India FMCG Bonanza Apr 2015

April 2015

Analyst

Harsh Gupta

[email protected]

Tel: +91-22-3083950

make money. not mistakes.

Bonanza

FMCG SECTOR“Lower commodity prices coupled with

increased affordability to boost prospects”

Margins to improve in 1HFY16 with

declining crude oil prices

Goods and Service tax (GST) implication

likely to be effective from FY17

Modern trade to drive revenues

higher for FMCG sector

Pick-up in economic growth with higher per

capita income will be a fillip for the sector

FMCG SECTOR

Institutional Research 4 April 2015 | Page 2

CONTENTS

SECTOR (3-22)

Introduction to FMCG 4

Key Growth Drivers 11

Margins to improve in 2HFY15 & 1HFY16from declining raw material prices 14

Goods and Service tax (GST) implication likely to be from FY17 16

Pick-up in economic growth with higher per capita income will be a fillip 17 for the sector

Modern trade to drive revenues higher for FMCG sector 18

Valuation Parameters 19

Key Risk and Concerns 19

Coverage Summary 20

COMPANIES (23-72)

Godrej Consumer Products Ltd. : “Inorganic growth intact” 23

Britannia Industries Ltd. : “Reinforcing Pillars” 35

Jyothy Laboratories Ltd. : “Transformed strategies will enhance prospects” 51

Hindustan Unilever Ltd. : “Treading Waters” 61

3

India Research 6 April 2015

FMCG SECTOR

Thematic Report

Hindustan Unilever Ltd. (HUL) Current Price: INR 881 Target Price: INR 1,000

Expected Upside 14%

52 Week High/Low 981/ 550

Avg. 6 Month (mn) 1,636

Britannia India Ltd. (BIL) Current Price: INR 2,185

Target Price: INR 2,600

Expected Upside 19%

52 Week High/Low 2,250/ 821

Avg. 6 Month (mn) 186

Godrej Consumer Products Ltd. (GCPL) Current Price: INR 1,073

Target Price: INR 1,480

Expected Upside 38%

52 Week High/Low 1,227/ 740

Avg. 6 Month 186

Jyothy Laboratories Ltd. (JLL) Current Price: INR 273 Target Price: INR 325

Expected Upside 19%

52 Week High/Low 315/171

Avg. 6 Month 250

Stock Performance 1M 3M 6M 1Y

HUL -5% 13% 16% 44%

BIL 3% 21% 55% 161%

GCPL -8% 10% 6% 28%

JLL -2% 5% 12% 32%

CNX FMCG -6% -1% 0% 9%

CNX Nifty -5% 3% 7% 27%

Analyst Harsh Gupta [email protected] Tel: 91 22 3086 3950

“Lower commodity prices coupled with increased affordability to boost prospects” Margins to improve in 1HFY16 with declining crude oil prices With declining crude oil prices, the FMCG companies are going to be highly benefited. The petroleum derivatives forms the raw material for packaging i.e. tubes, bottles, covers, Styrofoam, and so on, for diapers, detergents, shampoos, cosmetics and perfumes. Crude oil prices have been on a downward spree from the past couple of quarters. The price of crude oil was very well distributed in a range of USD 97-106/bbl from the start of 2013 till it has witnessed a level of USD 90.5/bbl in the month of September 2014 and a further decline till USD 53.3/bbl in December 2014 due to increasing production from Libya, Russia and Canada, coupled with the lack of demand from Europe, Japan, China and other countries consequentially putting strong pressure on further deteriorating crude oil prices.

Goods and Service tax (GST) implication likely to be effective from FY17

GST for the purpose of integrating multiple indirect taxes under a unified tax system is likely to be implemented in FY17. The rate of GST on services is likely to be 16% and on goods is proposed to be 20% Excise duty. The current excise duty is 12% (GST) is essentially a tax which will replace all indirect taxes levied on goods and services by the central and state governments in India, and is being seen as the next logical step towards a comprehensive indirect tax reform in the country. At present, the range of taxes in force includes Central Sales Tax, State Sales Tax, Octroi (at the city level), Entry Tax (for entering into states) – and the list goes on.

Pick-up in economic growth with higher per capita income will be a fillip for the sector With higher disposable income due to growing economy and reduction of personal income taxes over the decades, we believe FMCG industry continues to grow at CAGR of 12% to 14% (between FY15-20E) on the back of superior consumer spending and further liberalization of the sector. Though slowing economy may cause threat to growth prospects in the FMCG sector, our analysis suggest that FMCG will witness growth of 9.6% amidst such hurdles.

Modern trade to drive revenues higher for FMCG sector Modern trade has opened up an important sales channel catering to the growing urban shoppers who have a strong purchasing power, abundant alternatives and a willingness to experiment. This sales channel has not only nudged consumers to make more impulsive purchases but has also led to the growth of premium products and has incubated new product categories. Although modern trade has only a 9.2% market share in the overall FMCG trade in India, it is growing much faster than general trade.The recent proposal by the government to permit FDI in multi-brand retail is expected to provide a further fillip to Modern trade in India.

Exhibit 1: Peer Comparison (data on FY14 basis)

Company (mn) HUL Dabur GCPL Britannia JLL Market Cap 1,305,512 313,102 289,900 101,139 37,653 Diluted EPS 17.9 3.8 22.3 30.8 5.9 P/E 33.7 46.6 38.1 27.3 35.4 EV/EBITDA 25.1 33.2 25.0 15.9 19.0 ROE 131.8 40.7 23.1 49.3 13.7 PAT Margins (%) 13.0 13.6 10.4 5.7 8.1 Sources: Company, Bonanza Research


FMCG SECTOR

INTRODUCTION: FAST MOVING CONSUMER GOODS SECTOR

The Fast Moving Consumer Goods sector, FMCG as better known is broadly divided into three sub-sectors i.e. Personal Care Segment, Household Care Segment and last but not the least Food & Beverages Segment. The total market size of the FMCG sector in India stands at USD52.7bn or Rs 318,835 Cr. in CY14 growing at a CAGR of 14.9% from past 5 years. We may expect the market size to cross USD 100 bn mark by the end of CY19 keeping the pace constant at which the sector is growing. FMCG market is approximately 3% of Indian GDP which stands at USD 1,877bn in CY14.

Exhibit 1: FMCG Industry contribution in Total Indian GDP

Source: IBEF, Bonanza Estimates

FMCG in Rural & Urban Markets

The rural and urban market contributes differently to the FMCG sector. In the past few years, many companies present in the FMCG sector have been focusing on exploiting growing demand from the rural sector. The contribution from rural market is USD17.4 bn in CY14growing at a CAGR of 14% whereas urban market contributes USD 35.3 bn growing at a CAGR of 16%. We expect the scope of penetration in rural markets is still high compared with the urban markets. We expect rural markets to outperform urban markets as growth in the urban region is at its maturity levels and the trajectory is to reverse in favour of rural markets with an expectation to grow at 16-17% going forward whereas urban markets are projected to grow at 13-14%.

Exhibit 2: FMCG – Rural Urban Profile

Source: IBEF, Bonanza Estimates

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0

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Total India GDP (US$ bn) FMCG Market Size(US$ bn)

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4652

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20

30

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2013 2014E 2015E 2016E 2017E 2018E

Rural Market share (US$ bn) Urban Market share (US$ bn)

CAGR - 15%


FMCG SECTOR

Major Companies Contributing to Indian FMCG Sector

Exhibit 3: Indian FMCG Majors

Source: BSE, Bonanza Research

Refer to Exhibit 3; HUL and ITC are the major contributors in the FMCG sector. ITC is a diversified player in Hospitality and Tobacco business with other FMCG products which contributes approximately 60% and 2% respectively to its total sales and rest part is into other FMCG products. Dabur, Colgate Palmolive, Godrej Consumer, United Spirits and Nestle are other major contributors to the Indian FMCG sector registering total revenues of more than Rs 3000 Cr.

Exhibit 4: Peer Comparison

Company Market cap. Diluted EPS (Rs) P/E( x) EV/EBITDA(x) ROE (%)

Rs Cr FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14

HUL 130,551 18 18 27 34 21 25 124 132

Dabur 31,310 3 4 40 47 29 33 45 41

Britannia 10,116 20 31 27 27 15 16 40 49

GCPL 28,992 15 17 52 51 39 37 19 20

Jyothy Labs 3,765 3 6 61 35 19 19 7 14

Source: Company Reports, Bonanza Research

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Market Capitalisation (Rs. Cr.) Total Revenue FY14 (Rs Cr.)


FMCG SECTOR

Sector Classification Exhibit 5: FMCG classification into segments and sub segments

Source: Bonanza Research

Segments: FMCG Sector

The FMCG sector is divided mainly into 3 segments namely Personal Care, Household Care and Food and Beverages. The Food & Beverage segment under FMCG sector is the major contributor with 43% contribution followed by Personal Care Segment with 22% contribution along with Hair care contribution of 8% and Baby care contributing to 2%. Fabric and Home care together contributes 16% in the total FMCG sector.

Exhibit 6: FMCG Sector Break-up

Source: IBEF

FMCG Sector

Personal Care

Oral Care, Hair Care, Skin Care, Etc.

Household Care

Fabric Wash, Household Cleaners,

Aerosols, Etc.

Food & Beverages

Health Beverages, Staples, Cereals, Dairy Products, Soft Drinks,

Snacks, Etc.

Food Products, 43%

Personal Care, 22%

Fabric Care, 12%

Hair Care, 8%

Households, 4%

OTC Products, 4%

Baby Care, 2%Others, 5%

Market Break up of Indian FMCG Industry 2013


FMCG SECTOR

Personal Care Segment

Exhibit 7: Share of FMCG companies in Shampoo market

Source: IBEF

The Indian personal care industry is estimated at INR~850bn. The industry is divided into personal wash, hair care, oral care, skin care, cosmetics, men’s toiletries and fragrances. Most segments of this industry face challenges through a decline in lower sales due to lower volumes as well as lower realization. The next phase of growth has to come from the rural market as the urban markets are near saturation levels in terms of penetration. The industry has a low entry barrier and competition is severe. Besides the large multinational players, there are some leading domestic players as well as the huge unorganized players. Though most of the market share is with the larger players, companies vie for the marginal market share. Cheaper imports and duplicate products are also affecting the major players. Companies have been adopting promotion schemes to dole out freebies and repackaging products in smaller packages to cater to a wider consumer base are some recent trends.

The way ahead for the personal care companies is to introduce new and better product, improve penetration, and make the consumer trade-up in price and quality. Rural marketing will be a major thrust area for all companies. Under Personal care segment, HUL is an obvious leader in hair care shampoo segment with a market share of 46% followed by P&G and Dabur. Sunsilk and Clinic Plus are the most popular brands of HUL followed by Head & Shoulders of P&G.

