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UBS Investment Research
Indian Consumer Sector
R evenue growth accelerates QoQ
Analysis of Q1 FY12 results of 52 companies in the Indian consumer space
We analysed the Q1 FY12 results of 52 companies in India. The companies include
both rated and not-rated companies, and span various sub segments. The insights
provide sector cues as well as reasons for stock preference within the consumer
space.
Sector revenue growth +25.5%
Consumer sector revenue grew 25.5% YoY. The tobacco segment grew 19.6% and
home & personal care (HPC) 19.5%, while retail recorded the highest growth at
51%. Paints segment growth normalised to 23% post a 9.4% growth in Q4 FY11.
Volume growth continued to surprise for some companies despite price increases.
Sector EBITDA growth +16.4%, margins contract 114bps YoY
High raw material costs continued in Q1 causing RM/sales to increase to 58.7% vs.
58.2% in Q4 FY11 and 55.8% in Q1 FY11. Companies adopted strict cost control,
reduced promotional volumes, reduced A&P spends and rationalised within the
segments to maintain profitability. PAT grew higher at 22% YoY for the sector.
Outlook and top picks
Price increases have not had a dampening impact on volumes, while we expect
further price increases to be introduced as RM costs increase unrelented. We
believe volume growth should continue to form a lower part of an overall
accelerating revenue growth outlook. Our preferred picks are Titan, GCPL and
United Breweries. We have valuation-led Neutral ratings on Nestle and Emami
Introduction
We reviewed the Q1 FY12 results of 52 companies (both rated and not-rated) in
the Indian consumer space. The companies reviewed are listed below by
segment.
HPC: HUL, Dabur India, Godrej Consumer Products, Marico, Colgate
Palmolive India, Emami, Henkel, Nirma, JL Morison, Jyothy Laboratories.
Tobacco: ITC, Godfrey Phillips, VST Industries, Golden Tobacco
Food & Beverages: Nestle India, United Spirits, GlaxoSmithKline Consumer
Healthcare, Britannia Industries, Tata Global Beverages, McLeod Russell,
Jayshree Tea, United Breweries, Radico Khaitan, Kwality Dairy, Heritage
Foods, Ruchi Soya, Tilaknagar Industries, Globus Spirits.
Retailers: Shoppers Stop, Trent, Titan, Bata India, Provogue India, Jubilant
Foodworks
Paints: Asian Paints, Kansai Nerolac, Akzo Nobel India (formerly ICI
Paints), Jenson & Nicholson
Consumer Durables: Videocon Industries, TTK Prestige, Whirlpool of India,
Bajaj Electricals, VIP Industries, Voltas
Miscellaneous: Zydus Wellness, Liberty Shoes, Mirza International, Pidilite,
Page Industries, Mahindra Holidays, Cox & Kings, Crew BOS.
Key takeaways from Q1 FY12
Divergence seen in volume growth of companies. While companies such as
Marico, Nestle, and GCPL posted volume growth higher than or equal to
their trend due to their brand strength and pricing power, HUL and Dabur
recorded single-digit volume growth—affected by their exposure to the
competitive categories they operate in and a slowing market.
We believe volume growth for the sector should decelerate given more price
increases are on the anvil, but overall revenue growth should accelerate from
here (as witnessed in the past two to three quarters) as new consumers get
into the consumption basket.
Raw material costs continue to be high. Some of the price increases have
come through and we expect companies to introduce more in the current and
coming quarters.
Consumer durables have seen a marked decline in sales growth and profit
growth as the cyclical part of the business is being affected by tightening and
consumer procrastination on big-ticket spends.
Strong revenue growth +25.5%
Consumer sector: Q1 FY12 revenue grew 25.5% YoY with a reasonably
strong volume growth despite price increases. Companies continue to introduce
price increases, with HUL announcing a hike in its ‘Pears’ soap brand, and
detergent prices in end-July. Paint companies implemented further price
increases in July 2011 to pass on cost increases in crude, TiO2 and most recently,
in monomers as a consequence of the US and Europe using higher volumes for
generation of clean energy, creating a supply shortage in the commodities.
HPC segment: Revenue growth in the HPC segment was 19.5% YoY vs.
20.3% in Q4 FY11 and 11% in Q1 FY11. Although Marico, HUL, Dabur,
GCPL and Emami grew sales 23%, Jyothy Laboratories (-18.7% YoY) and
Henkel India (-21% YoY) brought down segment growth rates. Jyothy
management has clarified that non-core home care revenue (mosquito repellents,
scrubbers, etc) has been consciously brought down, while we believe that, with
the amalgamation with Henkel’s operations, there has been some disturbance in
trade.
