Consumer - Q4FY15 Results Preview - Expect healthy operating performance :: Centrum

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Expect healthy operating performance

We believe strong pricing will continue to help large FMCG companies post healthy

topline growth with volume growth below 5%. However, smaller consumer

companies will grow at a faster pace. Revenues for our coverage universe will

continue to grow by 13.7% YoY in Q4FY15. We expect operating margin expansion

of 108bps with all companies (except Speciality Restaurant) posting margin

expansion. Operating profit and PAT are expected to grow 20% YoY and 19%

respectively. We expect positive surprise from IFB Industries and Talwalkars but

negative surprise from Speciality Restaurants.

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Strong pricing to help topline growth: We expect 13.7% YoY sales growth for

our coverage universe. Large cap MNC companies, Colgate, GSK Consumer and

Nestle, are expected to report ~2-5% volume growth with ~13-16% revenue

growth. Growth will continue to be led by strong pricing as volume growth will be

low. We expect midcap companies to post higher growth with Talwalkars Better

Value Fitness and La Opala posting 26% and 24% revenue growth respectively

with IFB posting 13.4% topline growth despite high base. Negative SSSG will

impact growth for Speciality Restaurants.

 Strong margin expansion across companies: We have modeled operating

margin expansion of 108bps YoY for companies under coverage. Softening

commodity prices will continue to benefit most companies during the quarter.

Hence we have modelled ~150bps gross margin expansion for both Nestle and

GSK Consumer and 290bps for Colgate. IFB Industries will show strong margin

expansion on the back of low base and healthy topline growth. La Opala and

Talwalkars’ margins will expand while Speciality Restaurants will post a decline on

the back of low topline growth and decline in SSSG. Operating profit will grow by

20% YoY for the coverage universe.

 Healthy profit growth across companies: PAT for our coverage universe is

expected to grow by 13.7% YoY with benefits from declining commodity cost

aiding margin expansion. Nestle is expected to post healthy PAT growth of 21%

on the back of strong EBIDTA growth coupled with margin expansion. Colgate

and GSK Consumer’s PAT will grow by ~14-17%YoY. Among small cap stocks, IFB

Industries will grow by 64% on the back of margin expansion while Talwalkars and

La Opala are expected to grow by ~33% each. Speciality Restaurants will continue

to disappoint with PAT decline of ~72%.

 Valuation & Risk: We prefer midcap companies over large caps. Talwalkars Better

Value Fitness (Buy) and IFB Industries (Buy) continue to be our top picks in the

consumer space. We have Hold ratings on Speciality Restaurants on the back of low

revenue growth and La Opala due to steep valuations despite long term potential.

We maintain negative bias on large MNC FMCG companies on the back of steep

valuations and subdued financial performance. We have Sell rating on Colgate,

Nestle and Hold on GSK Consumer Healthcare. Key upside

lower A&P spends and faster than expected volume growth.