FMCG in Q4: Religare Cap's views on HUL, GCPL, ITC

Varun Lohchab, managing director and co-head of research, Religare Capital Markets says FMCG major Hindustan Uniliver Limited (HUL) is likely to post muted volume growth in the fourth quarter on back of weakness in personal care, soaps and detergent segments.

"HUL looks fully valued at levels of Rs 470 per share," he told CNBC-TV18 in an interview. Along with HUL, he says Marico could also see subdued volume growth.

On the other hand, Lohchab feels that Godrej Consumer Products (GCPL) may do relatively better in the fourth quarter. "The household insecticides growth may bode well for GCPL," he says. 

For ITC, he sees a volume growth of 2 percent in cigarettes sales and earnings to grow by 15-16 percent. 

All in all, he says, there is a slowdown in consumer categories across the board but rural growth is supporting growth in consumer sectors.

Also read: Valuations fine, momentum will bring back FIIs: Religare MF

Below is the edited transcript of his interview to CNBC-TV18.

Q: How do you see volume growth in HUL? What are your own channels checks showing in terms of how much volume have begun to slip?

A: Our channel checks for HUL suggest that volumes in Q4 will be muted. In Q3 they reported a volume growth of 5 percent compared to 9-10 percent of what they did in last 2-3 quarters ago. In this quarter it will be closer to 5 percent with very little upside risk. It may drift a bit more because our channel checks suggest that there is a slowdown across the board in personal care categories and even in soaps and detergents to some extent. The entire sector is seeing some moderation in growth.     

Q: Which categories in your eyes are the worst affected? Could it also spill over to other listed companies like Godrej Consumer or Marico?

A: It is more pronounced in case of the personal care categories. The more discretionary ones would be skin creams or shampoos and entire personal care portfolio and also continues in the package food space. Demand for package food has been soft over sometime given the discretionary nature of demand.

Our channel check suggests that volume growth even for Marico be subdued. Their last quarter volume growth has been lower compared to last few quarters and that would continue. I think Godrej Consumer Products (GCPL) will do relatively better in this quarter because one of their key categories in India which is household insecticides continues to grow very well.      

Q: Will HUL be de-rated due to sluggishness in volumes?

A: I think the stock is fully valued at Rs 470-480 levels. We have a target price of Rs 480. The stock can get de-rated from these levels if they show around three-four percent volume growth. Anything below four percent volume growth will clearly lead to stock de-rating because people are still building in at least four-five percent volume growth and 12-13 percent top line growth.

Q: Is this also being coupled with down trading because then that would impact both - what happens in terms of sales as well as hit the margins of these companies?

A: As per our channel checks, we are not seeing too much down trading at this moment. So, the slowdown is across the board. We are not seeing the same consumer moving down the price points as of now. What would lead to some degree of product mix change in adverse direction would be the fact that rural demand continues to do very well relative to urban.

Urban growth rates have slowed down more and therefore for some of the top end premium range, you will see the growth coming off a bit more compared to the mass end because the rural is still supporting growth to some extent. So, to that extent, the product mix could get affected a bit but it is not that same consumer is down trading from premium end brands to the mid end.

Q: You don't think United Spirits will be a very successful open offer process?

A: Open offer will be more of a non-event given where the stock prices and Diageo has continued to maintain its Rs 1,440 price band. So we don't think there will be any meaningful tendering. It is just another step being achieved in the process of the deal getting consummated. I think from a stock offering perspective and what Diageo would get, ultimate stake in the company. I think this will be a largely a non event.

Q: How do you expect the quarter to be for ITC?

A: For ITC volume growth will be positive, we are expecting around two percent volume growth in cigarette business. Last quarter, they did around 1-1.5 percent. ITC recently increased its price they didn't hike the price in January-February, which they typically do to some extent on their portfolios.

Therefore, the pricing element in case of ITC, again in the cigarettes business, would be a tad lower on a year-on-year basis. For ITC, we are expecting around 15-16 percent earning growth this time around which will be moderation from 20 percent earning growth trajectory compared to what they did over last 12-13 quarters. So, we may not see big volume growth moderation for ITC but because of price hikes being slightly muted, one will see earning growth being more in mid teens rather than 20's.