FMCG Quarterly Review 12 November 2010

Quarterly Review 12 November 2010

Recommendation snapshot
FMCG CMP Target
Company Reco
(Rs) (Rs)
Topline momentum strong but margins under pressure Asian Paints 2,651 3,000 Buy

Q2FY11 results of our FMCG universe were largely in line with estimates. Britannia 432 450 Hold
Aggregate sales growth stood at 16.7% YoY against 18% estimated, while Colgate 878 860 Sell
EBITDA margins contracted 80bps (vs 90 bps decline estimate), mainly owing to Dabur 97 110 Hold
higher input-commodity prices. Adjusted PAT growth was at 15% YoY against
Emami 488 450 Sell
12.3% estimated. We maintain our cautious stance on the sector given that
GCPL 436 460 Hold
valuations remain high, and hence recommend select stocks like ITC, Asian
Paints (APNT) and Marico. We remain negative on Emami, Colgate and GSK GSK Consumer 2,341 2,200 Sell
Consumer. HUL 309 330 Hold

ITC 175 210 Buy

Sales growth in line at 16.7% YoY: Godrej Consumer Products (GCPL), Britannia
and Emami reported the strongest sales growth in our FMCG universe, at 66%, Jyothy Labs 277 305 Hold

27.5% and 26% YoY respectively. Hindustan Unilever (HUL) reported 10.7% Marico 138 150 Buy
growth, with a strong 14% uptick in volumes. ITC’s net sales grew 16.3%, with Nestle 3,800 3,500 Hold
broad-based growth across businesses. The company’s cigarettes business
showed resilience with 13% sales growth and a 1% decline in volumes. APNT’s
sales were below estimates, growing at just 5% YoY due to the impact of a
RCML FMCG Universe: Q2FY11 snapshot
prolonged and erratic monsoon which affected demand for paints in the country. YoY (%) YoY (%)
Sector Q2FY11A Q2FY10A
Actual Estimate
Gross margins trend down: EBITDA growth for the sector came in at 12.1% YoY Sales 185,883 159,244 16.7 17.6
with margins declining by 80bps. The impact was largely led by a decline in EBITDA 39,332 35,101 12.1 12.9
gross margins as input commodity costs started to firm up. Adjusted PAT growth
Adj. PAT 28,689 24,957 15.0 13.9
of our coverage universe was at 15% against our estimate of 12.3%, with a boost
from ITC whose numbers were 7% above our expectations.

Key positive surprises: Emami, GSK Consumer and ITC results were above Stock Performance
expectations. GSK Consumer, Nestle and Emami reported above expected Absolute Percentage Change
topline growth while ITC delivered strong margins. Company Name 1 Mth 3-mnth 6-mnth 1-yr

Key negative surprises: APNT and Jyothy Labs (JYL) disappointed at the net sales Asian Paints (0.4) (1.1) 28.2 57.3

level, with APNT being affected by the extended monsoon season and JYL given Britannia (3.0) 3.7 30.8 27.6
the impact of its decision to discontinue trade discounts on its Maxo brand. Colgate 2.6 3.5 19.2 29.1
Britannia’s sales growth was strong, but the company disappointed on the
Dabur (9.2) (3.7) 9.0 17.7
profitability front with EBITDA margin contraction of 375bps YoY on account of
Emami 3.4 8.3 49.7 109.4
high input (wheat, sugar) prices.
GCPL 9.5 21.0 42.9 46.5
Key highlights: Volume growth remained strong on account of benign price GSK Consumer 11.5 28.6 45.0 68.5
increases taken by most companies. However, some players like GSK Consumer
HUL 4.9 18.4 30.5 16.3
and Emami are likely to take 2–5% price increases over the next one month as
ITC 1.4 13.2 38.0 39.5
cost pressures remain strong in input commodities such as menthol, LLP, milk
and barley. Crude oil and palm oil prices have also moved up over the past 3–4 Jyothy Labs (5.2) (2.0) 56.3 80.2
months which is likely to put margins under pressure for our FMCG universe. Marico 6.5 17.8 29.0 25.5
Most companies, except for JYL (where Sachin Tendulkar has become the brand Nestle 18.0 34.4 38.3 44.5
ambassador for Ujala), have not increased A&P expenses significantly.
BSE FMCG 2.2 13.7 31.1 30.8

Maintain cautious sector outlook; prefer ITC, APNT, Marico: Our outlook on Sensex 1.2 13.9 20.1 22.2
FMCG remains cautious given where current valuations for the sector are in
relation to the growth profile. We, however, remain selectively positive on ITC,
APNT and Marico from our coverage universe.

