FMCG Sector Report: Naturally Rural - The Spell of Ayurveda

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Table of Contents

NSE

Table of Contents Page No.

Sectoral Outlook - worst seems to be over for FMCG 2

Investment bets in FMCG 3

FMCG Industry in India – a snapshot 4

Trends and focus areas in FMCG industry 5 - 7

After troubled two years, what lies ahead for FMCG? 8 - 10

Government initiatives to boost rural income 11 - 12

Normal Monsoon expectation – a blessing for rural economy 13

Shift towards Natural Products is here to stay? 15 - 18

Digital footprints in the FMCG space 19 - 22

Emami Ltd. 23 - 31

Dabur India 32 - 40

GSK Consumer Healthcare Ltd. 41 - 49

Disclaimer 50

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Premia Research

Worst seems to be over for FMCG

Emami Ltd. – BUY

CMP Target Upside

576 683 18.6%

Dabur – BUY

CMP Target Upside

441 508 15.2%

GSK Consumer Healthcare – BUY

CMP Target Upside

6,690 7,833 17.1%

Prices as on 13/08/2018

Financials (`cr) Emami Ltd. FY19E FY20E

Rev. 2,862 3,256

EBITDA Mar (%) 28.5 28.7

PAT 604 721

P/E (x) 43.3 36.3

Dabur FY19E FY20E

Rev. 8,689 9,752

EBITDA Mar (%) 21.1 21.7

PAT 1,569 1,826

P/E (x) 49.5 42.5

GSKCH FY19E FY20E

Rev. 4,777 5,333

EBITDA Mar (%) 21.5 22.0

PAT 816 915

P/E (x) 34.5 30.7

Source: IIFL Research

The worst seems to be behind for the Indian FMCG sector, especially

for the companies with higher rural exposure. We believe the FMCG

space is optimally placed to benefit from expected rural revival,

normal monsoon prediction, stabilization of trade channels and

increasing direct reach by the companies. GST implementation has

led to the industry witnessing green shoots in terms of fundamental

changes viz. structural change in trade channels (direct distribution,

focus on modern trade and e-commerce), realignment of supply

chain to improve profitability and industry consolidation (shift

towards organized market).

Improving macro and rural revival in focus

We are optimistic on the rural demand revival owing to the macro

tailwinds like (a) government focus on improving farm income through

MSP hike for FY19 (average 14.5% yoy), farm loan waivers (`1,21,500cr

since April 2017 ahead of 2019 general elections), direct benefit

transfer (DBT), import restrictions, etc., (b) consecutive third year of

normal monsoon and (c) companies’ focus on increasing direct reach,

especially in rural areas.

Structural change in the industry to drive growth

The already bruised FMCG industry (due to demonetization) was

further hit by de-stocking and disruption in the wholesale channel

during GST implementation. However, with structural changes in place

for the industry now (increase in direct coverage, alterations in the

supply chain and warehousing), the companies would start to witness

the benefits of abating headwinds.

With demand drivers and supply chain in place, a number of FMCG

companies are trading at higher valuations (refer Exhibit 2) factoring

in most of the positives. However, there are few companies which

are trading at 20-40% discount to the industry leader. Encouraged by

growth triggers and attractive valuations, we recommend BUY on (1)

Emami (increasing direct reach, stabilizing trade channels), (2) Dabur

(rural recovery play), (3) GSK Consumer Healthcare (volume recovery

and high risk-reward as Horlicks is on the block).

Analyst – Tejashwini Kumari [email protected]

August 14, 2018

mailto:[email protected]

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Investment bets in FMCG

Despite higher valuation, FMCG still has some investment bets

The NIFTY FMCG index has run-up 25% in last one year. It has

outpaced the return of NIFTY index which has grown by 15.8% over

the same period.

Exhibit 1: FMCG index has outpaced the NIFTY over past year

Source: NSE, IIFL Research

A number of FMCG companies are trading at higher multiples

factoring in most of the positives. However, we believe there are few

pockets which provide investment opportunity at current valuations.

We believe that the companies with low PE (vs. other FMCG majors)

and growth visibility (rural recovery, trade stabilization, etc.) still have

their run left.

Exhibit 2: Valuation gap provides investment opportunity

Forward PE (x) chart

Source: Company, IIFL Research

-5.0

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NIFTY Index NSEFMCG Index

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FY19E FY20E

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FMCG Industry in India

FMCG is the 4th largest sector in the Indian economy

Expected to reach $103.70bn (current size - $52.75bn);

growing at a CAGR of 27.9% over FY18-20E

Rise in Rural Consumption to drive this growth (registered

9.7% growth in FY18)

Urban: Rural contribution stands at 55%:45%

Rural FMCG market is expected to grow to $220bn by 2025

Low penetration in rural India offers a huge opportunity

The middle income class population to double by 2020E,

growing at a CAGR of 10.8%

Exhibit 3: FMCG Industry break-up – personal care dominates

Source: IBEF, IIFL Research

Personal & Home care50%Healthcare

31%

Food & Beverages

19%

OTC products and

ethicals

Beverages, bakery

products, cereals,

snacks, ice-cream,

dairy proodcts, etc.

Oral care, hair care,

skin care, cosmetics,

perfumes, feminine

hygiene, Fabric wash,

household cleaners

Exhibit 4: Rural growth outpaced urban growth in past three years (%)


6.5

5.4

8.2

5.9

5.7

6.1

9.1

8.6

9.7

0.0 2.0 4.0 6.0 8.0 10.0

Total

Urban

Rural

By Volume

FY18 FY17 FY16

8.7

7.7

10.5

8.5

7.9

9.6

13.5

12.6

15.1

0.0 4.0 8.0 12.0 16.0

Total

Urban

Rural

By Value

FY18 FY17 FY16

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Trends and focus areas in FMCG


industry

(a) FY19E to be a year of new launches

In order to strengthen growth, companies are focusing on new

products launches. Emami, JLL, HUL and Britannia have strong

product pipeline for FY19E. Most companies had held back on new

launches amid demonetisation and GST implementation. We

believe, FY19E would witness an array of new product launches.

(b) Up-trading and premiumisation

In our view, the focus of companies on premiumisation would

continue to be strong. Companies are up-trading customers

through small/affordable packs of premium products.

Exhibit 5: Up-trading and premiumisation opportunity

Source: HUL Annual Presentation, IIFL Research (c) Rural affordability – all about the price points

Rural consumption is generally constrained by the low affordability.

With increasing awareness among the rural consumers, the FMCG

companies are seen offering aspirational products at affordable price

points in smaller packs. Companies have come up with low unit packs

(LUPs) especially for the rural consumers in the price range of `1-

20/unit. The key examples of the same are detergent and

shampoo/conditioner sachets, small packs of premium biscuits at a

price point of `5, smaller SKUs of premium soaps and hair oils. Even

GSK Consumer offers its basic Horlicks in `5/pack for the rural market.

The LUPs are helping the companies in increasing the penetration

level and up-trading the customers to premium products and aiding

categories’ growth.

The key examples of the same are

detergent and shampoo/conditioner

sachets, small packs of premium biscuits

at a price point of `5, smaller SKUs of

premium soaps and hair oils

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industry

Exhibit 6: Small packs driving the growth across categories

Category (urban + rural)

Sub `10 salience within category

Key price points (`)

CAGR* of LUPs vs. category

Categories where small packs are pivotal for existence

Instant Noodles

75% 10-12 1.8x

Western Salty Snacks

87% 5, 10 2x

Traditional salty snacks

66% 10 2x

Biscuits 69% 5, 10 1.2-1.9x

Shampoo 63% 1 2.2x

Where small packs are growth levers

Tea 20% 5, 10 1.2x

Toothpaste 24% 10 2.4x

Washing Powder

33% 5, 10 1.5x, 5.7x

Coffee 42% 2, 4 3.1x

Where companies are beginning to explore

Milk Food drinks

7% 5 3.5x

Hair Oil 8% 10 16x

Source: Nielsen Report ‘PACK SMALL, GROW BIG’; IIFL Research; *CAGR over 2015-17

As per the Nielsen report, ‘Pack Small, Grow Big’, North and West

markets are at the forefront in terms of LUP usage. Moreover, it is

interesting to note that the phenomenon of usage of LUPs is as

urban as it is in rural India. Emami derives ~30% of its revenue from

SKUs priced less than `10.

(d) Expanding Ayurveda/natural products

The entry of Patanjali has indeed brought a wave of

Ayrvedic/natural and Swadeshi products in India. We believe that

it resulted in a strong demand for products with ayurvedic/naturals

offerings thus, expanding the category size. Further, in the past two

years, we have witnessed major product launches by the FMCG

companies with Ayurvedic offerings and we expect this trend to

continue (discussed in detail here).

