>India Consumer Staples Q2FY12 Review: Tier I outperforms!!

􀂄 Broad takeaways from management calls: A) Though demand has remained intact as yet and benefits of good monsoon can be seen in the subsequent quarters, impact of food inflation on urban wallets, leading to down-trading, is a threat. B) Competitive intensity remains high and ad-spends should move up in H2FY12e. C) Currency depreciation will impact input costs in H2FY12e.

􀂄 What surprised us? Positives: 1) Volume growth of 9.8%, 8% and 14% reported by HUVR, ITC and Marico 2) HUVR’s operating margin expansion of ~100bps. Negatives: 1) Dabur’s subdued volume performance. 2) Fourth consecutive quarter of PAT decline in CLGT. 3) Sharp operating margin decline in APNT (~400bps).

􀂄 What lies ahead? 1) Possible moderation in volume growth owing to a) fading impact of government social spending schemes in rural areas and b) sustained high inflation leading to down-trading in urban markets 2) We believe pricing power will continue to be tested in an environment of high input costs, sticky food inflation and elevated competitive intensity. Price hikes taken so far haven’t neutralized gross margin pressure and further price hikes will be

essential to sustain brand investments. 3) Current strategy of reducing adspends to manage operating margins is not sustainable in our view and will impact volumes, going forward.

To read full report: CONSUMER STAPLES