Exhibit 8: Hair oils market share

Source: IBEF

46%

23%

12%

10%

9%

HUL P&G

Dabur Cavin Care

Others

Shampoo Market Share

46% 54%

Coconut Hair Oil Market size Non Coconut Hair Oil Market size

Amla Based Oils

Light Hair Oils

Cooling Oils

Others


FMCG SECTOR

Hair care - Oils The hair oil market is valued at INR 6 bn growing at an impressive 6-7% in volume terms despite the high penetration level. There are two types hair oil available in the market; coconut oil and non greasy perfumed oil. Coconut oil comprises approximately 46% the total market leading by Marico’s Parachute Coconut Oil and the balance comprises the non greasy perfumed oil. Usage of hair oil is an everyday habit with 50% of the population out of which some perceive that massaging the head with hair oil has a cooling impact. Penetration in hair oil segment is moderately high at ~87% and uniformly distributed among the urban and rural areas.

Hair Care – Shampoos

Shampoo’s market in India is valued at INR 4.5 bn with penetration level at 13% only. The market is expected to heat-up due to lower duties and aggressive marketing and promotion strategies employed by the players. Shampoo available in sachet has constructed an image of affordability, comprising of ~40% of the total shampoo sale. The Indian shampoo market is characterised by a twin-benefit platform: cosmetic and anti-dandruff. It is basically an upper middle class product, as more than 50% of the consumers use ordinary toilet soap for washing hair. While the awareness level is high, the penetration level is very low at about 30% in the metros. Urban markets account for 80% of the total shampoo market. The penetration level is rapidly increasing due to decline in excise duty, which was 120% in 1993 to 30% currently.

Oral Care

The oral care market can be segregated into toothpaste (60%), toothpowder (23%) and toothbrushes (17%). While 60% of toothpaste is sold on the family platform, around 35% is sold on cosmetic propositions. On the other hand, while toothpowder accounts for 52% of the market, red toothpowder accounts for 40% and black toothpowder accounts 8%. The penetration level of toothpastes/powder in urban areas is 3 times that in the rural areas. Traditional materials such as neem and tobacco are popular for dental hygiene in the rural areas; Frequency of usage for toothpaste is only 1.5 times among other consumers, compared with 2 times in the developed world. Per capita consumption of toothpaste is only 70gm compared with 300gm in Europe and 150 gm in Thailand. Given the low per capita consumption and penetration rates, toothpaste demand is mainly being driven by the overall market growth of 8-10%. Toothpowder growth is also being driven by the rural segment.

Major Companies Present in Personal care Segment –

1. HUL (Body Care, Hair Care, Oral Care, Skin Care) 2. GCPL (Hair Care – Godrej Expert, Body Care - Cinthol) 3. Dabur (Hair Care, Oral Care, Skin Care) 4. ITC (Body Care) 5. Emami Ltd. (Skin Care)

Exhibit 9: Personal Care Majors

Company Segment Sub-Segment Brand Leadership HUL Body Care Soap Bar Lifebuoy, LUX HUL Body Care Body Wash LUX Colgate Palmolive Oral Care Toothpaste Colgate GCPL Hair Care Hair Colour Godrej Renew HUL Hair Care Shampoo Clinic Plus, Sunsilk Dabur Skin Care Bleach Fem Oxybleach HUL Skin Care Face Cream Fair & Lovely Marico Hair Care Hair Oil Parachute Reckitt Benckiser Body Care Liquid Hand Wash Dettol Source: Industry Sources, Bonanza Research


FMCG SECTOR

Household Care Segment The household care market of India is a burgeoning industry which comprises of products used for the upkeep of houses for day to day use. The rapid urbanization of the Indian population along with rising awareness pertaining to home hygiene has led to a growth in demand for homecare products. The household care has been in general perceived as chore which has been transitioning rapidly, impelled by consumers’ desire to be ‘house- proud. This has resulted in the creation of a marketplace of easy to use, convenient and multipurpose products. However, the industry is characterized by low penetration rates and is presently in development phase, with the presence of only limited number of players, thus making it an oligopolistic organized market.

The rise in personal disposable income coupled with the evolving lifestyle of the rural and urban population and rising awareness pertaining to maintenance of hygienic home conditions have contributed towards promoting the sales of toiletries and household cleansing products in India. The toiletries and household cleansing market is expected to grow at a CAGR of 16.36% from FY’2014-FY’2019. The dish washing market has displayed rapid growth over the past five years and has majorly been dominated by the organized players who occupy 50% market share in FY’2014. The major brands of this market are Vim, Exo and Pril which have significant revenue contribution. Within this market, the liquid dish wash have been the fastest growing segment from FY’2009-FY’2014.

Floor cleaning market is the second largest product category of the toiletries and household cleansing market of India. As per Euromonitor, Reckitt Benckiser controls surface care market with 57% share through brands such as Dettol, Easy-Off Bang, Lizol and Colin. The floor cleaning market has been further segmented into dish wash bars, liquid and powder in which dish wash bars commanded a predominant share. Lizol, Domex and Mr Muscle were the major players of the dish washing market with Lizol positioned as the market leader.

The toilet cleaning market had displayed a consistent revenue growth. Growing awareness, easier access to range of products through organized retail formats and changing lifestyles have been the key growth drivers for the sector with even rural households starting to display preference for toilet cleaner products instead of phenyl and acids which facilitated the further expansion of the industry in India. Reckitt Benckiser dominates toilet care space with its brand Harpic enjoying 69% market share in 2013, as per Euromonitor.

Liquid hand wash is a concentrated market with very few major brands operating in the market. The major brands are Dettol, Savlon, Lifebuoy and Palmolive among others. Dettol dominated the market with a revenue share of ~50% in FY12. The liquid hand wash market was valued at INR ~3,000 million in FY’12.

The market is expected to grow in the coming years with increasing number of innovative product launches by the existing players focusing on niche uses and convenience such as multifunctional cleaners. These multifunctional cleaners could be used for multiple domestic applications or liquid hand washes which exhibits both skincare and germicidal properties. The preferability for the non-ionic surfactants with their inherent bio-friendly properties and degradability are also likely to make headway in the household care market of the country.

Major Companies Present in Household care Segment –

1. Reckitt Benckiser (Toilet Cleaner – Harpic, Aerosol Product - Mortein) 2. Godrej Consumer Products Ltd. (Fabric wash - Ezee and Aerosol Products – Good

Knight and HIT) 3. Dabur India (Air Freshener - Odonil, Aerosol Products) 4. Jyothy Lab (Dish wash and Fabric wash) 5. HUL (Dish wash and Fabric wash)


FMCG SECTOR

Exhibit 10: Household Care Segment

Company Segment Sub-Segment Brand Leadership Market Share Competitors

Reckitt Benckiser Home Care Toilet Cleaner Harpic 69%

Dettol, Lizol, Domex, SaniFresh, Mr. Muscle

GCPL Fabric Wash Liquid Wash Ezee 75% Comfort, Safewash, Vanish

HUL Fabric Wash Detergent Surf Excel 36% Tide, Ariel, Rin, Wheel

Jyothy Lab Fabric Wash Liquid Fabric Whitener Ujala 70% Robin Blue, Rin

HUL Dish Wash Liquid Vim 60% Pril

HUL Dish Wash Dish Bar Vim 65% Exo

Dabur India Home Care Air Freshener Odonil 42% Air Wick, Ambipur

GCPL Home Care Mosquito Repellent Good Knight 30% Maxo, All Out

Source: Industry Sources, Bonanza Research

Food & Beverages Segment

The Indian food industry stood around Rs 247,680 crore (USD 39bn) in 2013 and is expected to grow at a rate of 11%CAGR to Rs 408,040 crore (USD 64.3bn) by 2018.

Indian agricultural and processed food exports during April-May 2014 stood at USD 3,814 mn, according to data released by the Agricultural and Processed Food Products Export Development Authority (APEDA).

India has 85,000 bakery units, of which 75,000 operate in the unorganised sector, garnering a 65% market share. The per capita consumption of bakery products stands around 1-2kg/annum.

The Indian dairy industry has grown considerably post the white revolution and reports suggest that with current growth rate of approximately 3-4%, it is thought to grow to 185 mn tonne and become a USD24 bn organised industry by 2020 and USD140 bn overall including the unorganised sector.

Exhibit 11: F&B Segment

Company F&B Segment Brand Leadership

Britannia Breads & Biscuit Britannia, Good Day

Amul Dairy Products Amul Butter

ITC Packaged Foods, Personal Care Aashirwad Flour, Vivel

HUL Soups Knorr

Nestle Food & coffee Maggi, Nescafe

Source: Company Websites, Bonanza Research


FMCG SECTOR

Key Growth Drivers for FMCG Sector in India

Exhibit 12: Impact of FMCG Sector drivers

Growth Drivers Description Impact

GDP Growth GDP has witnessed a growth of 7% approximately from 2001-2010 which is expected to grow by 8% approximately from 2011-2020.

Positive

Growing Population Population is expected to grow at a rate of 1.2% from 2011-2020 against a growth of 1.5% witnessed from 2001-2010.

Neutral

Changing Lifestyle Changing taste and preferences of consumers and shift in age groups has provided potential Positive

Government Policies

NREGA, Farm Loan waiver, Goods and Services Tax (GST) and increasing FDI investment limits are some of the initiatives taken or intended to be taken by the government to boost up investments in the FMCG sector.

Positive

Modern Trade

Modern trade has emerged as a high volume channel for distribution by FMCG players. Second, the share of some consumer product categories such as processed food&beverages is also expected to grow rapidly within organized retail.

Positive


Category Wise Penetration in India

Exhibit 13: Segmental Penetration (%)

Source: IBEF

Market Leader Category Wise

Exhibit 14: Segment Leaders

Category Market Leader Market Share Brand Name Competitors

Hair Oil Marico 42% Parachute Dabur, Bajaj

Shampoo HUL 46% Sunsilk, Clinic Plus, Dove P&G, Dabur

Oral Care Colgate 50% Colgate HUL, Dabur

Skin Care HUL 58% Fair & Lovely L’oreal, P&G

Fruit Juice Dabur 50% Real Active Pepsico

Source: IBEF

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FMCG SECTOR

Per Capita Consumption in low penetrated segments

Exhibit 15: Segmental Per Capita Consumption across neighbouring nations

Source: IBEF

As refer to Exhibit 15, it is visible that India is having lowest per capita consumption in low penetrated markets as compared to its neighbouring countries in Asia i.e. China, Malaysia, Thailand and Indonesia. There could be a scope of high growth in such categories especially in India. The penetration level in toilet soaps and fabric wash segment is extremely high which makes very difficult for any new player to enter this segment and compete with existing majors. With lower penetration in shampoos, powders and skin cream segments, there is a scope of penetration in these segments and HUL as an obvious market leader in shampoos and skin cream segment with 46% market share and 58% market share respectively, is going to be largely benefitted. The per capita consumption in India for such products is still at a growing stage as compared to other nations. The per capita consumption of skincare products in India is ~USD 0.3, shampoos USD 0.3 and toothpastes USD 0.4 indicates high potential for FMCG companies to expand their reach.