Emami derives ~30% of its revenue from

SKUs priced less than `10 (in FY18)

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industry

(e) Increasing direct reach and rural penetration

Post the dent in distribution channel after GST implementation, all

the FMCG companies are focusing on reducing their wholesale

dependence and increase their direct reach. Emami has the highest

wholesale dependence in the entire FMCG space at 50% in FY17

followed by Dabur India, Jyothy Laboratories (JLL), and Marico at

35% each; GSK Consumer’s dependence was 30%. Post the

disruption in wholesale channel post demonetisation and GST,

FMCG companies’ focus is on reducing the wholesale dependence

and increasing direct reach. Dabur and Emami have successfully

reduced their dependence on wholesale to 20% and 38%

respectively at present.

Exhibit 7: Declining wholesale dependence

Source: Company, IIFL Research; *last reported

0

10

20

30

40

50

60

Dabur Emami

FY17 Current

Dabur and Emami have successfully

reduced their dependence on wholesale

from to 20% and 38% currently from 35%

and 50% in FY17 respectively

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What lies ahead for FMCG?

After troubled two years, what lies ahead for FMCG?

FMCG companies were adversely impacted by demonetisation

followed by GST implementation

Wholesale channel, contributing 30-60% of sales of FMCG

companies, was hit badly and is still in recovery mode

To overcome the challenges of wholesale disruption,

companies resorted to increase their direct reach

Rural is the focus area for FMCG companies with stabilizing

trade channels, expectation of normal monsoon and

government’s focus on rural income growth

FMCG Industry on a recovery mode post tumultuous two years

FMCG sector’s performance was adversely impacted in past two years,

as two macro events hit the industry - (a) demonetization (which

disrupted the wholesale channel); revenue growth declined by 0.1%

for the FMCG universe in Q3FY17 and (b) GST implementation (leading

to destocking across channels and further pain in the wholesale route);

revenue growth again got hit and settled at mere 1.0% yoy in Q1FY18

(refer Exhibit 8).

Exhibit 8: Adverse impact on FMCG sector* in two key events

Source: Company, IIFL Research; Note: *numbers are for a universe of 13 stocks

The overhang of demonetisation and challenges faced during GST

implementation dampened the FMCG growth, however, stabalisation

of GST and government’s flexibility towards reducing rates of a number

of items (in mid-November 2017) aided the growth thereafter. Further,

9.0

-0.1

4.4

1.0

5.4

11.7 11.1

14.415.9

1.6

15.3

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12.6

19.317.2

21.6

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15.0

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25.0

Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19

Sales yoy growth (%) EBITDA yoy growth (%)

Impact of

destocking ahead

of GST

implememntation

Impact of

demonetisation

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What lies ahead for FMCG?

various government’s initiatives to boost rural income (ahead of

general election) coupled with a normal monsoon is expected to

benefit the FMCG sector as a whole. After two consecutive tough

years, we are hopeful that the FMCG industry would witness a revival

in consumption trends, especially rural demand. Demand was

adversely impacted across both urban and rural channels, however

urban demand bounced back soon vs. rural, supported by other trade

channels (modern trade, e-commerce, etc.). However, the rural pain

prolonged due to high dependence on the wholesale channel.

Rural demand revival – reality or a mirage?

Rural demand is expected to benefit from government’s focus on farm

income growth ahead of the upcoming elections (higher MSP,

MNREGA allocation, Housing for All, Farm Loan Waivers, Direct Benefit

Transfer, Fasal Bima Yojna, Power for All, import restrictions) and

normal monsoon prediction. The rural segment, which contributed

45% of the FMCG revenue in FY18 grew at a faster pace than the urban

in FY18 at 10% yoy (Source: IBEF). It is further estimated to clock a

higher growth rate of 15-16% vs. 8% for urban in FY19E.

The commentary of companies post the Q1FY19 results substantiated

that rural grew at a faster rate than urban for the companies during

the quarter.

Exhibit 9: Average rural salience in revenue (%)


20

20

30

34

40

40

40

50

52

0 10 20 30 40 50 60

Britannia

Nestle

GCPL

Marico

Colgate

HUL

JLL

Dabur

Emami

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Government Initiatives

How is rural FMCG growing despite decelerating wage?

According to the latest Nielsen data, the consumption growth in rural

India has outpaced the urban FMCG growth in the past three years,

FY16-18 (refer exhibit 4). However, this contrasts with the decelerating

rural wage growth in India.

Exhibit 10: Average Wage Rates for Rural Laborers* – men (%)

Source: CMIE, IIFL Research; * Engaged in Agricultural and Non-Agricultural Activities

So, the question here is – How is the rural growth justified?

We believe that despite the decelerating rural wage growth, there are

other factors which overlooked, the ones which are working as pseudo

drivers of this rural growth.

The farm loan waivers in India’s largest states - total waiver

since 2017 stands at `1,21,500cr (refer exhibit 10)

Increase in number of DBT beneficiaries

Higher rural FMCG growth in FY18 may be attributed to the

volume boost driven by price cuts in many categories of revision

in GST rates in November 2017 coupled with stabilizing trade

channel and company’s initiatives to increase direct reach

Going ahead, the steepest hike in MSP since 2013 will aid the

growth

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Declining wage rate

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Farm loan waiver – a temporary boost to the farmers

Five states have announced farm loan waivers (since 2017), three of

them being the largest states of India – UP, Karnataka and

Maharashtra. The total waiver so far is `1,21,500 cr, primarily aimed

at fulfilling the poll promises. We believe more waivers are on the

cards, as India is approaching 2019 general elections. The farm

waivers may provide temporary revival in farming but at the cost of

credit culture in the company. However, in the medium term it will

prove to be a boon for the farmers; FMCG companies with higher

exposure to rural will benefit the most out of it.

Exhibit 11: Loan waivers ahead of elections since 2017

State ` cr

Uttar Pradesh 36,000

Maharashtra 34,000

Rajasthan 8,000

Punjab 9,500

Karnataka 34,000

Total 1,21,500 Source: Media articles, IIFL Research

Increase in number of DBT beneficiaries

The number of beneficiaries of Direct Benefit Transfer (DBT) scheme,

which entails transfer of subsidies straight into the bank accounts of

beneficiaries, has increased to 121cr in FY18 (from mere 36cr in FY17

and 31cr in FY16). The total funds transferred under the scheme in

FY18 stood at `1,90,871cr (a 156% jump yoy).

Steepest hike in MSP since 2013 ahead of election year

The Government of India (GoI) finally announced the Minimum

Support Prices (MSPs) for the ongoing kharif 2018 season ahead of the

election next year. The average hike of 14.5% yoy was steepest since

2013. The increase in MSP is expected to increase the disposable

income in the hands of the farmers, thus, aiding the rural economy.

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Exhibit 12: MSP hike – watchful about the implementation plan

Commodity Variety 2017-18 2018-19 yoy (%) Avg. Market

price

`/quintal `/quintal Paddy Common 1,550 1,750 12.9 1,726 Grade‐A 1,590 1,770 11.3

Jowar Hybrid 1,700 2,430 42.9 1,754 Maldandi 1,725 2,450 42.0

Bajra 1,425 1,950 36.8 1,238

Maize 1,425 1,700 19.3 1,287

Ragi 1,900 2,897 52.5 2,064

Tur (Arhar) 5,450 5,675 4.1 5,903

Moong 5,575 6,975 25.1 6,275 Urad 5,400 5,600 3.7 5,830

Cotton Medium Staple

4,020 5,150 28.1

Long Staple 4,320 5,450 26.2 5,564

Groundnut 4,450 4,890 9.9 3,673 Sunflower seed

4,100 5,388 31.4 3,061

Soyabean Yellow 3,050 3,399 11.4 3,274

Sesamum 5,300 6,249 17.9 7,696

Nigerseed 4,050 5,877 45.1 4,108 Source: CMIE, IIFL Research; * Engaged in Agricultural and Non-Agricultural Activities

Other farmer supportive initiatives by the government

Price-gap alleviation scheme, Bhavantar Bhugtan Yojana (BBY)

for crops trading below MSP in Madhya Pradesh, Haryana

Input assistance scheme Rythu Bandhu to provide direct cash

assistance for purchasing agri input in Telangana (budgetary

allocation of `12,000cr). The government is providing 5.83

million farmers `4,000 per acre per season to support farm

investment twice a year (rabi and kharif seasons)

Raita Belaku scheme, similar to Telangana scheme of direct

subsidy (limited to dry lands in Karnataka)

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Rural Economy and Monsoon

Normal Monsoon expectation – a blessing for rural economy

The India Meteorological Department (IMD) has forecasted a normal

monsoon for 2018, with rainfall expected at 97% of the long period

average (LPA).

Exhibit 13: IMD expects a normal monsoon for 2018 (%)

Source: Bloomberg, IIFL Research

Note: Anything less than 90 percent of LPA is termed a 'deficient' monsoon, and 90-96 percent

of the same is considered 'below normal'.

The rainfall in 2014 and 2015 were below normal and impacted the

foodgrain production and thus the farm income. We believe the

normal monsoon should aid the farm income coupled with the

government’s push to double the farm income by 2022.

