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Volume growth momentum sustained: Q3FY2012 was yet another quarter of strong top line growth for the fast moving consumer goods (FMCG) companies, with the volume growth momentum sustaining during the quarter. Despite a gloomy macro-economic environment almost all the FMCG companies under our coverage (except for Zydus Wellness and Tata Global Beverages Ltd [TGBL]) posted a steady volume growth during the quarter (Hindustan Unilever Ltd [HUL]-about 9% year on year [YoY]; Marico-about 16% YoY; GSK Consumer Healthcare [GSK Consumers]-about 11% YoY; Bajaj Corp-about 20% YoY) sustained during the quarter. The improvement in rural penetration, innovations and renovations in portfolios along with adequate media spends were some of the key drivers of growth for the FMCG companies. The growth in rural India was ahead of that in urban India for most of the FMCG companies under our coverage.
Gross margins improved sequentially: The quarter saw the FMCG companies witnessing a sequential improvement in their gross profit margin (GPM), as the prices of the key inputs declined from their highs in the recent past. HUL continues to curtail its advertisement spends to show a better picture at the operating level while companies like Marico and GSK Consumers continued to support their brands and new launches with brand building and promotional activities. With a strong top line growth, the higher other income aided the FMCG companies under our coverage (ITC, GSK Consumers, Bajaj Corp) to post a robust bottom line growth during the quarter.
HUL, Marico and GCPL beat Street's expectation: It was yet another quarter when HUL beat our as well as the Street's expectations by posting a robust operating performance. HUL's top line grew by 16.4% YoY with a volume growth of 9.0% YoY during the quarter. The operating profit margin (OPM) improved substantially due to the trimming of advertisement spends, which aided the operating profit and the adjusted profit after tax (PAT) to grow by 41.9% YoY and 30.3% YoY respectively during the quarter. Marico maintained its above 20% organic revenue growth in Q3FY2012. This was driven by mid-teen volume growth on the back of a strong volume growth in the domestic consumer business. The consolidated top line of Marico grew by 29.4% YoY. However, higher depreciation charges and tax outgo led to a 13% year-on-year (Y-o-Y) bottom line growth (ahead of our expectation). Godrej Consumer Products Ltd (GCPL) results are ahead of our expectation mainly on account of an exponential top line growth an OPM of around 20% (which is better than expected).
Outlook and valuation We expect the top line growth of the FMCG companies to sustain in strong double digits, driven by a mix of sales volume and price increases in the coming quarters. The prices of commodities (the key raw materials for FMCG companies) have remained volatile in the past few months. If these correct from the current levels, we can see a substantial improvement in the margins in the coming quarters. Also, going ahead any significant correction in the commodity prices might cause the FMCG companies to shift their focus back on improving the sales volume growth.
We retain our view of remaining selective in the FMCG space with preference for the companies having a strong balance sheet, better earnings visibility and decent valuations from the current levels. Hence we maintain our penchant for ITC and GSK Consumers among the large-caps, and for GCPL and Bajaj Corp in the mid-cap space. We also like Marico largely on account of its sustained strong performance in the domestic market and a three-pronged strategy of driving growth by entering into categories through new product launches, acquisitions in the domestic as well as international markets, and enhancing the reach of the existing portfolio.
SECTOR UPDATE
Retail
India on the cusp of a consumer revolution-collaboration the way forward
We attended the Confederation of Indian Industry (CII)'s "National Retail Summit 2012" recently. The summit was represented by leading veterans from the fast moving consumer goods (FMCG) and retail industries as well as consultants and investment stalwarts.
The following are the key takeaways from the summit: All the speakers from the FMCG as well as retail segment unanimously agreed that India is on the cusp of a consumption revolution that is yet to make inroads (approximately Rs3.6-trillion consumption opportunity by 2020). Many categories in food as well as fashion either do not exist in India today or have very low penetration, thus paving the way for increasing categories and robust category growth (a case in point mentioned was of chocolate where India's one-year consumption equals Brazil's one-day consumption). As players discussed the opportunity that exists, they also spoke of the challenges to be faced, like inadequate supply chains, logistic issues, and the ever discerning and ever changing consumer and the more complex shopper. The discussion ended with the participants agreeing for a collaborative effort between FMCG and retail stakeholders that would aid India to unleash the consumption wave. Speakers across verticals spoke on various topics, we present below some of the thoughts that flowed during the summit.
We remain bullish on India's consumption space: The FMCG and retail players are both in a sweet spot to cash in on this great opportunity through a collaborative effort, creating newer categories and newer products for consumption. Food, education, leisure and healthcare are the segments to see a revolution (growing 3-4x from the current levels). Thus, we maintain our bullish view on the consumption space.
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