Consumer Products: Month in review - December 2014: RM tailwinds strengthen :: Kotak Securities

Please Share:: 

Month in review – December 2014: RM tailwinds strengthen. The KIE consumer
universe delivered negative 1% returns performing in line with the broader market in
the past one month. Promotional intensity has picked up in detergents (led by HUL) and
hair oils, RM tailwinds continue to strengthen and Nestle has taken price hikes yet again
(in Maggi and baby foods despite benign input cost environment). Sector valuations at
34X FY2016E earnings (ex-ITC) remain rich. We retain our ‘tread selectively’ view. Our
preferred picks are ITC, Dabur, Marico and Colgate; we also like HUVR, Britannia,
Pidilite and Bajaj Corp but would advise buying on dips.

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

Promotional intensity picks up in detergents; several categories/products witness price hikes
Refer to Exhibit 2 for complete pricing monitor and Exhibit 3 for ongoing promotional offers.
 Soaps & detergents. (1) Soaps – surprisingly we haven’t noticed any major price-offs/cuts or
promotions in soaps despite strong RM tailwinds except for select price-offs taken by HUL over
the past few months. (2) Detergents – promotional intensity has risen significantly led by HUL
– (a) it has cut prices of Rin 1 kg SKU from `80 to `75 and Wheel 1 kg SKU from `48 to `44,
(b) it has launched several freebies/price-offs in detergent bars (both Rin and Surf Excel) and (c)
it continues to run promotional price-offs in all SKUs of Surf Excel Easywash.
 Home and personal care items. (1) Hair oils – promotional intensity has picked up since last
month – Marico continues to run price-offs (`5 off) across its key hair oil brands like Parachute
CNO, Parachute Jasmine and Hair & Care and Dabur is also offering freebies with several hair oil
SKUs. (2) Body lotions – HUL continues to run several promotional offers (freebies) in brands
like Vaseline and Pond’s. (3) Household insecticides – promotional intensity in household
insecticides continues. Key price hikes – (1) HUL has hiked prices of Fair & Lovely 50 gm SKU
by 5% and (2) Colgate has hiked prices of several key toothpaste brands by ~2-5%.
 Food items. (1) Biscuits –promotional intensity has reduced over the past few months as
companies have shifted focus to new launches. (2) Edible oils – all key players continue to
offer 1L free on their 5L SKU (Saffola Gold, Fortune, Riso and Sundrop) and Sundrop continues
to run promotional offer on several variants/SKUs. Key price hikes – (1) Nestle has hiked prices
of Maggi noodles 70 gm SKU by 20% from `10 to `12 and (2) Nestle has hiked prices of its
baby food portfolio by ~1-5% (surprising given milk and milk powder prices have corrected);
we note this is the third price hike in the past 12 months equating to a 11-20% price hike yoy.
Raw material inflation – RM tailwind continues to strengthen; crude down 50%+ yoy
Refer to Exhibit 4 for detailed RM inflation impact.
 Agri-inputs. Agri-inputs movement was mixed – international coffee prices (both Arabica and
Robusta) corrected ~1-5% mom, domestic sugar prices dropped 6% mom and milk powder
corrected another 2% mom (down 21% yoy). However, milk prices inched up 7% mom (after
correcting last month; down 16% yoy), barley was flat this month but remains inflationary (up
22% over past 6 months) and wheat inched up 1% mom (up 8% in past 6 months).
 Oil commodities basket. Within the oil basket, crude oil continued to correct, dropping
19% mom (~44% yoy), LLP corrected 5% mom, PFAD dropped 2% mom and copra
corrected 9% mom. On a spot basis, crude is now down 50%+ yoy in INR terms. However,
mentha oil has inched up 3% mom.

Other commodities. Paints/specialty chemicals inputs index remains deflationary as

several key inputs dropped mom – PAN (down 5% mom), Tio2 Dupont (down 2% mom),

turpentine oil (down 2% mom), VAM (down 9% mom) and styrene (down 11% mom).

Among other inputs – HDPE (down 5% mom), LAB (down 3% mom) and caustic soda

(down 5% mom) witnessed correction.

 Who benefits? Pretty much everyone – soap players like GCPL, HUL and JYL (crude,

PFAD and soda ash have dropped), food players like Britannia, Nestle and GSKCH (milk

powder and cocoa bean have 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 continues to correct and yoy

inflation has come down to ~16% versus ~100%+ levels a quarter ago). Correction in

HDPE is likely to benefit all FMCG companies due to reduction in packaging costs.

Sector (KIE consumer universe) performs in line with markets

Our overall coverage universe delivered negative returns (down 1% mom) in absolute terms

in the past one month, in line with the broader markets. Bajaj Corp (+25%), Britannia

(+8%), JYL (+11%), Pidilite (+8%) and CLGT/HUL (+6% each) were the key outperformers

while ITC (down 9%) and Dabur (down 4%) were the drags. The sector has performed

broadly in line with the market over the past 12 months while delivering meaningful

outperformance in the past six months.

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 are ITC, Dabur, Marico and Colgate; we continue to like HUVR,

Britannia, Pidilite and Bajaj Corp but would advise buying on dips post the sharp run-up.

Key industry/stock developments

 New launches

 Overall new launch activity was slow.

 Britannia launched another premium cookie in December after launching NutriChoice

Heavens last month. It launched a chocolate chip cookie called Good Day Chunkies

priced at `50 for 100 gm SKU – at ~25% premium to Parle Milano and Sunfeast

Choco fills.

 Dabur India launched Dabur Anmol Coconut Hair Oil with Jasmine, non-sticky coconut

hair oil, further strengthening its presence in the hair oil market. It comes in two SKUs

– 100 ml and 200 ml priced at `40 and `72 respectively.

 ITC has launched a new premium cigarette under Classic brand at `15/stick price point

called ITC Blue fills (97 mm length versus the normal 84 mm length for the KSFT

segment). We note that ITC’s last premium offering Insignia did not do too well in the

market. The company’s decision to launch the new premium offering under the

‘Classic’ brand umbrella perhaps reflects caution on trying to create a new cigarette

brand.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily12012015az.pdf