Exhibit 14: Foodgrain production to get a boost

Source: Bloomberg, IIFL Research

98 96 93

10696 97

106

88 8697 95

0

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40

60

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120

2013 2014 2015 2016 2017 2018

Forecast Actual rainfall

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2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

Foodgrains Production (MT) % growth

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Rural Economy and Monsoon

Exhibit 15: Improving consumer sentiment

Source: BSE, IIFL Research; Base - 100 (Sep - Dec 2015)

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85

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95

100

105

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India Urban Rural

Rural sentiment

improving better than

the urban

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Ayurveda in FMCG

Shift towards Natural Products is here to stay?

“Ayurveda is generally understood as ‘Science of life’ translating

‘Ayuh (r)’ as life and ‘Veda’ as science” – Dabur Annual Report 2018

Patanjali Ayurveda not only gave a tough competition to the

established FMCG players (by eating their market share), it also

changed the dynamics of the industry. Since generations, we Indians

trust the Ayurvedic/natural products to be authentic and traditional.

The entry of Patanjali in the Indian market acted as a trigger to deepen

the same not only among the older generations but the new ones as

well. The Naturals/Ayurvedic category caught attention of the

consumers like never before leading to the expansion of the category

itself. Patanjali’s sales grew from mere `446cr in FY12 to `10,561cr in

FY17, before hitting a break in FY18 with flat sales.

Exhibit 16: The rise of Patanjali led to expansion of Naturals

Source: Mint article, IIFL Research

The entry of Patanjali has indeed brought a wave of Ayurvedic, natural

and Swadeshi products in India. In the past two years, in order to

respond to Patanjali’s entry, the FMCG industry witnessed a number

of product launches with Ayurvedic offerings. HUL bought Ayurvedic

hair-care brand Indulekha in 2015, launched a new range of personal

care herbal products under its Ayush brand in 2017. Colgate launched

its herbal toothpaste Vedhshakti in 2016, Dabur also effectively

responded to Patanjali primarily in oral and honey category. With

42.9

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00

20

40

60

80

100

120

FY13 FY14 FY15 FY16 FY17 FY18

(yo

y sa

les

gro

wth

(%

)

Surge in consumer preference for Natural

space platform and efforts by companies to

launch new and exciting products in this

space will aid growth

Patanjali

reported zero

growth in FY18

vs.8-12% growth

in major FMCG

players

Patanjali turned out to be the most

disruptive force in FMCG industry leading to

a great shift towards Ayurvedic/natural

products. Even the established FMCG

players had to follow the suit to remain

competitive

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Ayurveda in FMCG

consumers gravitating towards the products with natural/Ayurvedic

offerings, we expect the momentum of this category to continue.

New product launches in FY18 with Ayurvedic/natural offerings


The contribution of naturals in Personal

care is estimated to contribute ~50% by

2025 from current 41%

Exhibit 17: Patanjali’s products are available at a significant discount to peers

Categories Product Price (Rs)

Patanjali Competition Unit Patanjali Competition Difference*

Oral care Dantkanti Colgate Active Salt Neem Toothpaste

100gm 40 56 -29

Hair oil Patanjali Kesh Kanti Hair Oil

Emami Kesh King Hair Care

120ml 130 119 9

Honey Patanjali Honey Dabur Honey 500gm 135 189 -29

Shampoo Patanjali Kesh Kanti Anti-Dandruff Shampoo

Head & Shoulder Anti-Dandruff Shampoo

200ml 110 161 -32

Chyawanprash Patanjali Chyawanprash

Himani Chyawanprash& Dabur Chyawanprash

1kg 250 300 -17

Instant Noodles Patanjali Atta Noodles Maggi Atta Noodles 60gm 12 12 0

Cow Ghee Patanjali Cow Ghee Gowardhan Ghee 500gm 260 268 -3 Source: Bigbasket.com, Company, IIFL Research; * Patanjali vs. competition price

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Ayurveda in FMCG

The (Natural) growth in personal care segment

The Natural segment in India’s personal care (PC) market is

estimated at `18,500cr ($3bn), 41% of the total personal care

market, as per Nielsen data (MAT December 2016)

The natural segment of personal care is growing at 1.7x the

overall personal care category

Personal care includes toilet soaps, skin care products, hair oil,

oral care, hair wash

Naturals portfolio of HUL growing ~2.5x of overall average

Exhibit 18: Natural Personal care market contribution

Source: Nielsen Report – But Naturally!, IIFL Research; values in () indicates growth rate

Is there any regional play in the naturals category? Let’s find it out.

Exhibit 19: Natural Personal care market contribution

Source: Nielsen Report – But Naturally!, IIFL Research

34

30

13

117 6

0

20

40

60

80

100

Hair Oil(5%)

Toilet Soap(-1.3%)

Face Care(12.9%)

Toothpaste(20.1%)

Shampoo(13.2%)

Hand &body

(17.5%)

TotalPersonal

care (6.6%)

(%)

4038

32 32 32 32 32 31 30 29 29 29 28 28 2825

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Del

hi

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a

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t

Ass

am

Raj

asth

an

Har

yan

a

Bih

ar

Contribution (%) Growth (%)

States with lower penetration of natural

category are witnessing higher growth rate

providing opportunities to the FMCG

companies for further penetration

opportunity

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Ayurveda in FMCG

What is driving the Natural category in Personal care

The Indian consumers are changing, as conventional offering is not

enough to attract them; they need something extra, something more.

Over the time companies have accepted it and tweaked the offerings

accordingly. We have witnessed a slew of launches/variants, especially

in the personal care category, with additional features apart from the

core offerings.

Problem solution, Enhancement and Maintenance are the three major

benefit segments contributing 21%, 39% and 40% respectively to the

total natural personal care space.

Exhibit 20: Contribution of benefit segments to Natural PC

Source: Nielsen Report – But Naturally!, IIFL Research

The two companies – Emami and Dabur – about which we are going to

discuss in length in our report are well known for their natural

offerings. Emami has carved out its leadership in niche categories with

its natural offerings, especially in the problem solving space.

Our take: Products with Natural offering are here to stay

We believe that (a) increasing awareness about environment friendly

natural/Ayurvedic/organic products and their benefits, (b) product

modernization and re-branding (vs. earlier loose of unbranded

products), (c) demand for chemical free products (consumers have

started looking at the ingredient list while making a purchase) will drive

the demand for the natural products.

Problem solution21%

Enhancement39%

Maintenance40%

19 | P a g e

Premia Research

Digital Footprints

Digital footprints in the FMCG space

The rising usage of internet among the Indian consumers can’t be

ignored, especially by the FMCG companies. Increasing mobile users,

availability of smartphones at affordable price points and lower data

tariff is driving the digital footprints of Indian consumers.

Let us first see few numbers about the internet usage in India (Source:

BCG Report – Decoding Digital Impact: A $45bn opportunity in FMCG).

The number of internet users in India is likely to grow from ~39cr

in 2016 to more than 65cr by 2020E

Rural internet users will contribute to more than 50% of the user

growth in the next 3-4 years

Share of female internet users in urban is expected to grow from

~31% in 2016 to 40% by 2020E

Vernacular content is increasingly becoming important

FMCG to benefit from digital influence and rising e-commerce

It is estimated that by 2020E, ~40% of the FMCG consumption

would be digitally influenced

Cost of online video advertising has come down by ~68% in past

two years

Digital advertising in FMCG has shown consistent growth of

~30% for last five years

Exhibit 21: The rising digital consumer

India's digital divide - the rise in rural consumers

More Indians to make internet based purchase

Source: Emami Annual Report 2018, IIFL Research

6752

3348

0

20

40

60

80

100

120

2016 2020EUrban Rural

50 50

35

65

0

10

20

30

40

50

60

70

0-25 years 25+ years2016 2020E

20 | P a g e

Premia Research

Digital Footprints

Currently, ~10% of the advertising spend is on digital in the

FMCG space. It can potentially reach 25-30% by 2020E (and 50-

70% for the select premium products)

E-commerce in FMCG can potentially grow to $5-6bn by 2020E

Exhibit 22: Extent of digital influence by 2020E

Categories Share of digital influence

Grocery/Snacks/Beverages/Home care <25%

Baby care/Fragrance/Health Food 25-50%

Hair care/Face cream/Male grooming >50%

Apparel 45%

Consumer electronics 60%

Source: BCG Report – Decoding Digital Impact: A $45bn opportunity in FMCG, IIFL Research

Exhibit 23: Pronounced effect of online spend on Premium products


Note: Relative spend = relative spend on purchased product in online household to offline household

21 | P a g e

Premia Research

Digital Footprints

Problem Solution categories + Naturals = Higher preference

The report highlights that ‘Problem solutions’ categories to be 7x

higher influenced vs. the conventional usage categories. Also, the

digital consumers have more preference toward the natural

space/products with natural solutions.

Exhibit 24: Natural Solutions will have higher preference


Note: Relative spend = relative spend on purchased product in online household to offline household

Digital campaigns to attract the youth

Companies are coming up with engaging, innovative and specialized

campaigns on the digital platforms, viz. youtube.com, facebook.com,

twitter, mobile apps, etc. to catch the attention of the new generation

consumers.