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India Indonesia China Malaysia Thailand

Skin care Shampoo Toothpaste


FMCG SECTOR

Changing Consumption Pattern across India

The consumption pattern of the consumers has seen a shift in past few years. We can refer to Exhibit 16 that the consumers have a preference for shampoo over biscuits.

Shampoos in hair care segment have been reaching to 79% of the total stores where Biscuits reach out to 78% of the total stores.

Exhibit 16: Segment wise stores reach

Source: IBEF

79% 78% 75% 70% 68% 64% 63% 59% 54%

35%

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FMCG SECTOR

Margins to improve in 2HFY15 & 1HFY16 from declining raw material prices

With declining crude oil prices and crude oil derived products, the FMCG companies are going to be highly benefited. We believe, the FMCG companies are going to see an improvement of 100-300 bps in their profit margins with price of crude oil get halved to USD 50.

The petroleum derivatives form the raw material for packaging i.e. tubes, bottles, covers, Styrofoam, and so on, for diapers, detergents, shampoos, cosmetics and perfumes. The crude oil derivatives account for 15-30% of the total cost of making FMCG products depending on company to company.

The crude oil prices have been on a downward spree from past few quarters. The price of crude oil was very well distributed in a range of USD 97 to USD 106/bbl from the start of 2013 till it has witnessed a level of USD 90.5/bbl in the month of September 2014 and a further decline till USD 53.3/bbl in December 2014 due to increasing production from Libya, Russia and Canada, also with lack of demand from Europe, Japan and other countries the crude oil prices have been in pressure and declined significantly. We may expect that crude oil prices to settle near USD 40/bbl, the levels witnessed in early CY2009.

Exhibit 17: Crude Oil Price Trend

Source: http://www.macrotrends.net/1369/crude-oil-price-history-chart

Exhibit 18: PFAD Price Trend

Source: Bloomberg

Exhibit 19: Sugar & Wheat Price Trend

Source: Bloomberg

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Sugar Price Rs/Qtl Wheat Price Rs/Qtl


FMCG SECTOR

Palm Fatty Acid Distillate (PFAD) prices down 18% since January 2014 The main contributor in packaging of FMCG products, PFAD have been witnessing a considerable downside in its prices since Jan 2014. The price of PFAD is now quoting at USD 583/MT down 18% from USD718 in Dec 2013. Following a decline in crude oil prices from past couple of quarters, PFAD prices have been declined too.

Sugar prices softened though Wheat prices remain stable

The continuous fall in commodity prices from past few months have been positive for the industry. The prices of sugar have been softened from past few months. The sugar prices came down to INR 2,648 per quintal in Nov 2014 compared to INR 3,356 in Nov 2012. The fall in crude oil and other commodity prices can support the fall of sugar prices whereas the prices of wheat has not much impacted and remain stable at INR 1,590 Per quintal.


FMCG SECTOR

Goods and Service tax (GST) implication likely to be from FY17

Implication of GST will integrate multiple indirect taxes under a unified tax system.GST is essentially a tax which will replace all indirect taxes levied on goods and services by the central and state governments in India, and is being seen as the next logical step towards a comprehensive indirect tax reform in the country. At present, the range of taxes in force includes Central Sales Tax, State Sales Tax, Octroi, Entry Tax (for entering into states) and the list goes on. The rate of GST on services is likely to be 16% and on goods is proposed to be 20%excise duty, the current excise duty is 12%, However, for consumers, it is expected that there will be more money to spend on FMCG products as income tax exemptions limits have been hiked to INR250,000 The implementation of GST will lead to rationalisation of warehousing, lower logistics cost and reduce delivery time for goods manufacturers and it will remove all forms of Octroi, local body and other forms of indirect taxes. Key Developments favouring FMCG Relaxation of license rules - Industrial license is not required for almost all food and agro-processing industries, barring certain items such as beer, potable alcohol and wines, cane sugar, and hydrogenated animal fats and oils as well as items reserved for exclusive manufacture in the small-scale sector. Statutory Minimum Price - In October 2009, the government amended the Sugarcane Control Order, 1966, and replaced the Statutory Minimum Price (SMP) of sugarcane with Fair and Remunerative Price (FRP) and the State-Advised Price (SAP) FDI in organised retail - The government recently approved 51% FDI in multi-brand retail, which will boost the nascent organised retail market in the country. It also allowed 100% FDI in the cash and carry segment and in single brand retail.


FMCG SECTOR

Pick-up in economic growth with higher per capita income will be a fillip for the sector

India's GDP is now measured in market prices instead of factor cost and the base year was changed to 2011/12 from 2004/05. According to revised figures, the economy advanced 6.5% in the June quarter (5.7% under the older methodology) and 8.2% in September quarter (5.3% was initially reported).Indian GDP is expected to register an overall growth of 7% in CY14 under the new methodology and expected to see a growth above 8% by end of CY15.

India GDP Annual Growth Rate

Exhibit 20: Quarterly GDP growth rate (y-o-y)

Source: Tradingeconomics

With higher disposable income due to growing economy and reduction of personal income taxes over the decades, we believe FMCG industry continues to grow at CAGR of 12% - 14% between FY15-20 on the back of greater consumer spending and further liberalization of the sector. Though a slowing economy may cause threat to growth prospects of FMCG sector but our analysis suggest that in such a worst-case scenario the FMCG will witness a robust growth of 9%-10% in terms of revenue.

6.56

5.14.54.6 4.4

77.5

6.4 6.5

8.27.5

0123456789

Q1 Q2 Q3 Q4

CY12 CY13 CY14


FMCG SECTOR

Modern trade to drive revenues higher for FMCG sector

Modern Trade has opened up an important sales channel catering to the growing urban shoppers who have strong purchasing power and with more choices, a willingness to experiment. This sales channel has not only nudged consumers to make more impulse purchases but has also led to the growth of premium products and incubated new product categories. Although modern trade has only a 6% share in overall FMCG trade in India, it is growing much faster than general trade and expected to contribute 10% by end of CY16. The recent proposal by the government to permit FDI in multi-brand retail is expected to provide a further fillip to Modern Trade in India.

Modern trade results in — Increased availability of choice in products and services Rationalization and convergence of prices Better quality of food and non-food products Equalization in the standards of living available to consumers between countries A zero tolerance policy for inefficiencies since consumers will become unwilling to

pay for substandard products and inefficiencies Modern Trade contributing 6% in CY12 and expected to contribute 10% of total FMCG sales in CY16 Exhibit 21: FMCG Revenue Channels

Source: IBEF

Exhibit 22: Modern Trade growing contribution

Source: IBEF

E-commerce and M-commerce holds promise for the future E-commerce has been around for a while and trying to establish itself in contributing to the FMCG sector apart from other sectors. However its contribution to FMCG is still less than 1%. Despite the consumers’ increasing access to online payment methods, shoppers restrict their use of these options largely to travel and electronics. One possible reason for this could be lack of consumer trust in the quality of FMCG products being delivered. The other reason could be that e-commerce sites still haven’t ironed out the twist in their distribution and deliveries. Late or incomplete deliveries, product mismatches, etc., have not particularly endeared the concept to online shoppers. Players like LocalBanya.com and Bigbasket.com are trying to change consumer perception with new advertising campaigns and investment in optimal distribution capabilities. However, any change will take time to pay dividends. Moreover e-commerce provides shopping convenience by sitting at home and delivered at your door step.

M-Commerce, on the other hand, is a relatively new phenomenon. Players like Flipkart and Amazon are leveraging the rapid growth in mobile internet penetration to reach the 180 mn potential consumers accessing mobile internet from their smart phones. A number of online retailers have created mobile applications that can be downloaded and used by consumers.

59%13%

8%

6%

3%6%

5%

Grocers

General Stores

Chemists

Paan Plus

Food Stores

Modern Trade

Others90%

10%

Traditional Modern Trade


FMCG SECTOR

Valuation Parameters for FMCG Sector

Exhibit 23: Price Earnings Ratio

Source: Ace Equity

Exhibit 24: EV/EBITDA Ratio

Source: Ace Equity

Exhibit 25: Price/Book Value Ratio

Source: Ace Equity Key Risk and Concerns

1. Risk from volatility in currency movement

2. Increase in the raw material prices

3. Decline in Consumer Confidence Index

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FMCG SECTOR

Coverage Summary Godrej Consumer Products Ltd. (GCPL) “Inorganic growth intact”

Investment Rationale

Global businesses reaching 50% of total business, expected to contribute more going forward

Acquiring leading brands to maintain leadership in present segments

Improving margins on declining raw material prices

Product Innovations and re launches to increase market share

Initiate with Buy, TP – 1,480

Britannia Industries Ltd. (BIL)

“Reinforcing Pillars”


Innovation in Pillar brands to increase market share

Strengthening depth and width of distribution network to boost revenues

Adding Health focused brands to its product line

Cost optimization aid to improve margins with favourable commodity cycle

Initiate with Buy, TP – 2,600


FMCG SECTOR

Jyothy Laboratories Ltd. (JLL)

“Transformed strategies will enhance prospects”


Innovations to continue through investments in high growth brands

HI segment to grow strong on lower base going forward

Margin expansion in sight

Power brands presence expanding geographically

Initiate with Buy – TP 325

Hindustan Unilever Ltd. (HUL) “Treading Waters”


Strong brand positioning and distribution network - Retaining leadership

Pickup in growth across segments on lower base, F&B to remain healthy

Growth overhangs in rural segment, volumes still to pick up

Re launching existing brands to derive higher demand and keeping market share intact

Initiate with Buy – TP 1,000


FMCG SECTOR

This page has been intentionally left blank


Godrej Consumers Product Limited |BUY

INITIATING COVERAGE Bloomberg Code: GCPL IN | Reuters Code: GOCP.BO

For private circulation only. For important information about Bonanza’s rating system and other discloser refer to the end of this material.

