Good times ahead - asiaresearch.daiwacm.comasiaresearch.daiwacm.com/eg/cgi-bin/files/Marico_140106.pdf · Parachute and loose coconut oil has narrowed due to the recent sharp copra

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■ What's new With Marico increasing investments in market-infrastructure development, preserving a price premium for all its brands, focusing on attractive categories, and making a renewed push in product innovation, we are more upbeat on its prospects for the next few years. ■ What's the impact While sales of the company’s flagship Parachute coconut oil have been slow over the past 5 quarters, we expect them to pick from 2H FY14, as the price premium between Parachute and loose coconut oil has narrowed due to the recent sharp copra price rise. We expect sales-volume growth of Marico’s Saffola brand to recover on the back of a shift to step up product innovation. Also, the company plans to widen its distribution reach to semi-urban and rural areas from the current 10 cities in India. We believe

both initiatives will bear fruit from 2H FY14. We expect Marico’s high-growth products – ie, its value-added hair oils, “Youth” brands, and Saffola-brand foods – to continue to gain market share over FY14-16, supported by new-product launches. Also, its international sales picked up in 1H FY14 and we expect more improvement over the medium term. We cut our FY14E EPS by 13% due to the planned spin-off of loss-making subsidiary Kaya. We believe this will unlock value for shareholders, as Kaya should no longer be an earnings drag. For FY14-16, we forecast a sales CAGR of 15.6% (led by volume growth) and EBIT margin expansion, translating into a strong 23% EPS CAGR. ■ What we recommend Reflecting the favourable business outlook, we reiterate our Outperform (2) rating. We raise our 6-month target price to INR239 (from INR200), now based on the average of our FY14-15E EPS (formerly FY14E) and an unchanged 24x target PER, in line with the stock’s past-7-year average. A slower-than-expected sales-volume pick-up would be the main risk to our call.

■ How we differ We expect higher sales and lower interest costs over FY14-16.

Consumer Staples / IndiaMRCO IN

6 January 2014

Marico

Good times ahead

• Sales-volume growth for Parachute oil should pick up and aid market-share gains from 2H FY14

• Saffola-oil innovation, other high-growth products, and distribution expansion should drive a 23% FY14-16E EPS CAGR

• Planned Kaya spin-off looks set to unlock shareholder value: raising target price to INR239, reaffirming Outperform rating

Source: Daiwa forecasts

Source: FactSet, Daiwa forecasts

Consumer Staples / India

MaricoMRCO IN

Target (INR): 200.00 239.00Upside: 10.8%3 Jan price (INR): 215.70

BuyOutperform (unchanged)

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Share price performance

Marico (LHS)Relative to SENSEX Index (RHS)

(INR) (% )

12-month range 191.30-235.45Market cap (USDbn) 2.223m avg daily turnover (USDm) 1.75Shares outstanding (m) 641Major shareholder Promotor Group (62.9%)

Financial summary (INR)Year to 31 Mar 14E 15E 16ERevenue (m) 47,463 55,023 63,410Operating profit (m) 6,434 7,895 9,627Net profit (m) 4,657 5,704 7,051Core EPS (fully-diluted) 7.263 8.896 10.996EPS change (%) 25.2 22.5 23.6Daiwa vs Cons. EPS (%) (1.9) 1.8 7.3PER (x) 29.7 24.2 19.6Dividend yield (%) 0.9 1.4 1.9DPS 2.000 3.000 4.000PBR (x) 9.0 7.4 6.1EV/EBITDA (x) 20.1 16.5 13.4ROE (%) 26.5 33.5 34.0

Mihir Shah(91) 22 6622 1020

[email protected]

How do we justify our view?How do we justify our view?

Consumer Staples / India MRCO IN

6 January 2014

- 2 -

Growth outlook Marico: sales growth and EPS growth (YoY)

We forecast Marico’s sales to increase at a CAGR of 15.6% over FY14-16, driven by an improvement in sales-volume growth on the back of the initiatives taken by the company in each of its brands and portfolios, and also due to an improved distribution reach. For FY14-16, we forecast an EPS CAGR of 23%, driven by: 1) a better EBITDA margin, resulting from a fall in employee costs and a moderation in advertising and promotion (A&P) spending to close to normal levels, and 2) a decline in interest costs, on the back a reduction in debt, which should result from better free cash generation following the planned spin-off of Kaya. Source: Company, Daiwa forecasts

Valuation Marico: one-year forward PER bands

Like the India Consumer Sector, Marico has been rerated over the past 5 years and has traded at high PERs (averages of 26x over the past 5 years and 28x over the past 3 years), as demand for defensive stocks has risen due to the weak economic environment. In recent months, however, Marico’s valuation and share price have moderated due to the company’s lower-than-expected sales and earnings performance over the past few quarters. The stock trades currently at a PER of 24.2x on our FY15E EPS. While we do not expect the PER to return to its past-3-year high of 28x, we see scope for a further rerating. Our target PER of 24x for Marico is in line with its past-7-year trading average, and represents a mid-cycle multiple.