Most of the HPC companies operating in hyper-competitive categories such as
HUL and Dabur have posted decelerating volumes at around -8%. We believe
the reduction in volume growth is due to reduced A&P and conscious loss of
share in less profitable segments in order to both improve revenue mix and
maintain overall profitability.
MNC companies continue to view India as a very high growth opportunity due
to the low penetration rates and scope for distribution expansion. At an analyst
briefing, Unilever’s CEO Paul Polman stated he expects 75% of Unilever’s sales
to come from the emerging market by the end of the decade, expressing strong
confidence in the underlying demand potential.
Domestic HPC companies continue to look for acquisitions outside India due to
the aggressive competition in domestic markets, and as a low-risk alternative to
higher growth.
Tobacco segment: Revenues grew +19.6% YoY, up sequentially from 17.2%
in Q4 FY11 and 15.1% in Q1 FY11. ITC posted record-high volume growth of
~8% in Q1 FY12 vs. -2.8% in FY11. We project ~5-6% volume growth in
FY12E. Q1 FY12 started out with two significant initiatives: 1) a low pipeline
inventory at the beginning of the year; and 2) price increase in the flagship Gold
Flake Regular filter.
F&B segment: The segment recorded higher growth at 38.7%, vs. 24.6% in Q4
FY11 and 16% in Q1 FY11. The primary driver of this growth is Ruchi Soya,
which grew +71%. This has been due to a ~236% increase in export volumes,
underlying which the company has improved its capacity utilisation. United
Spirits (+32.3% YoY), Kwality Dairy (+51.1% YoY), and Radico Khaitan
(+29.2%) contributed to the higher-than-trend sales growth in the segment.
Retail segment: Retail grew +50.8% YoY vs. 35.7% in Q4 FY11 and 33.8%
in Q1 FY11. Jubilant Foodworks and Titan Industries drove the higher-thantrend
rates. Both companies grew +60% in Q1 FY12. Gold volumes grew ~40%
despite a ~10% increase in gold prices, while diamond jewellery grew ~5-6%
despite a ~90-100% increase in prices. Jubilant recorded ~36% same store sales
growth YoY.
Apparel retail companies have hiked prices ~16-17% during the quarter to offset
increased input costs. Shoppers Stop’s (pure department store) standalone entity
had a revenue growth of 15% YoY. Shoppers Stop management mentioned that
the high prices are affecting volume growth in the segment.
Paints segment: Revenue grew +23.2% YoY vs. 9.4% in Q4 FY11 and 24.8%
in Q1 FY11. Paint companies continued to introduce price increases (Asian
Paints ~8.3% YTD in FY12) and are expected to announce more in the current
quarter. With the ongoing shortage of TiO2, companies will also have to face
higher prices of monomers, which are also in short supply due to strong demand
from developing markets
Volume growth analysis
Divergence is seen in volume growth of companies, with varied consumer
behaviour and dynamics affecting segmental volumes.
Companies such as Marico, Nestle, and GCPL posted volume growth higher
than or equal to their trend due to their brand strength and pricing power in their
sub-segments of strength.
Colgate and Asian Paints have all had accelerating growth rates as new products
(Sensitive) and new purchase occasions (more people get their houses painted
during the wedding season) have driven higher volumes in the segments.
HUL and Dabur saw volumes grow single digits, being affected by their
presence in the competitive categories they operate in and a slowing market.
Raw material costs
Raw material cost remains the key pressure for staple companies. Prices of
copra, milk, barley, and palm oil all remain high compared with last year’s
levels. Although there was a reduction in the increase of price increases for
some raw materials (as mentioned at the Asian Paints conference call), raw
material pressure forced companies to introduce price hikes. For the sector, raw
material to sales was 58.7%, 290bps higher than Q1 FY11 levels and 50bps
higher than in Q4 FY11.
Based on the raw material inventory cycle of companies, these higher costs will
be reflected in subsequent quarters, which we believe will keep gross margins
under pressure.
Valuation
Consumer sector PE has expanded on better-than-expected volume growth in the
consumer space and flight to consumption in a market that has been devoid of
growth opportunity.
Consumer sector PE of covered companies is 26.5x YTD in FY12 vs. 24.6x in
the comparable period of last year.
Statement of Risk
The key risks that could affect the sector include continued upward movement
of downstream petrochemical products and higher agri-commodity based raw
material costs and the inability of branded consumer companies to be able to
pass on price increases in an increasingly competitive market.
Higher excise duty on cigarettes and state taxes on liquor could delay the
uptrading in cigarettes and to better quality ENA-based spirits.
