Broking firm Nomura believes that over the next few quarters, the growth outlook for consumer companies in India continues to remain strong. Volumes are likely to remain buoyant in the medium term, concerns such as delay in monsoons and economic slowdown notwithstanding
In 2012, the consumer sector has been the best performing sector in India, with the FMCG (fast moving consumer goods) index up 35.8% YTD (as of 14th September) compared to the benchmark Sensex +19%. This outperformance of 16.8% has been on account of continued delivery on the operational front from companies across the sector as well as a risk-off environment, where defensive sectors have been the flavour with investors, according to a report by Nomura Equity Research. This is also reflected in the performance of other defensive sectors such as pharmaceutical companies, which has also had a strong run with the healthcare index at +28.3%, outperforming the Sensex by 9.3%.
Nomura believes that over the next few quarters, the growth outlook for consumer companies in India continues to remain strong. Unlike its previous expectations, the global brokerage firm is yet to witness any meaningful slowdown or trading down in the staples sector. The on-the-ground feedback and company commentary suggest that volumes are likely to remain buoyant in the medium term, concerns such as delay in monsoons and economic slowdown notwithstanding.
Stocks of Consumer companies are trading currently at an average of 27x FY14F P/E, higher than the long-term average of around 24x. Nomura expects valuations to remain at current elevated levels in the near to medium term due to: a) continued strong growth, and b) prevailing risk-off environment.
In the current environment, the brokerage prefers companies with a history of consistent delivery. ITC is a top buy in the large cap space where mid-teens EBIT growth in the key cigarette business is seen continuing in the next few years. Nomura has upgraded Hindustan Unilever to a neutral on the back of continued strong operational performance. Among the mid-cap names, it prefers GCPL, as its performance across geographies has been robust. It also recommends Jubilant Foodworks despite its high relative valuations. We believe its earnings will continue to surprise the street positively.
Among the stocks in the coverage universe, we see that the outperformance Vs the
Sensex is across the board with United Spirits the top performing stock and Nestle India being the only underperformer. United Spirits is +88% YTD (on the back of a sharp move in recent months on news reports of an M&A deal with Diageo; Source: The Economic Times,
25 April 2012). On the other hand, Nestle, where underlying performance on the volume front, has been underwhelming, has underperformed the Sensex.
Even when we look at valuations of the consumer companies against the Sensex, the premium is at multi-year highs. The consumer sector trades at a 117% (as of 14 September 2012) premium to the Sensex compared to the long-term average of 73%. This premium has moved up from 100% at the start of the year, which indicates that even if we see this on a short-term basis, valuations across the consumer sector have seen a significant re-rating, says Nomura Equity Research.
The brokerage believes tat one of the key reasons for this re-rating has been the consistent track record across companies in terms of delivery on operational performance. If we look at volume growth performance over the last few quarters, companies across the sector have shown consistent delivery in terms of volume growth, which investors have rewarded with higher multiples.
It can be noted that this performance has been delivered across a full cycle. If we look at sector performance since the financial crisis in 2008, we see that sales growth has been fairly robust, despite the swings in commodity prices and threat of softening demand over the past three to four years. The only quarter where sales growth was sub-10% was in 2008, in the first quarter after the financial crisis.
FY12 saw a significant level of pricing action across categories, particularly as companies tried to balance the increasing commodity costs with price increases. A look at some of the key segments, such as soaps, detergents and shampoo, indicates that the pricing action is now showing signs of slowing down. This trend is likely to sustain in the near term, as commodity cost pressures have eased significantly. Pricing is also a function of the demand situation and inflation, both of which have seen a slowdown in recent months. In FY13F, the majority of the impact on revenue growth will be in the form of volume growth with price/mix element being a smaller contributor.
A look at EBITDA margin trends across the consumer sector shows a significant level of variation across the time period. This is a reflection of two key variables: first, the commodity price trends and, second, the investment in advertising and promotion (A&P) in the sector. Over the past few quarters, there has been a recovery in EBITDA margins led primarily by softening of commodity costs.
However, there have been some recent spikes in commodity costs particularly in commodities such as maize and wheat, which should temper some of the margin performance for food companies as well as in pockets of HPC categories such as oral care. Copra prices are still down substantially y-o-y, which should continue to benefit Marico into FY13F. Barley and milk prices being relatively stable are a positive for Nestle and GSK Consumer, opines Nomura.
Nomura Equity Research has upgraded Hindustan Unilever to ‘neutral’ from ‘reduce’ and raise its target price to Rs527 from Rs327 on the back of structural improvements in the business. It believes HUL has turned a corner and valuations are likely to sustain at higher levels than the long-term average in the near term.
