Transcript of "Edelweiss consumer goods -_sector_update-feb-12-edel"
Strictly Private and ConfidentialIndian Consumer Goods: Resilience continues Abneesh Roy Harsh Mehta +91-22-6620 3141 +91-22-4063 5543 email@example.com firstname.lastname@example.org February 2012
Key trends in Q3FY12 Volume spurs : Volume for 12 out of 13 companies in line or better than expectations; positive surprises: Asian Paints, Marico and Dabur. This is in sharp contrast to many media and street Q3FY12 forecasts of a sharp slowdown in rural demand and inventory pile up. Ad spend remain soft, but some pick up: Six companies (out of 13) cut it in terms of % of sales (v/s. 10 out of 13 in Q2FY12). Four trimmed ad spends on absolute basis. Strain on gross margin persist: Gross margins of 12 companies (out of 21) dipped significantly ( i ifi tl (except GCPL, Marico, N tl E t GCPL M i Nestle, Emami, B it i Britannia, Agro Tech and cigarette i A T h d i tt companies). EBIDTA margin dips: EBITDA margin of 12 (out of 21) companies declined, though much lower than gross margin (Dabur, USL, Zydus Wellness, Pidilite and Bajaj Corp saw a high decline) (Dabur USL Wellness decline). Pricing power rises: Majority took calibrated price hikes. Quality of sales growth was better with balanced blend of price and volume growth. N New launches pick up pace: C l h i k Companies are persisting with i i i i i h innovations and product launches i d d l h across segments, and pace seen improving from the previous quarter. International businesses continue to bloom: In most cases, businesses reported healthy growth despite global economic pressures Emami disappointed in Africa Dabur in Turkey. pressures. Africa, Turkey Q3FY12 results | Hits: GCPL, Marico, Colgate, Asian Paints, Dabur. Flops: USL. Top picks: Dabur, Marico, GCPL and ITC. 2
Outlook for coming quarters: Upbeat Volume: To remain healthy as penetration levels and per capita usage will remain attractive for years to come. Both rural and urban India to drive demand. Ad spend: To see a slow revival. Gross margin: Gross margin pressure likely peaked out. Coming quarters likely to see expansion in gross margins, part of which will be ploughed back into ad spends. India growing much faster than world average: In Dec quarter Indian volume growth quarter, continues to be much faster than the rest of the world, justifying premium multiples. • Colgate India reported ~15% YoY volume growth v/s parent company’s 4.0%. • HUL reported 9 % YoY volume growth against parent company’s 0.1%. d 9.1% l h ’ 0 % • Coca-Cola India reported a healthy 20% YoY volume growth v/s 3% for parent company. Packaging law: The new packaging legislation could impact categories like biscuits, detergents, tea, coffee and soaps, which in turn could affect affordability and thereby overall sales. Budget: Tax-free slabs are expected to be raised, which will aid consumption. 3
Some unanswered questions…… Is it trend reversal of slowdown in ad spends: Some consumer companies like Dabur, Marico, GSK sharply stepped up ad spends in Dec quarter. Laggards in margins like soaps & detergents and biscuits posted sharp recovery in margins. Is it sustainable? Marked increase in action in toothpaste segment. Is P&G finally entering toothpaste in India? Are margins in personal care set for a structural downtrend? Has India stepped up usage of hair oils as seen in strong volume g g growth by all hair oil companies? y p 4
Risks Currency: Further MTM impact will depend on how the INR moves from INR53 (Dec end). Hike in excise tax, reduction in fiscal benefits. Slowdown in rural growth due t low food i fl ti Sl d i l th d to l f d inflation and cut back in govt. spends. d tb ki t d Slowdown in discretionary items in urban areas. Increase in ad spends, entry of new players. p , y p y Difficulty in price hikes in lower SKUs, new packaging norms. 5
