ET Now: What do you make of the kind of volume growth numbers we have got from Emami, Britannia and for that matter Godrej Consumer? Are you getting a sense that midcap FMCG companies are growing faster than the top FMCG companies?
Sanjay Manyal: If we really see the trend in the midcap FMCG companies, the volume growth has been healthy. But we need to understand that this volume growth has come because of the huge advertisement expenditure these companies have incurred. Whether it is Jyothy Lab or Marico or for that matter Britannia, there has been a huge advertisement expenditure which has been done in the quarter and these expenditure companies have done because of the gross margin expansion. So raw metal prices have helped these companies and there has been a gross margin expansion and we have seen this trend in most of the companies. There has been a certain percentage which has been given as advertisement expenditure. However, what we believe is that rupee depreciation in June and onwards would take a toll on the raw material cost again and probably this gross margin expansion which has happened in the first quarter would not sustain and these companies probably have to either reduce their advertisement cost in the coming quarters or they will be taking a hit on the margins in the coming quarters.
ET Now: I want to talk about specific companies now. Jyothy Laboratories for one grew twofold in terms of the bottom line at Rs 28.7. There are quite a few bullish targets on this one. 250 is what the street is talking about. What is your view?
Sanjay Manyal: This is probably one of the first quarters where Jyothy Lab has shown very good margin expansion, simultaneously with the good volume growth across the brands. But we would still want to see another few quarters of the sustainability of this growth. As I mentioned, these companies have taken huge increase in the advertisement expenditure and that probably has resulted into good volume growth and there has been reduction in raw material cost which has benefited these companies. Jyothy Lab has seen 600 basis point expansion in its gross margins. They have passed on almost 400 basis point in the advertisement expenditure and that is probably one of the reasons why they have seen both top line and the bottom line growth. But we would like to see the sustainability of this growth in coming quarters and as far as margins are concerned, we are apprehensive about margins because of the rupee depreciation and again the raw material cost is inching up. So we would be cautious specifically on Jyothy Lab because this is the first quarter where they have shown a good growth both in bottom line and the top line.
ET Now: At a time when we are in a pronounced economic downtrend. Is it not time to focus on FMCG companies which will benefit in a downturn, so do not buy Nestlé but maybe by an Emami. Similarly do not buy Glaxo Consumer, but buy into Godrej Consumer?
Sanjay Manyal: Yes absolutely, we need to look at the midcap companies and we need to understand, we need to differentiate between growth and valuation multiple. So these large cap companies like HUL and Nestlé were getting 35 plus kind of multiples a few months back. Growth was down, volume growth was negligible for HUL as well as there was negative volume growth for Nestle. So obviously, the valuations were not justifying these numbers whereas on the other hand if we really see something like Marico or Dabur for that matter, it has been good 9-10% odd volume growth whereas multiples are at for Marico specifically. It is trading at 22 times 2-year for multiple. So certainly, there has been a valuation gap between these companies and when these companies are providing good growth, I would rather put my money in something like Marico and Dabur rather than Nestlé and HUL.
ET Now: What about Britannia? Good set of numbers, improved products mix, higher realisations this time around. Do you think that the company will be able to sustain this kind of cost efficiency?
Sanjay Manyal: Though Britannia is not in our active coverage, but we have seen they have witnessed very good improvement in the EBITDA margin and that is majorly because of the raw material cost has sustained at its levels whether it is sugar prices or the wheat prices. We have not seen any inflation in these communities and that has led to a huge expansion in the operating margin for the company and similarly Britannia is also trading at a very comfortable multiple and that has probably resulted into the kind of move we have seen yesterday in the stock and that has probably became one of the favourable stocks in the midcap segment.
ET Now: Your top picks within the midcap FMCG basket?
Sanjay Manyal: In our coverage universe, we remain positive on Marico. We have a buy on Marico. We remain positive on Dabur. We have target of 180 on Dabur and we are cautious on the large cap companies though most of FMCG companies have the trades of being a portfolio stock, but again, we are not comfortable on the valuation front for HUL and Nestlé and our favourite picks remain Marico and Dabur.