FMCG Current Price: INR 1,073 Target Price: INR 1,480

Expected Upside (%) 38%

Stock Details Bloomberg Code GCPL IN

Reuters Code GOCP.BO

Shares O/S (mn) 340.4

M Cap (INR mn) 3,65,249

52 week H/L (INR) 1,195/701

Shareholding Pattern (%) Promoter Group 63.3%

FII 28.9%

DII 1.9%

Others 5.8%

Stock Performance Chart

Stock Performance Return (%) 1 Mth 6 Mths 1 Yr

Absolute -8% 6% 28%

Relative -3% -1% 1%


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GCPL Nifty

“Inorganic Growth Intact” Godrej Consumer Products Ltd. (GCPL) is a perfect blend of domestic and international business in FMCG products. The company’s strategic move to grow inorganically in 3 continents and mainly in 3 segments has been fruitful for the company till now. The company has grown at a robust pace in last 5 years at a CAGR of 40% in terms of its revenues because of international acquisitions made in past few years which contributes 47% in its total revenues. We expect this growth to normalize going forward on back of higher growth base.

Global businesses reaching 50% of total business, expected to contribute more going forward The revenue from international business stands at 47% of the total revenues by the end of FY14 which stood at merely 15% in FY10 of total sales. We believe GCPL may see 50:50 revenue contributions from its domestic and international business going forward. The highest contributor in international sales is from Indonesia at 45% of total international sales followed by Africa at 25%, Latin America at 19% and Europe at 10% in FY13. In international business, the revenues from Africa business are growing at a faster pace vis-a-vis other business geography.

Acquiring leading brands to maintain leadership in present segments GCPL 3*3 approach for business expansion has been successful so far where they have been acquiring companies with brands leading that segment. The company is focusing on 3 segments focusing in 3 continents. Hair care segment, Household care segment and Personal care segment and they have chosen Asia, Africa and Latin America as their target markets. The company has acquired Rapidol, Kinky Group, Darling Group and Frika all under Hair care segment in Africa (in different periods) to lead the market in this segment. Improving margins on declining raw material prices With a significant decline in raw material prices like crude oil and its derivative products like PFAD, HDPE, LDPE etc. from past couple of quarters and high exposure of GCPL towards crude oil derivatives will be beneficial for the company. We expect Q4FY15 and Q1FY16 will reflect improvement in margins on back of lower crude oil prices. The crude oil prices have been on a downward spree from past couple of quarters.

Product Innovations and re launches to increase market share GCPL has launched innovative products not only domestically but also globally. In Household Insecticides (HI) segment GCPL has introduced “Hit anti roach gel” and “Good Knight Fast Card” which has been witnessing pick up in its demand after a delayed monsoon in FY15. GCPL has also launched Godrej Expert Rich Hair Creme in the personal care segment. These launches would help GCPL to maintain their leading market share in HI segment and Hair care segment in India.

Key Financials

Year to March FY14 FY15E FY16E FY17E CAGR (%)

Net Sales (Rsmn) 76,024 81,914 96,658 114409 15%

EBITDA (Rsmn) 11,629 14,981 17,081 18092 16%

PAT (Rsmn) 8,193 10,263 11,849 12575 15%

EBITDA Margin (%) 15% 18% 18% 16% -

EPS (Rs) 24 30 35 37 16%

EV/EBITDA (x) 26 26 22 26 - Source: Company, Bonanza Research

Godrej Consumer Products Limited


Godrej Consumer Products Limited Godrej Consumer Products Ltd. (GCPL) is growing at a CAGR of 40% in last 5 years in terms of its revenues because of international acquisitions made in past few years which contributes 47% in its total revenues. We expect this growth to normalize going forward on back of higher growth base. The 3*3 strategy has been fruitful so far for the company as they have a focused approach in 3 continents Africa, Latin America and Asia in 3 segments Personal Care, Hair care and Household care.

Investment Rationale Global businesses reaching 50% of total business, expected to contribute

more going forward

Acquiring leading brands to maintain leadership in present segments

Improving margins on declining raw material prices

Product Innovations and re launches to increase market share

At CMP of INR 1,073, the stock is trading at 31x of FY16E EPS and 29x of FY17E EPS. We assign a BUY rating on the stock valuing the Company 40x on FY17E EPS of INR 37 to arrive at target price of INR 1,480 proposing an upside of ~38%.

Initiate with BUY; TP- INR 1,480



Global businesses reaching 50% of total business, expected to contribute more going forward GCPL’s 3*3 approach for business expansion has been successful so far where they have been acquiring companies with brands leading that segment. The company is focusing on 3 segments focusing in 3 continents. Hair care segment, Household care segment and Personal care segment and they are focusing in Asia, Africa and Latin America as their target markets. The revenue from international business stands at 47% of the total revenues by the end of FY14 which stood at merely 15% in FY10 of total sales. We expect that this trend will lead to 50:50 revenue sharing between domestic and international business by FY16. The highest contributor in international sales is from Indonesia at 45% of total international sales followed by Africa at 25%, Latin America at 19% and Europe at 10% in FY13. We expect Africa business to outperform the Latin America business in terms of revenue growth considering the acquisitions made in Africa and growth of more than 30% registered in Q3FY15.

Exhibit 1: Domestic and International revenue mix

Source: Company and Bonanza Research

Exhibit 2: International revenue mix


Exhibit 3: Revenues (INR Mn)


Exhibit 4: Profits After Tax (Domestic & International)


0%

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2010 2011 2012 2013 2014 2015E 2016E 2017E

Domestic Business International Business

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Europe Indonesia Middle East LatinAmerica

Africa

FY12 FY13

0

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FY12 FY13 FY14 FY15E FY16E FY17E

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FY12 FY13 FY14 9M ending Dec2015

Domestic PAT (mn) International PAT (mn)



Exhibit 5: PAT Margin (Domestic & International Business)


Exhibit 6: EBITDA Margin (Domestic & International Business)


Quarterly Performance by international subsidiaries

Exhibit 7: EBITDA Margins


Exhibit 8: Quarterly Revenues (INR mn)


International businesses are outperforming the domestic business growth in revenues mainly on back of company maintaining their strategy to grow inorganically. Historically we have witnessed a robust growth in the revenues and profits from the international business though PAT margins remain better for the domestic business. The African business may see some consolidation after GCPL has acquired Frika in the current year, a hair extension company in South Africa. The profitability is expected to improve on back of falling crude oil prices and most likely we may see EBITDA and PAT margins trending up in domestic as well as international businesses. We can see the EBITDA margins have been stable to positive in last 2 quarters of FY15 and expected to remain firm in coming few quarters on back of lower crude oil prices.

21%

15% 14% 14%

8%10%

7% 6%0%

5%

10%

15%

20%

25%

FY12 FY13 FY14 9M ending DecFY15

Domestic International

19%17% 18% 19%

14%11% 11%

13%

0%2%4%6%8%

10%12%14%16%18%20%

FY12 FY13 FY14 9M ending DecFY15

Domestic International

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Indonesia Africa Latam Europe

International business exhibits a strong revenue growth though domestic business PAT margins outshine international business PAT margins.



Acquiring leading brands to maintain leadership in present segments GCPL has a strategy to acquire the brands which are leaders in their own segment. The company has made acquisitions in 3 continents Asia, Latin America and Africa in 3 core categories - household care, personal care and hair care as per their 3*3 business strategy.

Africa

GCPL has acquired companies in Africa which are leader in their segment. With acquisition of Kinky and Rapidol brands in hair care segment in South Africa in 2008 and 2006 respectively, GCPL has become a prominent player in Africa. Moreover acquisition of Tura in 2010, Nigeria seems to be a strategic fit for GCPL. Tura has been a household brand for over two decades in Africa, whose products like soaps, moisturising lotions and skin-toning creams are sold widely. Notably, it has an efficient sales network with over 70% distribution reach in the West African region. For GCPL, which currently has a relatively stronger presence in South Africa, Tura will further strengthen its presence in the African continent and also prove to be a solid base for introducing GCPL’s own products in West African countries. To fully capture the synergies, GCPL plans to put in place a cross-functional team from India, Rapidol, Kinky and Tura operations. That apart, penetration levels are also low in Africa so the scope for long term growth is quite visible for GCPL. With a recent acquisition of Frika in South Africa, GCPL is consolidating their business with larger presence. The company has posted an average growth of 19% in its sales in first 3 quarters of FY15 boosted by a growth of 30% (y-o-y) in Q3FY15.

Asia

GCPL has acquired an Indonesian company, Megasari in 2010 which is present in the personal care and household care segment. Megasari offers products like Stella, a leading brand in Air care segment in Indonesia, “HIT”, also a leading brand in HI segment and Mitu, which is present in Baby care segment is one of a leading brand in Indonesia. Indonesia business currently contributes largest share (40%) in total sales from GCPL’s international business.

Latin America

GCPL has made acquisitions in Chile and Argentina in 2012 and 2010 respectively with acquisitions of Cosmetica Nacional in Chile and Issue group and Argencos in Argentina. With such acquisitions the company has made its presence in Latin American markets.

Exhibit 9: GCPL’s acquisitions over a period of time

Name of the company Country Entry Segment Acquisition Period

Keyline Brands Limited UK Personal Care 2005

Rapidol (Pty) Limited South Africa Hair Care - Color 2006

Godrej Global Mideast FZE UAE Personal Care& Household Care 2007

Kinky Group South Africa Hair Extensions 2008

Megasari Indonesia Household Care & Personal Care 2010

Tura Nigeria Personal Care 2010

Cosmética Nacional Chile Hair Care –Color 2010

Issue Group Argentina Hair Care –Color 2010

Argencos Argentina Hair Care –Color 2010

Darling Group South Africa Hair Care – Hair Extensions 2011

Frika South Africa Hair Care – Hair Extensions 2015


African acquisitions provides an opportunity to penetrate aggressively for a long term growth

Latin American entities contributing significantly to the total revenues from international operations



Improving margins on declining raw material prices With declining raw material prices like crude oil and PFAD prices from past couple of months and high exposure of GCPL towards crude oil derivatives will be beneficial for the company. We expect Q4FY15 and Q1FY16 will reflect significant improvement in margins on back of lower crude oil prices around USD 45/bbl. The price of crude oil was very well distributed in a range of USD 97 -106/bbl from the start of 2013 till it has witnessed a level of USD 90.5/bbl in the month of September 2014 and a further decline till USD 53.3/bbl in December 2014 due to increasing production from Libya, Russia and Canada, also with lack of demand from Europe, Japan and other countries the crude oil prices have declined significantly.

Palm Fatty Acid Distillate (PFAD) prices have declined significantly as it is a derivative product of crude oil. The current prices in Jan 2015 are quoting below last 5 years average price at USD 583/mt. We expect the prices of Crude Oil to settle around USD 55-60 in 2015 on pickup in demand from Europe and Japan.