Source: Bloomberg, Daiwa forecasts

Earnings revisions Marico: consensus EPS-forecast revisions

The Bloomberg-consensus FY14-16 EPS forecasts have been revised down over the past year to factor in lower-than-expected results and moderating sales growth. However, we do not expect further cuts to the FY15 and FY16 forecasts in the foreseeable future, as we expect sales-volume growth to pick up.

Source: Bloomberg

How do we justify our view?

Growth outlook

Valuation

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Key assumptions

Profit and loss (INRm)

Cash flow (INRm)


Year to 31 Mar 2009 2010 2011 2012 2013 2014E 2015E 2016EParachute sales growth (%) 16.6 5.9 21.0 27.5 11.5 5.6 12.3 11.3Other hair oils sales growth (%) 19.3 16.4 29.1 43.0 29.0 16.7 19.0 19.0Gross margin change YoY (bps) (215) 593 (281) (197) 551 (143) 40 32A&P as a % of sales (%) 10.5 13.2 11.1 10.7 13.0 12.8 12.8 12.6

Year to 31 Mar 2009 2010 2011 2012 2013 2014E 2015E 2016ETotal Revenues 23,884 26,608 31,260 39,682 45,843 47,463 55,023 63,410n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Other Revenue n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Total Revenue 23,884 26,608 31,260 39,682 45,843 47,463 55,023 63,410Other income 0 0 90 115 118 136 157 180COGS (13,105) (13,021) (16,176) (21,315) (22,099) (23,558) (27,092) (31,020)SG&A (7,740) (9,835) (10,993) (13,637) (17,605) (16,968) (19,616) (22,352)Other op.expenses (358) (601) (708) (725) (866) (639) (577) (591)Operating profit 2,682 3,151 3,473 4,119 5,392 6,434 7,895 9,627Net-interest inc./(exp.) (357) (257) (410) (424) (580) (435) (323) (241)Assoc/forex/extraord./others 122 183 212 326 375 413 475 546Pre-tax profit 2,447 3,077 3,275 4,021 5,187 6,412 8,047 9,931Tax (409) (643) (850) (783) (1,462) (1,641) (2,213) (2,731)Min. int./pref. div./others (150) (117) 439 (67) 234 (113) (130) (150)Net profit (reported) 1,887 2,317 2,864 3,171 3,959 4,657 5,704 7,051Net profit (adjusted) 2,012 2,394 2,502 3,170 3,720 4,657 5,704 7,051EPS (reported)(INR) 3.099 3.788 4.655 5.154 6.173 7.263 8.896 10.996EPS (adjusted)(INR) 3.304 3.915 4.066 5.152 5.801 7.263 8.896 10.996EPS (adjusted fully-diluted)(INR) 3.304 3.915 4.066 5.152 5.801 7.263 8.896 10.996DPS (INR) 0.655 0.660 0.662 0.700 1.000 2.000 3.000 4.000EBIT 2,682 3,151 3,473 4,119 5,392 6,434 7,895 9,627EBITDA 3,040 3,752 4,181 4,844 6,258 7,073 8,472 10,218

Year to 31 Mar 2009 2010 2011 2012 2013 2014E 2015E 2016EProfit before tax 2,447 3,077 3,275 4,021 5,187 6,412 8,047 9,931Depreciation and amortisation 358 601 708 725 866 639 577 591Tax paid (336) (629) (783) (1,100) (1,100) (1,641) (2,213) (2,731)Change in working capital (1,008) (1,287) (980) 194 (952) (112) (662) (735)Other operational CF items 355 300 219 169 318 435 323 241Cash flow from operations 1,816 2,061 2,439 4,009 4,319 5,733 6,072 7,298Capex (938) (1,275) (1,521) (1,107) (9,436) (1,000) (1,000) (1,500)Net (acquisitions)/disposals (121) (706) (64) (2,065) 1,440 6,200 0 0Other investing CF items 70 (92) (2,370) (347) (328) 0 0 0Cash flow from investing (988) (2,074) (3,955) (3,520) (8,323) 5,200 (1,000) (1,500)Change in debt 163 716 3,283 107 871 (1,997) (1,986) (1,684)Net share issues/(repurchases) 0 0 5 1 30 0 0 0Dividends paid (467) (470) (472) (500) (385) (1,531) (2,297) (3,063)Other financing CF items (414) 35 (76) (794) 3,907 (4,968) (453) (391)Cash flow from financing (717) 281 2,740 (1,187) 4,423 (8,497) (4,736) (5,138)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 111 268 1,224 (698) 418 2,436 336 660Free cash flow 879 786 918 2,902 (5,117) 4,733 5,072 5,798

Financial summary


6 January 2014

- 4 -

Balance sheet (INRm)

Key ratios (%)


Company profile

Marico is India’s leading hair-care, skin-care and health-food company. It is the market leader in coconut hair oil, with a market share of around 52% for its Parachute and Nihar brands. It also operates another hair-oil segment, with a market share of 23%. Its edible oil, Saffola, is based on the company's ‘good for heart’ platform and it is diversifying into healthy foods. Marico also has a skin-solution business, accounting for around 7% of revenue, and an international business accounting for about 25% of revenue.

