Sharekhan Investor's Eye
Investor's Eye
[October 03, 2008] Sharekhan
www.sharekhan.com
Summary of Contents
PULSE TRACK
a.. Inflation at 11.99%, below consensus estimate
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SHAREKHAN SPECIAL
Q2FY2009 FMCG earnings preview
Key points
a.. The fast moving consumer goods (FMCG) companies announced
price hikes across product categories in Q2FY2009 in a bid to protect their
margins. The price hikes were done as a combination of an increase in absolute
prices and a reduction in the pack sizes.
b.. Commodities showed a mixed trend in Q2FY2009. Palm oil prices
declined by 20.1% quarter on quarter (qoq) which augurs well for soap producers
like Hindustan Unilever Ltd (HUL), Godrej Consumer Products Ltd (GCPL) and the
newest entrant, ITC; the full benefit of lower palm oil prices would be
reflected in their performance from Q3FY2009 onwards. Also, the correction in
crude oil prices bodes well as it would bring down the packaging cost for the
FMCG companies and crude linked commodities like LAB (key input for
detergents). However, prices of key commodities like copra, auction tea,
caustic soda, soda ash and LAB increased by 6.5%, 14.0%, 21.5%,14.0% and 18.3%
respectively during the quarter on a sequential basis, further adding to the
pressure on the margins of the FMCG companies. In addition, prices of milk
products and sugar remained firm during the quarter.
c.. Our channel checks and market research suggest that the
inflationary scenario has affected the sales volumes across most of the FMCG
product categories and even led to downtrading in certain pockets. In such a
situation, we expect the FMCG companies to pass on the drop in the prices of
commodities to consumers going forward in order to push volume growth,
especially ahead of the festive season, and to sustain growth in the medium
term.
d.. For Q2FY2009, we expect the top line growth of most FMCG
companies to be driven by price increases backed by a comparatively lower
volume growth. Also, we expect the profit growth of almost all the FMCG
companies to lag behind their sales growth on account of margin declines.
e.. Though the volumes of FMCG products in general have come
under pressure in recent times because of steep price increases announced by
the companies to protect their margins, we believe this is going to be a
short-term phenomenon. We expect the cost inflation pressures to recede for the
FMCG companies sooner than later as prices of commodities are already trending
downwards. Also, factors like an increase in the disposable income of the
middle class on salary increases as per the Sixth Pay Commission's
recommendations and a better than initially expected kharif output will boost
the spending power of rural India. Therefore, we are optimistic about the
prospects of the FMCG sector. Our top picks in the sector remain HUL and ITC.
Q2FY2009 Oilfield services earnings preview
a.. High realisations combined with an increased asset base
continue to drive growth for the oilfield services companies under our
coverage. The outlook for these companies remains bright on account of the huge
investments lined up in the oil exploration and production sector.
b.. We expect our universe of oilfield services companies to
report an excellent top line growth of 103.9% and an impressive bottom line
growth of 106.1% for Q2FY2009. Aban Offshore and Shiv-Vani Oil and Gas
Exploration Services remain our preferred bets in the sector.
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