FMCG scrips in fast lane

The outlook for the domestic consumer goods industry remains attractive with companies witnessing significant revenue growth. Analysts say the FMCG (fast-moving consumer goods) companies are getting back the pricing power after the bloodletting seen in the previous year.

Morgan Stanley is 'overweight' on Hindustan Lever (HLL), the $2.2 billion largest consumer company in the country, though the HLL stock has fallen significantly during the past few weeks.

The company's numbers for the final quarter of 2006, out on Tuesday, showed its domestic revenues increased 8.5 per cent, driven by 11 per cent growth in the foods and 8 per cent rise in the HPC (home and personal care) category.

While its PBT (profit before tax) grew 11.8 per cent, the bottom line rose 10.2 per cent. The company's operating profit was up 4 per cent, while margins fell a bit. However, other operational income grew 11.2 per cent and margins improved nearly 80 basis points.

"We believe HLL is the most levered play on the potential improvement in the consumer environment, as it has not only a strong urban and rural presence but also a dominant presence across most HPC products, covering most income groups. Also, the company has been able to restructure itself successfully by improving the health of its core power brands, increasing the profitability of its foods business and altering its focus to drive market share-led revenue growth," a recent Morgan Stanley report said.

"HLL will continue to see valuation support as it begins to reap the fruits of its restructuring. We forecast 19 per cent earnings CAGR over CY2007-09. The slowdown in sales growth in Q4 is an aberration largely because of flat sales in skin care and shampoos. We expect the company to demonstrate around 13 per cent revenue growth during CY2007-09. A potential improvement in earnings growth is likely to drive a recovery in HLL's share price performance," it added.

IL&FS Investsmart maintains a 'buy' rating on Godrej Consumer Products (GCPL).

GCPL posted 29.3 per cent growth in consolidated net sales to Rs 238 crore. EBITDA margins, however, fell 110 bps to 21.6 per cent owing to rise in raw material costs. Consolidated net profits shot up 10.6 per cent to Rs 39.56 crore.

In Q3FY07, GCPL's soap sales expanded an impressive 24.6 per cent to Rs 110 crore, since about 60 per cent of the soap sales during the quarter were at higher price points. The hair colour sales (excluding the Keyline brand) grew 14.8 per cent to Rs 47.17 crore.

International operations, which include the Keyline and Rapidol brands, posted sales of Rs 40.30 crore during the quarter. The division's PAT stood at Rs 2.90 crore for Q3FY07.

GPCL's EBITDA margins fell 110 bps to 21.6 per cent in Q3FY07 on higher input costs.

"At the current market price, the stock is trading at PE multiples of 19.2x and 16x its FY08E and FY09E earnings respectively. On an EV/EBITDA basis, the scrip is quoting at 15.1x and 12.6x its FY08E and FY09E earnings respectively. We believe despite higher raw material costs, the company will post strong earnings growth going forward, supported by its higher pricing power," an IL&FS report said.