Trend 1: Volume spur on Consumer pack continues to surprise positively in terms of volume growth despite several price hikes, with 12 out hikes of 13 companies posting volume growth in line/better than expectations. Asian Paints surprised with ~10% volume growth (on high base) despite a slowdown in discretionary spend. Colgate reported a healthy ~15% volume growth in the toothpaste category, better than Dabur’s 3%, while oral care growth was muted for HUL HUL. Dabur’s domestic volume growth rebounded to ~8% YoY and shampoos posted a strong volume growth at 35% YoY in Q3FY12 v/s 16% YoY in Q2FY12. GSK’s Q4CY11 volumes grew 11% YoY led by 16% YoY volume growth in Horlicks. ITC’s cigarette volume growth slowed down largely due to base effect. Volume growth Y‐o‐Y Q3FY12 (%) vs. expectations Colgate‐toothpaste Colgate toothpaste 15 0 15.0 Colgate‐toothbrush ~13‐14 Asian Paints 10.0 Emami* 10.0 Godrej Consumer ‐ Soap* 19.0 Hindustan Unilever 9.1 ITC ‐ cigs 5.0 Marico 20.0 United Breweries 5.0 Dabur (domestic) 8.0 USL 1.0 Tata Global Beverages ~3‐4 GSK Consumer 11.0 Bajaj Corp 20.5 Coca‐Cola India 20.0 Unilever PLC (Parent) 0.1 Colgate‐Palmolive Co (Parent) 4.0 Source: Company, Edelweiss research * Domestic nos. 8
Trend 1: Volume spur on (Contd…) Revenues (INR mn) Q3FY12 Q3FY11 growth (%) Hindustan Unilever 59,376 51,277 15.8 ITC 61,954 54,243 14.2 Asian Paints 25,605 20,996 22.0 Dabur 14,527 , 10,800 , 34.5 Colgate 6,898 5,766 19.6 Godrej Consumer 13,441 9,888 35.9 Marico 10,578 8,177 29.4 Emami 4,573 4,060 12.6 USL 19,539 19,601 (0.3) Nestle 19,547 16,710 17.0 Agro Tech 1,816 1,956 (7.2) GSK Consumer 6,248 5,242 19.2 Britannia Industries 12,491 10,834 15.3 Godfrey Phillips 4,821 4,247 13.5 VST Industries VST Industries 1 701 1,701 1 387 1,387 22 7 22.7 Zydus Wellness 755 909 (16.9) Berger Paints 7,823 6,201 26.2 Kansai Nerolac 6,655 5,601 18.8 Pidilite 7,680.5 6,593.2 16 Tata Global Beverages Tata Global Beverages 18,018 16,060 12.2 Bajaj Corp 1,125 862 30.6 Source: Company, Edelweiss research HUL reported a robust 9.1% volume growth (high base of 13% in Q3FY11); double-digit sales growth across segments though most segments disappointed, except soaps and detergents. USL’s 1% volume growth disappointed due to issues in Tamil Nadu (volume loss of 1.5mn cases) and West Bengal (volume drop of 48% YoY for industry). Emami’s 10% volume growth on back of market share gains in a few categories. 9
Trend 2: Ad spend under control; some revival Four out of 13 companies have cut ad spending on an absolute basis to reduce pressure on margins (v/s three out of 13 in Q2FY12). Six have cut ad spending in terms of % of sales, indicating a revival in ad spending (v/s 10 out of 13 in Q2FY12). In our view, some companies like Dabur have upped the ante in ad spend in order to regain market share and view achieve higher volume growth. A&P YoY Growth (%) Change in bps YoY Dabur 46.9 114 Godrej Consumer* 1.4 (284) Marico 48.6 164 Emami 1.8 (187) USL 11.7 119 Agro Tech (47.2) (401) GSK Consumer GSK Consumer 27 1 27.1 113 Hindustan Unilever (7.1) (287) Colgate (10.9) (533) Zydus Wellness (4.3) 118 Tata Global Beverages 22.3 156 Britannia Industries Britannia Industries 17.4 13 Godfrey Phillips (0.2) (208) Source: Company, Edelweiss research * Domestic nos. Marico saw an increase in ad spends primarily largely due to new brand launches. HUL’s reduction in ad spends helped the company expand its EBITDA margin. GCPL’s A&P spends in Q3FY12 were almost stable on an absolute basis due to fewer launches. GSK’s high A&P spends was due to heavy promotional spends for the launch of oats and relaunch of Boost which is primarily a one off The company expects A&P spends to be ~15‐16% of sales one‐off. ~15 16% sales. 10
