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Goldman Sachs' top stock ideas in consumer sector in FY20


Global brokerage Goldman Sachs believes the fiscal year 2019-20 has started on a weaker footing than any year in the recent past, with a tepid outlook for near-term consumption. Here are the top stock ideas by Goldman Sachs

Goldman Sachs' top stock ideas in consumer sector in FY20
Global brokerage Goldman Sachs believes the fiscal year 2019-20 has started on a weaker footing than any year in the recent past, with a tepid outlook for near-term consumption. The brokerage said the three-month period ended March 31, 2019, was the first quarter in 10 years that has seen each of the 17 consumer companies in its coverage reporting sales growth decelerate year-over-year. It was especially stark in light of significant optimism about consumer sentiment at the start of the fiscal year 2019 and strong first-quarter results, added the brokerage.
Here are the top stock ideas by Goldman Sachs:
Avenue Supermarts (DMart): Reiterates 'Buy'; revises TP to Rs 1,740 (down from Rs 1,860)
  • Offers the highest upside of 34 percent within our coverage compared to 1 percent average downside.
  • Continues to offer the lowest consumer prices compared to competitors and
  • this is its key moat which allows it to drive volume growth at its stores.
  • While industry discounting has increased over the last year, we believe the AVEU being the lowest cost operator will be able to withstand competition and still remain profitable.
  • ITC: Upgrades to 'Buy'; revises TP to Rs 315 (up from Rs 305)
    • A moderate increase in taxes will allow ITC to take pricing and support an acceleration in cigarette EBIT growth.
    • The FMCG-others business has been steadily gaining scale and is now competitive across many categories, positioned among the top three players, including flour, biscuits, instant noodles, and stationery products.
    • Valuation less demanding relative to domestic consumer peers. ITC trades at a 51 percent discount to our Indian consumer coverage, compared with a 10-year average discount of 23 percent.
    • Colgate Palmolive: Buy; TP down 8 percent at Rs 1,347
      • Toothpaste market share stabilised in the latter half of FY19; forecast acceleration in sales growth to 10.4 percent from 6.7 percent in FY19.
      • New launches in toothbrushes to increasingly lower cost of entry for new consumers, especially in rural India. New launches under the Palmolive brand as Colgate tests waters in e-commerce and modern retail.
      • At 34X FY20, Colgate continues to trade at a wider discount to the sector (12 percent) than its 10-year average discount of 2 percent.
      • Britannia Industries: Buy; TP down 9 percent at Rs 3,349
        • New product contribution to rise to 8-9 percent in FY20 from about 4 percent in FY19, driven by new launches across biscuits, other baked products and dairy.
        • Continued foray in the Hindi-belt as Britannia is one of the few companies in our coverage that is still seeing material growth benefits from increased distribution.
        • Cost savings to accelerate in FY20 as it increases the utilisation at its newest facilities in Ranjangaon and Guwahati, as well as its export facility at Mundra.
        • Page Industries: Buy; TP down 6 percent at Rs 21,610
          • Women innerwear contributes around 20 percent to Page’s sales currently, and we forecast the segment to grow at an 18 percent sales CAGR over the next five years.
          • Page expects to significantly increase its new launches in FY20E compared to the last few years, especially in athleisure and kidswear. Within athleisure also, we expect Page to maintain a 20 percent CAGR (FY19-24E) driven by new launches in both the casual and performance wear categories.
          • Page’s 12-month forward PE has corrected by 17 percent compared to its five-year averages as growth rates have come off. However, post the correction, we believe the stock offers an attractive entry point into a long term growth story.
          • Aditya Birla Fashion and Retail: Buy; TP unchanged at Rs 238
            • Pantaloons to deliver a 13 percent sales CAGR in FY19-24E, including a 4 percent CAGR in sales/sqft and the remainder through retail expansion. It remains on track to drive margin expansion with a combination of increasing private label, cost efficiencies.
            • We remain positive on its strategy on leveraging its brand portfolio to cater to the smaller cities through entry-level brands like Peter England and into newer categories through the other three brands.
            • Dabur India: Sell; TP down 11 percent at Rs 334
              • Juices have been a growth driver for Dabur until FY15 but have seen a slowdown in growth with increased competition and some supply issues.