While the regulatory environment has been uncertain, with large increases in excise duty in both FY10 and FY12 budgets, ITC has been able to pass on these price increases to consumers and deliver robust revenue and earnings growth. This has been the case for the last six to eight years, and ITC will continue to deliver mid to high teens earnings growth, even if there remains some uncertainly on the regulatory front. Given this resilience which the company has demonstrated, ITC should continue to be a core holding in the Indian consumer sector. Nomura reiterates ‘buy’ with an increased target price of Rs310.
Godrej Consumer Products (GCPL) has delivered strong operational performances both on the domestic and international front over the past couple of years. The performance to continue in the medium term, with management focused on delivering volume growth ahead of industry. International business is now a substantial part of the portfolio, where the inorganic route has worked well for GCPL. The agency maintains a ‘buy’ rating with an increased target price of Rs800, on the back of increases in our earnings forecasts as well as P/E multiples.
Jubilant Foodworks delivered strong same-store-sales growth (SSSG) of 29.6% for FY12. With penetration of pizza still low and consumption in major cities continuing to hold up, Nomura believes SSSG will continue to be in the 20% range over the next couple of years. The company has guided for 18%-20% SSSG for FY13, which could be conservative. The launch of Dunkin Donuts will likely add another leg of growth in the medium term.
Nomura maintains ‘buy’ with an increased target price ofRs1,490, implying 20.6% upside.
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Anyone who has enough money and/or insurance does not die in dignity. S/he has to pass through a hospital intensive care unit en route to heaven!
“When I see some of the people who are glorified in magazines these days—who are so thin it's bordering on sickness—I just feel exhausted”— Katherine Heigl
Every hour in the US the TV adverts for drugs runs around 80 drugs! Many of them who see these do discuss the drug with their doctors as most drugs are advertised as if they are tailor-made for you hypochondriasis. Nearly half of all those that see their doctors get to take the drug, some for the rest of their lives. Sickness sales are the highest in the world today from the commercial point of view. The pharmaceutical companies laugh all their way to their banks!
What is the result? Every symptom, however trivial it might be, gets blown out of proportion. Many of life’s normal physiological processes like menarche, menopause, pregnancy, child birth, sexuality, sorrow, old age maladies and death have all become medicalised today, thanks to the bogey of long life, and at times, immortality that these advertisements propagate. Today anyone who has enough money and/or insurance does not die in dignity. S/he has to, per force; pass through a hospital intensive care unit en route to heaven! Do not get alarmed if I told you that 90% of the hospital profits in the USA come from keeping dying patients in the ICU for the last ten days of their journey through this world! The relatives are told that they have done their best. Relatives are happy that they do not have any guilt feeling of not looking after their near and dear ones.
The screening industry is the richest of them all. The catchment area for the screening industry is the whole population of this world. They have sold the wrong idea that getting screened is the best way to remain healthy. I am told that the Government of India has even given income tax rebate for screening insurance. I am sure there is some screening gate (scam) waiting to be unearthed. One has only to read the educative article on the screening industry by the former celebrated editor of British Medical Journal, Richard Smith, to remain here in good health as long as one is destined to be here. While one is healthy (health is enthusiasm to work and enthusiasm to be compassionate) one should NEVER go for screening.
Do not go to the hospital or doctor to get health? Do not go to the police to get honour. Do not approach the court for getting justice. You will be in for a shock and some trouble. But when you are not well, when you have lost your honour and when injustice is done to you, you have no choice but to go to them. Similarly going for screening when one is healthy could be very, very dangerous. The reason is not far to seek. Medicine is not a hard science. It is a statistical science where averages are equated with normality. We have no definition of NORMAL in medical science. When average is normal where false positives and false negatives are 50%. Now imagine your position when you go for a heart check-up. You will certainly end up on the angiogram table if not on the bypass table!
What is the fall out of all these cacophony? Medical establishment today has become the leading cause of death in the west, especially in the USA followed by cancer and heart attack in that order. Inside the medical establishment adverse drug reactions (ADR) take the cake with 400,000 deaths a year, which keeps mounting by the day as more and more drug advertisements are allowed directly on the popular TV channels. Hospital infections come next due to super bugs in the vicinity. Medical errors, over investigations and over interventions are to follow.
We need fresh thinking in this area with a new science of man of non-linearity and CHAOS. That will end the menace of the present screening industry. Let us call that new integrated system as Post Modern Medicine.
“Three-quarters of the sicknesses of intelligent people come from their intelligence. They need at least a doctor who can understand this sickness”—Marcel Proust
(Professor Dr BM Hegde, a Padma Bhushan awardee in 2010, is an MD, PhD, FRCP (London, Edinburgh, Glasgow & Dublin), FACC and FAMS. He is also Editor-in-Chief of the Journal of the Science of Healing Outcomes, Chairman of the State Health Society's Expert Committee, Govt of Bihar, Patna. He is former Vice Chancellor of Manipal University at Mangalore and former professor for Cardiology of the Middlesex Hospital Medical School, University of London. Prof Dr Hegde can be contacted at [email protected])