As at 31 Mar 2009 2010 2011 2012 2013 2014E 2015E 2016ECash & short-term investment 902 1,115 2,206 1,321 2,668 3,486 3,822 4,482Inventory 3,390 4,448 6,011 7,202 8,627 8,245 9,482 10,857Accounts receivable 1,108 1,507 1,779 2,083 1,966 2,373 2,751 3,170Other current assets 1,299 1,900 2,591 3,411 4,117 4,553 4,553 4,553Total current assets 6,699 8,970 12,588 14,017 17,376 18,658 20,609 23,063Fixed assets 3,111 3,997 4,578 5,018 14,224 8,385 8,808 9,716Goodwill & intangibles 850 850 3,976 3,955 3,955 2,542 2,542 2,542Other non-current assets 762 1,444 1,190 3,180 1,516 1,516 1,516 1,516Total assets 11,423 15,260 22,331 26,170 37,072 31,101 33,475 36,838Short-term debt 0 0 0 0 0 0 0 0Accounts payable 2,454 3,096 2,694 3,584 4,785 5,065 5,825 6,669Other current liabilities 690 1,041 2,523 3,059 3,345 3,416 3,608 3,823Total current liabilities 3,144 4,136 5,216 6,643 8,129 8,481 9,433 10,492Long-term debt 3,743 4,459 7,742 7,848 8,719 6,722 4,736 3,051Other non-current liabilities 0 0 0 0 58 58 58 58Total liabilities 6,887 8,595 12,958 14,491 16,906 15,260 14,227 13,601Share capital 609 609 614 615 645 645 645 645Reserves/R.E./others 3,927 5,930 8,540 10,815 19,170 14,696 18,104 22,092Shareholders' equity 4,536 6,540 9,155 11,430 19,815 15,341 18,748 22,737Minority interests 0 125 219 249 351 500 500 500Total equity & liabilities 11,423 15,260 22,331 26,170 37,072 31,101 33,475 36,838EV 141,155 141,783 144,069 145,090 144,717 142,050 139,728 137,383Net debt/(cash) 2,841 3,344 5,536 6,527 6,051 3,236 914 (1,431)BVPS (INR) 7.448 10.693 14.876 18.579 30.901 23.924 29.238 35.458

Year to 31 Mar 2009 2010 2011 2012 2013 2014E 2015E 2016ESales (YoY) 25.4 11.4 17.5 26.9 15.5 3.5 15.9 15.2EBITDA (YoY) 23.4 23.4 11.5 15.9 29.2 13.0 19.8 20.6Operating profit (YoY) 24.5 17.5 10.2 18.6 30.9 19.3 22.7 21.9Net profit (YoY) 25.4 19.0 4.5 26.7 17.4 25.2 22.5 23.6Core EPS (fully-diluted) (YoY) 25.5 18.5 3.9 26.7 12.6 25.2 22.5 23.6Gross-profit margin 45.1 51.1 48.3 46.3 51.8 50.4 50.8 51.1EBITDA margin 12.7 14.1 13.4 12.2 13.7 14.9 15.4 16.1Operating-profit margin 11.2 11.8 11.1 10.4 11.8 13.6 14.3 15.2Net profit margin 8.4 9.0 8.0 8.0 8.1 9.8 10.4 11.1ROAE 52.4 43.2 31.9 30.8 23.8 26.5 33.5 34.0ROAA 19.1 17.9 13.3 13.1 11.8 13.7 17.7 20.1ROCE 34.0 30.7 23.0 21.1 21.2 23.8 31.9 35.9ROIC 31.9 28.4 20.4 20.9 18.3 21.3 29.3 33.1Net debt to equity 62.6 51.1 60.5 57.1 30.5 21.1 4.9 net cashEffective tax rate 16.7 20.9 25.9 19.5 28.2 25.6 27.5 27.5Accounts receivable (days) 15.1 17.9 19.2 17.8 16.1 16.7 17.0 17.0Current ratio (x) 2.1 2.2 2.4 2.1 2.1 2.2 2.2 2.2Net interest cover (x) 7.5 12.3 8.5 9.7 9.3 14.8 24.5 39.9Net dividend payout 21.1 17.4 14.2 13.6 16.2 27.5 33.7 36.4Free cash flow yield 0.6 0.6 0.7 2.1 n.a. 3.4 3.7 4.2

Financial summary continued …


6 January 2014

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Good times ahead Marico’s sales-volume growth has been on a downtrend over the past 5 quarters, affected by weak consumer demand due to high inflation, a slowdown in spending on discretionary items, and increased competition in some of its product categories. However, we believe with Marico sharpening its focus on direct rural distribution reach, increasing its investment in go-to-market technology, infrastructure and people, preserving a reasonable product price premium gap and its renewed thrust behind product innovation; it is set for a revival. Marico: domestic sales-volume growth (YoY)

Source: Company, Daiwa

Marico: revenue breakdown (FY13)