Recently, Emami had come up with a digital campaign ‘Flying Basin’ for

its HE brand (HE On-The-Go Waterless Face Wash), ‘The Man Code’

campaign for Fair and Handsome and the Acapella YouTube campaign

for Navratna Cool Oil featuring Amitabh Bachchan.

22 | P a g e

Premia Research

Digital Footprints

Investing in the future trade channels

E-commerce in FMCG is currently less than $1bn and has a potential to

grow to $5-6bn by 2020E (4-5% of total branded FMCG market). In

order to tap the opportunity, Indian companies are investing in e-

commerce channel. The FMCG majors, viz. HUL, Godrej Consumer

Products (GCPL), Dabur, Emami, Marico, etc. whose current revenue

from the e-commerce is ~1% are aiming at increasing it to 3-5% over

next 3-4 years.

Marico proposed to step up launch of digital brands as the

market for premium and niche products grow, especially in areas

such as male grooming and female hair nourishment. It plans to

launch 5-6 digital brands per year.

HUL had launched digital-only portfolio of Brylcream, a male

grooming brand in June 2018.

In December 2017, Emami had acquired 30% in The Man

Company, premium grooming products for bath & body, beard,

shaving and perfume sold online.

Last year Dabur and Amazon jointly set up an online

marketplace exclusively for Ayurveda products.

GCPL is shifting its e-commerce business as a separate P&L unit

from September 2018, with its own innovation, marketing and

digital team along with new product development pipeline.

Exhibit 25: Digital campaigns by Emami – Loud and clear message to the youth

HE On-The-Go Waterless Face Wash

Acapella YouTube campaign for Navratna Cool Oil

Source: Emami Annual Report 2018, IIFL Research

The FMCG majors, viz. HUL, Godrej

Consumer Products (GCPL), Dabur, Emami,

Marico, etc. whose current revenue from

the e-commerce is ~1% are aiming at

increasing it to 3-5% over next 3-4 years

23 | P a g e

Premia Research

Emami Ltd. CMP: ` 576: 1-year target: ` 683

Sector FMCG

Recommendation BUY

Upside 18.6%

Stock Data

Sensex 37,645

52 Week h/l (`) 714/499

Market cap (` Cr) 26,128

BSE code 531162

NSE code EMAMILTD

FV (`) 1

Div yield (%) 1.1

Shareholding Pattern

Dec-17 Mar-18 Jun-18

Promoters 72.7 72.7 72.7

DII+FII 18.8 18.5 18.1

Individuals 8.5 8.7 9.1

Source: www.bseindia.com

Share Price Trend


Emami is a leading FMCG company with significantly diversified

product portfolio across niche categories. Company is set to benefit

from increasing direct reach, investment behind new launches,

stabilizing trade channels and recovery in Kesh King. We estimate

revenue and Adj. PAT CAGR of 13% and 14% respectively over FY18-

20E. At a PE of 36x FY20E (trading at ~30% discount to HUL), we

believe company is an attractive bet in the FMCG space to benefit

from the much anticipated rural recovery.

Partial recovery witnessed in Q1FY19; growth drivers in place:

Emami witnessed three years of muted performance on account of

demonetisation, disruption in wholesale channel, de-stocking ahead of

GST implementation and under-delivery of Kesh King portfolio. Green

shoots of revival have been seen in Q4FY18 and Q1FY19 results with

domestic growth of 9% and 21% yoy respectively. We are positive on

the growth outlook owing to (a) decline in company’s dependence on

wholesale from 50% (in FY17) to 38% now and (b) recovery in Kesh King

(6%/10% yoy growth in Q4FY18/Q1FY19).

Low penetrated categories provide huge growth opportunity:

Emami’s product portfolio is present across high growth and low-

penetrated categories which provides significant growth opportunity.

Further, company’s focus on new launches will power its growth. It is

targeting 2-3% growth to be aided from the new product portfolio.

Attractive valuation; recommend BUY: Emami has underperformed

the peers in last one year (~3% return vs. 25-42% return of peers like

HUL, Dabur and GCPL). At the CMP, company is attractively valued; we

recommend BUY with target price of `683 (43x FY20E EPS, 3-year

average).

Financial Summary

Consolidated (` cr) FY17 FY18 FY19E FY20E

Revenue 2,488 2,531 2,862 3,256

YoY growth (%) 5.5 1.7 13.1 13.8

EBITDA Margin (%) 30.5 28.4 28.5 28.7

Adj. PAT 602 550 604 721

Adj. EPS growth (%) 8.3 -8.6 9.9 19.3

RoE (%) 35.7 29.2 28.4 30.2

P/E (x) 43.4 47.5 43.3 36.3

Mcap/Sales (x) 10.5 10.3 9.1 8.0


3100032000330003400035000360003700038000

500

550

600

650

700

Aug-17 Dec-17 Apr-18 Aug-18

Emami Ltd Sensex

24 | P a g e

Premia Research

Emami Ltd.

Exhibit 1: Category-wise growth (%) assumptions

Consolidated FY17 FY18 FY19E FY20E

Navratna 3 7.5 12 13

Boro Plus Antiseptic cream 15 15 12 12

Zandu & Mentho Plus Balm 6 5 13 12

Fair & Handsome cream 6 5 12 12

Kesh King 48 20 15 15


Key investment rationales

Rural recovery and increasing direct reach to aid revenue

Emami was adversely impacted post demonetization and GST

implementation as the company’s dependence on the wholesale

channel was one of the highest amongst the industry players at ~50%

against average exposure of 30-35% for other companies. Emami’s

current direct reach stands at 8.5mn outlets (company has added

1.2mn outlets in FY18 itself). With increase in direct reach, company

has successfully reduced its wholesale channel’s contribution to 38%

at present from ~50% in FY17. Further, it intends to maintain this direct

reach in the near term (with wholesale contribution at ~35%) and

optimize returns from the same. Moreover, led by normal monsoon

expectation and rise in the MSP, the rural economy is set to see

recovery.

Exhibit 2: Domestic volume picking up steadily (%)


15 13.5

9.3

18 18

11

0.2

-1.5

-18

10

69

21

-20

-15

-10

-5

0

5

10

15

20

25

Q1

FY1

6

Q2

FY1

6

Q3

FY1

6

Q4

FY1

6

Q1

FY1

7

Q2

FY1

7

Q3

FY1

7

Q4

FY1

7

Q1

FY1

8

Q2

FY1

8

Q3

FY1

8

Q4

FY1

8

Q1

FY1

9

25 | P a g e

Premia Research

Emami Ltd. Kesh King portfolio back in positive territory

Kesh King, which contributed ~16% to Emami’s revenue in FY18, was

acquired in June 2015 for `1,684cr (valued at 5.5 times Kesh King’s

sales). The brand, at the time of acquisition, enjoyed a strong recall in

Northern and Western India, commanding a national market share of

more than 30%. Emami’s rationale behind the acquisition was its

interest in Ayurveda and extensive under-penetration of ayurvedic hair

and scalp-care category, providing huge growth opportunity. Besides,

the brand also enjoyed a superior gross and EBIDTA margin of 75% and

45% respectively.

However, demonetization, disruption in trade channel and GST

implementation weighed down the performance of the brand as Kesh

King’s dependence on wholesale stood at 75% earlier. Company

undertook measures for reducing wholesale trade reliance and

tweaking trade promotions. The effect of these measures was visible

in the past two quarters, where the brand reported growth of 6%

(Q4FY18) and 10% (Q1FY19) yoy after sales declining in past three

consecutive quarters.

Exhibit 3: Recovery seen in Kesh King portfolio (%)


New launches and focus on high margin products

Emami currently has a product portfolio of 300 products available in

more than 500 SKUs. More than 25 products, extensions and variants

have been launched during the past five years. Navratna, Zandu and

2 1

-28

-16-19

6

10

-30

-25

-20

-15

-10

-5

0

5

10

15

Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19

Kesh King portfolio includes ayurvedic

medicinal oil, aloe vera herbal

shampoo and ayurvedic capsules. The

portfolio witnessed sharp decline

since demonetisation as its

dependence on wholesale channel

was as high as 75%

26 | P a g e

Premia Research

Emami Ltd.

Boroplus brands top the list with annual sales of `600cr+, `500cr+ and

`400cr+ respectively in FY18. As a part of its strategy, company has

always focused on launching high-margin and differentiated products.

Currently, company is focusing on new launches to power its growth.

FY18 also witnessed a number of launches including, Boro Plus Healthy

White Fairness Cream, Boro Plus Face Wash, Hair colour, new variants

in Chyawanprash, cool talc, F&H cream and a pain relief portfolio.

Going forward, company is targeting 2-3% growth from the new

product portfolio. Further, company’s increasing direct reach should

aid faster growth.

