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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

                          Adani Ports694.35 47.45 7.33
                          Bajaj Auto4,167.10 113.20 2.79
                          HUL2,482.90 65.20 2.70
                          Bharti Airtel538.75 10.10 1.91
                          Grasim1,480.75 22.55 1.55
                          HUL2,480.75 63.85 2.64
                          Bajaj Auto4,164.95 105.95 2.61
                          Bharti Airtel538.90 10.20 1.93
                          Bajaj Finserv11,998.00 179.95 1.52
                          IndusInd Bank994.90 10.65 1.08
                          Adani Ports694.35 47.45
                          Bajaj Auto4,167.10 113.20
                          HUL2,482.90 65.20
                          Bharti Airtel538.75 10.10
                          Grasim1,480.75 22.55
                          HUL2,480.75 63.85
                          Bajaj Auto4,164.95 105.95
                          Bharti Airtel538.90 10.20
                          Bajaj Finserv11,998.00 179.95
                          IndusInd Bank994.90 10.65


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