>FMCG: Steady growth (ICICI SECURITIES)

I-Sec FMCG universe is expected to post steady sales growth of 14.3% YoY on the back of strong underlying volume growth. Despite a high base, ITC is expected to register volume growth of 8.5% in Cigarettes. On a low base, HUL will deliver volume growth of 9%; but, because of price cuts, sales growth will be restricted to 6.3% YoY. Operating margins for our universe will expand 100bps YoY, albeit decline 160bps QoQ. Increase in input costs and rollback of excise duty will arrest any further margin expansion. We expect paint companies to post >60% PAT growth, while profits of Britannia and HUL are expected to decline. Valuations are high as most stocks are trading at 10-15% premium to historical valuations. We maintain ITC and Asian Paints as our top picks. We drop Marico from our list of top picks as the recent spurt in its stock price leaves limited room for upside.

■ Steady double-digit sales growth to continue. We expect I-Sec FMCG universe to post steady sales growth of 14.3% YoY in Q4FY10E, in line with the 15% YoY growth achieved in Q3FY10. Volume growth is expected to be strong across companies. According to Nielsen retail audit data, 40% of the categories have grown >10% over January-February ’10. ITC will continue to register strong volume growth in Cigarettes – we expect ITC cigarettes volumes to grow 8.5% YoY. On a low base and on the back of aggressive advertising spends, HUL will deliver volume growth of 9% YoY; however, price cuts will keep sales growth at 6.3% YoY.

■ Margin expansion reduces as material cost benefits wither away. Operating margins for the I-Sec FMCG universe are expected at 22.1% in Q4FY10E, implying only 100-bps YoY expansion versus YoY expansion of 260bps, 330bps and 181bps in the first three quarters of FY10. The quantum of margin expansion has come down owing to unfavourable base and increase in prices of raw materials. On a YoY basis, Asian Paints will witness the highest margin expansion (up 528bps), followed by Procter & Gamble Hygiene & Health Care (up 465bps), Kansai Nerolac (up 279bps) and ITC (up 214bps). Britannia’s margins will suffer the most (down 264bps YoY), followed by HUL (down 106bps YoY). As prices of raw materials rise and benefits of old contracts fade away, we expect input costs-to-sales to increase going forward.

■ Robust PAT growth of 19% YoY. We expect I-Sec FMCG universe to register robust PAT growth of 19% YoY. Asian Paints and Kansai Nerolac are expected to post highest growth, of 73% and 62% respectively; Marico, ITC, GSKCH, GCPL and Colgate are expected to witness PAT growth within the 20-25% range. Britannia and HUL will disappoint this quarter, with PAT decline of 11% and 2% respectively.

■ Valuations expensive but not stretched. The BSE FMCG index has outperformed the broader indices by ~35% since the market peaked in January ’08. This performance is despite HUL’s sluggish performance, who is a key constituent in the FMCG index. Most companies are trading at 10-15% premium to historical valuations. We maintain ITC and Asian Paints as our top picks. Marico was our top mid-cap pick in FY10 (over which it outperformed the BSE Sensex by 10% and BSE FMCG Index by 50%); however, post the recent spurt in Marico’s stock price, we drop Marico from our list of top picks owing to limited upside.

To read the full report: FMCG