FMCG - It's raining... Offers - Antique

Our channel checks suggest limited period offers initiated by FMCG companies, notably in two key categories toothpastes and detergent powder. In toothpastes we believe that the limited period saver pack offers have been a fall-out of P&G's foray in to toothpastes while in detergents, we believe that the selective price reductions are a result of the pressure on growth. Assuming these two trends sustain or intensify in the coming quarters, the same would lead to increase in advertisement and promotional spends of Hindustan Unilever (HUL) and Colgate Palmolive India Ltd (CPIL). Add to it the pressure building from cost inflation resulting from currency depreciation, rise in crude oil prices and higher power and fuel prices, the same would lead to pressure on profitability. Currently we have built in an increase in advertisement and promotional spends by both the companies during FY14 (HUL at 13.6% of net sales (+78bps over FY13) and CPIL at 18.9% of net sales (+301bps over FY13). Therefore any incremental pressure from price cuts and increase in manufacturing cost could affect profitability of these companies by a higher than expected rate. We strongly believe that in view of the slowing demand, companies would initiate price cuts during the next two quarters. In anticipation of a challenging scenario during FY14, we re-iterate our SELL recommendation on HUL and CPIL at the current levels with a target price of INR484 and INR1211.

P&G and HUL initiating selective price cuts in detergents

Prices of P&G's key detergent brand, Tide Naturals are reduced by 9.6% and 10.7% on 1kg and 500gm SKUs respectively to INR47 and INR25, until the stocks last. Prices of HUL's Surf excel easy wash has been reduced by 24% to INR70 for a 700gm pack while Rin detergent powder prices have been cut by 10.5% to INR34.

Saver packs pushed in toothpastes to ward- off competition from P&G

In the toothpaste category, CPIL is aggressively pushing its saver packs (savings of about 10-12%) across key products, Colgate Maxfresh Gel, Colgate Total and Colgate Dental cream according to channel checks. Additionally we also understand from channel checks that CPIL will be ramping up its marketing efforts defend market share against its largest global competitor. HUL too is pushing saver packs of its strong toothpaste brand Close Up. However, the trade channel is currently doesn't expect any price cuts by industry players.

Outlook and Valuation

At the CMP of INR595, HUL is trading at a PE of 35.2x FY14e and 31x FY15e. Further CPIL at CMP of INR1400, is trading at a PE of 36.8x FY14e and 32.4x FY15e. Therefore, both the stocks have been trading at the higher band of their historic valuations. We expect a de-rating in the current valuations of these two companies in view of deteriorating demand and re-surfacing of probable input cost inflation. We therefore re-iterate our SELL recommendation on HUL and CPIL at the current levels with a target price of INR484 and INR1211.

Source : Equity Bulls

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