Parachute – worst of sales volume seems over

Parachute: sales-volume growth (YoY)


Sales volumes of the company’s flagship coconut oil brand, Parachute, have been affected adversely over the past 5 quarters, in large part by the widening price premium between Parachute and loose coconut oil (the latter accounts for 40-45% of India’s coconut oil market) due to falling raw-material (ie, copra) prices. This widening premium led to only a negligible number of consumers switching to buying branded oil from purchasing loose oil, as loose coconut-oil prices had fallen far more than the price of Parachute oil had. Copra price

Source: Bloomberg, Daiwa

However, with the sharp rise in the copra price since October 2013, we expect the price premium between Parachute and loose coconut oil to narrow, even though Marico raised the price of Parachute by 9% in November. We expect a narrowing premium to help Marico attract new consumers from the loose-oil segment. Empirical evidence suggests to us that Marico’s market share usually increases during a period of input cost inflation. Consumers tend to trade up if the price

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Parachute coconut oil

(Rigid packs)23.0%

Parachute coconut oil

(Pouch packs)4.1%

Nihar coconut oil4.3%

Saffola edible oil15.0%Value-added

hair oil16.0%

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premium between branded and non-branded or loose oil narrows. Price premium of Parachute vs. loose coconut oil (x)

Source: Daiwa

Though we would expect the above-mentioned sharp pick-up in the copra price in isolation to put pressure on Parachute’s gross margin, Marico increased the weighted average price of the product by 9% in November 2013 to offset this. Following this, Parachute’s price premium over loose oil has not increased substantially (as shown in the preceding chart), so it should continue to attract new consumers, in our view. We forecast Parachute’s sales-volume growth to pick from 2H FY14 onwards, reflecting the trends discussed above and supported also by a favourable comparison base with 2H FY13. We believe that if Marico maintains a price premium for Parachute at about the current level over loose coconut oil, then the company should be able to sustain sales-volume growth for its coconut portfolio overall of 7-8% a year over the next 1-2 years. For this portfolio, we forecast sales-volume growth of 6% YoY for 2H FY14, 8% YoY for FY15 and 7% YoY for FY16.

Saffola – shift in strategy augurs well

Saffola: sales-volume growth (YoY)


Marico is working on a three-prong strategy to revive sales growth of its Saffola branded products, which have been affected by the slowdown in spending on discretionary items at the top end of the price pyramid, where Saffola is positioned, and by increased competition from other, new edible-oil players.

• Stepping up product innovation. Over the past 3 years, there has been no meaningful innovation in Marico’s edible-oil portfolio. With competition increasing in this category, due to the entry of a few new players that are marketing and pricing their products aggressively, Marico renewed its push in product innovation. The company recently launched a new variant of Saffola oil, Saffola Total, which is a blend of 70% rice-bran oil and 30% kardi oil (refined safflower seed). The company claims this new blended oil has twice the antioxidant power of olive oil; also, it is produced using the losorb technology, which means the level of oil absorbed by the food is 10% less than that of plain olive oil. Saffola Total is now the top-end product in Marico’s edible-oil portfolio. We expect the company to develop more innovative products and differentiate these by offering consumers more benefits, rather than simply offering plain blended oil.

• Increasing Saffola’s distribution reach. While Marico has a solid distribution network for Parachute, Saffola is only distributed to 10 cities in India currently. This is largely because Saffola is positioned at the top end of the price pyramid, and thus in the past it did not make sense for the company to expand this reach beyond the above areas. However, over the past couple of months the company has been prototyping Saffola’s potential in one state by widening its distribution to semi-urban and rural areas. The response has been good so far,

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and Marico believes there is now enough potential for some semi-urban and some rural people to buy healthy products such as Saffola in these areas. The company has also made special product packs to suit consumers in the above areas. We believe it has taken the right steps to widen its presence with Saffola in these areas, which should also strengthen the latter’s brand image, and we expect the company’s expansion of its distribution network for Saffola to other states to help boost Saffola’s sales volume over the next few years.

• Maintaining a reasonable price-premium gap. Marico’s management is aiming to preserve the price premium between Saffola and other edible oils at about the current level in order to optimise sales volume and maintain its gross margin. We also note that, unlike in prior years, the company now runs promotional offers if the price differential between its edible oils and those of competitors increases. Thus, we believe that if a reasonable price-premium gap is maintained, it will encourage consumers to trade up soon, thereby improving Saffola’s sales volume.

On the back of these initiatives by the company, we forecast Saffola’s sales-volume growth to pick from 2H FY14. From a 7% YoY rise in sales volume for FY13, we forecast it to increase to 9.5% YoY for FY14 and to 11.5% YoY for FY15, and then drop back to 10% YoY growth for FY16.

