Volume growth intact in FMCG space: KRChoksey

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Volume growth intact in FMCG space: KRChoksey

KRChoksey has come out with its report on FMCG sector.

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Nestle BSE | NSE 29/05/12 Are Mutual Funds betting on Nestle? Other Stocks in this news ITC | Hindustan Unilever | Colgate Palmolive (India) | Marico | Emami | Dabur India | Britannia Industries |

KRChoksey has come out with its report on FMCG sector.

FMCG sector registered a strong top line growth of 19.1% to Rs 21300 crores in Q3FY11 on the account of strong volume growth seen across the segments. Results for our KRC FMCG Universe were largely inline with our estimates with top line growth of 15% y-o-y. Nestle , GSKCHL & ITC being the top performers registering Net sales growth of 24%, 21% & 19% respectively, on the account of strong volume growth across their categories.

EBITDA for the sector was up 13% y-o-y in Q3FY11 on the back of strong momentum in the topline. However margins for the sector continued to remain under pressure & declined by 108 bps y-o-y & for KRC FMCG universe by 59 bps y-o-y mainly due to significant rise in the key raw material prices (Palm oil, copra, Tea, Coffee). PAT for FMCG sector grew by 13% yo- y.

Volume growth continues to drive topline: Despite high inflation, FMCG sector continued to witness healthy toplne growth of 19.1% y-o-y primarily driven by the strong volume growth & limited price hikes seen in Q3FY11. Among the KRC universe, Nestle registered highest growth of 24% y-o-y, driven by 27% y-o-y increase in the domestic offtake. HUL continued to post strong topline growth of 11.6% led by 13% volume growth in domestic consumer business. GSKCHL grew by 21% y-o-y with robust volume growth of 18% & 13% in Boost & Horlicks respectively. ITC's topline was up by 19% y-o-y, reporting growth of 19% yo- y in cigarette segment (volume up by2-3%) & 24% y-o-y in the FMCG-Others segment. Colgate registered steady topline growth of 14% driven by volume growth of 13% &24% in the Toothpaste & Toothbrush categories. We believe topline growth for HUL, ITC, Nestle, GSKCHL & Colgate to be steady going forward on the back of product mix, strong brand equity & presence across price points.

Input cost inflation leads to Gross profit margin contraction: Significant rise in input costs led to decline in gross margins for the sector. Prices for the key raw materials like palm oil, copra, edible oil, Tea, coffee, PE, milk & barley continued to remain high leading to higher raw material consumption as % to sales for the sector. Gross margins for HPC players like HUL(-216 bps), GCPL(-81 bps), Marico(-530 bps), Emami(-553 bps) & dabur(-282 bps) declined on y-o-y basis due to significant increase in prices of Palm oil(+55%) ,Copra(+62%), Menthol(+75%) & LLP(+35%). As a result, to mitigate rising costs, players like Marico , Emami , Dabur , GCPL & Nestle have taken price hikes in the range of 3-15% in selective brands. Input cost inflation continues to remain key concern for the sector & we do not anticipate any price cuts in Q4FY11 especially in the HPC segment where the raw materials are crude linked derivatives.

No decline in Competitive Intensity: Competitive intensity continues to remain high not only with the growth in domestic players but also aggressive strategies by MNC players like P&G, Reckitt Beckinser etc. This is evident from 16% y-o-y increase in the ASP expenses. In the HPC segment we saw ASP expenses as a % to sales increasing for Colgate (626 bps), GCPL(+243bps) & HUL(+73 bps) on the account of brand promotions, new product launches & pushing new categories whereas players like Marico, Emami, Dabur & Britannia reduced promotional expenses to mitigate the rising raw material costs, resulting in moderate decline of 12 bps y-o-y in ASP expenses as a % to sales for the sector. Thus despite EBITDA growth of 13% y-o-y, rising raw material prices along with higher ASP expenses continued to limit margin expansion for the sector in Q3FY11. EBITDA margins for the sector declined by 108 bps y-o-y.

Positive measures in Budget to boost FMCG sector growth: We believe measures by the government to improve agricultural output, rural infrastructure & enhance supply chain would reduce raw material costs & boost the consumption in the rural markets which currently account for 40% of the FMCG volumes. This is positive for companies like HUL, ITC, Nestle, & Dabur which have strong presence in the rural markets.

Views- We expect the growth story to remain intact for the FMCG sector considering the positive budget measures & significant under penetration in many FMCG categories. We believe Foods (Beverages, packaged food, ice-cream) & emerging HPC categories (Skin care, deodorants and Baby oils) to be the key growth areas. We believe diversified presence, robust product mix & strong supply chain would be the key to maintain robust volumes & healthy margins. Considering above key points we maintain our positive outlook on Nestle, ITC & GSKCHL on the account of presence in diversified categories, global presence & strong product mix.

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To read the full report click on the attachment