We expect the cost of materials which is 45% of net sales will decline by 100 basis points in FY15 to 44% approximately leading to improvement in EBITDA margins by 300 bps to 18% in FY15 and FY16 from 15% in FY14 whereas the PAT margins are expected to improve by 100-200 bps in FY15 and FY16. The margins may remain stable in FY16 as the company will spend on A&P (advertising and promotions) for launching 10 products next year and hence the benign commodity prices will set off from higher spending on A&P expenses.

Exhibit 10: Palm Fatty Acid Distillate Prices (USD/MT)

Source: Bloomberg

Exhibit 11: GCPL consolidated PAT & EBITDA Margin


0

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1/30/2009 1/30/2010 1/30/2011 1/30/2012 1/30/2013 1/30/2014

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18%15% 15%

18% 18%16%

15%13%

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11%

0%2%4%6%8%

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FY12 FY13 FY14 FY15 FY16E FY17E

EBITDA Margin PAT Margin



Exhibit 12: Declining Cost of Materials as % of Net Sales

Source: Ace Equity and Bonanza Research

Goods and Services Tax (GST) would be an added advantage

With expectations of introducing GST in upcoming budget w.e.f. 1st April 2016, the scope of margin improvement will add to GCPL’s profitability. The company would be able to save on its freight and transportation cost. The rate of GST on services is likely to be 16% and on goods is proposed to be 20% excise duty.

50.8

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44.943.9 44.5

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Cost of Materials as % of net sales



Product Innovations and re launches to increase market share GCPL is innovating and launching new products and relaunching existing brands across all its business segments to increase its market share. GCPL launched seven to eight products in 2013 which came down to five to six in 2014 due to economic slowdown. The company is expected to launch nine to ten new products next year in 2015-16 and most of them to be present in Hair care and Home care segment.

In soap segment, it has launched Godrej No.1 face wash, relaunched Cinthol with a brand name Cinthol confidence plus and Godrej Protekt Hand wash and sanitizers which has been well received in the modern trade. The company has also launched B:Blunt, which is a premium hair care and styling brand. Apart from these, GCPL has launched a premium air freshener called Aer and paper-based mosquito repellent called Fast Card at Rs 1 and Neem low-smoke coil variant in household care segment. They have launched HIT Anti Roach Gel which is a different concept of getting rid of cockroaches from homes.The company has recently launched winter soap in Punjab for test marketing. The company has plans to keep innovating and re-launching products in existing segments to boost up their revenues going forward.

Revenue growth to pick up in FY16 with better profitability

The overall profitability for GCPL would likely to witness a robust growth of 25% in FY15 and 15% in FY16 (on a higher base) due to decline in its material cost and other operating costs. We expect the cost of raw material as percent of net sales to see a correction of 100 basis points from 44.9% in FY14 to 43.9% in FY15 and FY16 may again see an uptick of 60 basis points to 44.5% with growing demand from Europe, Japan and other countries. The revenues are expected to be soft at 8% in FY15 on back of declining demand and a disappointing performance from its international subsidiaries.

We may expect the demand to grow from the last quarter of FY15 on back of visible signs of moderating interest rate cycle leading to pick up in economic growth. We believe, GDP to grow at 7% and above by FY16 which may remain around 6%in FY15 (as per latest methodology). The revenues of GCPL are expected to grow by an average 18% in FY16 on back of lower base.

Exhibit 13: Total Revenues, EBITDA and PAT (INR mn)


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


Total Revenues EBITDA PAT



Valuations and Outlook GCPL at CMP of INR 1,073 is trading at 31x of its FY16E EPS of INR 35 and 29x of FY17E EPS of INR 37. We believe, with the pickup in growth of Indian economy, a decline in raw material prices, accretive innovations and a robust growth in revenues of international subsidiaries would help GCPL to post robust revenues and increased profitability. Hence we assign a multiple of 40 (considering industry trend) to its FY17E EPS of Rs 37 which gives us a one year target price of INR 1,480 proposing an upside of 38%.

Exhibit 14: P/E Band

Source: Bloomberg and Bonanza Research

Key Risk and Concerns Increased competition in the domestic business, leading to lower pricing/higher

brand spends

Regulatory pressures including changes to tax law and seasonal fluctuations

Increasing costs of raw material, transport and storage.

Margin pressures in overseas business

Exchange rate fluctuation and arbitrage risk

05001,0001,5002,0002,5003,0003,5004,000

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Actual Price INR Px = 1183 @ p/e of 53 Px = 1026.7 @ p/e of 46

Px = 870.48 @ p/e of 39 Px = 714.24 @ p/e of 32 Px = 558.00 @ p/e of 25



Company Profile Godrej Consumer Products Ltd (GCPL) is present in FMCG sector with leading Household and Personal Care Products. GCPL's products include soap, hair colorants, toiletries and liquid detergents. Its brands include 'Cinthol', 'Godrej Fair Glow', 'Godrej No.1' and 'Godrej Shikakai' in soaps, 'Godrej Powder Hair Dye', 'Renew', 'Colour Soft' in hair colourants and 'Ezee' liquid detergent. GCPL currently operates several manufacturing facilities in India spread over seven locations and grouped into 4 Operating Clusters at Malanpur (Madhya Pradesh), Guwahati (Assam), Baddi-Thana (Himachal Pradesh), Baddi-Katha (Himachal Pradesh), Pondicherry, Chennai and Sikkim. GCPL has bought out foreign companies in UK, Africa, Latin America and Asia as a part of its strategic move. They have made several acquisitions mainly in 3 continents where they are focused, Africa, Asia and Latin America and in 3 segments Hair Care, Home Care and Personal Care segment.

Exhibit 15: Value Growth Y-o-Y across segments

Source: Company, Bonanza Research

Gauging on quarterly basis, the growth across all the segments have been subdued in past few quarters due to higher base growth in same quarters of the preceding year. Going forward we expect uptick in volume growth on back of lower crude oil prices and economic growth coming back on track. Going forward, we expect higher growth to be seen again in HI and Hair Colors segment and a constant growth of lower double digit in Soap segment.

Exhibit 16: Business Growth in Constant Currency Terms

Q3FY14 (Y-o-Y) Q4FY14 (Y-o-Y) Q1FY15 (Y-o-Y) Q2FY15 (Y-o-Y) Q3FY15 (Y-o-Y)

Domestic Business 13% 12% 6% 7% 12%

Insecticides 8% 17% 9% 2% 16%

Soaps 6% 1% 2% 13% 11%

Hair Colors 37% 16% 14% 9% 10%

Liquid Detergents 36% NA NA NA 13%

International Business 22% 12% 14% 12% 20%

Indonesia 18% 1% 10% 15% 19%

Africa 29% 39% 17% 15% 36%

Latin America 15% 5% -4% 31% 25%

Europe 124% 16% 42% -9% -13% Source: Company, Bonanza Research

0%5%

10%15%20%25%30%35%40%

Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15

Household Insecticides Hair Colors Soaps



Exhibit 17: Urban and Rural Profile for GCPL’s Revenues


Product Portfolio Subsidiary companies Country Segment Brands

Godrej UK UK Personal Care Cuticura, Soft & Gentle, Godrej South Africa South Africa Hair Care - Color Inecto, Kinky

Godrej Nigeria Nigeria Personal Care Tura

Darling Africa Hair Care Darling

Godrej Argentina Argentina Hair Color Issue, Roby, 919

Cosmetica Nacional Chile Hair Color Illicit, Pamela Grant, Villeneuve

Godrej Indonesia Indonesia Home Care Stella, Mitu

Godrej Global Middle East Sharjah Hair care, Home care and Personal Care

Good Knight, Cinthol, Godrej Expert, Ezee, Godrej No.1

Godrej Household Products Bangladesh (Pvt) Ltd. Bangladesh Hair care, Home care

and Personal Care

Good Knight, Cinthol, No.1, Godrej Expert, Ezee, Godrej Renew

Godrej Household Products Lanka (Pvt) Ltd. Srilanka Hair care, Home care

and Personal Care

Good Knight, Cinthol, HIT, Godrej Expert, Ezee, Godrej Renew

Godrej Consumer Products Ltd. India Hair care, Home care

and Personal Care

Good Knight, Cinthol, Aer, HIT, Protekt, Godrej Expert, Ezee, Nupur Henna, Godrej No.1

Recent Developments Godrej Consumer Products has hiked its stake in hair extension brand Darling South

Africa and Mozambique businesses to 90%.

GCPL also acquired South Africa's hair extensions firm Frika Hair in 2015 for an undisclosed sum in order to consolidate its position in the South African market. Frika has annualized revenues of USD 200 mn.

28%

72%

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20%

40%

60%

80%

Rural Urban

FY14



Financials

P&L

Particulars (mn) FY14 FY15E FY16E FY17E Sales 78,031 84,273 99,443 117,342 Less : Excise Duty 2,205 2,360 2,784 2,934 Rate of Excise Duty 3 3 3 3 Other Operational Income 198 Net Sales 76,024 81,914 96,658 114,409 Cost of Materials 35,043 36,996 44,252 54,504 Change in Inventory 667 Operating & Other expenses 28,686 29,937 35,325 41,813 Total Operating Expenses 64,396 66,933 79,577 96,317 EBITDA 11,629 14,981 17,081 18,092 Depreciation 819 884 990 1,089 EBIT 10,810 14,097 16,091 17,003 Other exceptional Income 59 Interest Expenses 1,199 1,199 1,199 1,199 Other income 627 EBT 10,297 12,898 14,892 15,804 Tax 2,104 2,635 3,043 3,229 Current Tax 2,167 Deferred Taxation (63) Profit After tax 8,193 10,263 11,849 12,575 No. of shares 340 340 340 340 EPS 24 30 35 37 Source: Company, Bonanza Research

Balance Sheet

Particulars (mn) FY14 FY15E FY16E FY17E Share Capital 340 340 340 340 Share warrants 52 Reserves and Surplus 37,361 45,633 55,492 66,076 Loan Funds 15,903 15,903 15,903 15,903 Secured Loans - - - - Unsecured Loans 15,903 15,903 15,903 15,903 Deferred tax Liability (203) 265 265 265 Other long term liability 56 53 53 53 Total 53,509 62,194 72,053 82,637 Application of Funds Fixed Assets 58,035 62,678 70,199 77,219 Less : Depriciation 6,821 7,705 8,695 9,785 Less: Impairment of Fixed Assets Net Block 51,214 54,972 61,504 67,435 Capital Work in Progress 1,671 Investments 1,363 1,363 1,363 1,363 Long Term Loan and Advances 8,285 9,184 10,837 12,787 Current Assets 27,645 32,400 41,374 52,144 Inventories 10,821 12,741 15,034 17,637 Sundry debtors 7,113 8,307 9,803 11,726 Cash and Bank Balances 7,048 8,686 13,391 18,847 Other Current Assets 1,020 1,110 1,310 1,573 Loans and Advances 1,643 1,556 1,837 2,362 Current Liablities & Provisions 36,255 35,725 43,024 51,091 Current Liablities 27,482 27,986 34,089 41,609 Short & Long Term Provisions 8,773 7,739 8,935 9,482 Net Current Assets (8,610) (3,325) (1,650) 1,052 Misc. Exp. (412) Total 53,509 62,194 72,053 82,637 Source: Company, Bonanza Research