Exhibit 4: Emami’s products are leaders in most of the categories

Brands Segment Market size

(`bn)

Market share (%)

2013 2018

Navratna Oil Cooling Oil 9.3 55 64

Boroplus Cream Antiseptic cream

5.6 74 74

Zandu & Mentho Plus

Balms 9 58 54

Fair & Handsome fairness cream

Men's fairness cream

3.9 58 66

Kesh King Ayurvedic hair & scalp oil

7.1 NA 28

Navratna Cool Talc Cool Talc 5.5 18 26

Fair & Handsome face wash

Men's face wash 3 NA 16


Low penetration of key categories provides ample opportunities

Company has successfully entered and established leadership in niche

categories that were previously dominated by regional players. The

low penetration of categories where company has a strong presence

provides ample opportunity for growth. New launches (new products

as well as product extension) would fuel the growth.

27 | P a g e

Premia Research

Emami Ltd.

Exhibit 5: Low market penetration among key categories (%)


Further, company has successfully increased its direct reach to 8.5mn

outlets in FY18. It has also added ~500 salesmen to improve direct

coverage and enhance execution capability at the point of sale.

Coverage of village doubled in FY18 to ~25,000 from 12000 in FY17

across the country with a population of 5000 and above.

Exhibit 6: Increasing direct coverage (mn outlets)


Ad spend to remain elevated at 18.5% for FY19-20E

The success of any brand is primarily influenced by a high recall, which

is influenced by active promotion and advertising. Emami has the most

number of celebrities associated in the FMCG space; 60 celebrities

have been associated with its brands so far in its lifetime. Every year,

Emami invests ̀ 5-15cr behind new celebrity endorsements. We expect

92

41

29

27

24

16

12

9

8

8

6

4

0 20 40 60 80 100

Hair Oil

Talcum Powder

Balms

Antiseptic cream

Light hair oil

Cooling oil

Petroleum jelly

Ayurvedic Oil

Deodrants

facewash

Winter Lotion

Men's Fairness

5

6 6.3 6.4 6.4

7.3

8.5

0

2

4

6

8

10

FY12 FY13 FY14 FY15 FY16 FY17 FY18

Bollywood icons like Amitabh

Bachchan and Shah Rukh Khan have

been endorsing Emami brands for

more than a decade

28 | P a g e

Premia Research

Emami Ltd.

the company’s focus on new products will continue to keep the ad

spend elevated at 18.5% of the net sales for FY19E and FY20E.

Exhibit 7: Higher advertisement expense behind brand building


Higher RM and advertisement cost to keep EBITDA margin flat

Elevated ad spends and key raw material (mentha and crude oil) costs

(Exhibit 7) are expected to keep the EBITDA margin flat over FY18-20E.

We are estimating EBITDA margin of 28.5% in FY19E and 28.7% in

FY20E.

15.2

17.718.3

17.818.6 18.5 18.5

10

12

14

16

18

20

0

100

200

300

400

500

600

700

FY14 FY15 FY16 FY17 FY18 FY19E FY20E

Advertisement cost (Rs cr) % of net sales

Exhibit 8: Higher ad-spend and raw material inflation to keep margins under check

Raw material cost trend (%) EBITDAM to remain flat over FY18-20E

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

Q1

FY1

6

Q2

FY1

6

Q3

FY1

6

Q4

FY1

6

Q1

FY1

7

Q2

FY1

7

Q3

FY1

7

Q4

FY1

7

Q1

FY1

8

Q2

FY1

8

Q3

FY1

8

Q4

FY1

8

Q1

FY1

9

Mentha Oil LLP HDPE

23.8 24.2

29.1

30.5

28.4 28.5 28.7

20.0

22.0

24.0

26.0

28.0

30.0

32.0

0

200

400

600

800

1000

FY14 FY15 FY16 FY17 FY18 FY19E FY20E

EBITDA (Rs cr) EBITDAM (%)


29 | P a g e

Premia Research

Emami Ltd. Financials and valuations

We are estimating revenue CAGR of 13% (refer exhibit 1 for category-

wise growth assumptions) over FY18-20E for Emami aided by rural

recovery, increasing direct reach, new product launches, stabilizing

trade channels and recovery in Kesh King portfolio. Elevated ad-spend

and raw material inflation is expected to keep EBITDA margin

expansion under check; we estimate EBITDA margin of 28.5% and

28.7% for FY19E and FY20E respectively. Adj. PAT is estimated to report

14% CAGR over FY18-20E. We recommend BUY on the stock with a

target price of `683 valuing it at 43x FY20E EPS (3-year average).

Key risks

Slower rural recovery Significant increase in the key raw material inflation

Continued pressure in the international business

Exhibit 9: Significant discount to HUL provides a good opportunity

One-year forward PE (x) band Discount vs. HUL has widened (%)

30.0

35.0

40.0

45.0

50.0

55.0

13

-Au

g-1

5

13

-Dec

-15

13

-Ap

r-1

6

13

-Au

g-1

6

13

-Dec

-16

13

-Ap

r-1

7

13

-Au

g-1

7

13

-Dec

-17

13

-Ap

r-1

8

13

-Au

g-1

8

1Yr Fwd PE (x) 3 Yr Average PE (x)

1- STDV 1+ STDV

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18


30 | P a g e

Premia Research

Emami Ltd. Company Overview

Emami is a market leader in the niche categories e.g. cooling oil, pain

balm, antiseptic cream, etc., where gross margins are high and

competitive intensity is relatively low from both MNCs and regional

players. Company’s focus on Ayurveda blended with modern science

has helped it in creating and gaining market leadership position in

aforementioned categories. Additionally, the aggressive advertising

and promotion strategy gives Emami a unique competitive advantage.

Company’s Power Brands viz., Navratna, Boro Plus, Zandu &

Mentha Plus and Fair & Handsome contributed ~71% to the

revenue in FY18. International business contributed 11% to

FY18 revenue

The strategy of using its ayurvedic proposition, driving volumes

through smaller unit packs and aggressive investment behind

brands has helped four of its largest brands

Company has eight manufacturing units, which enjoy attractive

tax incentives; the newly commissioned Pacharia plant will

enjoy tax benefits till FY27E

It has 33 warehouses, 3,250 distributors, 250 super stockists,

6,500 rural sub-stockists (covering 25,000 villages) and 15,000

strong raw material supplier base

High advertisement spend behind the brands at 18.5% of net

sales

Exhibit 10: Revenue contribution (FY18)


Navratna 23%

Boro Plus Antiseptic cream

16%

Zandu & Mentho Plus Balm

22%

Fair & Haandsome

fairness cream10%

Kesh King16%

Others13%

31 | P a g e

Premia Research

Emami Ltd. Exhibit 11: Balance sheet

Consolidated (`cr) FY17 FY18E FY19E FY20E

Liabilities

Total Shareholders’ funds 1,756 2,014 2,246 2,522

Total Borrowings 173 334 10 10

Other liabilities 79 61 61 61

Total Liabilities 2,008 2,410 2,317 2,594

Assets

Net Block 1,940 1,746 1,531 1,350

Capital WIP 22 30 30 30

Inventories 179 194 219 249

Trade Receivables 97 156 176 201

Cash 50 80 335 794

Loans & Advances 90 18 20 23

Other current assets 9 138 8 9

Current Liabilities 605 388 439 499

Net Current Asset -180 197 319 777

Others 227 437 437 437

Total Assets 2,008 2,410 2,317 2,594

Ratios

ROE 35.7 29.2 28.4 30.2

ROCE 29.7 26.4 25.9 28.9 Source: Company, IIFL Research

32 | P a g e

Premia Research

Dabur India CMP: ` 441: 1-year target: ` 508

Sector FMCG

Recommendation BUY

Upside 15.2%

Stock Data

Sensex 37,645

52 Week h/l (`) 447/297


BSE code 500096

NSE code DABUR

FV (`) 1

Div yield (%) 0.6


Sep-17 Dec-17 Mar-18

Promoters 68.1 68.1 68.1

DII+FII 26.1 26.2 25.8



Share Price Trend


Dabur India Ltd. (DIL), with a number of iconic brands in its kitty, is

expected to be a key beneficiary of the expected rural recovery. With

various key concerns (de-stocking, wholesale channel disruption,

intense competition from Patanjali, muted international business)

abating, DIL is expected to post revenue and PAT CAGR of 12.2% and

16% respectively over FY18-20E. We recommend BUY on the stock

with target price of `508 (49x FY20E EPS, in-line with peers).

Diversified product portfolio is a key strength: DIL is present in eight

different categories with iconic brands (refer Exhibit 1), primarily

focused on Ayurvedic and natural offerings. We expect Dabur to

witness domestic revenue growth of 13% CAGR over FY18-20E aided

by (a) consumer gravitating towards natural/herbal products, (b)

company’s focus on increasing its distribution coverage and (c) market

share gain (through value segments and lower price units).

Worst is behind for the international business: DIL’s international

business (~28% of revenue) reported ~17% yoy and 10.5% yoy growth

in Q4FY18 and Q1FY19 respectively (after six quarters of muted

performance). With double digit growth back in MENA region and

anniversarisation of currency depreciation in the key markets, we

estimate 10% revenue CAGR for international business over FY18-20E.