The sector enjoys low corporate tax rates because of factory locations in areas
that are designated as tax benefit zones; any change in this law could affect
earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Indian Consumer Sector
R evenue growth accelerates QoQ
Analysis of Q1 FY12 results of 52 companies in the Indian consumer space
We analysed the Q1 FY12 results of 52 companies in India. The companies include
both rated and not-rated companies, and span various sub segments. The insights
provide sector cues as well as reasons for stock preference within the consumer
space.
Sector revenue growth +25.5%
Consumer sector revenue grew 25.5% YoY. The tobacco segment grew 19.6% and
home & personal care (HPC) 19.5%, while retail recorded the highest growth at
51%. Paints segment growth normalised to 23% post a 9.4% growth in Q4 FY11.
Volume growth continued to surprise for some companies despite price increases.
Sector EBITDA growth +16.4%, margins contract 114bps YoY
High raw material costs continued in Q1 causing RM/sales to increase to 58.7% vs.
58.2% in Q4 FY11 and 55.8% in Q1 FY11. Companies adopted strict cost control,
reduced promotional volumes, reduced A&P spends and rationalised within the
segments to maintain profitability. PAT grew higher at 22% YoY for the sector.
Outlook and top picks
Price increases have not had a dampening impact on volumes, while we expect
further price increases to be introduced as RM costs increase unrelented. We
believe volume growth should continue to form a lower part of an overall
accelerating revenue growth outlook. Our preferred picks are Titan, GCPL and
United Breweries. We have valuation-led Neutral ratings on Nestle and Emami
Introduction
We reviewed the Q1 FY12 results of 52 companies (both rated and not-rated) in
the Indian consumer space. The companies reviewed are listed below by
segment.
HPC: HUL, Dabur India, Godrej Consumer Products, Marico, Colgate
Palmolive India, Emami, Henkel, Nirma, JL Morison, Jyothy Laboratories.
Tobacco: ITC, Godfrey Phillips, VST Industries, Golden Tobacco
Food & Beverages: Nestle India, United Spirits, GlaxoSmithKline Consumer
Healthcare, Britannia Industries, Tata Global Beverages, McLeod Russell,
Jayshree Tea, United Breweries, Radico Khaitan, Kwality Dairy, Heritage
Foods, Ruchi Soya, Tilaknagar Industries, Globus Spirits.
Retailers: Shoppers Stop, Trent, Titan, Bata India, Provogue India, Jubilant
Foodworks
Paints: Asian Paints, Kansai Nerolac, Akzo Nobel India (formerly ICI
Paints), Jenson & Nicholson
Consumer Durables: Videocon Industries, TTK Prestige, Whirlpool of India,
Bajaj Electricals, VIP Industries, Voltas
Miscellaneous: Zydus Wellness, Liberty Shoes, Mirza International, Pidilite,
Page Industries, Mahindra Holidays, Cox & Kings, Crew BOS.
Key takeaways from Q1 FY12
Divergence seen in volume growth of companies. While companies such as
Marico, Nestle, and GCPL posted volume growth higher than or equal to
their trend due to their brand strength and pricing power, HUL and Dabur
recorded single-digit volume growth—affected by their exposure to the
competitive categories they operate in and a slowing market.
We believe volume growth for the sector should decelerate given more price
increases are on the anvil, but overall revenue growth should accelerate from
here (as witnessed in the past two to three quarters) as new consumers get
into the consumption basket.
Raw material costs continue to be high. Some of the price increases have
come through and we expect companies to introduce more in the current and
coming quarters.
Consumer durables have seen a marked decline in sales growth and profit
growth as the cyclical part of the business is being affected by tightening and
consumer procrastination on big-ticket spends.
Strong revenue growth +25.5%
Consumer sector: Q1 FY12 revenue grew 25.5% YoY with a reasonably
strong volume growth despite price increases. Companies continue to introduce
price increases, with HUL announcing a hike in its ‘Pears’ soap brand, and
detergent prices in end-July. Paint companies implemented further price
increases in July 2011 to pass on cost increases in crude, TiO2 and most recently,
in monomers as a consequence of the US and Europe using higher volumes for
generation of clean energy, creating a supply shortage in the commodities.
HPC segment: Revenue growth in the HPC segment was 19.5% YoY vs.
20.3% in Q4 FY11 and 11% in Q1 FY11. Although Marico, HUL, Dabur,
GCPL and Emami grew sales 23%, Jyothy Laboratories (-18.7% YoY) and
Henkel India (-21% YoY) brought down segment growth rates. Jyothy
management has clarified that non-core home care revenue (mosquito repellents,
scrubbers, etc) has been consciously brought down, while we believe that, with
the amalgamation with Henkel’s operations, there has been some disturbance in
trade.