Ratio Analysis

Particulars (INR mn) FY14 FY15E FY16E FY17E

EBITDA 11,629 14,981 17,081 18,092

EBITDA Margin (%) 15% 18% 18% 16%

PAT Margin (%) 11% 13% 12% 11%

ROE (%) 22% 22% 21% 19%

EPS (INR) 24 30 35 37

P/E (x) 35 37 32 38

Enterprise Value (EV) 298,875 383,018 378,314 473,616

EV/ EBIDTA (x) 26 26 22 26

EV/Sales (x) 4 5 4 4


Cash Flow

Particulars FY14 FY15E FY16E FY17E

Profit Before Tax 10,297 12,898 14,892 15,804

Adjustments for Interest and Depreciation 1,675 2,083 2,189 2,288

Adjustments for : changes in Working Capital 1,693 (3,647) 3,031 2,753

Cash From Operating Activities 13,664 11,334 20,112 20,845

Income Tax Paid

(2,635) (3,043) (3,229)

Net Cash flow from Operating Activities 13,664 8,699 17,069 17,617

Net Cash flow from Investing Activities (4,948) (3,871) (9,174) (8,971)

Net Cash flow from Financing Activities (6,333) (3,190) (3,190) (3,190)

Net Change in cash and cash equivalents 2,384 1,638 4,705 5,456



Britannia Industries Limited | BUY

INITIATING COVERAGE Bloomberg Code: BRIT IN | Reuters Code: BRIT.BO


FMCG Current Price: INR 2,185 Target Price: INR 2,600


Stock Details Bloomberg Code BRIT IN

Reuters Code BRIT.BO

Shares O/S (mn) 120

M Cap (INR mn) 2,62,200

52 week H/L (INR) 2,250/821


FII 19.4%

DII 9.2%

OtheINR 20.5%



Absolute 3% 55% 161%

Relative 8% 48% 134%


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BIL Sensex

“Reinforcing Pillars” Britannia Industries Ltd. (BIL) is well placed for gaining market share in the premium biscuits segment. Biscuits Industry is mainly dominated by 3 organised players in Indian market – Parle, ITC and Britannia. The company has a focused approach towards biscuits segment with introducing new launches in premium segment recently and moreover introducing different segments into play apart from biscuits category. The company has added health focused brands in their product portfolio such as Oat, Ragi, 5 grain biscuits etc. under their NutriChoice brand, breakfast food such as – Poha, Upma and also present in dairy products by introducing Butter, Cheese and Milk. BIL is making their distribution network strong for fast and easy availability of their products to the consumers with great focus on optimizing their cost through various measures. We expect company to register a CAGR of 14-15% in FY14-FY17E. We initiate coverage on the stock with a Buy rating with a target price of INR 2600.

Innovation in Pillar brands to increase market share

BIL’s power brand “Good Day” has gained a substantial market share against its closed competitors like Parle and ITC. Good Day has become INR 1,600 crore brands and sells over 50 lakh packs every day. BIL is innovating new variant for their existing pillar brands. The company has recently launched Good Day Chunkies and NutriChoice Havens in Biscuits segment with Britannia Cake catering to the Cake and Rusks segment.

Strengthening depth and width of distribution network to boost up revenues

BIL’s Sales, distribution and channel capabilities have been strengthened to increase width (increase in number of stores) of distribution in rural markets and depth (increase sales/store) in the urban markets. The company has already managed to increase number of rural distributors by 50%. BIL has a direct reach to 0.5 mn outlets two years ago and expecting to be close to 1 mn by FY16. The overall expansion plan is to reach 4.5 mn outlets in the next four-five years.


BIL is adding brands for health conscious people which suit the special lifestyle and nutrition needs of diabetics to manage extreme swings in blood sugar. The company is adding these brands under their range of Nutri-Choice biscuits. They have introduced brands like Nutri-Choice Digestive, Nutri-Choice 5 Grain, Nutri-Choice Ragi, Nutri-Choice Oat cookies and Nutri-Choice SugarOut. Apart from Biscuits BIL have now dairy products to offer too for a healthy meal plan. BIL offers Milk, Curd, Butter, Cheese, Gourmet etc.

Cost optimization and favourable commodity cycle aid to improve margins

The continuous fall in commodity prices from past few months have been positive for the industry. In case of BIL, the prices of sugar have been softened from past few months. The sugar prices came down to INR 2,648 per quintal in Nov 2014 compared to INR 3,356 in Nov 2012 whereas the prices of wheat has not much impacted and remain stable at INR 1,590 per quintal. The fall in crude oil prices would also help the company to lower their freight cost. Moreover the company is taking various measures to keep their cost in check.

Key Financials


Net Sales (INR mn) 63,074 71,313 84,860 1,02,829 18%

EBITDA (INR mn) 5,966 7,364 8,763 10,198 20%

PAT (INR mn) 3,698 5,581 5,351 6,278 19%

EBITDA Margin (%) 9% 10% 10% 10% -

EPS (INR) 31 47 45 52 19%

EV/Sales 1.6 3.5 2.9 2.3 -

EV/EBITDA 16.9 34.2 28.5 23.7 -


Britannia Industries Limited


Britannia Industries Ltd. Britannia is well placed for gaining market share in the premium biscuits segment. The company has a focused approach on premium biscuits segment with introducing new launches in the same segment recently and moreover introducing different segments into play apart from biscuits category. The company has added health focused brands in their product portfolio such as Oat, Ragi, 5 grain biscuits etc. under their NutriChoice brand, breakfast food items – Poha, Upma and also present in dairy products by introducing Butter, Cheese and Milk. BIL is making their distribution network strong for fast and easy availability of their products to the consumers with great focus on optimizing their cost through various measures. We expect company to register a CAGR of 14-15% in FY14-FY17E. We initiate coverage on the stock with a Buy rating with a target price of INR 2,600.

Investment Rationale Innovation in Pillar brands to increase market share

Strengthening depth and width of distribution network to boost revenues


Cost optimization aid to improve margins with favourable commodity cycle

At CMP of INR 2,185, the stock is trading at 46x of its FY15E EPS of INR 47 and 49x of its FY16E EPS of INR 45. We believe the overall outlook is positive for the FMCG industry considering lower raw material prices, introduction of GST and improving economic health which supports higher valuations for the industry. Hence we assign a P/E of 50x to FY17E EPS of INR 52, considering demand uptick in premium biscuits segment, though BIL has registered a onetime gain by selling off its land & building in Q2FY15 which has amplified its earnings in FY15. We assign a Buy rating on the stock with a target price of INR 2,600.




Innovation in Pillar brands to increase the market share BIL’s pillar brand “Good Day” has gained a substantial market share against its closed competitors like Parle and ITC in past few years. Good Day has become INR 1,600 crore brand. It sells over 50 lacs packs every day. Good Day is the largest brand in the cookies segment and has remained so ever since its inception. Britannia is the leading player in cookies with an estimated market share of 30%. ITC, on the other hand, is the largest player in creams with an estimated share of around 26%. Parle Products, the number two in both creams (22%) and cookies (27%), takes the top spot when the two segments are combined. It has a share of 25% in the INR 72,000 mn cookie plus cream market.

Apart from Good Day, other pillar brands like NutriChoice, 50:50, Marie Gold and Tiger have been performing well. The total market share of Parle is still largest with its popular Brand Parle G under biscuit category of INR 100/kg but BIL is able to capture the market share in premium brand segments with its pillar brands like Good Day and NutriChoice.

The cookies segment is growing at a CAGR of 14% in India. The mid-premium cookies segment is relatively smaller in size with INR 1,800 cr. consumer spends but has witnessed a CAGR of 20% in recent years. To maintain its leadership in the lucrative cookies segment, BIL has strengthened Good Day portfolio with the introduction of a new brand Good Day Chunkies. Moreover under its NutriChoice brand, BIL has added NutriChoice Havens which is a mix of Oats and Cranberries.

BIL’s market share to improve in premium segment with additions of innovative brands to its product line.



BIL’s Performance across segments Exhibit 1: Biscuits & High Protein Food Sales (INR mn)


Exhibit 2: Cakes Sales (INR mn)


Exhibit 3: Bread and Rusk Sales (INR mn)


Exhibit 4: Others Sales (INR mn)


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Strengthening depth and width of distribution network to boost revenues BIL’s Sales, distribution and channel capabilities have been strengthened to increase width (increase in number of stores) of distribution in rural markets and depth (increase sales/store) in the urban markets. Several initiatives were undertaken to drive sales productivity, which includes re-structuring of sales team, distributor consolidation, portfolio reconfiguration to simplify handling, split portfolio for focused selling, hub & spoke model to increase reach in the rural areas. The number of cities using the split-route model is already up from 11 cities to 25 currently and the company proposes to increase this to 50 in a year. The company has already managed to increase number of rural distributors by 50%.

BIL had a direct reach to 0.5 mn outlets two years ago and expecting to be close to 1 mn by FY16. The overall expansion plan is to reach 4.5 mn outlets in the next four-five years.

Moreover, salespersons carrying hand held devices has been increased to 50%, (25% a year earlier), for effective monitoring of sales. BIL has been able to reduce the distance travelled by its products by 20% in the last three years. Through its optimized manufacturing foot print, There is a sharp focus on product availability and freshness of the stock and has substantially improved the count of stock on shelves within 33% of the shelf life of the products, most notably in cakes and rusks and to almost to level of biscuits.

Good Day and NutriChoice biscuits have added nearly half a dozen new manufacturing units with plans to invest Rs 400 crore in the next 18 months to set up additional capacity and increase its in-house production to 60-65% of its total sales from 46% now. The company has also doubled its direct distribution where it was traditionally weaker. It will soon open a R&D centre in Bangalore to enable faster innovations and new launches.

Exhibit 5: Aggressive Plans to Increase Direct Distribution Outlets

Source: Company Report and Bonanza Research

Exhibit 6: Penetration(Urban and Rural India)

Source: IBEF

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CAGR - 26%

CAGR - 35%

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BIL’s revenues are expected to boost with an aggressive strategy to increase direct distribution outlets across India at CAGR of 35% by 2020.



