Valuations call for selective approach

Consumer sector saw some pick-up in competitive intensity with P&G getting aggressive though not alarming yet. Raw material basket is comfortable, but a sudden rise in crude and copra prices needs to be watched against. Except for Britannia that talked about slowdown in the month of December, other FMCG companies didn’t highlight any slowdown though were cautious on commentary near-term with upcoming elections. ITC, APNT, NEST, DABUR and JUBI are our sector Buys.

RM basket comfortable but volatile: Jefferies’ overall RM basket was flattish in January with food-based RMs being flattish while non-food RMs witnessed increase of mere 0.4% m-o-m.

Price hikes not much: Pricing actions remain soft but we have some action from P&G. Key pricing action witnessed: (i) 4.3% price hike in Colgate Dental Cream gm pack; (ii) 4% price cut in Pantene Pro V (P&G) in the 180ml pack; (iii) 2.5% price hike in Bournvita.

Promotional intensity, high in few segments: We witnessed some pick-up in promotions led by P&G in categories such as detergents. Higher promotion continued in oral care led by all the key players. Promotional intensity has also increased in the feminine hygiene segment. We also witnessed promotional pick-up in biscuits. Hair colour intensity has picked up.

Innovations, robust: Key launches include launch of Britannia Treat Burst biscuit; launch of Saffola Fittify Gourmet range and Coco Soul by Marico; P&G launching Tide Bar, Marico’s Hair & Care Dry Fruit Oil, ITC entered the RTD milk-based beverages with the launch of Sunfeast Wonderz Milk in four variants:

Our view and top picks: We continue to believe that re-rating cycle of staples is nearing its end and current valuations don’t leave much on the table making us selective on the sector. Our preference is for companies with superior top-line driven earnings growth and where margins are not looking too stretched from medium term perspective given benign RM and competitive intensity in last few years. Maintain BUY on APNT, NEST and DABUR given improving execution and growth traction while ITC is a buy on favorable risk-reward with less harsh regulatory environment. HUVR, BRIT and TTAN are HOLDs despite superior execution given all positives are baked in estimates and valuations. We remain on the sidelines on MRCO, CLGT, UNSP, GCPL and Emami, still not fully convinced on medium-term topline drivers.

Procter & Gamble India Ltd