Varun Lohchab Gaurang Kakkad Bandish Mehta RCML: Winner of LIPPER-STARMINE broker award for “Earnings Estimates in Midcap Research 2008” |

(91-22) 6766 3458 (91-22) (91-22) 6766 3470 (91-22) 6766 3471 “Honourable Mention” in Institutional Investor 2009 | Voted amongst Top 5 most improved
1 brokerages
varun.lohchab@religare.in gaurang.kakkad@religare.in bandish.mehta@religare.in by Asia Money Poll 2009 | RCML Research is also available on Bloomberg FTIS <GO> and Thomson First Call
 FMCG Quarterly Review 12 November 2010

Fig 1 - RCML FMCG Universe: Q2FY11 earnings review (YoY comparison)

Revenues (Rs mn) EBITDA margin (%) PAT (Rs mn)
Company Change
Q2FY11 Q2FY10 YoY (%) Q2FY11 Q2FY10 Q2FY11 Q2FY10 YoY (%)
bps
Asian Paints 18,108 17,239 5.0 18.3 18.7 (40) 2,250 2,146 4.8

Britannia 10,948 8,585 27.5 4.8 8.6 (375) 328 650 (49.5)

Colgate 5,693 5,029 13.2 22.8 22.0 80 1,003 897 11.8

Dabur 9,728 8,478 14.7 20.9 20.7 20 1,604 1,404 14.3

GCPL 9,528 5,756 65.5 17.7 19.4 (170) 1,304 930 40.2

GSK Consumer 6,126 4,951 23.7 18.9 18.9 (10) 786 600 30.9

HUL 46,809 42,281 10.7 13.8 15.4 (160) 5,338 5,178 3.1

ITC 50,612 43,523 16.3 35.3 35.3 - 12,468 10,099 23.5

Marico 7,788 6,922 12.5 12.7 13.8 (100) 733 695 5.5

Nestle 16,373 13,022 25.7 19.8 20.6 (85) 2,186 1,828 19.6

Emami 2,724 2,158 26.2 21.1 24.3 (315) 535 389 37.6

Jyothy Labs 1,448 1,301 11.3 10.8 12.5 (175) 154 141 9.4

Aggregates 185,883 159,244 16.7 21.2 22.0 (80) 28,689 24,957 15.0
Source: RCML Research

Fig 2 - Results surprise (%)

(%) Net Sales EBITDA Adj. PAT
Asian Paints (13.9) (9.9) (8.6)
APNT surprised negatively on the net Britannia 2.0 (17.9) (40.6)
sales front, while Britannia’s PAT fell Colgate 1.1 (6.0) (5.4)
short of expectations. JYL’s overall Dabur (2.8) (3.0) (0.8)
performance was below estimates
GCPL 2.2 (4.6) 0.9
GSK Consumer 2.6 1.8 6.4
HUL 1.6 0.3 (2.1)
ITC (0.1) 2.4 7.1
HUL, Marico, Dabur, Nestle and Godrej
Consumer delivered in-line numbers Marico (1.3) (4.7) (2.4)
Nestle 3.9 0.2 (2.2)
Emami 5.4 6.1 18.5
Jyothy Labs (12.6) (21.6) (13.1)
Source: RCML Research

2
 FMCG Quarterly Review 12 November 2010

Fig 3 - Actual vs Estimated sales growth (YoY)

(%) Actual grow th Y oY Es timated Grow th Y oY
70
60
50
GCPL witnessed the highest sales
growth due to inorganic growth. 40
Britannia, Emami, Nestle and GSK 30
Consumer reported 20%+ yoy growth 20
10
0

E mami
GCPL

ITC

J yothi
Cons umer

HUL
Marico
Dabur

Colgate

Paints
As ian
Nes tle
Britannia

Labs
GS K
Source: RCML Research

Fig 4 - Gross margin change (YoY)

(bps ) Gros s margin change (Y oY )
600
376
400 261
200 75 52 7
JYL witnessed the highest gross margin -
expansion, while Britannia and Emami (200) (38)
(128) (132)
witnessed maximum margin erosion on (210) (251)
(400)
the back of input cost inflation
(600) (554)
(546)
(800)

E mami
GCPL
ITC
J yothi

Cons umer

HUL

Marico
Dabur
Colgate

Nes tle

Britannia
Paints
As ian
Labs

GS K

Source: RCML Research

Fig 5 - A&P expenses change (YoY as a % of net sales)

(bps ) A&P expens es change (Y oY )
800 700

600
JYL saw the highest step-up in A&P
400
expenses due to the launch of Ujala
143 126
Techno Bright detergent with Sachin 200
Tendulkar as brand ambassador. Most
-
companies slowed down their A&P (17)
expenses during the quarter to protect (200) (69)
(122) (123) (168)
margins (400) (255)
E mami
GCPL
J yothi

