Monday, July 20, 2009


Performance to excel

The I-Sec FMCG universe is likely to register lower sales growth, of 10.9% YoY, due to muted sales growth in Hindustan Unilever (HUL) & ITC and lower price growth for most other companies. However, volume growth is expected to be strong for most categories. Lower input costs and excise benefits will result in margin expansion and, hence, we expect operating profits for the I-Sec FMCG universe to grow 21.5% YoY. However, while lower input prices and excise benefits will give relief to the sector, the quantum of margin expansion will vary across companies. We expect robust PAT growth for ITC, Nestlé, Godrej Consumer Products (GCPL), GlaxoSmithKline Consumer Healthcare (GSKCH) and Marico. We expect Asian Paints and HUL to register muted PAT growth. Overall, we expect the I-Sec FMCG universe PAT to grow 20.3% YoY. We prefer ITC, Marico, Nestlé and GSKCH.

Overall sales growth to be moderate, albeit not for all. The FMCG industry is expected to post moderate growth of 10.7% YoY on the back of lower price growth, but robust volume growth. Also, this is likely due to: i) declining exports for HUL and Nestlé, ii) lower growth in non-FMCG business of ITC (Agri & Hotels). We expect HUL to deliver muted sales of 6.6%. ITC would register robust growth of 21.8% YoY in the total FMCG division. However, we expect overall sales growth for ITC to be muted on account of below-par performance in hotels and agri segments.

Margin improvement a reality, but quantum of expansion will vary. With softening of commodity prices and benefits of lower excise, we expect operating profit margin for the I-Sec FMCG universe to expand in Q1FY10. Hence, operating profit growth of 21.5% YoY would be much higher than sales growth. However, the quantum of margin expansion will vary across companies. Categories facing intense competition (Toilet Soaps, Detergent etc) have resorted to rise in sales promotion, price cuts and extra quantity per pack. Categories such as Paints and Edible Oil have trimmed prices. Highly brand loyal categories (such as Coconut Oil, Oral Care, Tobacco, Alcohol, Skin Creams, Health Drinks and Baby Foods) will benefit from reversal of commodity prices and reduction of excise duty.

Outliers. Expect strong PAT growth in GCPL (up 53% YoY), GSKCH (up 32% YoY), ITC (up 24% YoY), Marico (up 37% YoY) & Nestlé (up 31% YoY). But, we expect muted growth in Asian Paints (up 6.7% YoY) and HUL (up 10.3% YoY).

We prefer ITC, Marico, Nestlé and GSKCH. We prefer companies that are present in categories with a mix of parameters that are: i) high volume growth (Biscuits, Noodles, Edible Oil & Shampoos) ii) strong entry barriers (Cigarettes, Alcohol and Baby Food) iii) high brand loyalty (Cigarettes, Alcohol, Baby Food, Health Food Drinks, Sanitary Napkins and Oral Care) iv) lower competitive intensity (Cigarettes, Alcohol, Baby Food and Coconut Oil) v) niche positioning (Saffola in Edible Oil, Navratna in Hair Oil). Given above parameters and valuations, we
continue to prefer ITC, Marico, Nestlé and GSKCH.

To see full report: FMCG SECTOR