Strong rural play: DIL derives ~45% of its sales from the rural markets.

After two years of muted performance, company is at recovery

inflexion point. Further, company’s focus on scaling up the small

brands rather than investing in new launches in FY19E would be cost-

effective and might result in category expansion. Post Q1FY19 results

stock has moved up sharply and at 42.5x FY20E EPS, we still believe

there is more room for upside left in the stock.

Financial Summary


Revenue 7,701 7,748 8,689 9,752

YoY growth (%) -2.1 0.6 12.1 12.2

EBITDA Margin (%) 19.6 20.9 21.1 21.7

PAT 1,280 1,358 1,569 1,826

EPS growth (%) 2.2 6.0 15.6 16.4

RoE (%) 26.4 23.8 24.2 24.3

P/E (x) 60.7 57.2 49.5 42.5

Mcap/Sales (x) 10.1 10.0 8.9 7.9


3100032000330003400035000360003700038000

250

350

450


Dabur India Ltd Sensex

33 | P a g e

Premia Research

Dabur India

Exhibit 1: Category-wise growth (%) assumption

Consolidated FY18 FY19E FY20E

Hair Care 0 8 12

Oral care 13 15 15

Health Supplements 6 10 12

Digestives 19 10 12

Skin Care 7 12 15

Home Care 3 10 12

Foods -1 20 15

OTC & Ethicals 1 10 12

International business -8 12 12 Source: Company, IIFL Research


Higher exposure to rural vs. peers – a key positive

DIL’s exposure to the rural market is high as compared to the other

FMCG players, as rural contributes ~45% of company’s total sales. DIL’s

performance was muted in last two years on account of various

headwinds, primarily owing to (a) the disruption in rural demand and

wholesale channel due to demonetization and GST implementation

and (b) intense competition from Patanjali (especially in honey and

Chyawanprash). However, with various initiatives by the company like

increasing direct reach and focus in value segments and lower price

units, the worries on both wholesale and rural sales are fading away.

Further, the momentum in rural sales (~3% ahead of the urban sales in

FMCG for Q1FY19; rural wholesale grew by 24% yoy against 8% yoy in

the urban) has been witnessed by the company and is expected to

continue supported by good monsoon and government’s thrust on

rural recovery like (increase in MSP and farm loan waiver in various

states). We expect the domestic revenue to grow at a CAGR of 13%

over FY18-20E.

34 | P a g e

Premia Research

Dabur India

Exhibit 2: Volume growth coming back on track


Increased focus on small brands to strengthen market position

DIL has ~16 brands whose sales are less than `100cr and management

believes that there is potential for them to grow at a much faster rate.

Majority of these brands, Gulabari, Pudin Hara, Odonil, Odomos,

Anmol, etc., are leaders in their respective categories, however due to

lack of push from the company, they haven’t witnessed sharp growth.

Now, company is focused on investing behind the small yet strong

brands, rather than new launches. Company’s focus on scaling up of

already existing brands would be cost effective and strengthen the

position of the products in their respective categories. Further, DIL is

investing behind innovation (in terms of packaging, format, etc.) to

increase the appeal of its products to the new generation consumers.

Additionally, DIL is focusing on channel-wise product development e.g.

(a) low unit packs (LUPs) for the rural market

(b) aspirational products for the modern trade (e.g. Activ, Real Activ

Coconut Water, Real Mocktails, Oxy Pro Clear Facial Kit, etc.)

(c) e-commerce (DIL has partnered with amazon for an Ayurveda

marketplace)

The company is also in the process of creating a premium product

pipeline to be sold only through the e-commerce channel.

4 4.5

-5

2.4

-4.4

7.2

13

7.7

21

0.52.4

-6.6

0.7

-5

9.8

17.7

10

24.7

-10

-5

0

5

10

15

20

25

30

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 Q1FY19

Volume growth (% YoY) Value growth (%)

DIL has witnessed recovery in its hair care

category by driven by low unit packs (LUPs)

– a channel-wise product development

initiative

35 | P a g e

Premia Research

Dabur India

Regional cluster based approach augurs well with niche categories

In order to stay at par with the changing market place due to GST, DIL

is focused on growing its distribution network (across traditional trade,

modern trade, e-commerce, etc.). At present, company’s direct reach

is 1mn retail outlets (expected to reach 1.2mn outlets by FY19-20E)

and indirect reach is 6.3mn outlets. It has 370 super-stockists and over

10,000 sub-stockists. Further, to keep up with the young consumers,

company is also focusing on e-commerce platforms and specialized

channels such as beauty retail and salons, chemists and Ayurvedic

pharmacies.

Further, company’s new sales structure, Buniyaad (undertaken one

year ago), has resulted in improvement in field force and helped the

company increase the average number of brands (especially the

smaller brands) being sold in the hinterland by nearly 10%. Moreover,

for the healthcare segment, company has a team of ~175 medical sales

officers covering more than 39,000 doctors, both Ayurvedic and

Allopathic.

Management is adopting regional cluster based approach for micro

analysis region-wise in order to create, execute, market and distribute

products accordingly. Dabur already has this cluster based approach in

the international market, which has aided the growth in Middle East

and Africa regions. Given the changing demand and upcoming niche

products, this approach may help the company in leveraging its brands

and strengthening its market presence in small and niche categories.

Recovery in international business on the way

The International Business Division (IBD), spread across Middle East,

Africa, South Asia, USA and Turkey contributed 27.9% to DIL’s

consolidated revenues in FY18. DIL’s IBD product portfolio includes

hair, skin and oral care products catering to the local tastes and

preferences. It also follows a localized supply chain strategy with own

manufacturing facilities in the key markets viz. UAE, Egypt, Nigeria,

Turkey, Nepal, Bangladesh and Sri Lanka.

IBD’s poor performance in FY17 and FY18 is attributable to currency

and geopolitical headwinds (refer Exhibit 3).

Cluster based framework is expected to

help the company in understanding

consumer needs and competition in a

better way

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Dabur India

Exhibit 3: International business on the cusp of recovery


With the anniversarisation of currency depreciation, we believe

recovery will be witnessed in the international segment. Further, in

order to boost the performance in the international market, company

has undertaken measures to respond to the changing market dynamics

through unique value-added nature-based product offerings. Further,

(a) change in the distribution structure in Saudi Arabia, (b) an uptrend

in the oil economy, (c) expected recovery in Namaste business (major

contributor of USA business) after a year of lackluster performance and

(d) a stable currency environment in Dabur’s international markets

should drive the IBD performance going forward. Moreover,

improvement in IBD performance (10% revenue CAGR over FY18-20)

will aid the operating profit of the company.

Investment behind advertisement and promotions to inch up

DIL was impacted by two major events – strong emergence of Patanjali

(especially in Honey, Chyawanprash and oral care categories) and

disruption in wholesale channel (rural sales impacted adversely). The

most disrupted categories (health supplement, hair care and oral care)

have started witnessing recovery and gaining market share. The

recovery in health supplement is driven by high brand equity coupled

with higher investment. The Ethicals portfolio is also witnessing growth

momentum led by medical marketing initiatives and on-ground

activations.

7.4 6.4

13.3

10.4

6

-2.3

0

-4.5-2.2

3.95

16.8

11.5

-10

-5

0

5

10

15

20

1Q

FY1

6

2Q

FY1

6

3Q

FY1

6

4Q

FY1

7

1Q

FY1

7

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

Q1

FY1

9

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Dabur India

Exhibit 4: Recovery in the major categories (%)


With macro headwinds abating, we expect the company to inch-up the

marketing and promotional spend in order to drive growth momentum

across categories. Further, company’s focus to scale up the smaller

brands, will require more investment behind marketing. We are

estimating the ad spend to inch-up to ~8.5% in FY19-20E from 7.9% in

FY18 (promotional spends are now netted off from the revenue itself).

-30

-20

-10

0

10

20

30

40

1Q

FY1

7

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

Health Supplement Hair care Oral Care

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Dabur India

Volume growth to drive the financials of the company

We expect DIL to report 12.2% revenue CAGR over FY18-20E led by

~9% volume growth. We are estimating domestic revenue to report

CAGR of 11.5% and international revenue growth of 10% (on a

depressed base) over the same period. We expect the company to

maintain its gross margin despite increasing crude price as oil and oil

derivatives are ~30% of raw material mix and rest are primarily agri

based (where prices are benign and with normal monsoon, it is

expected to remain soft). We are factoring in marginal uptick in the

advertisement expense to 8.4% in FY20E. Led by favorable product mix

and saving across other expenses (supply chain and logistic benefits

post GST implementation), we expect company’s EBITDA CAGR of

14.4% over FY18-20E and EBITDA margin at 21.2% and 21.8% for FY19E

and FY20E. Resultantly, PAT is estimated to report a CAGR of 16.0%

over FY18-20E. We recommend BUY on the stock with a target price

of `508, valuing it at 49x FY20E EPS.

