>INDIA FMCG (HSBC)

VOLUME GROWTH IS KEY

■ With limited scope for price / margin increase, volume growth is the key
■ Overweight on Colgate and Dabur, Neutral on HUL, ITC and Marico


In this report, we (1) analyse trends at FMCG companies as reflected in the results; (2) assess the outlook for the year ahead in light of recent trends. The main insights are:

■ Overall sales growth in the FMCG sector continues at 20%+ with the balance tilted towards price growth in large categories. However, recent product price cuts mean that future growth will be dominated by volumes.

■ Unorganised/regional competition has become more active as expected, and this is partially responsible for the market share losses of larger players. We believe that market shares will settle at June quarter 2009 levels.

■ Although gross margins will expand, the quantum of expansion will be lower than originally estimated due to the recent rally in commodity prices. We estimate gross margin expansion of 55bp for our coverage universe as compared to our earlier estimate of 100bp.

■ Focus on cost control should become even more important in light of reduced scope for gross margin improvement. Operating expenses as a percentage of sales declined 20bp y-o-y in the March quarter and will continue to be a focus area in FY10e, resulting in a 50bp EBIT margin increase for our coverage universe.

■ The sector has recently re-rated and valuations overall look fair. But we see upside for Dabur and Colgate as these are two volume-backed stories in our coverage and hence rate them Overweight. We are Neutral on ITC, HUL and Marico.

To see full report: INDIA FMCG