Trend 3: Strain on gross margin; worst likely behind Gross margins have declined for 12 out of 21 companies (dipped for 15 companies out of 21 in Q2FY12) due to G i h d li d f t f i (di df i t f i d t severe raw material inflation. Cigarette companies saw margin expansion due to high pricing power and benign raw materials. Calibrated price hikes and superior product mix helped GCPL, Marico, Emami, Nestle and Britannia expand gross margin by 20bps, 114bps 203bps, 220bps and 300bps, respectively. Agro Tech’s focus on improving margins helped the company improve gross margins by 589bps. Most players are focused on growing volume rather than gross margin. Gross margins Q3FY12 Q3FY11 Change in bps YoY Hindustan Unilever 48.2 49.9 (169) ITC ‐ cigs* 31.7 29.3 240 Asian Paints 39.4 40.3 (90) Dabur 49 4 49.4 51 9 51.9 (248) Colgate 61.6 62.5 (90) Godrej Consumer 53.5 53.3 20 Marico 48.5 47.3 114 Emami 62.4 60.3 203 USL 39.1 41.0 ((190) ) Nestle 54.6 52.4 220 Agro Tech 30.0 24.2 589 GSK Consumer 65.7 66.0 (24) Britannia Industries 36.7 33.7 300 Godfrey Phillips 63.7 61.5 219 VST Industries 54.8 53.5 138 Zydus Wellness 61.9 62.9 (97) Berger Paints 35.6 36.5 (89) Kansai Nerolac 33.0 33.7 (68) Pidilite 42.9 45.9 (297) Tata Global Beverages Tata Global Beverages 58 0 58.0 58 9 58.9 (99) Bajaj Corp 54.3 56.4 (210) Source: Company, Edelweiss research * Cigarette business EBIT margins 11
Trend 4: EBITDA margin dips, but a few manage better EBITDA margin of 12 out of 21 companies declined (declined for 14 out of 21 companies in Q2FY12). However, fall Q2FY12) However in EBITDA margin is much lower than fall in gross margin in most cases. EBITDA margin of most companies declined primarily on account of raw material inflation. However, a dip in EBITDA margin was cushioned by moderation in ad spending. , p g y p g HUL, ITC, Colgate, GCPL, Emami, Nestle, Agro Tech, Britannia and VST have managed margins well. Low margin segments did well. HUL’s S&D margins expanded for three consecutive quarters (7.5% in Q4FY11 to 9.2% in Q1FY12 to 12.4% in Q2FY12 to 13.5% in Q3FY12). Britannia’s margins too expanded by 130bps YoY. EBITDA margins Q3FY12 Q3FY11 Change in bps YoY Hindustan Unilever 16.3 14.1 221 ITC 37.6 36.3 130 Asian Paints 15.5 16.4 (90) Dabur 15.8 19.9 (407) Colgate 21.6 16.1 550 Godrej Consumer 19.7 16.8 290 Marico 11.5 12.2 (68) Emami 25.8 25.1 69 USL 9 6 9.6 14 1 14.1 (450) Nestle 21.1 19.7 140 Agro Tech 8.5 (1.3) 977 GSK Consumer 13.5 14.3 (78) Britannia Industries 6.7 5.4 130 Godfrey Phillips Godfrey Phillips 14.5 14.7 (21) VST Industries 32.6 29.8 281 Zydus Wellness 28.2 30.9 (272) Berger Paints 10.1 11.0 (91) Kansai Nerolac 12.1 12.3 (16) Pidilite 14.9 17.3 (235) Tata Global Beverages 10.0 11.5 (142) Bajaj Corp 25.5 30.2 (473) Source: Company, Edelweiss research 12
Trend 5: Pricing power continues Quality of sales growth was better with balanced blend of price and volume growth. Most companies have taken calibrated price hikes, but not completely to the extent of rise in commodity prices. Hence, EBITDA margins have contracted. However, empirically, it has been observed that with deflation in raw material, companies seldom roll back prices completely, which could lead to margin expansion. Also, they roll back prices with a lag.Price hike Product wise price hike Company Price hike (%) Category Price hike (%) Marico 9.3 Marico Asian Paints 12.0 Consumer Products Business (India) 22.0 Colgate‐toothbrush ~3‐4 Parachute Coconut Oil (Rigid packs) 27.0 Dabur (domestic) 8.0 Coconut Oil 30.0 Hindustan Unilever 6.7 Value Added Hair Oils 20.0 ITC ‐ cig ~6 Saffola 14.0 USL 12.0 Dabur (domestic) Tata Global Beverages ~3‐4 Shampoos (31.0) Bajaj Corp Bajaj Corp 10 1 10.1 Toothpaste 4 11.4 11 GSK Consumer 8.0 GCPLSource: Company, Edelweiss research Soaps 12.0 GSK Consumer Biscuits 14.0 Colgate Toothbrush ~3‐4 Source: Company, Edelweiss research 13
