Consumer Products: Baking in RM tailwinds :: Kotak Sec, report link

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Baking in RM tailwinds. We have upgraded our EPS estimates by ~2-14% for most
companies under KIE consumer universe (barring JUBI, SRL and ITC) as we bake in
benefits from input costs correction adjusted for (1) currency depreciation, (2) higher
A&SP spends and (3) lower price-led growth. Resurgence of unorganized competition
also remains a risk to volumes. RM tailwinds and roll-over to December 2016E (from
September 2016E) drive a ~3-17% upgrade in our target prices; upgrade HUVR to ADD
(from REDUCE) and downgrade PIDI a notch to ADD (from BUY).

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RM tailwinds strengthen led by weak crude oil prices
Input cost moderation across a wide category of inputs led by sharp drop in crude oil prices has
emerged as a key earnings tailwind for most FMCG companies. Quarterly average prices for
3QFY15 indicate ~5-25% deflation qoq across key inputs (spot prices indicate a higher
deflation, especially in crude derivatives) – (1) agri-inputs like tea, sugar, milk, milk powder and
cocoa bean, (2) oil commodities like crude oil, PFAD, LLP, copra and rice bran oil and (3) other
inputs like caustic soda, soda ash, LAB, HDPE, PAN, VAM and Styrene.
Who benefits? Pretty much everyone – soap players like GCPL, HUVR and JYL (crude oil, PFAD
and soda ash have dropped), detergent players like HUVR (LAB has corrected), food players like
Britannia, Nestle and GSKCH (sugar, milk, milk powder and cocoa bean has corrected), paint
majors (crude and several monomers have corrected), Pidilite (both crude and VAM have
corrected), hair oil companies like Marico, Bajaj Corp and Dabur (LLP has corrected) and Marico
(copra and rice bran oil have started to correct). Correction in HDPE is likely to benefit all FMCG
companies due to reduction in packaging costs.
Upgrade EPS estimates for most companies except ITC, JUBI and SRL
We have revised our EPS estimates up by ~2-14% for FY2016/17E for several companies as we
bake in RM tailwind benefits in EBITDA margins adjusted for – (1) recent currency depreciation,
(2) higher A&SP spends (we build in higher advertising spends across companies and spike in
promotional intensity in select categories) and (3) lower price-led growth (pricing growth is
likely to fade away in FY2016E due to benign RM environment; we also expect price cuts/priceoffs
in select categories). Resurgence of unorganized competition also remains a risk to
volumes.
We note – (1) we have not changed estimates for ITC, Jubilant Foodworks and Speciality
Restaurants as we don’t expect any material gains from benign RM environment for these
companies, (2) revision in Titan’s FY2015E estimates flows from weak demand environment and
lower gold prices and (3) Asian Paints estimates remain unchanged due to our recent earnings
upgrade, which had factored in RM benefits.
Refer to Exhibit 3 for detailed estimate revisions for our coverage universe.
3-17% upgrade in target prices; upgrade HUVR to ADD and downgrade PIDI a notch to ADD
Benefits from RM tailwinds and roll-over to Dec-2016E (from Sep-2016E) drive a 3-17%
upgrade in target prices across our coverage universe. We have changed ratings on several
stocks – (1) upgrade HUVR to ADD (from REDUCE), (2) upgrade APNT, Nestle India, SRL and
Titan to REDUCE (from SELL) and (3) downgrade PIDI a notch to ADD (from BUY). Exhibit 4
depicts our earlier and revised ratings and target prices for our coverage universe.
Sector forward P/E multiple remains rich at around 31X FY2016E (34X ex-ITC). Sector premium
(relative to Sensex) stays high at around 80%. We retain our ‘tread selectively’ stance. Our
preferred picks include ITC, Britannia, Dabur, Marico, Colgate, Bajaj Corp, Pidilite and HUVR.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily29122014ap.pdf