Consumer sector results preview for Q3FY12: MOST

3QFY12 organic sales and PAT to grow 18%: We expect our Consumer universe to post ~18.3% revenue growth and 18% PAT growth in 3QFY12. EBITDA is likely to grow 20% - margin pressures for Asian Paints, Pidilite, Dabur and GSK Consumer will be compensated by low base effect in Britannia, Colgate and improved margins in Hindustan Unilever (HUL) and ITC. Excluding the impact of acquisitions, sales would increase by 18%, EBITDA by 19% and PAT by 17%. We expect ITC to post 17% sales growth (6.5% cigarette volume growth) and 18% PAT growth; HUL's sales are likely to grow 17.4% (volume growth of 8.4%), with EBITDA margin expanding 40bp to 14.5%.

Volume growth to show initial signs of softening: Consumer demand is showing initial signs of softening in certain categories. This coupled with continued price increases to pass on the input cost pressures could begin to impact volume growth. We expect most players to post lower volume growth than 2QFY12. However, Dabur and GSK Consumer would post higher growth due to a lower base in 2Q.

Input costs show mixed trend; INR depreciation to hit margins and balance sheet: Input costs have shown mixed trends, with prices of LAB, milk, packaging and TiO2 sustaining at all-time highs while palm oil, sugar, copra and wheat have seen some correction. However, with the INR having depreciated by 20% in the last two quarters, gains from input cost correction are likely to be neutralized. The worst impacted would be Asian Paints, Pidilite and United Spirits; HUL and Godrej Consumer would also be impacted with respect to PFAD imports. The INR depreciation would also adversely impact the balance sheets of companies with un-hedged forex loans. Godrej Consumer, which has unhedged forex loans of USD500m, is likely to be the worst hit.

New launches pick up; ad spends to be sequentially higher: Most companies had deferred launches in the 1HFY12 to cut back on ad spends and protect margins. New launches in 3QFY12 have picked up, with GSK Consumer, Marico, Nestle, Dabur, Hindustan Unilever and Britannia ramping up their product portfolio. We expect adspend- to-sales ratio to be higher on a QoQ basis across companies; on a YoY basis, ad spends as a percentage of sales would be flat to marginally higher (expect Colgate, which had ad spend at 21% of sales in 3QFY11).

Maintain cautious view on the sector: With competitive intensity across the sector not abating and consumer sentiment showing initial signs of weakening, we believe there is more scope for valuations to come off from current levels (average P/E of 23x), given the growth prospects. We continue to prefer niche plays with strong pricing power and greater visibility on volume growth and profitability. ITC remains our top pick in the sector.

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