>INDIA CONSUMER (MORGANS STANLEY)

Across-the-board Margin Expansion to Continue in F2Q

Quick Comment –Tepid revenue growth, but margins to expand on lower input costs: We expect
the India consumer companies we follow to report F2Q revenue, operating profit, and adjusted net profit growth of 10.3%, 16.7%, and 16.1%, respectively. Tangible margin expansion (driven by input cost savings) should be visible across the FMCG companies. Operating margin for the sector is likely to improve by 115bp, led by GCPL, Colgate, ITC, and Nestle. We expect GCPL,
Colgate, and Nestle to report the strongest earnings growth of 62%, 31%, and 29%, respectively. We reiterate our In-Line rating on the group and maintain GCPL, Marico, and Nestle as our top picks.

HUL – 12% revenue growth; volume growth likely to improve sequentially; higher ad spending to limit margin expansion: HUL is likely to demonstrate revenue growth of around 12% YoY, driven largely by price and mix improvement. Despite huge input cost savings and cost control measures, HUL is likely to witness margin expansion of around 6bp to 13.9% primarily due to higher ad spend. The tax rate is likely to be higher by 125bp, limiting adjusted net profit growth to 9.9% YoY. We expect reported net profit to decline 12% on exceptional income reported in the Sep-08 quarter.

ITC – Margin expansion in Cigarettes & Paper; Hotels & Agri to drag revenue growth: We expect the company to report a muted top-line growth of 3.5% due to a downturn in the hotels business and a decline in revenue from the agri business. However, cigarette revenue is likely to grow 12.5%, buoyed by price hikes and a low base. We expect Cigarette EBIT growth of 16% YoY driven by 6% volume growth and price hikes. The paper business is likely to witness strong EBIT growth of 21% YoY. We look for Non-tobacco FMCG losses of Rs957mn compared to Rs1,166mn in F2Q09. ITC’s EBITDA and PAT are expected to rise 12.9% and 13.6%, respectively.

To see the full report: INDIA CONSUMER