| Summary of Contents
| SHAREKHAN SPECIAL Q1FY2013 FMCG earnings preview
Steady performance to sustain Key points -
Strong revenue growth momentum to sustain: In Q1FY2013, we expect the FMCG companies to maintain their double-digit revenue growth momentum. The growth would be driven by a mix of sales volume and price-led growth during the quarter. Our interaction with most of the FMCG companies indicates that the sector is yet to face the impact of the looming macro concerns and we expect a decent volume growth in most of the categories during the quarter. However the sales of discretionary items or premium categories might witness some slowdown in Q1FY2013. -
Raw material prices remained a mixed bag: The prices of some of the key inputs such as palm oil and copra have corrected from their highs and are lower on a year-on-year (Y-o-Y) basis (copra prices are down 40% YoY and palm oil prices are down 4.5% YoY). Further, the prices of sunflower oil and kardi oil have stabilised in the recent months. On the other hand, the prices of commodities such as HDPE, LAB, caustic soda, soda ash and raw tea substantially moved up on a Y-o-Y basis during the quarter (refer to table below). Also, a significant depreciation in the rupee against various currencies would have resulted in higher import prices for some of the key inputs (such as palm oil) in Q1FY2013. Having said that, the calibrated price hikes of the products would help FMCG companies to mitigate the impact of higher input prices. -
Margins to improve for most: We believe softening in the prices of the key raw materials and the benefits of calibrated price hikes in product portfolio would come into play for most of the FMCG companies in Q1FY2013. Marico will be the largest beneficiary of the correction in copra prices with an above 600-basis-point improvement anticipated in the gross margins during the quarter. We expect Godrej Consumer Products Ltd (GCPL)'s operating margins to improve by 150 basis points YoY to 16.5% largely on account of an improved revenue mix and a low base of Q1FY2012. -
Performance of Sharekhan's FMCG universe: We expect the top line of Sharekhan's FMCG universe to grow by ~17% YoY with most of the companies in the coverage universe posting a strong double-digit revenue growth (except for Zydus Wellness) in Q1FY2013. Since prices of most of the raw materials have corrected from their highs, we expect the margin profile of the FMCG companies under our coverage to be better in Q1FY2013 in comparison to Q1FY2012. However companies like Glaxo SmithKline Consumer Healthcare (GSK Consumer) and Tata Global Beverages Ltd (TGBL) are likely to witness a Y-o-Y decline in their operating margins, largely due to higher raw material prices. Mcleod Russel India Ltd (MRIL)'s is expected to post a robust performance. The revenues are expected to grow by 11.0% YoY to Rs120.4 crore and the profit after tax (PAT) is expected to grow by 56% YoY to Rs58.2 crore. The strong growth in MRIL's bottom line could be attributed to the anticipated significant improvement in the sales realisation during the quarter. Overall, we expect the operating profit and the adjusted PAT of Sharekhan's FMCG universe to grow by 20.1% YoY and 21.5% YoY respectively during the quarter. Outlook
In FY2012 the growth in demand for FMCG products in rural India was much ahead of that in urban India. However, a below-normal rainfall at the start of the monsoon season this year has dampened the overall sentiments. We believe these are early days to form a view. The progress of the monsoon during the July-August period will have to be keenly monitored as it will be the key determinant of rural economic growth in India. A below-normal monsoon will have its repercussion on the Indian FMCG sector in the coming quarters. We might see moderation in demand for FMCG products from rural India, which currently contributes 40-50% of the revenues for most of the FMCG companies under our coverage. Also, a below-normal monsoon will add on to the food inflation, thereby affecting the consumer buying decision in urban India. Hence in the scenario of high food inflation and below-normal rainfall we might see a moderation in sales growth for FMCG companies in the coming quarters. However we foresee a larger impact on the growth of discretionary and premium items rather than daily consumption items. Preferred picks: In an environment of uncertainties we prefer stocks with better earnings visibility and a strong balance sheet. Hence we like ITC in the large-cap space and GCPL and GSK Consumer in the mid-cap space.
Click here to read report: Sharekhan Special | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | | | |
No comments:
Post a Comment