>INDIA CONSUMER (MORGANS STANLEY)

Investment conclusion – investors may do well to reposition their portfolios: We believe that FMCG companies are likely to face an increase in intensity of competition. We think EBITDA margins may have peaked; valuations in general leave little room for upside.

We are upgrading ITC, Tata Tea and Dabur to OW…We recommend them as our new top three picks, as they are least likely to be affected by a potential scenario of heightened competition.

…and downgrading five other names: HUL and Colgate are now Underweight; we believe that they are likely to face the most significant threat from rising competitive pressures. Our previous top three picks – Marico, Nestle and GCPL – are now Equal-weight. We see limited upside to the stocks from the current levels.

We See Competitive Intensity Heightening

Likely increase in competitive pressures: We cite four factors: 1) an increase in advertising and marketing expenditures; 2) sharp improvement in gross margins for most companies, which will likely be reinvested; 3) HUL’s further aggression on market-share-led growth; 4) P&G’s potential focus on increasing its consumer base in India. We believe that a potential rise in competitive spending could manifest itself in price cuts, increased levels of promotions, and/or a sustained increase in ad spending.

Where could we go wrong? 1. The consumer staples market could display acceleration in growth and accommodate new players, driven by strong rural growth. 2. Competitive intensity slows down as companies reconcile to their existing market shares in their respective segments.

What’s next: We believe that potential price cuts, increase in promotional offers and/or P&G’s entry into a new product category or segment are likely to be negative triggers for the stocks. Potential reversal of excise tax cuts could also affect the sector adversely.

To read the full report: INDIA CONSUMER