| Summary of Contents
| SHAREKHAN SPECIAL Q3FY2012 FMCG earnings preview Key points -
Sturdy double-digit top line growth to sustain: The persistent inflationary environment is yet to have any significant impact on the fast moving consumer goods (FMCG) consumed on a daily basis. Our interaction with the management of the FMCG companies under our coverage indicated that the steady growth in the sales volume of most of the FMCG categories have been sustained in Q3FY2012. Having said that, the offtake of discretionary items (such as paints and consumer durables) and premium/niche FMCG categories might witness some slowdown in Q3FY2012. The steady volume growth and increased sales realisation (due to price increases) would help the FMCG companies to sustain top line growth in high teens in Q3FY2012. Hindustan Unilever Ltd (HUL), ITC, Marico, Godrej Consumer Products Ltd (GCPL), GlaxoSmithKline Consumer Healthcare (GSK Consumer) and Bajaj Corp are some of the FMCG companies that would achieve above 17% top line growth year on year (YoY) in Q3FY2012. -
Raw material prices remained firm: The prices of most of the key raw materials (except palm oil, wheat, barley and raw tea) remained higher on a year-on-year (Y-o-Y) basis. However, some of them witnessed a sequential dip or remained flat on a sequential basis. Though the raw material prices dropped sequentially but the depreciating rupee has made imports of some of these raw materials expensive. Palm oil prices declined by 6.1% YoY but remained flat on a quarter-on-quarter (Q-o-Q) basis. On the other hand, copra prices remained higher by 8.1% YoY but declined by about 9% on a sequential basis. Raw tea prices in India remained weak for the second consecutive quarter on the back of better domestic tea production. With the raw material prices remaining firm and the depreciating rupee increasing the importing cost of raw materials, we expect the gross profit margins (GPMs) of most of the FMCG companies to remain under pressure in Q3FY2012. -
Better profitability picture through cost rationalisation: We expect the FMCG companies to post better profitability at the operating level in Q3FY2012. This will be mainly on account of rationalising the media and promotional spends and stringently managing their operating cost during the quarter. -
Rupee depreciated for second consecutive quarter: The rupee remained weak in Q3FY2012, with a sequential depreciation of around 8% to the dollar. The FMCG companies having dollar-denominated debts adopted adequate hedging mechanism to limit the impact of the depreciating rupee in the near term. -
Performance of Sharekhan's FMCG universe: From the Sharekhan's FMCG universe we expect most companies (except Marico and Bajaj Corp) to post higher than 15% Y-o-Y growth in their bottom line during the quarter. Tata Global Beverages Ltd (TGBL) is likely to achieve a robust bottom line growth of around 40.0% YoY, largely on account of a Y-o-Y decline in the interest cost. Despite the strong top line growth, Marico and Bajaj Corp would achieve a moderate growth in their bottom line, as higher raw material prices are expected to put pressure on their margins. Zydus Wellness' bottom line growth would largely be driven by tax benefits accrued from new facility in Sikkim. Outlook: demand environment has to be keenly monitored in the coming quarters
Though the demand for FMCG items has remained stable in the prevailing inflationary environment, whether it would sustain going ahead is the key thing to watch out for in the coming quarters. We believe the persistent macro-economic uncertainties are weakening the consumer confidence which might lead to downtrading or slowdown in consumer offtake in some of the FMCG categories in the coming quarters. Having said that, the commentary of the FMCG companies on consumer trends will give some indication of the demand environment in the domestic market over the next two quarters. The volatility in raw material prices has maintained pressure on the margins of the FMCG companies. We expect another round of price hikes by the FMCG companies in the coming months to mitigate the pressure of the rising raw material cost. The FMCG companies are likely to continue with lesser spends on advertisement and promotional activities in the coming quarters.
Valuation: remain selective in the sector
Considered as the safest bet in an uncertain market, most of the FMCG stocks are trading at their peak valuations. We maintain our penchant for companies with strong balance sheet, no or less exposure to currency risk, strong earning visibility over the next two to three years and decent upside from the current levels. Hence, we continue to like ITC and GSK Consumer in the large-cap space. HUL is trading at a 22% premium to its three-year average (one-year forward) price/earnings ratio (PER) of 26.0x and does not provide any upside from the current levels. On the other hand, GCPL is currently trading at a discount to its three-year average (one-year forward) PER of 18.5x. Though the business performance of GCPL has been good over the last few quarters, the company's dollar-denominated debt of above Rs2,000 crore has remained the key overhang on its stock in an environment of weakening rupee.
SECTOR UPDATE Power Limited impact on CESC, NTPC of new coal pricing mechanism Key points
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The Event: Coal India having changed the pricing mechanism: From January 1, 2012, Coal India Ltd (CIL) has changed the pricing mechanism of thermal coal from Useful Heat Value (UHV) based grading system to Gross Caloric Value (GCV) based pricing now. According to industry sources, as per the new policy, coal prices could go up by 13-15% effectively on an average. In this note we look at the impact of the same on power generation companies that we cover. -
To push power generation cost: While CIL will gain from this new structure, coal consumers would bear the higher cost. If the average price of coal goes up by 13-15% then the cost of power generation would be up by approximately Rs0.50 per unit for an average power producer. -
But regulated players like CESC and NTPC could pass on the same: Though the cost of fuel would rise across the board, we see that the regulated players with an ability of passing on the higher cost of fuel would not see an affect on their bottom lines. Our recent interaction with the managements of NTPC and CESC reinstate the same. -
Additional 6% levy on ECL; negative surprise over and above the event: Apart from the rise in price as a result of the new pricing mechanism, CIL has indicated that it will levy an additional 6% on all the coal produced by Eastern Coalfields Ltd (ECL). Hence, companies procuring coal from ECL are likely to witness an around 20% hike in the cost of coal. CESC procures linkage coal from ECL, hence it will witness a 20% hike over the current rate. -
West Bengal government opposing the move as the region would be impacted the highest: As per media reports, the West Bengal government is opposing CIL's decision to adopt a new pricing formula. It is apparent that while the nationwide impact of the new mechanism would be that of a push in the coal cost by 13-15%, but for West Bengal and other customers of ECL, the increase in the coal cost would be of 20%. -
View: NTPC and CESC would be able to pass on the fuel price rise; bottom line impact for them to be limited: The move will push India's domestic coal procurement cost by 13-15%; subsequently it will push power generation cost by Rs0.5 per unit. The adverse impact of the move would be felt the most by companies which are procuring domestic coal and don't have a coal escalation clause. However, regulated power generators like NTPC and CESC could pass on the fuel cost rise into tariffs. On the other hand, state electricity boards would feel the pinch to some extent as they can't revise their tariffs with immediate effect and many of them have already revised tariffs just recently. We reiterate our positive stand on CESC based on its integrated status and attractive valuation. We rate CESC as a Buy with a target price of Rs 413 (based on sum of the parts methodology). We do not have an active coverage on NTPC. | | 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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