              • Hair oil segment well penetrated and is seeing heightened competitive activity with companies like Marico getting more aggressive on pricing and lower price packs.
              • Renewed aggression from Colgate could impact oral care growth and margins for Dabur.
              • Significant exposure to rural India which has seen challenges to consumption growth driven by a slowdown in wages for both agricultural and non-agricultural labour.
              • Hindustan Unilever: Sell; TP down 2 percent at Rs 1,489
                • Pace of margin improvement to slow down as margins in home care and foods (ex GSK), which drove a bulk of the margin improvement over FY17-19, have limited room for further improvement.
                • Personal care to see increasing competition with the 6.1 percent seen in Q4FY19 being the highest ever.
                • Demanding valuation relative to broader India consumer coverage with HLL trading at a 16 percent premium and HLL’s own history.
                • Jubilant FoodWorks: Sell; TP down 4 percent to Rs 1,129
                  • Pricing competition from food tech remains high as Swiggy, Zomato and Uber Eats continue heavy advertising and discounting.
                  • While the Cricket World Cup should somewhat offset the impact of a slowdown in consumption, it faces very tough base comps for 3 quarters of FY20.
                  • The entry into the Chinese fast food business is likely to be dilutive to margins at the outset.
                  • Valuation not factoring in impact of slower SSSG and flattish margins as it continues to trade at a premium to our broader consumer coverage.
                  • Marico: Sell; TP down 4 percent at Rs 297
                    • Risks to earnings in Saffola edible oil and value added hair oil and our FY20E/21E EPS estimates are 8 percent/12 percent below Bloomberg consensus.
                    • Challenges to the near term growth outlook for Saffola due to the presence of other brands with similar product benefits at lower prices.
                    • Will face competition in hair oil segment from Dabur, Patanjali, Himalaya, etc. as these players will offer lower consumer prices to drive share gains
                    • Titan: Downgraded to 'Neutral'; TP of Rs 1,261
                      • Trim our FY20-22E EPS estimates by 3-4 percent to reflect lower margin in both jewelry and watches segments as we believe Titan is likely to invest in the sales growth.
                      • If the current disruptions in the form of credit availability to smaller regional peers etc. last for longer than expected Titan is likely to gain market at a faster pace.
                      • Expect Caratlane to break even (PBIT level) in FY20E and expect the eyewear segment to generate 5 percent margin.
                      • Slower-than-expected Tanishq store opening will have a negative impact on our sales growth forecast.
                      • Higher than expected costs are downside risks.
                      • Asian Paints: Downgraded to 'Neutral'; revised TP to Rs 1,429
                        • There could be upside risk if the benefits from government push on housing is higher than expected.
                        • We forecast gross margin to improve to 39.4 percent in FY20E and 40 percent in FY21E from 39.1 percent in FY19
                        • Higher-than-expected competition from existing players like Berger, Kansai Nerolac or relatively new entrants like Indigo or Nippon could have a negative impact on volume growth.
                        • Market Movers

                          Nestle18,006.10 321.30 1.82
                          TATA Cons. Prod729.40 9.90 1.38
                          ONGC126.80 1.45 1.16
                          M&M817.50 8.90 1.10
                          Bajaj Finserv11,900.00 101.30 0.86
                          Nestle17,979.70 300.20 1.70
                          ONGC126.60 1.25 1.00
                          M&M816.40 7.85 0.97
                          Bajaj Finserv11,876.35 77.30 0.66
                          HUL2,403.60 12.45 0.52
                          Adani Ports730.10 -31.75 -4.17
                          Hindalco380.25 -10.60 -2.71
                          Tata Steel1,142.15 -32.15 -2.74
                          Power Grid Corp241.55 -6.05 -2.44
                          JSW Steel710.40 -14.70 -2.03
                          Power Grid Corp241.50 -6.00 -2.42
                          Reliance2,216.75 -32.95 -1.46
                          Bajaj Finance6,097.25 -63.45 -1.03
                          HDFC2,519.00 -25.40 -1.00
                          Bharti Airtel537.75 -4.85 -0.89


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