Author: CP

Godrej Consumer is witnessing steady growth across its key soaps and hair color segments. However, compared to Q2F2010, GCPL is likely witnessing slower revenue growth. Importantly, management is less clear about the industry outlook due to the following three factors:

• Significant pressure on consumer wallet on accountof highest ever food inflation
• Irrational and rising intensity in competitive pressures in soaps categorydriven by ITC and
• Anniversary of price hikes, thus negligible improvement in sales realizations on YoYbasis.

Godrej continues to gain market share in both soaps and hair color segments. Soap revenue growth (volume driven) is likely to be in mid teens and hair color revenue is likely to be around 15-20% in Q3F2010. Recall that GCPL reported 28% and 48% growth in soaps and domestic hair color revenues in Q2F2010.

GCPL appears to be quite keen to expand its presence in the African and East Asian Markets inorganically. Due to the high entry barriers in a few of these markets, the company is primarily looking at an entry strategy through an acquisition.

Indian IT / Outsourcing companies, some of which have transformed themselves from Pure-Play IT Offshore Development into Business Consulting and IT Management companies. Across the board they seems to be cautious of pipeline conversion to bookings and then further the bookings conversion into revenues, as clients remained more focused on getting it right than getting it started.

The telecom outsourcing market (Infosys 17%, TCS 20% and Wipro 27%) remains weak across developed markets.

Expect only modest earnings upside for Indian vendors from our current estimates. We prefer companies better geared to the recovery – Infosys, Wipto, TCS, HCL, Tech Mahindra. Predictability and timing of improvement remains challenging.

UBS’s Views on the IT Sector at Current State of Market is as follows,

TCS remains the only stock under our sector coverage with a Buy rating due to its higher level of forward-looking investments, strengths in the financial services vertical and emerging markets. We have Neutral ratings on Infosys Technologies and HCL Technologies and a Sell rating on Wipro.

India’s biggest macro risk is a second successive drought that would push the economy off the global recovery track. This would likely pull FY11 growth down to 5.5% levels from our normal-rains base case 7.7%.The direct hit on the harvest would be reinforced by shrinkage in rural demand as incomes fall again. Besides, the RBI would likely be forced to tighten to anchor 5% inflation expectations as depleting buffer food stocks would fire up agflation. In the double drought of 1987-88, India had also slipped behind the global recovery of the time.

Crude OIL @ USD 120 / barrel – A rising oil import bill and portfolio outflows to oil producers would likely push India’s import cover (ie, months of imports fundable by fx reserves) to single digit for the first time in 10 years. This, in turn, would limit the RBI’s ability to buy oil bonds from oil refiners and neutralize the monetary impact by releasing fx to fund higher oil imports.

Double Dip May Hurt – India is at a relative advantage clocking 6% growth in FY11-12 if the rains are normal. That said, we do not expect, let us be clear, a double dip. Even if a “W” does materialize, the growth impact of falling external demand should be restricted to 150bp on the demand side as exports are but 18% of GDP. India is dependent on foreign capital for project finance of 3-4% of GDP and this could hit the growth to minor extent.