Adding Health focused brands to its product line BIL is now focusing at the centre of the plate rather than being on side with just biscuit segment. The company is adding brands for health conscious people which suit the special lifestyle and nutrition needs of diabetics to manage extreme swings in blood sugar. The company is adding brands under their range of Nutri-Choice biscuits and moreover introducing variant for healthy breakfast such as Poha (Flattened Rice), Upma (Semolina), Oats and Porridge. They have introduced brands like Nutri-Choice Digestive, Nutri-Choice 5 Grain, Nutri-Choice Ragi, Nutri-Choice Oat cookies and Nutri-Choice SugarOut. Apart from this, BIL owns dairy products to offer for a healthy meal plan. BIL offers Milk, Curd, Butter, Cheese, Gourmet etc. The dairy and cakes segment is still at a nascent stage and leaves a scope of high penetration going forward though the dairy segment has been leveraged by Amul and BIL existence in dairy segment will be very competitive.

Britannia NutriChoice targets the urban customer; Nutrichoice Heavens is aimed at SEC-A, the most desirable category of consumers. Nutrichoice accounts for 6-7% of Britannia’s overall revenues and within the next three years, it is expected to account for 20-25% of the company’s overall revenues.

Exhibit 7: Health based Product line and competitors

Britannia Products Competitors Dairy Competitors

NutriChoice Havens ITC- Sunfeast Oats & Raisins Gourmet Cheese Amul, Mother Dairy, Local Players

NutriChoice Oat Cookies ITC- Sunfeast Oats & Almonds Actimind Amul Kool

NutriChoice ragi cookies Tigerzor Badam Milk Amul, Danone

NutriChoice 5 grain Parle – Simply Good Tigerzor Choco Milk Amul, Danone

NutriChoice Digestive Mcvities, Parle Simply Good Digestives Dairy Whitener Umang Dairies

NutriChoice sugarout Butter Amul Upma Local Players Masala Chaas Amul Poha Local Players Milk Amul

Oats & Porridges Kellogs, Saffola, Quaker, Bagrrys Dahi Fresh Amul, Danone

Ghee Amul Source: Company Report, Bonanza Research

BIL is diversifying itself from just being a biscuit player, targeting foods for healthy breakfast



Cost optimization aid to improve margins with favourable commodity cycle In addition to falling commodity prices, the company is taking initiatives to lowering their costs. The company has already launched bio mass energy in their factories and have plans to use such methods to reduce the usage of energy which will lead to increase in their margins. The Power & Fuel cost is 1.1% of the total expenditure so we believe there will be a negligible impact. Moreover an average distance travelled by a pack of biscuit is planned to reduce from 600 KM to 480 KM and further down going forward. Apart from these initiatives company has already been implementing Automation, TQM and Kaizen method to reduce their cost and hence improve their operating margins.

The continuous fall in commodity prices from past few months have been positive for the industry. In case of BIL, the prices of sugar have been softened from past few months. The sugar prices came down to INR 2,648 per quintal in Nov 2014 compared to INR 3,356 in Nov 2012. The fall in crude oil and other commodity prices can support the fall of sugar prices whereas the prices of wheat has not much impacted and remain stable at INR 1,590 Per quintal.

Exhibit 8: Palm Oil Price Trend (USD/MT)

Source: Bloomberg, Bonanza Research

Exhibit 9: Sugar & Wheat Price Trend (INR/QTL)


Exhibit 10: Raw Material Cost Contribution

Source: Ace Equity, Bonanza Research

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We expect an improvement of 100 bps of improvement in its EBITDA margins with lower food prices.



While the CY13 stock price gain was essentially earnings led, CY14 gain was both due to earnings and multiple expansion which was imminent due to sustainable change in return on capital and margins. CY15 is likely further see strong earnings growth as the volume growth trajectory is likely to step up over FY14 led by imminent urban recovery and new product launches.

Premiumisation coupled with higher spending, cost control and incremental progress in depth of distribution continue to boost margins with significant commodity tailwinds leading to lower transportation costs will create further margin tailwinds. We expect the EBITDA and PAT margins at 10% and 8% respectively in FY15E against 9% and 6% respectively in FY14.



Eyeing bigger pie in international markets to boost revenues International business currently represents around 5% of total sales. BIL is eyeing to increase their international revenues through organic or inorganic growth route and to increase this share to 25%. The company has plans to acquire overseas companies and growing capacities through inorganic route in FY16 and going forward. The company has ambitious plans to increase sales from international markets to INR 7000 mn within the next 18 months from roughly INR 4000-4500mn at the end of March. The company distributes its products in 75 countries, with Middle Eastern countries accounting for a majority of its international business.

The dairy and cakes segment is still at a nascent stage and leaves a scope of high penetration going forward though the dairy segment has been highly competitive by presence of Amul. BIL’s premium biscuits and cakes segment is going to benefit with higher consumer spending.

Britannia’s Subsidiaries Performance - Turnover (LHS), PAT (RHS)

Exhibit 11: Britannia Dairy Pvt. Ltd.


Exhibit 12: Strategic food International Inc


Exhibit 13: Al Sallan Food International Co. LLC


Exhibit 14: Daily Bread Gourmet Foods (India) Pvt. Ltd.


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BIL has plans to take its international business to contribute 25% from 5% through organic or inorganic route.



BIL’s subsidiary Britannia Dairy Pvt. Ltd has a presence in dairy products and growing at a CAGR of 13% in last 4 years (FY10-FY14) in terms of total turnover though the profits have been negligible. We believe the dairy business would likely to get a tough competition from Amul who are already a prominent player in dairy business.

Britannia strategy to focus on Biscuits and Bakery supply chain over haul, and aggressive focus on cost management led to doubling of EBITDA margins and Return on capital. Sustainable change in this cost economics not only has accelerated the earnings growth but also de-risked the operating model vulnerable to vagaries of volatile input prices.

BIL’s profitable growth in its subsidiaries through exports and dairy businesses fuelled a strong show in the consolidated bottom line in Q3FY15, which was up 36.5% y-o-y.



Valuations and Outlook BIL is outpacing the industry growth. The overall Biscuit industry did not fare well and grew only 5% in revenue terms and 1.5% in volume terms in the past year though BIL is showing a healthy double digit sales growth of 14% y-o-y both in Q3FY15 and 9 months ending Dec’14.In Q3 FY15, Britannia reported standalone EBITDA margin came at 10.6% aided by lower input costs (down 182 basis points to 50.7% of sales) as well as advertising and promotional costs (down 55 basis points to 7.6%). The company has registered a profit from the sale of its land and building in Q2FY15 which resulted in jump in profits and EPS, excluding that other income, company is still able to register a healthy growth of more than 20% in profits in first three quarters of FY15 outperforming the revenue growth.

BIL at CMP of INR 2,185 is trading at 46x of its FY15E EPS of INR 47 and 49x of its FY16E EPS of INR 45. We believe the overall outlook is positive for the FMCG industry considering lower raw material prices, introduction of GST, improving economic health and the increasing margins for the company on back of focusing on premium product categories which supports higher valuations for the company. Hence we assign a P/E of 50x to FY17E EPS of INR 52 which gives us a target of INR 2,600.



Key Risk & Concerns Increase in raw material prices i.e. Wheat, Sugar or Palm Oil Prices will

affect profit margins for the company

Weakness in economic environment lead to slower growth

Business segments to remain highly competitive, Risk of losing market share to the competitors

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Actual Price INR Px = 2475 @ p/e of 75 Px = 2145 @ p/e of 65

Px = 1815 @ p/e of 55 Px = 1485 @ p/e of 45 Px = 1155 @ p/e of 35



BIL’s new launches Good Day Chunkies and NutiChoice Havens have a direct competition from ITC’s brands Sunfeast Dark Fantasy and Sunfeast Farmlite respectively which are present in the premium segment of Biscuit industry. Parle’s Milano will also be challenged through BIL’s Good Day Chunkies. Britannia unveiled NutriChoice Heavens, priced at INR 50 for a 100 gm pack, or 60% above the cost of its premium NutriChoice range. In the past six months, Parle Products Pvt. Ltd has unleashed premium and super premium brands such as Hide & Seek Black Bourbon, Milano Centre Filled Dark Cookies and Happy Happy Dual Cream biscuits to take on ITC Ltd’s Sunfeast Dark Fantasy and Mondelez India Foods Ltd’s Oreo biscuits. The share of premium category in overall revenues expected to more than double in the next three years from 7% to 15%. This segment, as it is growing faster than the overall market.

Something to Cheer about Consumer spending to rise with visible signs of economic growth –

Premium segment to benefit with higher spending

With visible signs of pick up in Indian economic growth, consumer spending in India increased to INR 15,338.82bn in Q4 of 2014 from INR 14,645.01 bn in Q3 of 2014, an increase of 4.7% q-o-q. Consumer Spending in India averaged INR 8,152.51 bn from 2004 until 2014, reaching an all time high of INR 15,338.82 bn in Q4 of 2014 and a record low of INR 4,469.88 bn in Q3 of 2004.

India Total Disposable Personal Income

Disposable Personal Income in India increased to INR 80,663,730 mn in 2012 from INR 71,787,870 mn in 2011. Disposable Personal Income in India averaged INR 11,464,052 mn from 1950 until 2012, reaching an all time high of INR 80,663,730 mn in 2012 and a record low of INR 91,540 mn in 1950.



Financial Charts Exhibit 16: Total Revenues & Profit after Tax


Exhibit 17: EBITDA & PAT Margins


Exhibit 18: ROE & ROCE


Exhibit 19: EV/EBITDA


BIL is a debt free company with returns of more than 40% on its equity in FY14 and FY15E. The EBITDA margins too are expected to escalate from an average of 7% to 10% in FY15 and going forward on back of lower raw material cost. BIL’s enterprise value expected to be 30x of its EBITDA on back of significant jump in its market capitalization in FY15.

