for tractors, (2) higher wages in rural
segments. We found feedback on urban demand to be more muted and
driven by large number of promotions and continual brand re-launches.
Increase in VAT rates is causing some concern
Tamil Nadu government has raised VAT rates on cigarettes to 20% from
12.5% and on other FMCG products to 14.5% from 12.5%. We find that
distributors are worried that this VAT hike could lead to price hikes by
companies, thus affecting demand. Frequent price hikes leading to downtrading is a key concern expressed by the group interviewed. Tamil Nadu is
an important market given its size and above average income. It is among
the two largest markets for ITC along with Andhra Pradesh. We see pressure
on distributors profitability given higher interest and labour costs.
Sachets continue to dominate city outskirts and villages
We see two patterns in rural demand: (1) dominance of sachets especially
in shampoos and detergents, and (2) desire to consume branded products
especially since the price gap has shrunk significantly. In shampoos as well
as detergents the Rs1 sachet continues to dominate customer demand. We
find HUL to be quite competitive with a Rs1 Rin sachet offering 18g vs. 13g
for Tide as well as Ujala Techno bright. In shampoos, the three most
popular shampoos are Clinic Plus, Clinic All Clear and Heads & Shoulders.
In soaps, the three most popular brands are Lifebuoy, Lux and Medimix.
Dabur and L’Oreal have a limited product presence.
Given current valuations, we recommend being selective
Current valuations are at 30X 1-yr fwd EPS, which imply optimal demand
and pricing. We prefer companies that: (1) have pricing power to pass on
tax hikes and cost inflation to customers (ITC, Marico) and offer better
growth through higher exposure to lower penetrated categories. Key risks:
upside -sudden decrease in input costs, fall in competitive intensity;
downside - sustained copra prices, significant down-trading.