Investor's Eye: Update - FMCG

 

Investor's Eye [December 09, 2013]  Sharekhan www.sharekhan.com

Summary of Contents   SECTOR UPDATE FMCG Slowing demand and increasing margin pressure; remain selective Key points Demand weak in urban India; rural demand to remain strong RBI report highlights dip in consumer confidence; demand in urban areas to remain weak: The consumer confidence survey conducted by the Reserve Bank of India (RBI) and AC Nielsen shows a drop in the consumer confidence due to sustained inflation and a weak macro environment (as can be seen in the chart below). The RBI in its survey indicated that the confidence of urban consumers has deteriorated substantially. It has stated that the moderation in the urban spending is largely to do with weak corporate performance translating into no growth or a small growth in the salary of individuals, which is lower than the increase in the consumer price inflation. We do not expect urban consumer sentiments to improve significantly in the coming quarters, unless and until there is a significant drop in the food inflation. We believe the easing of inflation, stable political and macro environment will play a major role in reviving the urban sentiments. Rural demand to support revenue growth: India received 6% higher rainfall than normal in the monsoon season during 2013. This has improved the agriculture output prospects (for both kharif and rabi) in the current fiscal year. The area sown under the kharif crop has gone up by 4.4%, while (till date) the area sown under the rabi crop is up by 10.6%. This along with higher minimum support prices (MSP) for agriculture commodities (which grew in the range of 10-19% over the past six years) would boost the rural economy. Hence, we expect the rural spends for consumer products to remain strong in the coming quarters. Also, the rise in the aspiration level and the improved awareness led to an increase in the acceptance of new products in the low penetrated categories (notably, household insecticide, toothpaste and light hair oils). We believe that the strong demand for fast moving consumer goods (FMCG) products in rural India would support the revenue growth of FMCG companies in the near term. Channel checks show aggressive promotional offers and advertising spends, and introduction of products at lower price points to push sales; margins likely to get adversely impacted to sustain growth momentum Promotional add-ons and freebies to push sales volumes: Our channel checks and retail visits suggest that FMCG companies continued with promotional offerings and freebies to improve on its sales volumes. Hindustan Unilever (HUL) continued its promotional offerings in the detergent segment and offered freebies and promotional add-ons on highly competitive categories such as shampoos and the personal care space (body lotions). Also, there are not much discounts offered by HUL in the oral care space. Godrej Consumer Products (GCPL) has continued with its offers in its soap brand. Procter & Gamble (P&G) has been showering a myriad of offers in the hair care ie the shampoo category, while also maintaining some offers in the detergent segment. In line with HUL, P&G has also not been aggressive in the oral care space with its brand Oral-B. Reckitt Benckiser India is now following its peers and is giving freebies in some of its brands like Lizol, Harpic and Mortein. Colgate-Palmolive India continues with its freebies in the toothpaste category in order to maintain its market share (kindly go through the table below - ''Latest promotional offerings and freebies'').  Products at 'lower price points' 'value for money' to sustain growth momentum: In the months of September, October and November 2013, there are quite a few new value for money products launched, unlike a few months earlier where the focus was on launching premium products in the domestic market. As the consumers are spending less on premium and discretionary categories, the companies were trying hard to keep the shopper's interest alive in these categories. HUL which was in the forefront to launch new products or variants in the premium category has taken a step back by not making significant launches in the past two to three months. On the other hand, companies like Dabur India, Marico, GCPL, Zydus Wellness, Parle Agro and the multinational company (MNC) player, L'Oreal, have launched some new products (at lower price points) in the low penetrated categories (including household insecticides, food and drinks). Rich valuations and unfavourable demand conditions; be very selective Valuation-retain a selective stance: In view of premium valuations and the current headwind of volume slowdown, we prefer companies that have a strong positioning in key categories, strong balance sheet and a decent upside from the current levels. ITC has corrected recently and is currently trading at a steep discount to its large-cap peers. Hence, in the large-cap space we like ITC, while in the small- to mid-cap space we continue to like Jyothy Laboratories Ltd (JLL), Marico and Tata Global Beverages. JLL raised Rs263 crore through preferential allot (that of Rs1.5crore to the promoters) and Rs400crore through non-convertible debentures, which would be utilised for zeroing debt on the consolidated books. This would result in interest savings of around Rs45-50 crore per annum and consequently result in an upward revision in our earning estimates. Preference for Marico is purely based on relative valuations (cheaper compared to GCPL, GlaxoSmithKline [GSK] Consumer, etc), while Tata Global is a play on the soft tea prices, expectations of a better performance by Tata Coffee (its subsidiary) and its niche positioning within the FMCG space. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards, The Sharekhan Research Team

 

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