Given the rich valuations, it is advising investors to increase their investment horizon.
Brokerage summary follows...
Results of six FMCG companies that reported so far indicate that these companies are able to manage the ill effects of the macro economic slowdown by boosting sales (innovation, promotions) and Ebitda (benign input costs) to deliver and average net profit growth of 16.1%, c50 bps higher than our estimates. Although volume growth in some pockets was impacted overall, the impact is not large. Moreover, many companies have been indicating gross margin expansion in future, to offset the hit of A&P and slow demand.
Sales impacted by poor international segment; domestic in line: Sales for the sector grew at an average of 14.7% vs. our estimate of 15.8%. Domestic volume growth has been in line with our estimate and in some cases, it even improved from Q3 levels. It seems that a combination of sales promotions to spur demand and innovations have allowed sales to remain buoyant. Moreover, rural distribution expansion has enabled companies to gain market share from unorganised players.
Ebitda in line; net profit marginally higher: Ebitda growth for the sector was at 15%, in line with our estimate. Gross margins expanded by ~190 bps, higher than our estimate of 90 bps expansion because of lower input cost. Some companies invested the same in higher A&P. Going ahead, we believe that gross margin expansion for some companies could accelerate, providing a buffer against higher support spends or lower off-takes.
Valuations limit upside; prefer Emami, ITC, and GCPL: Valuations for most stocks would mean that they need a longer investment horizon. We advise investors to stick with companies focused on particular niches and those having high market shares. Emami is gaining market share strongly and has the highest volume growth in the industry. We like ITC for its high pricing power and consistent growth. GCPL has strong brands and likely to see Ebitda margin expansion.
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