Edible oils: Marico’s current products vs. competition Brand Company INR/5 litresBlended rice bran oil Saffola Total Marico 885.00Sundrop Heart Agro Tech Foods 878.00Saffola Gold Marico 680.00Ricela Rice Bran Oil Ricela 670.00Riso Rice Bran Oil Riso 625.00Dhara - Life Refined Mother Dairy 615.00Saffola Active Marico 580.00Saffola Tasty Marico 580.00Fortune Adani Wilmar 575.00Blended sunflower oil Sundrop Super Lite Advanced Agro Tech Foods 825.00Sweekar Cargill 695.00Gemini Refined Sunflower Oil Cargill 630.00Fortune Sunlite Sunflower Oil - Plus Adani Wilmar 615.00Sunrich - Refined Sunflower Oil Ruchi Soya 570.00Dalda Sunflower Oil Dalda 540.00Guinea Lite Refined Sunflower Oil Raj Oil Mills 540.00Dhara Refined Oil Mother Dairy 536.48Nutrela Refined Oil Ruchi Soya 520.80Sunday Liberty Oil Mills 470.00Surya Sunflower Oil Satguru Agro 450.00Aadhaar Refined Sunflower Oil Aadhaar 430.00Other edible oils RRO Primio Kachi Ghani RRO Primio 750.00Sweekar Advanced Cargill 725.00Sundrop Nutrilite Agro Tech Foods 713.00Tez Mustard Oil Recon oil 660.00Dhaara Kachi Ghani Mother Dairy 615.00Fortune Soyabean Adani Wilmar 615.00Nutrela Refined Soyabean Oil Ruchi Soya 495.00Sundrop Lite Agro Tech Foods 495.00Ruchi Gold RBD Palmolein Oil Ruchi Soya 375.00Loose Palm Oil Unbranded 330.00Groundnut oil RRO Primio Refined Groundnut Oil RRO Primio 850.00Guinea Lite Refined Groundnut Oil Raj Oil Mills 760.00Guinea Filtered Groundnut Oil Raj Oil Mills 740.00Dhara Groundnut Oil Mother Dairy 725.00Olive oil Farrell Premium Imported - Extra Light Olive Oil Jindal Retail 4,425.00Farrell Premium Imported - Extra Virgin Olive Oil Jindal Retail 4,299.00Borges Olive Oil Borges 3,200.00

Source: Daiwa


6 January 2014

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Value-added hair oils – focusing on attractive sub-categories

Value added hair oil: sales-volume (YoY change)


Marico’s value-added hair-oil portfolio has performed extremely well, except for the past couple of quarters, with strong sales-volume growth of more than 20% YoY over the past few years, on the back of market-share gains, especially in the amla (Indian gooseberry) segment. Sales-volume growth in recent quarters has moderated compared with its average rate over the past 2-3 years, as the company has more than doubled its sales volume over the past three years, making it challenging to maintain such a high growth level. However, we believe the value-added hair-oil category continues to be an attractive one, as there are multiple sub-categories within it that allow Marico to have broad-based participation and enter sub-categories where it does not have a presence, such as cooling hair oil and almond oil. Marico has performed well in terms of sales in the amla category with its price-discounting strategy for its Nihar Shanti amla hair oil, and has achieved a market share in this category of 29% currently, up from about 10% in FY07. Over the past couple of years, Marico has also launched products in newer sub-categories, such as Parachute Advanced Hot Oil, Parachute Advanced Ayurvedic Oil, Parachute Advanced Scalp Therapie (for hair-loss control), and Parachute Advanced Tender Coconut Oil (launched earlier in 2013), and we see significant room for market-share gains in all these products. We expect Marico’s sales growth in the value-added hair-oil category to continue to be driven by new product launches and market-share gains over the next few years. We believe Marico can increase sales-volumes in this category by around 15% a year in the

medium term, which is lower than its past-3-year average rate of more than 20% per year, but would still be healthy. Value-added hair oils: Marico’s current products vs. competition Brands Company Current price (INR/100 ml)Amla oil Dabur Amla Hair Oil Dabur 39.00Bajaj Brahmi Amla Hair Oil Bajaj Corp 38.00Nihar Shanti Amla Hair Oil Marico 25.14Other hair oils Dove Elixir Hair Oil HUL 170.00Parachute Scalp Therapie Marico 137.00Himtaj Ayurvedic Oil Himtaj 65.00Himgange Ayurvedic Oil GK Burman Herbal 63.00Parachute Advanced Hot Oil Marico 50.00Parachute Advanced Ayurvedic Oil Marico 48.89Hair & Care Marico 48.00Dabur Jasmine Dabur 47.00Parachute Tender Coconut Hair Oil Marico 45.00Keo Karpin Dey's 44.00Clinic Plus Daily Care Nourishing Hair Oil HUL 41.00Parachute Advanced Coconut Hair Oil Marico 38.24Dabur Vatika (Hibiscus) Dabur 36.67Parachute Advanced Jasmine Hair Oil Marico 35.50Almond oil Dabur Almond Hair Oil Dabur 55.00Bajaj Almond Drops Bajaj Corp 55.00Clinic Plus - Almond Gold HUL 53.33Dabur Vatika Enriched Almond Hair Oil Dabur 37.33Cooling/Thanda oil Navratna Cool Emami 60.00Navratna Extra Thand Oil Emami 60.00Bajaj - Kailash Parbat Cooling Oil Bajaj Corp 55.00

Source: Companies, Daiwa

Youth brands, personal care, foods – positioning for future growth

Marico is complementing its product portfolio with products that it believes offer good business potential, with its acquired portfolio of brands targeting the youth market (Setwet – hair gel, Zatak – male deodorant, and Livon – hair serum), and has expanded into the mass skin-care category with Parachute Advanced Body Lotion, and into healthy breakfast foods with Saffola oats and Saffola muesli. These brands currently do not contribute significantly to Marico’s top line. However, the company is investing in them and is establishing a presence in their niche categories, as it expects them to be key categories in the future.

