ITC: (CMP: Rs. 288; Target Price: Rs. 312) – BUY
ITC’s dominance on cigarette would continue going forward, owing to extensive portfolio, large distribution network, and suitable backward integration. We expect strong pricing power and likely foray into 64 mm cigarette segment would aid ITC in maintaining healthy growth momentum. Besides, better cigarette revenue mix with pricing power, higher operational efficiency would boost PBIT/stick to 109 paisa by FY15E from 80 paisa in FY12P.
Outlook & Valuation: Valuing the stock using DCF methodology – as relative valuation is not feasible in the lack of suitable comparison – we initiate coverage on ITC with “BUY” recommendation with a target price of Rs. 312 apiece, having 8% upside potential from the CMP.
HUL: (CMP: Rs. 573; Target Price: Rs. 576) – HOLD
The higher involvement of top management at the field level, setting up of aggressive sales targets, improvement in product portfolio and expansion in distribution network have improved the visibility in the business. We expect it would help in delivering better revenue going forward which HUL was missing in previous several years. We expect sales and net earnings to show 15.7% and 17.5% CAGR during FY12‐15E vs. 14% and 13.5% growth in FY10‐12 respectively.
Outlook & Valuation: Valuing HUL at P/E of 30x (1.8x PEG) on 24‐month forward earnings – which is ~10% premium to FMCG sector’s valuations and ~20% higher than its past three years median P/E – we initiate coverage on HUL with “HOLD” recommendation with target price of Rs. 576 apiece, having 1% upside potential from the CMP.
Nestlé India: (CMP: Rs. 4,760; Target Price: Rs. 4,564) – SELL
Consistent price hike, low discretionary spending amid rising competition across all categories has been impacting Nestlé India’s volume growth for past few quarters. However, recent new launches with higher focus on rural market would aid the Company in showing better volume growth, going forward. Higher spending on capacity expansion would force Nestlé India to focus more on volume growth. As the likely pressure on pricing power would limit further expansion in EBITDA margin, we expect Nestlé India to maintain EBITDA margin at ~21% in CY12E & CY13E.
Outlook & Valuation: Nestlé India’s valuations premium has declined to 25% compared to 40% in the previous year. We give 31x (PEG of 1.9x) multiple on 24‐month forward earnings and derive target price at Rs4,564. We initiate coverage on Nestlé India with “SELL” recommendation.
Dabur India: (CMP: Rs. 132; Target Price: Rs. 150) – BUY
Strong presence in domestic market has enabled Dabur to maintain high revenue growth momentum. On the back of initiative to expand rural distribution network, we expect Dabur to report better sales growth in the rural business in ensuing quarters. Besides, its global business is also expected to maintain high growth momentum as Daburʹs overseas acquired entities that Hobi Kozmetic and Namaste Group have been integrated completely and their portfolio is being extended across geographies.
Outlook & Valuation: Valuing the stock on 24x P/E on 24‐month forward earnings, we initiate coverage on Dabur with “BUY” recommendation with a target price of Rs. 150 apiece.
Colgate: (CMP: Rs. 1,236; Target Price: Rs. 1,322) – HOLD
Colgate‐Palmolive is expected to maintain EBITDA margin at ~21‐22% in FY13 & FY14 owing to favorable revenue mix and better price growth expectation. The Company is expected to sustain its volume growth owing to its regular launches, higher rural focus and continued dental awareness programmes. However, we believe that its A&P spend would continue to remain higher in FY13 & FY14 in order to maintain the healthy volume growth.
Outlook & Valuation: Based on give 26x P/E on 24‐month forward earnings, we initiate coverage on Colgate‐Palmolive with “HOLD” recommendation with a target price Rs 1,322 apiece.
Marico: (CMP: Rs. 204; Target Price: Rs. 232) – BUY
Its Parachute portfolio has been contributing significantly towards its volume growth, which we expect to remain high albeit at slightly slower pace in comparison to past few quarters. Again, Saffola, personal care portfolio of Paras Pharma and global business would continue to contribute to the Company’s overall sales growth. Copra prices correction and addition of high margin Paras Pharmaʹs personal care business would also help in maintaining the EBITDA margin.
Outlook & Valuation: Based on 24x P/E on 24‐month earnings, we initiate Marico with “BUY” recommendation with a target price of Rs. 231 apiece.
Jyothy Labs: (CMP: Rs. 172; Target Price: Rs. 201) – BUY
We are bullish on long‐term business outlook on account of Jyothy’s higher focus on product development, synergy benefits through Henkel India acquisition, better Rural: Urban mix and scope of improvement in EBITDA margin. Jyothy’s core business is expected to deliver ~20% CAGR during FY12‐15E. Meanwhile, as the Company has almost turnaround Henkel Indiaʹs performance, we expect better sales growth from Henkel India on account of price hike and increase in the distribution reach.
Outlook & Valuation: We reiterate our “BUY” recommendation on Jyothy Labs and our target price of Rs. 201 apiece is based on 19x P/E of 24‐month forward earnings.
Best FMCG Stocks To Buy