FMCG pack: UBS bets on ITC, sell UB & Tata Global Beverage

UBS Securities is betting big on ITC as it is likely to post a strong second quarter results. Sunita Sachdev, Executive Director, UBS Securities is expecting its volume to growth at 1-2% in this quarter. She also reasons that ban on chewing tobacco will support cigarette volumes.

Steady volume growth, high returns and robust cashflow will support ITC, she adds
Meanwhile, Sachdeva recommends selling Tata Global Beverages. According to her, valuations of United Breweries' is stretched and therefore it is downgraded to sell. Also read: How you should play ITC, TCS, Exide now Transcript of the full interview to follow soon. Q: What do you think ITC might turn in today?
A: ITC is our top pick. We expect good results from the company today. We expect topline growth of 17.5 percent led by operating profit growth of around 18 percent. The  bottomline growth will be in the same area. Importantly, volume growth in the cigarette segment is expected to be between 1-2 percent. Q: Would you still recommend a buy on ITC even after the kind of valuation levels which is making some people slightly uncomfortable?
A: It has run up very significantly, but it is our top pick. We have one year price target of Rs 340. It is our top pick because of three fundamental reasons. We expect the company to continue to move consumers up from regular filters to king size filters. New consumers are coming into the micro filter level. Many states have banned chewing tobacco; though it is not exactly a direct product that the consumers should move to, but over the long-term, consumers who chew tobacco will have to move to cigarettes. ITC will gain from all these fundamental moves and it continues to remain our top pick.
_PAGEBREAK_

Q: The one stock which has done remarkably well is Tata Global Beverages but do you think it is enough?
A: Amongst the FMCG pack, Tata Global Beverages has been quoting at a significant discount to all the consumer names. The reason being, over 55 percent of their revenues come from international markets. Returns for the company are much lower than consumer averages. So, it has been at a discount for a reason, there has been a lot of news around it so it has managed to perform really well, but it is a sell in our rating pecking order. Q: You have become a bit cautious on United Breweries after its recent out performance, is it a valuation call?
A: It is primarily a valuation call and also the expectation of a takeout having build into the stock price valuations. While the company will continue to give in good volume growth in this quarter as well as in the quarters going ahead, there is a sustainable secular uptrading thesis happening in beer as well. At the same time, it is trading at 26 times EV to EBITDA on our numbers for FY14, which is making it the most expensive brewery stock in the world. That is definitely reason enough to have an under performer on that name. Q: Following ITC your next big pick in the pecking order is Nestle, why?
A: Nestle we believe is a blue chip. People believe that this company is getting its time to get its act right. They have set up capacity and are going through a period where they are correcting their volumes in categories they don't want to be in. This is an excellent time to get into the name for a year given that the world has an outlook for inflation across underlying commodities and our thesis that packaged food is an area that we want to be in.
_PAGEBREAK_
Nestle is a key company that gets across Indianising food and its distribution in place with Maggi being the leader into the semi-urban and rural markets. We believe they would piggy back on Maggi and use that distribution to throw in more products in India using the capacity and the global knowledge they have in packaged food. So, we believe Nestle is an unbelievable pick at these valuations and at this time given the time correction in the stock. Q: While people might be fretting about valuation levels today, the kind of growth that you are expecting over the next couple of years will justify the premium valuations for which people are paying today?
A: Our report says that we look for three things in consumer companies. One is a steady volume growth of 10-12 percent; secondly, high returns in the range of 38-39 percent, at least the sector average roes and steady cash flows. If these three are maintained then the valuations are something that the market will get use to, given that there could be no downside to earnings. If companies disappoint on either of the three, then there could be a disappointment. But, if they maintain these three things - volumes, returns and cash flows then there should be no problem with sustaining these valuations Q: Do you think Titan doesn't fit the bill for these parameters or you are not bullish on that name?
A: Titan is going through a correction; it is going to slowly move itself from being dominated on gold into higher end jewellery. They are putting in a lot of efforts to distinguish themselves from other jewellers in the segment. But, at the same time given that volumes in the underlying business are under pressure, we don't see consumers being exuberant, so volumes in this segment will continue to be under pressure. It does not really satisfy the first case yet of strong volumes and this is why we are neutral on its name.