>FMCG SECTOR:Potentially strong Q3FY12 performers include HUVR, ITC, MRCO, BRIT, GCPL, GSK Consumer and CLGT

We expect a strong quarter from our FMCG universe with topline/EBITDA/PAT growth of 18%/19.5%/20.3% YoY, led by EBITDA margin expansion of 50bps—the first margin uptick in four quarters. Potentially strong Q3 performers include HUVR, ITC, MRCO, BRIT, GCPL, GSK Consumer and CLGT, whereas NEST, APNT, UNSP and Dabur could deliver muted PAT growth. HUVR and ITC remain our top picks, though select mid-caps look attractive as well (MRCO, BRIT, UNSP, GSK Consumer, Emami) in the wake of strong large-cap outperformance.


■ Expect sales growth of 18% YoY: We expect sales to increase by 17.9% YoY for our FMCG universe, led by strong organic numbers from GCPL, BJCOR, MRCO, NEST and BRIT. Volume growth is likely to remain steady with CLGT, MRCO and BJCOR reporting healthy numbers. We expect large-caps HUVR and ITC to report strong topline growth YoY at 16% and 18.5% respectively.


■ Operating margins to improve 50bps YoY: The average operating margin for our FMCG universe is likely to expand by 50bps YoY, the first increase in four quarters. Though gross margins would still contract YoY for most companies due to the higher raw material prices, the decline would be limited by a lower base and flattening of input costs QoQ. We expect EBITDA margins to improve the most for CLGT, GCPL, BRIT, HUVR and ITC while a few companies such as Dabur, JYL and APNT will continue to witness YoY declines.


■ Key issues to watch for: (1) Any signs that a consumer spending slowdown is denting category volume growth. (2) Pricing action/strategy in highly competitive categories such as shampoos, biscuits and detergents. (3) A&P spending trend post weak H1FY12 spending. (4) Gross margin pressure on a QoQ basis. (5) Product mix shifts across categories. (6) Forex impact.


■ HUVR and ITC our top picks: HUVR and ITC remain our top picks in the sector. However, following the strong outperformance of sector large-caps over mid-caps in the last six months, the risk-reward has now turned favourable for select mid-caps. Our preferred picks in the mid-cap space include MRCO, BRIT, GSK Consumer, Emami and UNSP. We remain UNDERWEIGHT on CLGT, NEST, APNT, UBBL and JYL.


To read the full report: FMCG
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