• Youth brands contributed only 3% to Marico’s revenue for FY13 but we forecast high sales growth for them of 25% per year over the medium term. Marico is already the market leader in both the hair gels and hair serum categories, with respective

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market shares, in terms of sales volume, of 43% and 80%, while for the time being it has a much smaller 5% market share in the male deodorant category. The company expects to scale up its brands in these categories by increasing investments in advertising and communication and product launches, and leveraging its existing distribution reach.

• Parachute Advanced Body Lotion is differentiated from competing products with its ‘natural’ focus (coconut-based), and with this product Marico is currently the No.3 player in the mass skin-care category with a 7% market share by sales volume. The product has been well-received by consumers and is enjoying sales growth of 26% YoY currently, according to the company, which is above the category’s average sales growth rate. Marico plans to leverage its expertise in the coconut space and increase its participation in the overall skin-care segment in the future.

• Saffola Oats is the N0. 2 product in the high-growth (ie, 25-30% sales growth p.a.) category of healthy breakfast foods, with a market share of 13%. Saffola Muesli has already achieved a market share of 9%, making it the No. 3 product in this category. Marico aims to establish Saffola as a healthy lifestyle brand and its entry into the healthy breakfast foods category is a step in the right direction, in our view. We expect the company to enter more categories with a health-conscious product proposition in the future.

Distribution expansion should help boost sales-volume growth

Marico is gearing up to significantly expand its urban and rural reach, as it is investing more in its IT and backend distribution infrastructure as well as its field sales force. In urban areas, it is focusing on increasing its presence in modern trade (organised retail format) and chemist channels, while in rural areas it is broadening its overall reach. Marico is increasing its field sales force (it aims to add 1,000 sales people, of which more than 50% will be in rural areas), and is equipping them with handheld terminals to improve sales-call efficiency. These moves form part of the company’s current revamping of its distribution model following its recent portfolio expansion into more categories like foods and Youth brands. We expect these initiatives to help propel sales-volume growth in the next few years for all of Marico’s product categories in both urban and in rural areas, as we

continue to see significant structural growth potential for its portfolio in these areas.

International business –we expect sales to improve

Marico: international business revenue breakdown


Marico’s international sales grew by only 4.5% YoY for FY13, largely affected by: 1) a weak macroeconomic environment in Bangladesh, 2) uncertain political environment in Egypt, and 3) a change in its distribution network and the packaging of some of its products in the Gulf Cooperation Council (GCC) region to boost sales and market share (however this transition has resulted in a decline in sales growth for this region). However, international sales picked up for 1H FY14 (15% YoY growth for 1Q FY14 and 14% YoY for 2Q FY14) and we expect to see a further improvement in the medium term for the following markets:

• The business environment in Bangladesh is showing signs of improvement, on the back of falling inflation. However, due to the impending elections early next year, the country is facing several instances of strikes, which could have an impact on sales.

• Southeast Asia sales are doing well, led by Vietnam, and we expect this to remain the case.

• While in the GCC, the change in the distribution network is complete but work is still being done on the packaging, which should allow the company to optimise its portfolio mix. The Egypt business is likely to remain volatile due to the ongoing political unrest. For 1Q FY14, sales grew 30% YoY while for 2Q FY14, they were up only 5% YoY. The company is focused on driving penetration in Egypt and regaining the loss of momentum experienced due to the unrest.

Bangladesh42.0%

SE Asia24.0%

MENA20.0%

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• In South Africa, although the business environment remains challenging, Marico is doing better than its peers and gaining market share. The company is striving to further increase its key categories and expand its footprint in other parts of sub-Saharan Africa.