Key risks

Slower than estimated rural recovery Further increase in competition in foods segment Continuation in currency depreciation in DIL’s key geographies

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Dabur India

Company Overview

Dabur India Ltd. (DIL), with a legacy of over 134 years, is today the

oldest and the most trusted name in the field of Ayurveda and

healthcare. The company’s business model is based upon its three

verticals i.e. Healthcare (HC), Home and Personal Care (HPC) and

Foods.

Exhibit 5: Categories and brands

Category Brands

Health Supplements Dabur Chyawanprash, Dabur Honey and Dabur Glucose

Digestives Dabur Hajmola, Pudin Hara and Nature Care

OTC & Ethicals Dabur Honitus, Dashmularishta Asav, Ashokarishta Asav, Dabur Lal Tail, Dabur Janam Ghunti, Shilajit,

Hair Care Dabur Amla, Vatika and Anmol

Oral Care Dabur Babool, Dabur Red Paste, Dabur Meswak and Dabur Red Gel

Home Care Odomos (mosquito repellents), Odonil (air fresheners) and Sanifresh (toilet cleaners)

Skin Care Fem, OxyLife, Dabur Gulabari

Foods Real, Activ

Exhibit 6: Home and Personal care dominates the domestic market

Revenue contribution (FY18) Break-up of domestic sales (FY18)

Domestic68%

International28%

Others4% Health Supplements

17%

Digestives6%

OTC & Ethicals

9%

Hair Care 21%

Oral Care 17%

Home Care 7%

Skin Care 5%

Foods18%

Healthcare

Home and Personal Care


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Dabur India

Exhibit 7: Balance sheet


Liabilities


Total Borrowings 475 369 319 219



Assets

Net Block 1,958 2,028 2,012 2,083


Inventories 1,107 1,256 1,255 1,409


Cash 305 306 442 887


Other current assets 1,020 1,137 1,207 1,277

Current Liabilities 2,223 2,434 2,311 2,539

Net Current Asset 894 1,005 1,428 1,971

Others 2,614 3,192 3,512 3,832

Total Assets 5,509 6,267 6,994 7,928

Ratios ROE 26.4 23.8 24.2 24.3 ROCE 28.0 26.2 27.0 27.8


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GSK Consumer Healthcare CMP: ` 6,690: 1-year target: ` 7,833

Sector FMCG

Recommendation BUY

Upside 17.1%

Stock Data

Sensex 37,645

52 Week h/l (`) 6,927/4,856


BSE code 500676

NSE code GSKCONS

FV (`) 10

Div yield (%) 1.1


Dec-17 Mar-18 Jun-18

Promoters 72.5 72.5 72.5

DII+FII 12.8 14.8 15.2



Share Price Trend


GSK Consumer Healthcare (GSKCH), market leader in the Indian

health food drinks (HFD) industry, is recently put on the block as its

parent GSK Plc looks at divesting partial or full stake. GSKCH, with

brands Horlicks and Boost is expected to benefit from high pricing

power, product innovation, premiumisation and efforts towards

increasing penetration. We recommend BUY with a target price of

`7,833 (36x FY20E EPS).

Strong brand recall and strategic initiatives to aid growth: GSKCH

is the market leader in the malt based drinks with ~45% market share

in `78.7bn industry. After depressed volumes in FY16 and FY17,

company reported ~6% volume growth in FY18 led by various

initiatives (LUPs to increase penetration, premium science based

launches, investment behind brands, etc.). We are estimating 11%

revenue CAGR over FY18-20E supported by ~5% volume growth p.a.

Profitability to improve with cost optimization: GSKCH has the

highest cost structure in the industry (refer exhibit 3) and is focused on

reducing its cost through value engineering and cost saving initiatives

in area of procurement, network optimization, manufacturing

technology, automation, simplification. Led by company’s initiatives to

cut cost, PAT CAGR is estimated at 14% over FY18-20E.

With Horlicks on block, risk-reward looks favorable: The deal

structure for the stake sale is not certain at this point of time. However,

given the strong brand equity, dominant market position and pricing

power, we believe the acquisition will be valued at a significant

premium. Even if the deal doesn’t materialize, the estimated upside is

~17% supported by improvement in company’s performance.

Financial Summary


Revenue 3,991 4,317 4,777 5,333

YoY growth (%) (3.5) 8.2 10.7 11.6

EBITDA Margin (%) 21.0 20.5 21.5 22.0

PAT 657 700 816 915

EPS growth (%) (4.5) 6.6 16.5 12.2

RoE (%) 21.0 20.1 20.8 20.9

P/E (x) 42.8 40.2 34.5 30.7

Mcap/Sales (x) 7.0 6.5 5.9 5.3


3100032000330003400035000360003700038000

4900

5900

6900


GSKCONS Ltd Sensex

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GSK Consumer Healthcare


Product innovation to drive the next leg of growth

The company has acknowledged various challenges faced by the

categories - (a) new breakfast options for the children to consume with

milk (cornflakes, Musselli, Choco Fills, etc.), (b) better availability of

milk in company’s key markets of south and east India (per capita

availability of milk in the country has grown by ~25% over the last five

years). The company is undergoing various strategic measures to get

both, the category and company, in fast pace.

1. Improving penetration and accessibility: Post the demonetization

havoc, company has been consistently focusing on increasing its

direct reach and has a distribution network of 4.2 million outlets

with the direct reach of 1 million outlets. Horlicks has a reach of 1.6

million outlets. The company is focused on driving volume through

increased penetration through driving accessibility and availability

with sachet (`5/sachet) and base Horlicks. As per the company,

20% of the sachet users, over a period, have upgraded to large size

packs.

2. Expanding the consumer base: GSKCH (Horlicks and Boost), Heinz

(Complan), and Mondelez (Bournvita) lose their core consumers

once they turn 13 years old. If we look at Mondelez (Cadbury),

Cadbury has now successfully expanded their customer base to all

age groups by positioning and launching chocolates and

confectioneries suitable for respective age groups. GSKCH, to

overcome this shortcoming, has launched products like Growth

Plus, Mother Horlicks, Horlicks Lite, Women Horlicks and Junior

Horlicks to cater to nutrition needs of children and adults at

different life stages. Moreover, company is running various

campaigns to make the product weather neutral by showing that

Horlicks can be taken in cold milk as well.

3. Launch of Premium and Super Premium: Company has come up

with premium and science based products like Horlicks Protein Plus

(in Q3FY18). Further, in order to penetrate the growing Protein

Malt beverage market (market size of `700cr), GSKCH launched

Protein X. It enjoys a 40% market share in the category.

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4. Investment behind brands: GSKCH is one of the highest ad

spending company. Being the category leader where category itself

is going through tough phase, GSKCH not only needs to promote

the products but also keep on coming up with various campaigns

for category awareness.

5. Cost optimization may give a push to profitability: In the last

conference call, company had mentioned that it is rationalizing all

cost elements of costs. Company is focused on reducing cost

through value engineering and cost saving initiatives in area of

procurement, network optimization, manufacturing technology,

automation, simplification. The company also aims at taking the

pricing in-line or slightly ahead of inflation to cover up the cost.

Currently GSKCH has one of the highest cost structure in the

industry (excluding adex and royalty).

6. Exhibit 1: GSKCH - highest overhead expenses in the industry

Source: Company, IIFL Research; Note: overheads are exclusive of royalty payment and adex

Volume growth is back for the company

GSKCH’s volume growth had gone for a toss since Q1FY17 on account

of various hurdles, viz. category slowdown, demonetization, de-

stocking at the time of GST implementation and rural slowdown.

However, company has reported a volume growth of 16%, 8% and

12.8% for Q3FY18, Q4FY18 and Q1FY19 respectively led by recovery in

rural demand, market share gain, new launches, aggressive marketing

and promotion and focus on increasing category penetration.

0 5 10 15 20 25 30 35

HUL

Emami

Bajaj Corp

GCPL

Dabur

Britannia

Marico

Colgate

JLL

Nestle

GSKCH

Overheads as % of net sales

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Premia Research


Exhibit 2: Volume growth (%) is back for the company


Headroom for EBITDAM expansion

We estimate the company to report 153bps EBITDA margin expansion

over FY18-20E led by benign raw material prices, product mix change

in favor of premium product, cost rationalization initiatives and focus

on pricing.

Exhibit 3: Benign raw material to aid EBITDA margin

Milk and milk powder prices change Marginal inflation in wheat price (%)

-7-5

-17

-1

2 3

16

8

12.8

-20

-15

-10

-5

0

5

10

15

20

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

-30

-20

-10

0

10

20

30

Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19

SMP Price (%) Milk price (%)

-15

-10

-5

0

5

10

15

20

Q1

FY1

7

Q2

FY1

7

Q3

FY1

7

Q4

FY1

7

Q1

FY1

8

Q2

FY1

8

Q3

FY1

8

Q4

FY1

8

Q1

FY1

9


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Horlicks and India business stake sale by the promoter

GlaxoSmithKline Plc (GSK Plc), announced on March, 27 2018, that it is

considering the sale of its brand Horlicks and also a sale of its stake in

its India subsidiary to fund the acquisition of Novartis. Various

newspaper articles have mentioned that companies such as Nestle,

HUL, Pepsi, Danone, Mondelez, Coca Cola and private equity firm KKR

may be keen on purchasing the assets given strong brand equity of

Horlicks. We believe that the most likely scenario is that the buyer will

be entitled to the global rights for GSK consumer brand as well as GSK

Plc’s 72.5% stake in GSK India.

