Indofood reported very good set of 1Q10 results. This was expected since Rupiah strengthened sharply in 1Q10. Indofood costs are essentially US$ linked as 75-80% of its raw material costs are US$ denominated. The costs of packaging is also US$ linked to a certain extent. Indofood imports wheat, skimmed milk, sugar.
Indofood is one of the best plays on stronger rupiah as its earnings are highly leveraged to strong currency. A 5% appreciation in rupiah can have 20+25% impact on earnings depending upon how much costs savings are passed on to consumers.
On costs plus business model i.e. BOGASARI (flour) and cooking oil, margins will reverse over next two quarters unless the currency strengthens further. There is a lag effect on passing on costs cuts. Note that additional flour capacity is coming into the market which will mean increased supply.
On Noodles which make up 36% of Indofood net revenue, Indofood will continue to maintain 12-13% margins since price war in noodles has clearly ended. On the dairy business which makes up 9-10% of the net revenue, we believe that Indofood will emphasize margins instead of volumes at this stage since they do not have excess capacity. Our channel checks indicate that while competitors are aggressively promoting their products, Indofood is not. Margins for dairy business could be double digits.
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