Consumer Sector

Limited earnings downside from the weaker Rupiah 

Limited impact from rupiah depreciation

Our discussions with the companies under our coverage strongly suggest that the current Rupiah depreciation will have only a slight impact on earnings. Most of the companies are unconcerned since the impact of the Rupiah depreciation is naturally hedged through time deposits and export revenues. Furthermore, the softer food commodity prices will also help. As such, we foresee limited earnings downside from the Rupiah depreciation and retain our view of potential margins improvement from the downtrend in food commodity prices.

ASP increases to cushion earnings

All of the consumer players under our coverage are planning to increase ASP by 3-5% this year in response to the higher inflation while, at the same time, also enjoying cheaper raw material prices. In our view, higher revenues from exports will naturally offset the potential earnings downside arising from the weaker Rupiah. And although a weakening Rupiah could potentially shave 1% off gross margins, the planned increases in ASP shall help offset the negative impact on earnings.

Imported raw material costs under control

Although most of the raw material costs are USD linked, some of the costs are not directly expose to USD movement. Most of the contracts, for example, are done in IDR with turnover of 2-3 months. Thus, in the case of further adverse developments on the Rupiah, the impact will start to be seen in 4Q. Among the consumer players under our coverage, the pharmaceutical sector is most vulnerable to US dollar strength since around 80% of the raw materials are imported. Nonetheless, the pharmaceutical companies keep on average around 24% of their total cash in US dollars to cover around 5-6 months of raw material purchases. This is a natural hedge against potential currency risk.

Limited USD debt exposure

Most of the companies under our coverage have no major US dollar debt exposure. As such, we believe there is no currency risk in this regard. Here, Indofood reported that USD debt accounts for only around 27% of its total debt as per end of 1Q12, whereas Indofood CBP, the subsidiary, accounted of around 25%. Hence, both companies are in net cash position at the current period.

INDF and MYOR remain our top picks

We continue to favor Indofood Sukses Makmur (INDF) for its cheap valuation amidst the recent downtrend in stock prices and Mayora Indah (MYOR) for its superior growth.