Best case scenario – Acquisition by FMCG company with Indian

operation: We believe the most favorable scenario for this transaction

would be a FMCG company with Indian operations like Nestle, HUL,

ITC, etc. owing to various synergies on sales and cost fronts. (Refer

Exhibit 4 for more details)

a) Combined distribution network with an existing FMCG company,

particularly in rural areas and in north/west India would drive sales.

b) GSK’s high cost structure (refer Exhibit 1) would have huge scope

of reduction

c) Company’s advertisement expense may come down with

association with a much larger entity

We believe that with the drivers mentioned above, GSKCH may witness

~50% increase in its profitability in the best case scenario.

Minority shareholders to benefit from the deal: We believe that the

minority shareholders would benefit if the deal goes through. Our

rationale for the same are as below:

An open offer would be triggered with the sale of 72.5%

shareholding of GSK Plc. This offer would have to be made at a price

not lower than the price at which GSK Plc sold the shares to the

acquirer. Once the deal is announced the share price is most likely

to witness an appreciation.

Even if the acquirer (like HUL/Nestle) opts for merger of GSKCH with

itself, it is likely that investors will bid up the stock price so that they

get a better swap ratio.

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For the purpose of variance in the deal, we are analyzing three

scenarios of the deal.

Exhibit 5: Acquisition scenarios – impact on financials Base Case Scenario 1 Scenario 2 Scenario 3

Revenue 5,332.9 5,070.2 5,332.9 5,070.2

Aux. income 262.7 0 262.7 0

Raw material 1,722.5 1,637.7 1,722.5 1,637.7

% of Sales 32.3 32.3 32.3 32.3

Employee 645.3 557.7 586.6 608.4

% of Sales 12.1 11.0 11.0 12.0

Royalty 186.7 - - 101.4

% of Sales 3.5 - - 2.0

Other expenses 1,605.2 1,419.7 1,493.2 1,419.7

% of Sales 30.1 28.0 28.0 28.0

Expenditure 4,159.6 3,615.07 3,802.34 3,767.17

% of Sales 78.0 71.3 71.3 74.3

EBITDA 1,173.2 1,455.2 1,530.5 1,303.0

EBITDA margin (%) 22.0 28.7 28.7 25.7

Interest - - - -

Depreciation 84.1 84.1 84.1 84.1

Other income 276.7 276.7 276.7 276.7

PBT 1,365.9 1,647.8 1,723.2 1,495.7

Tax 450.7 543.8 568.6 493.6

Tax rate (%) 33.0 33 33 33

PAT 915.1 1,104.0 1,154.5 1,002.1

EPS (`) 217.6 262.5 274.5 238.3

Target PE 35 40 40 36

Target Price 7,616 10,501 10,981 8,578

Upside (%) 13.8 57.0 64.1 28.2


Exhibit 4: Acquisition scenario - Assumptions

Scenario 1 Scenario 2 Scenario 3

Acquirer Indian FMCG company acquires GSKCH (ex-aux income)

Indian FMCG company acquires GSKCH (auxiliary income continues

Any MNC/PE buys out GSKCH

Synergies (a) operational synergies (a) operational synergies (a) no operational synergies

(b) cost rationalization in-line with the acquirer’s cost structure

(b) cost rationalization in-line with the acquirer’s cost structure

(b) cost rationalization may happen.

(c) higher valuation multiple (c) higher valuation multiple Assumptions No Royalty payment No Royalty payment Royalty Continues

Aux income to continue for few years


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Company is attractively valued at the CMP

GSKCH is an attractive bet in the FMCG space given company’s focus

on volume growth, product launches in the high margin science based

protein supplements category and the expected rural revival. We

estimate revenue and PAT CAGR of 11.2% and 14.3% respectively over

FY18-20E. Further, though the deal structure for the stake sale is not

certain at this point of time, the strong brand equity, dominant market

position and pricing power certain acquisition at a significant premium.

Even if the deal doesn’t materialize, the estimated upside is ~17%

supported by improvement in company’s performance. We

recommend BUY with a target price of `7,833 (36x FY20E EPS).

Exhibit 6: One year forward PE (x) and standard deviation


Key risks:

Slower offtake of the malt based drinks Higher inflation in the key raw materials (sugar, milk, wheat and

barley Intensifying competitive intensity in similar or adjacent categories

20.0

25.0

30.0

35.0

40.0

45.0

10

-Au

g-1

5

10

-Oct

-15

10

-Dec

-15

10

-Fe

b-1

6

10

-Ap

r-1

6

10

-Ju

n-1

6

10

-Au

g-1

6

10

-Oct

-16

10

-Dec

-16

10

-Fe

b-1

7

10

-Ap

r-1

7

10

-Ju

n-1

7

10

-Au

g-1

7

10

-Oct

-17

10

-Dec

-17

10

-Fe

b-1

8

10

-Ap

r-1

8

10

-Ju

n-1

8

10

-Au

g-1

8

1Yr Fwd PE (x) 3 Yr Average PE (x) 1- STDV 1+ STDV

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Company Overview

GlaxosmithKline Consumer Healthcare (GSKCH) is an Indian subsidiary

of GlaxoSmithKline (75% holding), marketing health and nutrition

products. The company is engaged in manufacturing of Health Food

Drinks (HFD) under the brands Horlicks and Boost. Apart from this,

company earns auxiliary service commission from certain group

companies for services rendered towards selling and distribution (viz.

Crocin, Eno, Iodex, Voltaren, Sensodyne). GSKCH products dominate

the South and East markets.

HFD category is witnessing slowdown since FY2015, hence GSKCH has undertaken various initiatives like (a) sachet and small pack units to aid penetration and affordability, and (b) campaigns towards benefits of HFDs to drive performance

Further, for the premium hi-science products, company is strengthening distribution in the chemist and pharmacy channels.

Malted Foods (Horlicks/Boost) contributed 95% to the FY18 revenue and rest were contributed by biscuits and other snack items.

Revenue from South and East India contributed the highest in the revenue at 46% and 38% respectively. North and west contributes 6% and 3% to the revenue respectively.

Exhibit 7: Product Portfolio

Product type GSKCH Competitor

Base Drink Horlicks Classic Malt

Bournvita Pro-Health Chocolate drink (Mondelez)

Boost Power Vita (Patanjali)

Children Junior Horlicks - Stage 1 (2-3 years)

Complan (Kraft - Heinz) Bournvita Lil' Champs (Mondelez) PediaSure (Abott)

Women Women's Horlicks – Chocolate

Nestle Mom & Me (Nestle)

Mother Horlicks Mama Protinex (Danone) Specialized Product

Cardia Plus NA


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Exhibit 8: Balance sheet


Liabilities


Total Borrowings - - - -



Assets

Net Block 496 476 602 718


Inventories 461 409 503 561


Cash 3,087 3,585 4,037 4,467


Other current assets 263 274 309 345

Current Liabilities 1,601 1,743 1,922 2,146

Net Current Asset 2,544 2,819 3,288 3,631

Others 270 337 143 133

Total Assets 3,359 3,670 4,084 4,532

Return ratios

ROE 21.0 20.1 20.8 20.9

ROCE 30.8 29.8 30.3 30.5


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Disclaimer

Recommendation Parameters for Fundamental/Technical Reports: Buy – Absolute return of over +10% Accumulate – Absolute return between 0% to +10% Reduce – Absolute return between 0% to -10% Sell – Absolute return below -10% Please refer to http://www.indiainfoline.com/research/disclaimer for recommendation parameter, analyst disclaimer and other disclosures. IIFL Securities Limited (Formerly ‘India Infoline Limited’), CIN No.: U99999MH1996PLC132983, Corporate Office – IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 Tel: (91-22) 4249 9000. Fax: (91-22) 40609049, Regd. Office – IIFL House, Sun Infotech Park, Road No. 16V, Plot No. B-23, MIDC, Thane Industrial Area, Wagle Estate, Thane – 400604 Tel: (91-22) 25806650. Fax: (91-22) 25806654 E-mail: [email protected] Website: www.indiainfoline.com, Refer www.indiainfoline.com for detail of Associates. Stock Broker SEBI Regn.: INZ000164132, PMS SEBI Regn. No. INP000002213, IA SEBI Regn. No. INA000000623, SEBI RA Regn.:- INH000000248 For Research related queries, write at [email protected] For Sales and Account related information, write to customer care: [email protected] or call on 91-22 4007 1000

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Documents

FMCG Sector Report: Naturally Rural - The Spell of Ayurveda