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May 29, 2013, 03.50 PM IST | Source: CNBC-TV18

How FMCG pack looks after Q4 earnings: Nomura analyses

Manish Jain of Nomura India has a bullish view on the food sector for almost two years now. “I would still prefer something like a Nestle over something like Britannia. Nestle has a much wider product portfolio and valuations over there are much better now,” he told CNBC-TV18 in an interview.

Manish Jain of Nomura India has a bullish view on the food sector for almost two years now. "I would still prefer something like a Nestle over something like Britannia . Nestle has a much wider product portfolio and valuations over there are much better now," he told CNBC-TV18 in an interview.

On ITC , he has a buy call with a target price of Rs 390. “From a two-three year perspective, one year perspective also it will continue to do well,” he says.  

He holds a "neutral" view on Colgate for now, citing headwinds in the near-term. "You will obviously see promotional cost going up. They have already started showing in the results. You have already seen two straight quarters of profit after tax (PAT) decline from a company like Colgate which is a bit perplexing and that will continue," he says.

Below is the verbatim transcript of his interview to CNBC-TV18

Q: Britannia came out with absolutely mind boggling numbers and along with the strategic change which you would expect on the back of the management that Britannia announced?

A: Food sector in general is something that we have been very bullish on for a very long time now, almost two years now. From a longer term perspective we continue to like food companies versus non food companies in general. I think the terminal growth rate over here is much higher. If you look at amongst the food companies, that we like and that we don’t like, I would still prefer something like a Nestle over Britannia. That is largely because it’s a longer term call. However, Nestle has a much wider product portfolio. Valuations I think over there are much better now especially the fact that stock has not done too much over here.

I don’t remember when was the last time when we actually had Nestle at sub 30 price-earnings (P/E) multiples available to us. Somewhere people have written the company off. Britannia on the other hand what surprises me the most over here even though we don’t officially cover, it is that despite being a food company, if you look at outside their biscuits portfolio, they have actually not done too much in terms of innovation and success. As the breakfast cereals and all that they launched have actually not been doing too much.

Second is that the profitability there has been a bounce back and people expecting 40-50 percent Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) growth over the next couple of quarters. However, clearly if you look at most of the other companies, they make somewhere close to 18-20 percent EBITDA margins even in the worst case.

Nestle right now is making 23-24 percent EBITDA margins. These guys make 6-8 percent EBITDA margins. In the near term I agree there is bounce back, there is strategy change so you would want to be in Britannia, it looks good. But from a longer term perspective, I would still prefer somebody like Nestle. I think the quality of management shows the commitment to India in terms of the research and development (R&D) capabilities that they have put up. Innovation pipeline is now picking up, valuations are much more reasonable.

After a lull of six-eight quarters I think growth to pick up now. They are doing the right things now. So, I would much rather pitch Nestle against Britannia right now.

Q: What about the frontline Fast-moving consumer goods (FMCG) stocks? ITC post its numbers had a smooth run. It hit that lifetime high of somewhere around Rs 350. Quarter after quarter, it has been delivering. How much more of an upside do you see for a stock like ITC and would you recommend it now?

A: I would recommend ITC at any price point. I don’t think valuations matter. The thing is where else in the world would you get a monopolistic business which is regulated in nature, high barriers to entry. Management in the company has 80 percent market share in value terms in the business which is delivering 17-18 percent EBIT growth quarter after quarter.

I think from a two-three year perspective, one year perspective also it will continue to do well. Our target price on the stock is somewhere close to Rs 390 right now. So clearly, it has a decent upside. I would continue to recommend buying it. The way I look at ITC is slightly different. The biggest concern people seem to have on ITC and this is a question we get always is their terminal growth rate on the cigarette business, what would you put it at. That is something that I think is clearly a number which is underestimated.

If you look at most of the global companies, even in developed markets like US, UK - they are still delivering positive EBITDA growth despite volume decline. I don’t think why ITC can’t replicate it over here because the pricing power is clearly very enormous. So, good quality management in the core business is doing really well. Best of all is that the FMCG business, the personal care business has now broken even. It is a first year of profit where they have delivered. It is also one of the fastest growing companies in the personal care space.

Six percent plus market share in the skincare business is doing well, food is much in profit. So, clearly it has done well on all fronts and it’s a stock which I would buy now and I would recommend it at any given price point. I don’t think valuations in ITC would matter at all.

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