Trend 6: Pace of new launches picks up Q3FY12 saw launches of several new products and categories by HUL, ITC, GCPL, Dabur, Marico and Colgate.New products and innovationsCompany New Product LaunchHUL Lux Handwash, AXE Shower gels, Dove body lotions range Clinic Plus conditioners, Sunsilk Keratinology Bru Gold – 100% coffee Surf Excel Quickwash and Pepsodent G relaunchedDabur Dabur Almond Hair Oil New variants of Hajmola launchedGCPL HIT extra power electric mosquito repellant in Indonesia Touch of Silver Intensive Conditioner and Cuticura Vitamin E Night and Day cream in UKMarico Two new variants of Saffola Arise: long grain and basmati Parachute Advansed Body Lotion, Saffola Masala OatsColgate Colgate 360° Sonic Power and Colgate ZigZag Anti‐Germ toothbrushes Colgate Barbie and Colgate Spiderman (toothbrush and toothpaste in kids segment)ITC Vivel Clear 3 in 1 soap Di Wills range of hair care treatment in three variants Fiama Di Wills Face and Body Talc in select marketsGSK ConsumerGSK C Launched Horlicks Oats and relaunched Boost L h d H li k O t d l h dB tBritannia NutriChoice Multigrain Thins, NutriChoice Multigrain Rosty, 50‐50 SnackuitsSource: Company, Edelweiss research 14
Trend 7: International sales growth robust for most players Companies reported robust growth in international business despite global economic pressure. Marico’s international business was~23% of the Group’s turnover in FY11 and grew 16% YoY (organic) in Q3FY12. Dabur’s organic growth in international business was a robust 37.8% despite political disturbances in Middle East. GCPL’s international margins expanded on back of strong performance in Indonesia and Africa. Emami’s international business declined primarily due to slowdown in Africa; however, growth in other regions remained intact (Middle East: 50% YoY and GCC: 40% YoY growth). Companies are also planning introduction of a few international products in India. International businessCompany Growth (%) Company International sales as % of total revenueAsian Paints Flat HUL 1.0Dabur* 37.8 Emami 14.0Godrej Consumer* 30.0 Dabur 20.0Marico* 16.0 GCPL 33.0Emami (7.0) Marico 24.0 Source: Company, Edelweiss research * Organic growth Note: FY11 data 15
Rural focus bolsters volume Rural India remains a major focus area for all companies. Rural consumption market stood at ~USD190bn in 2010 and is expected to triple to USD600bn in next 10 years. Companies are increasingly focusing on rural expansion with specific products and direct distribution distribution. Most companies have rural growth outstripping urban growth. Emami’s rural sales contribution has been consistently increasing and is 50% of total sales as of Q3FY12. Dabur does not see a slowdown in rural areas which contributes a little more than 50% to sales. The company has a massive extension plan to increase its direct reach in rural India. For Marico, rural growth outpaced urban (rural sales contribute 40% to total Parachute sales). % of sales Rural Urban Dabur 50.0 50.0 Emami 50.0 50.0 Bajaj Corp 36.0 64.0 Source: Company, Edelweiss research 17
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