Cons umer

HUL

Marico

Dabur

Colgate
Britannia
Labs

GS K

Source: RCML Research

3
 FMCG Quarterly Review 12 November 2010

Fig 6 - EBITDA margin change (YoY)

(bps ) EBITDA Margin Change (Y oY )
200
78
100 18 2
-
Most FMCG players witnessed a (9)
(100) (42)
contraction in EBITDA margin on the (86) (102)
back of high food and non-food inflation (200) (160) (171) (175)
(300)
(317)
(400) (376)

E mami
GCPL
ITC

J yothi
Cons umer

HUL
Marico
Dabur
Colgate

Paints
As ian

Nes tle

Britannia
Labs
GS K
Source: RCML Research

Fig 7 - Actual and Estimated EBITDA growth (YoY)

(%) Actual Grow th Y oY Es timated Grow th Y oY
70
60
GSK Consumer, Nestle reported strong 50
EBITDA growth while Britannia and JYL 40
saw EBITDA decline yoy 30
20
10
0
(10)
(20)
(30)
(40)
E mami
GCPL

ITC

J yothi
Cons umer

HUL
Marico
Dabur
Colgate

Paints
As ian
Nes tle

Britannia
Labs
GS K

Source: RCML Research

Fig 8 - Actual and Estimated Adj. PAT growth (YoY)

(%) Actual grow th Y oY Es timated Grow th Y oY
50
40
30
20
10
0
Emami and GSK Consumer reported (10)
strong PAT growth led by higher other (20)
income (30)
(40)
(50)
(60)
E mami
GCPL

ITC

J yothi
Cons umer

HUL
Marico
Dabur

Colgate

Paints
As ian
Nes tle

Britannia
Labs
GS K

Source: RCML Research

4
 FMCG Quarterly Review 12 November 2010

Fig 9 - Sector Valuation Snapshot

CMP Target MCap Dividend FDEPS (Rs) EPS CAGR ROE (%) P/E (x) FCF Yield (%)
Company Reco
(Rs) (Rs) (Rs mn) Yield (%) FY11E FY12E FY10-12E FY11E FY12E FY11E FY12E FY11E FY12E
Asian Paints 2,651 3,000 Buy 254,137 1.4 92.7 113.1 10.8 45.7 43.9 28.6 23.4 2.9 3.5
Britannia 432 410 Sell 51,561 2.0 14.5 20.6 31.1 56.1 66.1 29.7 21.0 0.7 3.9
Colgate 878 860 Sell 119,348 3.0 32.4 35.1 6.3 129.5 129.3 27.1 25.0 3.2 3.5
Dabur 97 110 Hold 168,937 1.2 3.3 4.0 19.0 51.7 47.1 29.6 24.1 2.9 3.3
Emami 488 450 Sell 73,908 1.0 15.7 18.4 23.6 33.9 31.9 31.0 26.6 1.7 2.4
GCPL 436 460 Hold 140,924 1.4 15.6 18.2 26.9 37.4 30.9 27.8 23.9 (12.2) 3.7
GSK Consumer 2,341 2,200 Sell 98,457 1.0 69.0 82.3 22.0 29.2 29.1 33.9 28.4 0.4 2.3
HUL 309 330 Hold 674,773 2.2 9.9 11.4 8.9 76.7 75.4 31.3 27.1 1.3 3.3
ITC 175 210 Buy 1,348,678 1.6 6.2 7.6 17.3 30.6 32.2 28.2 23.1 1.9 3.1
Jyothy Labs 277 305 Hold 22,339 1.6 12.3 14.2 17.7 18.6 16.1 22.6 19.6 2.8 2.5
Marico 138 150 Buy 84,905 0.9 4.8 5.7 20.1 38.5 35.8 29.1 24.1 3.6 3.0
Nestle 3,800 3,500 Hold 366,400 1.6 80.6 100.7 20.8 125.4 137.4 47.1 37.7 1.5 2.4
Aggregate - - - 3,404,367 - - - 30.4 25.3 1.3 3.1
Source: RCML Research

5
 FMCG Quarterly Review 12 November 2010

Coverage Profile

By recommendation By market cap (US$)

(%) (%)
60 59 80 70

60
40 30
40 29
20 11 20
1
0 0
Buy Hold Sell > $1bn $200mn - $1bn < $200mn

Recommendation interpretation

Recommendation Expected absolute returns (%) over 12 months

Buy More than 15%

Hold Between 15% and –5%

Sell Less than –5%

Recommendation structure changed with effect from March 1, 2009

Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a
12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary
mismatch between upside/downside for a stock and our recommendation.

Religare Capital Markets Ltd

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