Equity Analysis /

Is there a debt bomb ticking?

    Nirgunan Tiruchelvam
    Nirgunan Tiruchelvam

    Head of Consumers Equity Research

    Tellimer Research
    25 October 2018
    Published by
    • Consumer companies are facing a potentially nasty predicament of high foreign currency debt levels at a time of local currency depreciation. Net debt has risen by 15% CAGR among our select group of consumer stocks. 
    • We stress test the cashflows of the sector using a Teflon Test.
    • THBEV SP, NB NL, NESTLE NL and JKH SL seem immune.
    • FLOURMIL NL, CPF TB, JAP SP and UACN NL look vulnerable as they have high foreign debt, low margins and foreign currency inputs.

    Developing Market consumer companies may be on the cusp of a rapid interest rate hike and currency depreciation. The prospect of this double whammy could be dangerous for the consumer companies. Net debt has risen by a CAGR of 15% among the peer group of consumer companies in frontier and emerging markets.

    We test 42 consumer companies to assess their ability to withstand a potential interest rate hike and currency depreciation. We use six metrics including net debt ratio, ratio of foreign debt to total debt and proportion of COGS in foreign currency. For full details of our methodology see page 7.

    Our test indicates that multinational corporations (MNCs) that have a tight grip on the bottom of the pyramid are relatively immune to the twin shocks. These companies are highly cash generative and their leverage is low. Also, MNCs such as UNILEVER NL, NESTLE NL and NEZS MK are intensely branded, enjoy high margins, and sell in small units at high volumes. These factors help insulate them. 

    In our coverage we highlight our Buy recommendations on Thai Beverage, Nestle Nigeria and Nigeria BreweriesThese companies have relatively low foreign debt, their products are branded and their cashflows are not vulnerable to an upsurge in foreign denominated input costs.

    Companies that are low margin, lightly branded and have thrived on leverage are particularly vulnerable. These include UACN NL, EABL KN, FLOURMIL NL, CPF TB and JAP SP.

    WIL SP and FLOURMIL NL are two consumer companies that are essentially commodity processors and are potential victims of depreciation and rate hikes. Most of WIL SP’s US$20bn net debt is in foreign currency. Its effective interest rate of 1% suggests that it is exploiting the carry trade. UCSP KN, the Kenyan supermarket operator, is in the danger zone, as its leverage is high and its margins are low. CPF TB has elevated leverage and a cost structure that is foreign denominated.