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Sector Review
FMCG Sector
- Q1FY12 Review
August 23, 2011
Strong volume growth across sector Companies posted strong volume growth except for HUL and Dabur. Volume growth revived for GCPL, GSK Cons, ITC and Marico when compared to Q4FY11. Colgate, GSK Consumer and Marico posted strong volume of 14% each during Q1FY12. Colgate posted stable volume growth, while Dabur and HUL witnessed decelerating volume growth.
Analyst
Chanchal Biyani +91-22- 66142415 chanchal@geplcapital.com
63 66
FMCG Sector 17 20 14 12 13 13 14 15 10 5 -
Q1FY12 Review
14 13 14
14
14
11
12
10
13
10 9 9
10
(5) (9) (10) (10) (15) Colgate Dabur Q1FY11 GCPL Soaps Q2FY11 GCPL Hair Colour Q3FY11 GSK cons' Q4FY11 HUL Q1FY12
Margins remains under pressure With increasing raw material prices, gross margins continue to witness pressure despite price hikes taken by the companies. Prices of raw materials like Palm oil, Copra, LAB, HDPE and Milk continue to remain high. Companies took selective price hikes so as to protect volume growth. These price hikes were not enough to mitigate the impact of increase in raw material prices. Due to increase in RM cost, gross margins and consequently EBITDA and PAT margins contracted for the companies. Britannia, GCPL and Nestle managed with flat or marginal contraction in the margins, while Colgate and Jyothy Labs witnessed high margin EBITDA and PAT margin contraction.
Continued margin pressure led by increase in RM cost (Margin contraction/expansion in bps)
31 200 0 -50 -200 -400 -600 -800 -1000 -1200 -1335 -1400 -1600 Britannia Colgate Dabur GCPL GSK cons' HUL ITC 10 27
-45
-76
-319
-480
-381
-295
-124
-750
-492
Nestle
Gross Margins
Source: Company, GEPL Capital Research
EBITDA Margins
-50
14
FMCG Sector -
Q1FY12 Review
Ad spends cut to protect margins
Companies realigned their ad spend to mitigate the impact of increasing raw material price. As the competitive intensity in the sector remained high, the moderated level of ad spends are not sustainable. Most of the companies have moderated ad spends from their peak (as a % of sales), while GCPL has increased the ad spends.
Ad spends moderated over the quarter (Ad spends % of sales)
21.6 25.0
16.2
16.4
17.6 17.7
11.9 10.3
10.4
10.8
11.7
15.0
14.6 15.3
16.0
7.2
7.4
10.0
5.0
Britannia Ind Colgate Q1FY11 Dabur Q2FY11 GCPL Q3FY11 GSK cons' Q4FY11 HUL Q1FY12 Jyothy
Higher other incomes and extraordinary profits helped few companies to post PAT growth ahead of EBITDA growth; however in overall PAT growth was impacted by increased RM cost for the companies.
EBITDA growth and PAT growth lagged sales growth due to increase in RM cost (Y-o-Y growth in %)
60 39.8 21.4 23.7 24.9 21.6 24.5 40 20 0 -15.2 -17.6 -18.7 -20 -40 -60 -80 Britannia Ind Colgate Dabur GCPL GSK cons' HUL ITC -67.5 29.9 31.4 32.7
20.9
20.7
6.3
19.6
18.6
20.2
15.6
14.9
11.5
10.3
14.4
10.2
10.8
11
15.3
17.2 9
Jyothy
-45.5
M arico
Nestle
9.0 9.0
FMCG Sector -
We believe FMCG sector will continue to witness robust growth driven by mix of volume growth and increase in realization in the coming quarters. We believe with easing raw material prices in the recent past, there would be some respite on gross margin front. Normal monsoon and lower food inflation are another welcome signs for the sector. Decrease in prices of agri-commodities would help food companies. However, if RM cost pressure continues, companies might resort to selective price hikes to mitigate the pressure. Competitive intensity in the sector continues to remain strong which will push the ad spends higher, which have moderated in the recent past. The stocks are trading near their peak valuations with limited upside opportunity. However our preferred pick is ITC with strong earning visibility with lower margin pressure.
Valuation Summary Market Cap Return (%) 1M (3.6) (7.7) (5.6) (5.2) (1.2) (4.9) 1.1 (23.2) 2.3 6M 26.3 13.6 9.6 15.4 9.0 13.4 32.0 (23.0) 27.8 12M 15.9 9.8 2.7 10.6 30.1 17.7 26.5 (39.4) 26.0 P/E (x) FY11 34.6 27.0 28.7 25.3 25.1 28.5 26.1 21.2 28.3 FY12E 21.8 23.5 23.3 20.1 20.5 24.9 22.1 17.1 23.5 P/B (x) FY11 13.0 28.4 12.8 6.9 7.7 19.5 7.9 2.8 9.3 FY12E 10.7 22.3 9.9 5.8 6.3 17.2 6.9 2.5 7.1 EV/EBITDA (x) FY11 21.7 20.6 21.6 20.6 17.1 21.3 16.8 17.3 20.4 FY12E 13.3 17.9 17.5 16.5 14.3 18.4 14.2 13.7 17.0
` mn
Britannia Ind. Colgate Dabur GCPL GSK Consumer HUL ITC Jyothy Labs Marico 41,903 114,683 168,328 117,059 90,221 603,739 1,323,194 19,114 81,588
FMCG Sector -
Q1FY12 Review
NOTES
GEPL CAPITAL Pvt Ltd (formerly known as Gupta Equities Pvt. Ltd.) Head Office: D-21/22 Dhanraj mahal, CSM Marg, Colaba, Mumbai 400001 Reg. Office : 922-C, P.J. Towers, Dalal Street, Fort, Mumbai 400001 Disclaimer: This document has been prepared by the Research Desk of M/s GEPL Capital Pvt. Ltd. and is meant for use of the recipient only and is not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to support any security. The information contained herein is obtained and collated from sources believed reliable and we do not represent it as accurate or complete and it should not be relied upon as such. The opinion expressed or estimates made are as per the best judgment as applicable at that point of time and are subject to change without any notice. GEPL Capital Pvt. Ltd. along with its associated companies/ officers/employees may or may not, have positions in, or support and sell securities referred to herein.