| Summary of Contents
| SHAREKHAN SPECIAL Q4FY2012 FMCG earnings preview Key points -
Strong top line growth is foreseeable: We expect Q4FY2012 to be yet another quarter of strong top line growth driven by a mix of sales volume growth and price increases for all the fast moving consumer goods (FMCG) companies under our coverage (except for Zydus Wellness [Zydus]). Our interaction with some of the FMCG companies under our coverage gave us the clear indication of a strong demand environment for daily consumption items in the domestic market. Also, the focus on enhancing the reach of their products (especially in rural India) is helping these companies to improve the consumption of products/categories. On the other hand, the discretionary/premium categories might witness some pressure on sales volume in Q4FY2012. The acquisitions made by some of the FMCG companies (including Godrej Consumer Products Ltd [GCPL], Marico and Dabur India) in the recent past would help in achieving a robust top line growth. -
Raw material prices remained a mix bag: Though the prices of some of the key inputs, such as palm oil, copra and sunflower oil, have corrected from their highs, the prices of the other key inputs such as kardi oil, rice bran oil, LAB and HDPE have remained substantially higher on a year-on-year (Y-o-Y) basis. The FMCG companies had implemented calibrated price increases in their respective product portfolios during the fourth quarter. Despite that we expect the gross margin of some of the FMCG companies (including Bajaj Corp, GlaxoSmithKline Consumer Healthcare [GSK Consumer] and Zydus) to remain lower on a Y-o-Y basis. On the other hand, we expect the gross margin of Marico to improve substantially year on year (YoY) while that of Hindustan Unilever Ltd (HUL) and GCPL (reaping the benefits of low raw material inventory) is expected to remain stable on a Y-o-Y basis. -
OPM to improve YoY: The rationalisation of the advertisement spends and stringent management of the operating cost would help the FMCG companies to post a better picture at the operating level. -
Performance of Sharekhan's FMCG universe: We expect the top line growth of most of the FMCG companies to remain above 17% YoY except for companies like Zydus, which is bearing the brunt of competitive intensity in categories such as scrubs and face wash. With the most of the companies likely to post a better margin picture, we expect companies under Sharekhan's FMCG universe to achieve a robust bottom line growth (except for Zydus and GSK Consumer). Despite a flat operating performance, Tata Global Beverages Ltd (TGBL) is expected to post around 26% Y-o-Y growth in the bottom line mainly on account of a lower interest cost YoY. -
Going ahead: Union Budget 2012-13 proposed a basic duty hike of 2% in consumer goods and an increase in the service tax rate by 2%. Also, the commodity price momentum has remained volatile for the past few months. In view of this, we expect the FMCG companies to go for price hikes in their respective product portfolios in the coming months. Having said that, we expect the companies to go for calibrated price hikes taking into account the competitive environment in the respective categories.
We expect the steady volume growth momentum to sustain for most of FMCG companies, despite the price hikes implemented in the coming quarters. The steady volume growth would be on the back of an increase in the distribution reach, renovation/innovations amongst the product portfolio and steady consumption of FMCG products in the domestic market. With the implementation of price hikes and the prices of the key raw materials staying lower than their highs, we expect the margins to more or less remain stable in the coming quarters. -
Valuation: We retain our view of remaining selective in the sector. We prefer ITC, Marico and GCPL from the current levels. Since our last update on the company (on February 8, 2012) Bajaj Corp has moved up by 14% and there could be upside of another 11-13% from the current level. Though HUL's business fundamentals are intact, but the current valuations do not provide any upside from the present levels. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. |
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