FMCG scrips buoy portfolio

With volumes growing at a healthy pace, easing of input prices should help these firms post profitable growth.

FMCG stocks, seen as defensive plays, have been outperformers in the past two months. FMCG index returns were higher by about 400 basis points than the Sensex during this period. Even HUL, which has lagged in the past, marched ahead to its 10-year high. While fundamentals are improving, other reasons for the trend include increased interest of foreign funds. Also, FMCG stocks are playing catch-up on valuations.

Earlier, despite high raw material prices, companies could not fully pass on the costs to consumers due to the economic slowdown. However, recently, many have increased prices selectively.

For instance, HUL, which introduced several price cuts in the past 12 months to protect its market share and boost volumes, has increased prices of soaps by three-eight per cent and of Rin by eight per cent. Marico, Dabur and Nestle have also effected price increases and experts believe the likes of GCPL will not be far behind. The return of pricing power is being perceived as a positive.

On a broad note, crude oil-linked inputs have been steady compared to the same time last year, while a cooling in major agri inputs is heartening for many companies. “Lower input costs could bring some relief to margins at the gross level in the September quarter results,” says Manoj Menon, analyst, Kotak Securities. Menon, however, expects that higher ad spends could take away some of these gains in margins at the operating level.

Broadly, FMCG companies are expected to report healthy growth in volumes, both in rural and urban markets. The ongoing festive season and softening of raw material costs after a decent monsoon are the other positives.

Anand Shah, analyst, Angel Broking, says, “Overall, expect top line to grow 13-14 per cent year-on-year, as in the June quarter. However, the second half of 2011 could see a smarter pick-up.”

We take a look at four companies, which apart from providing stability to your portfolio in volatile times, can deliver healthy returns in the medium term.
 

IN GOOD HEALTH
in Rs crore	Net sales			Net profit			PE (x)
	FY10	FY11E	FY12E	FY10	FY11E	FY12E
Britannia	3,340	4,140	4,770	156	199	250	23
HUL	17,840	19,200	21,300	2,250	2,200	2,490	28
ITC	18,230	21,280	24,350	4,010	4,740	5,500	25
Nestle	6,042	7,090	8,150	790	960	1,150	29
E: Analyst estimates, P/E is based on estimated FY12 earnings Consolidated numbers wherever applicable

Britannia
Britannia Industries had seen a 50 per cent year-on-year drop in net profit in the June quarter on account of food inflation, marketing expenditure and rise in interest costs. However, softening of agri inputs like sugar and wheat could help in margin expansion, though the same could lead to new local competition in the low-priced product segment, like Tiger. Robust demand in the premium segment with products like Good Day, Treat and Nutrichoice should help drive its future performance. Buy.

HUL
The price increases in toilet soaps and detergents will neutralise the impact of higher input costs of palm fatty acid, LAB and HDPE. In spite of higher input costs earlier, HUL had been shy of increasing prices in both the segments, partly due to stiff competition. The good monsoon could boost rural demand and consumption, the segment that contributes 45 per cent of its revenues. Though soaps and laundry segments are not out of the woods yet, others like skin care, beverages and processed foods are doing well. HUL has been a major outperformer. But since it has seen a sharp rise (up over 10 per cent) in the past one week, it should be considered on dips.

ITC
ITC has been a major outperformer in the past one year due to a pickup in all its business segments. Its diversified revenue base has helped negate the impact of competitive/pricing pressures in comparison to its peers. The increase in excise duties did not impact cigarette volumes majorly in recent quarters and upgrading of beedi customers to cigarettes holds promise for the long term. Besides, segments like hotels and paper are doing well. Lower prices of wheat and sugar should boost profitability of its FMCG (non-cigarettes) division, which has been inching towards a turnaround. The stock can be bought with a longer-term perspective .

Nestle India
Higher disposable incomes would help packaged food players like Nestle. With an urban-centric portfolio (instant noodles, chocolates and confectionery), Nestle is expected to do well. Besides, the introduction of low-priced units should help it clock good growth rates in rural markets too. Lower wheat and sugar prices should aid margins. While higher milk prices are not assisting margins, higher fodder availability could see a correction in milk prices in the next quarter. Besides, product innovation and thrust on distribution should ensure healthy growth rates in the domestic market (around 90 per cent of revenues). Buy.