ITC, Godrej Consumer, United Spirits & Jubilant Foods top bets in consumer sector for 2015: CLSA

NEW DELHI: The sharp correction in the price of crude oil and its derivatives is likely to create a margin tailwind for the consumer sector in FY16, global brokerage firm CLSA said in a note.

While a part of the savings would be ploughed back in the form of higher advertising and promotional (A&P) spends, there would still be a positive impact on margins, the report added.

The Asia-Pacific brokerage firm is of the view that the demand environment continues to remain weak, although most companies expect a gradual pick-up in FY16.

ITC, Godrej Consumer, United Spirits and Jubilant Foods are our positive recommendations while we remain negative on HUL and Colgate, added the report.

ITC continues to provide high earnings visibility, thanks to strong pricing power. It faces no risk on the input cost front, and remains our top pick in the sector.

CLSA has upgraded Godrej Consumer to BUY (from SELL) which should benefit from a low base, benign input prices and contributions from new launches.

They remain convinced on United Spirits and Jubilant Foods which also are BUYs, notwithstanding some near-term pressures and earnings volatility.

Crude oil prices have come down by 47 per cent in rupee terms over the past five months, which is a key positive for the consumer industry. The prices of crude derivatives and palm oil — which go as an input for the consumer goods industry — have also been declining.

Adding to the benefits, decline in oil prices may also help in lowering the freight costs for the industry. However, the benefit would be partially offset by higher A&P spends, as the industry would plough back a part of cost savings.

Within its coverage, CLSA sees Asian Paints and HUL as the key beneficiaries where oil derivatives form almost 40-45 per cent of the input base. It has accordingly revised the FY16-17 EPS estimates higher by 4-7 per cent for Asian Paints and 3-4 per cent for HUL.

It has also raised its FY16-17 EPS estimates by 1-4 per cent for Colgate, Godrej Consumer and Dabur.

While most companies are hopeful of a pick-up in growth, CLSA channel checks indicate that the environment continues to remain challenging.

Factors like tough macro, high inflation, weak consumer sentiments, etc., have been weighing on the consumer sector growth rates over the past few quarters, added the report.