Kaya – spin-off should unlock value in Marico

In January 2013, Marico announced plans to restructure its business, and spin off Kaya Ltd and all of its Kaya overseas entities in the Middle East and Southeast Asia into a new company called Marico Kaya Enterprises Ltd (MaKE). The spin-off was approved by the Bombay High court in October 2013, with the transaction scheme backdated to 1 April 2013. For every 50 shares in Marico (face value of INR1), Marico shareholders will be allotted 1 share (face value of INR10) in MaKE, at a premium of INR200/share. This would translate into equity share capital for MaKE of about INR129m, and a net worth of about INR2.7bn. MaKE will also carry forward an external debt of INR870m. This effectively translates into an enterprise value of INR3.6bn for MaKE, and values the business at 1.06x EV/sales for FY13. Kaya had revenue of INR3,360m (about 7% of Marico’s turnover) and an EBIT loss of INR185m for FY13. Following the spin-off, Marico’s investments in Kaya will be adjusted against its securities premium account. Marico has an exposure of about INR2,610m (INR730m equity capital invested by Marico in Kaya, INR1,080m interest-free loans, INR210m allocated indirect capital and a loan of INR590m taken by Kaya Middle East from Marico Middle East). MaKE is to be listed on Bombay Stock Exchange and National Stock Exchange and should mirror Marico’s shareholdings. After the spin-off, there will not be any cross-holdings between Marico and MaKE. We believe this business restructuring will unlock Marico’s value to shareholders, as its loss-making and capital-intensive business is being separated. Marico should be better able to utilise its free cash flow following the spin-off as there should no longer be a drag on its books. We expect it to result in Marico’s EBITDA-margin profile improving, which should also lead to higher profitability and better return ratios for Marico.


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Sales, earnings outlook and valuations

Forecast revisions

We are cutting our FY14 revenue forecast by 13.7%, net-profit forecast by 9.3% and EPS forecast by 13% to factor in the weak 1H FY14 results and also the spin-off of the Kaya business. Accordingly, we are adjusting our earnings forecasts from FY14 onwards (stripping out Kaya). Marico: forecasts for main businesses

FY14E FY15E FY16E

Parachute India Value growth 6% 12% 11% Volume growth 4% 8% 7% Price growth 2% 4% 4%Saffola India Value growth 6% 16% 14% Volume growth 10% 12% 10% Price growth -3% 4% 4%Value Added Hair Oils India Value growth 17% 19% 19% Volume growth 15% 15% 15% Price growth 2% 4% 4%Others (Personal care and Foods) Value growth 19% 20% 16% Volume growth 14% 14% 12% Price growth 4% 5% 4%International business Value growth 16% 15% 16% Volume growth 10% 11% 12% Price growth 5% 4% 4%Source: Daiwa forecast

Sales and earnings outlook

Net sales CAGR of 15.6% for FY14-16E We project a sales CAGR of 15.6% for FY14-16. We forecast sales growth to pick up from FY15 onwards, driven by various initiatives taken by the company in each of its categories to prop up sales-volume growth. We also expect Marico’s plan to improve distribution reach to aid in driving incremental sales-volume growth in both urban and rural areas.

Marico: net sales and net sales growth

Source: Company, Daiwa forecasts

Gross margins should improve in FY15 We forecast the gross margin to decline by 144bps YoY for FY14, on the back of a sharp increase in copra prices from a low base in FY13. However, we expect the gross margin to improve for FY15 by 40bps YoY and by 32bps for FY16, led by a better product mix. Marico: gross profit and gross profit margin


EBIT CAGR of 22.3% for FY14-16E Marico: EBIT and EBIT margin


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We forecast the EBIT margin to expand by 179bps for FY14, by 79bps for FY15 and by 83bps for FY16 on the back of our higher EBITDA margin assumptions for the period, led by a decline in previously high A&P spend and a reduction in employee cost in FY14 due to the spin-off of the Kaya business. Marico: A&P spend and A&P as a % of sales


Marico’s A&P spend increased to 13% as a percentage of sales for FY13, from 10.7% for FY12 and 11% for FY11, on the back of new launches and increased spend relating to the acquisition of the Youth brands. We expect the high spend to decline marginally by 25bps for FY14, 5bps for FY15 and 15bps for FY16, and for it to fall to 12.5% of sales. Net-profit CAGR of 23% for FY14-16E We forecast net-profit growth of 25.2% YoY for FY14, 22.5% YoY for FY15 and 23.6% for FY16, driven by an improvement in the EBIT margin and lower interest costs for the period, as we expect a reduction in Marico’s debt given it should be able to utilise its cash flow better after the Kaya spin-off. Marico: net profit and net profit growth


Valuation

Over past six months, Marico’s share price has declined by 10%, due to lower domestic sales volume growth. This has also resulted in lower PER and EV/EBITDA multiples, which had been trading at higher than past-5-year averages given the market’s preference for defensive stocks amid a weak economic backdrop. However, we believe the worst is over in terms of sales growth and that Marico’s sales are now set to rebound. We forecast a volume-led sales CAGR of 15.6% for FY14-16. As such, we are raising our six-month target price for Marico to INR239 (from INR200) as we roll forward our PER valuation base to September FY15 (from March FY14). We continue to value Marico at a target PER of 24x, in line with its past-7-year trading average. We forecast a strong EPS CAGR of 23% for FY14-16 on improved sales-volume and EBIT-margin expansion over the same period. Marico is trading currently at a 24.2x FY15E PER, which is below its past-3-year trading average of 28x and its past-5-year average of 26x. Although we do not expect the valuation to return to its past-3-year trading average we believe there is some scope for a rerating. We maintain our Outperform (2) rating on the stock. Marico: 1-year forward PER bands


Risks

The main risk to our rating, target price and forecasts for Marico would be if the sales-volume growth revival for Parachute and Saffola in FY14 were to occur later than we expected previously. A secondary risk would be if competition were to increase in the value-added hair-oil category, affecting Marico’s market-share gains over the next few years.

