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Low risk, Low reward
Volume growth to moderate in FY12 (vs. FY11) due to rising
inflation, which has impacted urban India more
Return of pricing power: Price-led growth to improve sector
revenue growth to 18% in FY12E (vs. 17% in FY11)
Margin mean reversal to aid 90 bps improvement in EBITDA
margins over the next two years as RM costs retreat from
recent peaks (contributing 60 bps) along with better fixed cost
absorption (contributing 30 bps)
An earnings growth of 19% YoY is expected in FY12 which is
ahead of 13% YoY growth registered in FY11
The avg 6- yr growth and fwd PE multiple have been at 17%
p.a. and 23x resp. With similar earnings growth over the next 2
years, risk-aversion has expanded FMCG’s fwd PE to 26x
now. This also translates to an 88% premium to Sensex (vs. 5-
yr historical median of 32%). Thus, FMCG sector is at best a
quasi-cash allocation, with low reward from a 1-yr
perspective
Key Buy Recommendations
Godrej Consumer (upside of 14%): Potential for earnings
surprise on: (1) Higher domestic off-take in insecticide and hair
color portfolio; (2) Further decline in palm oil prices; (3) GCPL
and GHPL’s distribution synergy; & (4) Integration of Darling
acquisition. While domestic volume growth has been ahead of
market expectations, we believe recent acquisitions will be
significantly earnings accretive.
Dabur (upside of 6%): (1) Expected recovery in volume
growth in H1FY12; (2) Expected margin improvement from
recent price hikes in core brands & moderating RM cost; & (3)
Synergy benefit from international acquisitions (i.e. Hobi &
Namaste).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Low risk, Low reward
Volume growth to moderate in FY12 (vs. FY11) due to rising
inflation, which has impacted urban India more
Return of pricing power: Price-led growth to improve sector
revenue growth to 18% in FY12E (vs. 17% in FY11)
Margin mean reversal to aid 90 bps improvement in EBITDA
margins over the next two years as RM costs retreat from
recent peaks (contributing 60 bps) along with better fixed cost
absorption (contributing 30 bps)
An earnings growth of 19% YoY is expected in FY12 which is
ahead of 13% YoY growth registered in FY11
The avg 6- yr growth and fwd PE multiple have been at 17%
p.a. and 23x resp. With similar earnings growth over the next 2
years, risk-aversion has expanded FMCG’s fwd PE to 26x
now. This also translates to an 88% premium to Sensex (vs. 5-
yr historical median of 32%). Thus, FMCG sector is at best a
quasi-cash allocation, with low reward from a 1-yr
perspective
Key Buy Recommendations
Godrej Consumer (upside of 14%): Potential for earnings
surprise on: (1) Higher domestic off-take in insecticide and hair
color portfolio; (2) Further decline in palm oil prices; (3) GCPL
and GHPL’s distribution synergy; & (4) Integration of Darling
acquisition. While domestic volume growth has been ahead of
market expectations, we believe recent acquisitions will be
significantly earnings accretive.
Dabur (upside of 6%): (1) Expected recovery in volume
growth in H1FY12; (2) Expected margin improvement from
recent price hikes in core brands & moderating RM cost; & (3)
Synergy benefit from international acquisitions (i.e. Hobi &
Namaste).
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