>INDIA CONSUMER: Expect volatility in performance (MORGAN STANLEY)

MS India Consumer’s PAT growth is likely to slow from 20.1% in Q3 to 17.6% in Q4F2010e: Higher input costs, a volatile advertising to sales ratio, price cuts and forward covers on input costs are likely to lead to significant volatility in the quarterly results for FMCGs this quarter. We expect MS India consumer to report revenue, operating profit and adjusted net profit growth of 13%, 18% and 18% respectively. ITC, Nestle, Colgate are expected to report the strongest underlying performance whereas GCPL, Marico and HUL may disappoint on the underlying performance of the domestic business. We reiterate our OW on ITC and Tata Tea. We retain our Underweight ratings on HUL and Colgate.

HUL – We forecast 7.8% revenue growth, volume growth likely to improve and higher ad-spend to limit margin expansion: HUL is likely to demonstrate revenue growth of around 7.8% yoy largely driven by volumes. Despite huge input costs savings and cost control measures undertaken by the company we believe it is likely to witness margin contraction of around 40bps to 14.6% primarily on account of higher ad spend and product price cuts. Tax rate is likely to be higher by 170bps limiting adjusted net profit growth to 3.9% yoy.

ITC – Strong business profitability: We expect ITC to report net profit growth of 22% driven by improvement in margins across most of its business segments. Cigarette EBIT growth is expected at 15% yoy driven by 8% volume growth and price hikes. The paper business is likely to witness strong EBIT growth of 33% yoy. Non-tobacco FMCG loses are expected to be at Rs900 mn compared to Rs1200 mn in Q4F09. We expect the company to report a top line growth of 14% driven by a strong 12%, 34% and 19% and revenue growth in Cigarettes, agri and paper businesses respectively. Hotels business revenues are expected to be up 8% (after declining consecutively for last five quarters).

To read the full report: INDIA CONSUMER