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Earnings season for the Indian consumer space kicks off later this week. We
expect companies in our coverage universe on an average to report healthy
mid teens earnings growth during the June'11 quarter.
Pricing to underpin top-line growth as volume growth moderates. We
expect marginal decline in volume growth rates for most categories on
account of recent aggressive price hikes undertaken (which could affect
consumption) and high base qtr effect. We expect HUL to return to positive
price/mix growth after five consecutive quarters of decline. ITC and GSK
Consumer would be exceptions and will likely witness revival in volume
growth rate to 5-6% (for cigarettes) and 8-9% levels (MFD) respectively.
Gross margin pressures to sustain for HPC companies; food names
likely to fare better. We expect y/y decline in gross margins for HPC
companies, though quantum will likely be lower than prior quarter on
account of price hikes. Food companies should see flat gross margins y/y as
they have initiated more aggressive price hikes and some of the commodity
costs for them have relatively been benign. Liquor companies (UNSP) could
suffer from high glass and ENA costs.
Controlled ad spends to negate much of gross margin decline. Given
considerable input cost push, June'11 qtr will likely be quieter in terms of
promotional activities. Our discussions with media companies too suggest
subdued spends by FMCG players during the qtr.
Investors’ interest could focus on the following: 1) Volume growth trends
looking for any impact on account of inflationary concerns, 2) Guidance on
margins in coming quarters considering recent price correction for some of
the key raw materials, 3) Commentary on level of competitive activity, and
4) Performance of overseas acquisitions done by domestic companies.
Stock returns likely limited by valuations. Indian staples sector trades at
the higher end of its valuation range (25x P/E, a 12-15% premium to its past
3-5 yr-avg). The sector has outperformed the broader market by 15% over
1HCY11, and on P/E Indian staples are trading at a 75% premium to MSCI
India (vs 50% 10-yr avg premium). While we do not deny the structural
high-quality nature of these names, further re-rating looks unlikely unless
there is acceleration in growth.
Stock preference. Our preferred picks are ITC, UNSP and GSK Consumer.
We would seek better entry opportunities for Nestle India and Dabur. We
remain UW on HUL and Colgate India given stretched valuations
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Earnings season for the Indian consumer space kicks off later this week. We
expect companies in our coverage universe on an average to report healthy
mid teens earnings growth during the June'11 quarter.
Pricing to underpin top-line growth as volume growth moderates. We
expect marginal decline in volume growth rates for most categories on
account of recent aggressive price hikes undertaken (which could affect
consumption) and high base qtr effect. We expect HUL to return to positive
price/mix growth after five consecutive quarters of decline. ITC and GSK
Consumer would be exceptions and will likely witness revival in volume
growth rate to 5-6% (for cigarettes) and 8-9% levels (MFD) respectively.
Gross margin pressures to sustain for HPC companies; food names
likely to fare better. We expect y/y decline in gross margins for HPC
companies, though quantum will likely be lower than prior quarter on
account of price hikes. Food companies should see flat gross margins y/y as
they have initiated more aggressive price hikes and some of the commodity
costs for them have relatively been benign. Liquor companies (UNSP) could
suffer from high glass and ENA costs.
Controlled ad spends to negate much of gross margin decline. Given
considerable input cost push, June'11 qtr will likely be quieter in terms of
promotional activities. Our discussions with media companies too suggest
subdued spends by FMCG players during the qtr.
Investors’ interest could focus on the following: 1) Volume growth trends
looking for any impact on account of inflationary concerns, 2) Guidance on
margins in coming quarters considering recent price correction for some of
the key raw materials, 3) Commentary on level of competitive activity, and
4) Performance of overseas acquisitions done by domestic companies.
Stock returns likely limited by valuations. Indian staples sector trades at
the higher end of its valuation range (25x P/E, a 12-15% premium to its past
3-5 yr-avg). The sector has outperformed the broader market by 15% over
1HCY11, and on P/E Indian staples are trading at a 75% premium to MSCI
India (vs 50% 10-yr avg premium). While we do not deny the structural
high-quality nature of these names, further re-rating looks unlikely unless
there is acceleration in growth.
Stock preference. Our preferred picks are ITC, UNSP and GSK Consumer.
We would seek better entry opportunities for Nestle India and Dabur. We
remain UW on HUL and Colgate India given stretched valuations
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