Most of the HPC companies operating in hyper-competitive categories such as
HUL and Dabur have posted decelerating volumes at around -8%. We believe
the reduction in volume growth is due to reduced A&P and conscious loss of
share in less profitable segments in order to both improve revenue mix and
maintain overall profitability.
MNC companies continue to view India as a very high growth opportunity due
to the low penetration rates and scope for distribution expansion. At an analyst
briefing, Unilever’s CEO Paul Polman stated he expects 75% of Unilever’s sales
to come from the emerging market by the end of the decade, expressing strong
confidence in the underlying demand potential.
Domestic HPC companies continue to look for acquisitions outside India due to
the aggressive competition in domestic markets, and as a low-risk alternative to
higher growth.
Tobacco segment: Revenues grew +19.6% YoY, up sequentially from 17.2%
in Q4 FY11 and 15.1% in Q1 FY11. ITC posted record-high volume growth of
~8% in Q1 FY12 vs. -2.8% in FY11. We project ~5-6% volume growth in
FY12E. Q1 FY12 started out with two significant initiatives: 1) a low pipeline
inventory at the beginning of the year; and 2) price increase in the flagship Gold
Flake Regular filter.
F&B segment: The segment recorded higher growth at 38.7%, vs. 24.6% in Q4
FY11 and 16% in Q1 FY11. The primary driver of this growth is Ruchi Soya,
which grew +71%. This has been due to a ~236% increase in export volumes,
underlying which the company has improved its capacity utilisation. United
Spirits (+32.3% YoY), Kwality Dairy (+51.1% YoY), and Radico Khaitan
(+29.2%) contributed to the higher-than-trend sales growth in the segment.
Retail segment: Retail grew +50.8% YoY vs. 35.7% in Q4 FY11 and 33.8%
in Q1 FY11. Jubilant Foodworks and Titan Industries drove the higher-thantrend
rates. Both companies grew +60% in Q1 FY12. Gold volumes grew ~40%
despite a ~10% increase in gold prices, while diamond jewellery grew ~5-6%
despite a ~90-100% increase in prices. Jubilant recorded ~36% same store sales
growth YoY.
Apparel retail companies have hiked prices ~16-17% during the quarter to offset
increased input costs. Shoppers Stop’s (pure department store) standalone entity
had a revenue growth of 15% YoY. Shoppers Stop management mentioned that
the high prices are affecting volume growth in the segment.
Paints segment: Revenue grew +23.2% YoY vs. 9.4% in Q4 FY11 and 24.8%
in Q1 FY11. Paint companies continued to introduce price increases (Asian
Paints ~8.3% YTD in FY12) and are expected to announce more in the current
quarter. With the ongoing shortage of TiO2, companies will also have to face
higher prices of monomers, which are also in short supply due to strong demand
from developing markets
Volume growth analysis
Divergence is seen in volume growth of companies, with varied consumer
behaviour and dynamics affecting segmental volumes.
Companies such as Marico, Nestle, and GCPL posted volume growth higher
than or equal to their trend due to their brand strength and pricing power in their
sub-segments of strength.
Colgate and Asian Paints have all had accelerating growth rates as new products
(Sensitive) and new purchase occasions (more people get their houses painted
during the wedding season) have driven higher volumes in the segments.
HUL and Dabur saw volumes grow single digits, being affected by their
presence in the competitive categories they operate in and a slowing market.
Raw material costs
Raw material cost remains the key pressure for staple companies. Prices of
copra, milk, barley, and palm oil all remain high compared with last year’s
levels. Although there was a reduction in the increase of price increases for
some raw materials (as mentioned at the Asian Paints conference call), raw
material pressure forced companies to introduce price hikes. For the sector, raw
material to sales was 58.7%, 290bps higher than Q1 FY11 levels and 50bps
higher than in Q4 FY11.
Based on the raw material inventory cycle of companies, these higher costs will
be reflected in subsequent quarters, which we believe will keep gross margins
under pressure.
Valuation
Consumer sector PE has expanded on better-than-expected volume growth in the
consumer space and flight to consumption in a market that has been devoid of
growth opportunity.
Consumer sector PE of covered companies is 26.5x YTD in FY12 vs. 24.6x in
the comparable period of last year.
Statement of Risk
The key risks that could affect the sector include continued upward movement
of downstream petrochemical products and higher agri-commodity based raw
material costs and the inability of branded consumer companies to be able to
pass on price increases in an increasingly competitive market.
Higher excise duty on cigarettes and state taxes on liquor could delay the
uptrading in cigarettes and to better quality ENA-based spirits.
The sector enjoys low corporate tax rates because of factory locations in areas
that are designated as tax benefit zones; any change in this law could affect
earnings.
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