ƒFMCG ƒ Steady volume revival; largely price driven growth :Q3FY15 Result Preview : ICICI Securities, report

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ƒ Steady volume revival; largely price driven growth
With an improving urban demand scenario, we expect a slight revival in
volume growth for Colgate, Dabur, ITC (FMCG) and Marico. However,
sales growth would still be largely price driven. We expect 13% YoY
revenue growth in our coverage universe with volume growth for HUL,
Colgate, ITC (FMCG), Marico and Dabur expected to remain in the 6-8%
range. However, volume growth for Nestlé and Tata Global Beverage
would continue to remain lacklustre in Q3FY15E. ITC (cigarettes) and
VST Industries are likely to witness volume de-growth of 5-6% YoY with
the steep price hikes last year due to continued pressure of excise duty
and VAT increases. We expect 25% YoY sales growth for Marico mainly
driven by price hikes taken last year due to an incessant increase in
copra prices till August 2014.
ƒ Commodities prices soften; margins to witness uptick
Given the sharp decline in commodity prices, companies may see a
partial relief in raw material cost as they generally hold 25-40 days
inventory. Copra, palm oil prices have declined 23%, 25% from their
respective peaks in July, August, respectively. Similarly, crude prices
have seen a sharp dip by ~45% in the last four months. This would
lighten packaging cost burden for FMCG companies in Q3FY15E.
However, we believe the full benefit of this decline would come by
Q4FY15E. We believe HUL and Marico would be key beneficiaries of a
reduction in raw material cost. We expect HUL and Marico to see an
improvement in operating margins by 70 bps and 30 bps YoY,
respectively. Similarly, Colgate may also witness a 120 bps YoY
improvements in operating margin mainly on the back of a reduction in
advertisement spend due to declining competitive intensity. We expect
a margin decline of 250 bps and 30 bps for VST Industries and ITC,
respectively, mainly due to volume de-growth and limited price
increase to the extent of excise duty hike. With a steady recovery in
urban demand, FMCG companies are also focusing on premiumisation
and expanding distribution network through new channels like ecommerce.
This would also help in improving margins in future.
ƒ PAT expected grow at 9.2% YoY
With tax holidays in Baddi for most FMCG companies expiring, tax
provisioning would increase, which is expected to impact earnings for
FMCG companies. Adjusting for one-time income of | 300 crore for HUL
due to property sale, our coverage universe expected to witness 9.2%
YoY growth in earnings.

3: Company specific view (FMCG)
Company Remarks
Colgate We expect 8% YoY volume growth and 7% YoY realisation growth to drive revenues by
15%. We expect operating margins to see 120 bps increase on account of marginal
reduction in raw material cost as commodity prices are headed southwards with
simultaneous reduction in advertisement spend due to low competitive intensity. We
also expect the effective tax rate to increase from 26.1% to 27% as the company's
Baddi facility is coming out of tax holiday
Dabur Dabur has witnessed above 8% volume growth despite most FMCG companies seeing
a slowdown in volumes. We expect the company to post 15.3% YoY sales growth led
by 8% volume growth. Domestic revenues may record 15.5% YoY growth whereas the
international business would see 15% YoY growth. We expect strong 23% YoY and 16%
YoY growth in foods & health supplement segment
HUL Volume growth for HUL may be ~6% YoY partially due to low base effect and steady
revival in urban discretionary demand. We expect sales growth of 13.3% YoY in S&D,
15.7% YoY in personal product & 12.3% in both beverages & foods segment. Operating
margins may see 70 bps increase mainly due to lower raw material cost as effect of
lower commodity prices started ticking from in Q3FY15. Adj PAT expected to grow
5.9%.
ITC We expect cigarettes sales to grow at 16.2% YoY mainly led by 21% YoY increase in
prices with 4% decline in volumes. Sales growth for FMCG, agri, papers & hotels
business is expected to be 13.9%, 26.7%, 11.8% & 7.8%, respectively. We expect the
company to maintain its operating margins at 37.3% as it has passed on the entire
excise duty announced in July. PAT may witness 8.6% growth in Q3FY15
Jyothy Lab Jyothy Labs is expected to post 13% YoY sales growth mainly led by 13.5% YoY
growth in the soaps & detergent segment. Revenue growth in Henko, Exo & Pril is
expected to be 11.1%, 12%, 15% and 12.7%, respectively. We expect a 230 bps dip in
operating margins mainly on account of a 270 bps increase in A&P spend partially
offset by lower raw material cost. PAT may witness a steep increase due to
elimination of interest cost after the debt repayment
Marico We expect Marico to post 25% YoY sales growth mainly due to price hike taken to
pass on copra price increase. However, average copra prices procured by the company
have fallen from | 115/kg in August to | 99/kg in November. Copra prices have further
fallen in December to | 85/kg. We believe this quarter may witness the partial impact
of a correction in copra prices while margins would remain at elevated levels at 17.1%.
Net profit may grow 24% in Q3FY15
Nestlé India Nestlé India is expected to post 9.7% YoY sales growth mainly led by realisation
growth. Milk product, beverages, prepared dishes and chocolate may grow at YoY
11.3%, 9.1%, 6.4% and 6%, respectively. Operating margins may remain at elevated
levels at 21.3% despite an increase in A&P spend as raw material prices started
cooling off in Q4CY14
Tata Global
Beverages
We expect TGBL to witness 5.3% YoY growth in revenues mainly on the back of 13.2%
YoY growth (| 556 crore) in the coffee segment. The tea segment is expected to grow
at 3.5% YoY to | 1627 crore. Raw material prices may increase for TGBL with tea
prices continuing to remain high in the Indian market. However, lower marketing spend
may keep operating margins at 10.1%. Net profit may grow at 5.8% YoY to | 126 crore
VST
Industries
VST Industries have taken price hikes to the tune of 20% in Q3FY15 to only partially
offset excise hike in cigarettes. We estimate 5.5% YoY de-growth in cigarettes volume
for the company. Despite the steep hike, the company would be unable to maintain its
margins, which is expected to witness a 250 bps dip in Q3FY15E. We expect VST to
pay 32% higher excise duty to | 270 crore in Q3FY15E
Source: Company, ICICIdirect.com Research

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