Manoj Menon, senior analyst, Kotak Institutional Equities is bullish on ITC, Dabur and GlaxoSmithKline Consumer from the FMCG space. In an interview to CNBC-TV18 he said that, given their current valuations and price, one can look to buy these three stocks from one year’s perspective.
Below is the edited transcript of Menon’s interview with CNBC-TV18. Also watch the accompanying video.
Q: We have had some disappointing numbers from Nestle and the caption of what you have written is interesting, you say that unbridled price hikes do impact volumes. Do you think this could be a problem for other FMCG companies as well where prices have been raised? Do you think volumes could be impacted for companies like HUL also?
A: As far as the impact of prices on volumes for other companies including HUL is concerned, in our view prices increases by most companies has been reasonably moderate mostly to protect margins. In the last one year (FY12) and calendar year (2011), most companies have had significant gross margin erosion, despite the fact that they have taken price increases.
Nestle had very muted volume growth and significant price increase component in their sale growth. At the same time, it was one of the few companies last year, which has expanded gross margins which tells us that possibly price increases have taken ahead of input cost inflation that the company has seen. Nestle has been more of an outlier, I wouldn’t paint the whole industry using the same brush.
Q: With respect to other FMCG companies especially in the food business is there enough evidence to believe that margins and volumes are intact?
A: We don’t have any lead indicator as yet. But our broad industry channel check suggests that the other food companies in the space, which his Britannia and GlaxoSmithKline Consumer at least for them in our understanding the sales growth is reasonable and in line with calendar year 2011 trends. So in our view Nestle seem dot be more of an outlier.
Also a point to highlight is that the reported volume growth that we see is a function of the consumer off take as well as the ability of the company to service the market as well.
Nestle, last year was going through a phase where it was going through capacity constraints. The way to see Nestle numbers is possibly higher price increases have hurt consumption and at the same time the reality was that they were not having capacity in most of their categories which is not the case for other companies.
Q: Some of the risk aversion and defensive appeal in the market right now is some of the FMCG companies. Looking at valuations what would be your top picks, anything that you are advising a buy call right now?
A: Given where the valuations are, we will have only three stocks at this point in time for something to buy as of today’s price, even with a one year view, which should be ITC, Dabur and GlaxoSmithKline Consumer.