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Also, the company’s international sales growth and/or profit margins could be affected adversely, which could in turn affect our valuation, if political/economic climate conditions in various regions in which it operates were to worsen.


6 January 2014

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Daiwa’s Asia Pacific Research Directory

Daiwa’s Asia Pacific Research Directory

HONG KONG

Hiroaki KATO (852) 2532 4121 [email protected] Regional Research Head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected] Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected] Deputy Head of Regional Economics; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Taiwan)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong Research; Head of Hong Kong and China Property

Jeff CHUNG (852) 2773 8783 [email protected] Automobiles and Components (China)

Grace WU (852) 2532 4383 [email protected] Head of Greater China FIG; Banking (Hong Kong, China)

Jerry YANG (852) 2773 8842 [email protected] Banking (Taiwan); Insurance (Taiwan and China)

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong, China); Broker (China)

Winston CAO (852) 2848 4469 [email protected] Capital Goods – Machinery (China)

Alison LAW (852) 2532 4308 [email protected] Head of Regional Consumer; Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected]

Consumer (Hong Kong/China)

Anson CHAN (852) 2532 4350 [email protected]

Consumer (Hong Kong/China)

Eric CHEN (852) 2773 8702 [email protected] Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)

Felix LAM (852) 2532 4341 [email protected] Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected] Regional Head of Small/Mid Cap; Small/Mid Cap (Regional); Internet (China)

Jackson YU (852) 2848 4976 [email protected]

Small/Mid Cap (Regional)

Joey CHEN (852) 2848 4483 [email protected] Steel (China)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong, China); Transportation (Regional)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group; Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES

Norman H PENA (63) 2 813 7344 ext 301

[email protected]

Banking/Property

Michael David MONTEMAYOR

(63) 2 813 7344 ext 293

[email protected]

Consumer/Retail

Patricia PALANCA (63) 2 813 7344 ext 408

[email protected]

Utilities/Mining

SOUTH KOREA

Chang H LEE (82) 2 787 9177 [email protected] Head of Korea Research; Strategy; Banking

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Jun Yong BANG (82) 2 787 9168 [email protected] Tyres; Chemicals

Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery)

Sang Hee PARK (82) 2 787 9165 [email protected] Consumer/Retail

Jae H LEE (82) 2 787 9173 [email protected] IT/Electronics (Tech Hardware and Memory Chips)

Joshua OH (82) 2 787 9176 [email protected] IT/Electronics (Handset Components)

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game

TAIWAN

Mark CHANG (886) 2 8758 6245 [email protected] Head of Taiwan Research

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Cement; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

Lynn CHENG (886) 2 8758 6253 [email protected] IT/Electronics (Semiconductor)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of India Research; Strategy; Banking/Finance

Navin MATTA (91) 22 6622 8411 [email protected] Automobiles and Components

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

Mihir SHAH (91) 22 6622 1020 [email protected] FMCG/Consumer

Deepak PODDAR (91) 22 6622 1016 [email protected]

Materials

Nirmal RAGHAVAN (91) 22 6622 1018 [email protected] Oil and Gas; Utilities

SINGAPORE

Adrian LOH (65) 6499 6548 [email protected] Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore)

Angeline LOH (65) 6499 6570 [email protected] Banking/Finance, Consumer/Retail

David LUM (65) 6329 2102 [email protected] Property and REITs

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)


6 January 2014

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Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726

Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129

Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100

Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935

Daiwa Capital Markets Europe Limited 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600

Daiwa Capital Markets Europe Limited, Frankfurt Branch Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, Federal Republic of Germany

(49) 69 717 080 (49) 69 723 340

Daiwa Capital Markets Europe Limited, Paris Representative Office 36, rue de Naples, 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808

Daiwa Capital Markets Europe Limited, London, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441

Daiwa Capital Markets Europe Limited, Moscow Representative Office

Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, Manama, Bahrain

(973) 17 534 452 (973) 17 535 113

Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621

Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, Republic of Singapore

(65) 6220 3666 (65) 6223 6198

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, Seoul, 150-876, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office

Room 301/302，Kerry Center， 1 Guanghua Road，Chaoyang District， Beijing 100020, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa SSC Securities Co Ltd 45/F, Hang Seng Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai 200120, People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Capital Markets Co. Ltd, Bangkok Representative Office

18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand

(66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Capital Markets Co. Ltd, Hanoi Representative Office

Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417

London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550


6 January 2014

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Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship

Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: CITIC Securities Company Limited (6030 HK); China Outfitters Holdings Limited (1146 HK); The People's Insurance Company (Group) of China Limited (1339 HK); China Precious Metal Resources Holdings Company Limited (1194 HK); Jiangnan Group Limited (1366 HK); Blackgold International Holdings Ltd (BGG AU); Tosei Corporation (8923 JP); Modern Land (China) Co. Ltd (1107 HK).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited, Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research.

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Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.


6 January 2014

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This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain

This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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