Q2FY2008 FMCG earnings preview: Sharekhan Special dated September 13, 2007

SHAREKHAN SPECIAL

Q2FY2008 FMCG earnings preview 

• Backed by a pick-up in demand in the semi-urban as well as rural areas, the fast moving consumer goods (FMCG) sector has seen the volume growth getting better every quarter. The revenue growth for the current quarter is likely to be driven by volume growth as well as improved pricing power of the FMCG companies.
• Rising input prices is a concern for the industry. In the past quarters the FMCG companies had been able to combat this issue with price hikes, innovative products with higher realisations and prudent advertising spend.
• We expect the earnings of the market leader in the segment, Hindustan Unilever Ltd (HUL), to grow by 17.2% year on year (yoy) backed by a 13% growth in the home & personal care (HPC) segment. We expect HUL's margin to improve from 13.1% in Q3CY2006 to 14.2% in Q3CY2007, primarily due to the price hike taken in many of its products as well as improved product mix.
• ITC's growth is expected to be broad based with the reduction in the magnitude of the losses in the non-FMCG businesses. The imposition of the value added tax (VAT) and the price hike taken by the company in the first quarter of FY2008 had affected the growth of its cigarette business in that quarter and the second quarter is expected to witness a trailing effect of the same. Despite this, we expect higher realisations to boost ITC's bottom line by 11.2%.
• In our past reports we had always opined that the implementation of VAT might have a dampening effect on the stock price of ITC but the same would likely be a temporary aberration. The recent spurt in the stock price substantiates our opinion. We continue to be bullish on the stock with a long-term perspective.
• The long-term prospects of the FMCG sector appear favourable with the rising disposable income of Indians and the increased spending by them. We believe with strong free cash flows, high return on capital employed (RoCE) and sustainable growth, the sector still has considerable upside potential compared with the other sectors.