50,32857,008

64,23272,622

86,417

104,716

1,867 2,339 3,698 5,581 5,350 6,278

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Financials

P&L

Particulars (Rs mn) FY14 FY15E FY16E FY17E Sales 64,232 72,622 86,417 104,716 Less : Excise Duty 1,158 1,309 1,557 1,887 Net Sales 63,074 71,313 84,859 102,829 Cost of Materials 38,223 42,484 50,554 61,782 Change in Inventory (126) Operating & Other expenses 19,010 21,465 25,543 30,849 Total Operating Expenses 57,108 63,949 76,097 92,631 EBITDA 5,966 7,364 8,763 10,198 Depreciation 634 775 913 986 EBIT 5,332 6,589 7,850 9,211 Other exceptional Income (200) 1,599 Interest Expenses 54 - Other income 348 EBT 5,426 8,188 7,850 9,211 Tax 1,728 2,607 2,500 2,933 Profit After tax 3,698 5,581 5,350 6,278 No of shares (mn) 120 120 120 120 EPS 31 47 45 52 Source: Company, Bonanza Research

Balance Sheet

Particulars (Rs mn) FY14 FY15E FY16E FY17E Share Capital 240 240 240 240 Share warrants Reserves and Surplus 8,338 11,486 14,505 18,120 Loan Funds 3 4 4 4 Secured Loans 3 4 4 4 Unsecured Loans - - - - Deferred tax Liability 92 Other long term liability 188 191 191 191 Total 8,860 11,921 14,940 18,555 Application of Funds Fixed Assets 9,393 11,063 13,030 14,072 Less : Depriciation 3,937 4,712 5,624 6,610 Net Block 5,457 6,352 7,406 7,462 Capital Work in Progress 972 Non Current Investments 2,290 2,323 2,323 883 Investments 1,440 1,440 1,440 Non Current Assets 121 Long Term Loan and Advances 1,004 1,452 1,663 Current Assets 7,160 14,352 17,629 28,111 Inventories 3,669 4,613 5,489 6,338 Sundry debtors 537 778 926 1,133 Cash and Bank Balances 658 5,834 7,494 16,319 Other Current Assets 10 28 33 28 Loans and Advances 2,287 3,099 3,688 4,292 Current Liablities & Provisions 9,584 13,998 15,522 17,900 Current Liablities 6,331 9,088 10,815 12,376 Short & Long Term Provisions 3,254 4,910 4,707 5,524 Net Current Assets (2,424) 354 2,108 10,211 Total 8,860 11,921 14,940 18,555 Source: Company, Bonanza Research

Ratio Analysis

Ratio Analysis FY14 FY15E FY16E FY17E

EBITDA Margin 9% 10% 10% 10%

PAT Margin 6% 8% 6% 6%

EV/EBITDA 17 35 31 26

Debt / Equity 0.0 0.0 0.0 0.0

ROE 43% 48% 36% 34%


Cash Flow

Particulars (Rs mn) FY14 FY15E FY16E FY17E Cash Flow From Operating Activities 5,426 8,188 7,850 9,211

Adjustments 557 775 913 986 Operating Profit before working capital changes 5,983 8,963 8,763 10,198 Adjustments for Working Capital changes 1,981 2,399 (94) 722 Cash Generated From Operations 7,964 11,362 8,669 10,920

Income Tax Paid (1,819) (2,607) (2,500) (2,933) Net Cash flow from Operating Activities 6,145 8,754 6,169 7,987 Net Cash flow from Investing Activities (635) (1,146) (2,178) 3,502 Net Cash flow from Financing Activities (3,255) (2,432) (2,332) (2,663) Net Change in cash and cash equivalents 2,255 5,177 1,659 8,825




Biscuit Industry India’s biscuit market is estimated to be worth INR 23,000 crore and growing at the rate of 8% per annum. The premium category accounts for 25% of the overall biscuits category and is growing at 17% per annum. The focus on premium and health biscuits comes amid a slowdown of the category growth from mid-teens over two years ago to single digits. The slowdown in rural areas was even sharper. However, the rural growth rate is still higher than urban. We may expect the trend of premiumisation will accelerate going forward but mass people product cannot be ignored.

Exhibit 20: Biscuits Per capita consumption globally

Source: IBEF, Bonanza Research

Exhibit 21: Biscuit Market Share

Source: IBEF, Bonanza Research

Exhibit 22: BIL’s Revenue Mix


Exhibit 23: BIL’s Operating Performance

Operating Performance FY12 FY13 FY14 Q2FY15 Domestic bakery business (Volume Growth) 9% 4% 4% 8%

Gross Margin 35.7% 36.8% 38.9% 38.8%

EBITDA Margin 5.6% 6.7% 9.6% 10.9%


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Parle Britannia Priya Gold ITC Others

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Exhibit 24: Product Portfolio

Britannia Biscuits Biscuit Competitors Breads & Rusk Cake Dairy

NutriChoice Havens ITC- Sunfeast Oats & Raisins Britannia Breads Fruit Rollz Gourmet Cheese

NutriChoice Oat Cookies ITC- Sunfeast Oats &Almonds Multi Fiber Veg Cakes Actimind

NutriChoiceragi cookies NA Multi Grain TigerzorBadam Milk

NutriChoice 5 grain Parle – Simply Good Honey & Oats Tigerzor Choco Milk

NutriChoice Digestive Mcvities, Parle Simply Good Digestives Rusks – Suji Toast Dairy Whitener

NutriChoice sugarout NA Butter

Britannia Tiger ITC - Sunfeast Glucose Masala Chaas

Milk Bikis ITC – Sunfeast Milky Magic Milk

Marie Gold Parle – Marie, ITC Sunfeast Marie Light Dahi Fresh

Fifty Fifty Parle Krack Jack, ITC – Sunfeast Sweet n Salt Ghee

Jim Jam ITC – Sunfeast Dream Cream

Good Day (Cashew/Butter) ITC – Sunfeast Mom’s Magic (Cashew, Butter), Parle 20-20 Cookies

Bourbon ITC Sunfeast Bourbon Bliss, Parle Hide & Seek Black Bourbon

Good Day Chunkies Parle Milano, ITC Dark Fantacy Choco Fills

Little Hearts NA

Nice Time Parle Coconut Source: Company Report and Bonanza Research

Company Profile Britannia Industries Ltd. (BIL) is in the business of bakery and dairy products, which include biscuits, bread, dairy products, rusk and cakes. BIL holds around 38% market share in biscuit segment and sales from this segment contribute 83% to its total sales. Some of the major brands of Britannia are Tiger, Good Day, Nutri-Choice, Marie Gold, 50:50 etc. Its dairy products include Britannia Butter, Britannia Cheese Slices, Britannia Milk, Britannia Slimz Milk, Britannia Flavoured Yoghurt and Britannia Daily Fresh Dahi. The Company through its wholly owned subsidiary, Daily Bread Gourmet Foods Pvt Ltd., offers bakery products, including cakes, salads, pastas, specialty breads, Ragi Bread, Omega 3 Bread and range of health breads, among others. It has around 36 stores and serves cafe chains and multiplex chains. It has operations in Mumbai, Delhi, Kolkata, Chennai, Odisha and Uttaranchal, among others.


Jyothy Laboratories Limited | BUY

INITIATING COVERAGE Bloomberg Code: JYL IN | Reuters Code: JYOI.BO


FMCG Current Price: INR.273 Target Price: INR 325


Stock Details Bloomberg Code JYL IN

Reuters Code JYOI.BO

Shares O/S (mn) 181

M Cap (INR mn) 49,413

52 week H/L (INR) 315/171


FII 15.4%

DII 8.0%

Others 9.8%



Absolute -2% 12% 32%

Relative 3% 5% 5%


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JLL Nifty

“Transformed strategies will enhance prospects” Innovations to continue through investments in high growth brands Jyothy Laboratories Ltd. (JLL) will go for innovating and launching new products through investments in Ujala, Exo and Maxo. These three brands provide JLL a good prospect for growth in the future. The company has plans to launch fast card in the HI segment under their brand Maxo and new mix of liquid vaporizer in the same segment in Q4FY15. In personal care segment, Margo has recently launched liquid face wash in two variants – Original Neem and Neem and Saffron to compete with players like Himalaya, Clean & Clear, Ponds etc. Margo glycerine is another brand extension in soap segments after JLL’s existing brand Margo original Neem. It has launched last year and has been competing with HUL’s Pears, Godrej No.1 Saffron and Milk and other similar brands with larger geographic presence. HI segment to grow strong on lower base going forward The Household Insecticide (HI) segment has rebounded and registered a robust growth of 48% in Q3FY15 due to lower base. The growth is mainly backed by liquid vaporizer in the HI segment whereas the coil segment has registered a subdued growth and expected to de-grow considering the industry trend Coil segment subdued growth will be offset by growing demand in liquid vaporizers. Moreover the company has plans to launch a new mix of liquid vaporizers in Q4FY15 with fast cards in the HI segment under their Brand “Maxo”.

Margin expansion in sight The EBITDA Margins for the Q3FY15 stood at 13.5% as against 13.2% reported in Q3FY14. As per the management the impact of lower crude is yet to be seen in Q4FY15. Due to inventory issues in Q3FY15 there was not much improvement in the profit margins but at the start of Jan’15 month there has been an improvement of 400 bps in their gross margins. We expect EBITDA margins to improve by 300 basis points in FY15 to 16% as compared to 13% in FY14 and to remain stable going forward and PAT margins are expected to improve from 8% in FY14 to 11% in FY15 and 12% in FY16.

Power brands presence expanding geographically With a single brand and only presence in south India, JLL has now become multi product brand with geographic expansion. JLL has now power brands which are adding significantly to its revenues. JLL’s power brands (Ujala, Henko, Maxo, Pril, Exo and Margo) have witnessed a pickup in volumes last quarter (Q3FY15) on back of lower base in previous quarters. We expect JLL will focus on maintaining the market share of its power brands and invest in innovation and re launching its power brands.

Key Financials

Year to March FY14 FY15E FY16E FY17E CAGR (%) Net Sales (Rs mn) 12,602 14,616 15,539 20,828 18% EBITDA (Rs mn) 1,668 2,334 2,801 3,166 24% PAT (Rs mn) 1,061 1,585 2,064 2,321 30% EBITDA Margin (%) 13% 16% 16% 15% - EPS (Rs) 6 9 11 13 29% EV/EBITDA (x) 25 25 21 18 - Source: Bonanza Research

Jyothy Laboratories Limited


Jyothy Laboratories Ltd.

JLL’s revenue grew by 22% in FY14 and expected to see a moderate growth of 16% in FY15 on back of sluggish industry growth of 10% though we expect a robust growth of 40% in EBITDA in FY15E on back of robust growth expected in high margin Household Insecticides segment on a lower base. We expect that revenues for JLL will be back on track by FY16 and may register a growth of 20% on back of improving economic situations, Lower raw material prices, lower interest rate cycle and Q3FY15 indicating a pickup in volumes from previous quarters. We expect EBITDA margin to improve by 250-300 bps to 16% in FY15E and FY16E on back of lower raw material prices.

Investment Rationale Innovations to continue through investments in high growth brands

HI segment to grow strong on lower base going forward


Power brands presence expanding geographically

At CMP of INR 273, the stock is trading at 25x of FY16E EPS of INR 11 and 21x of FY17E EPS of INR 13. We assign a BUY rating on the stock valuing the Company 25x on FY17E EPS of INR 13 to arrive at target price of INR 325 proposing an upside of ~19%.

Initiate with BUY; TP- INR 325



Innovations to continue through investments in high growth brands JLL has been innovating and launching new products through investments in Ujala, Exo, Maxo and Henko. These three brands provide JLL a good prospect for growth in the future.

The company has plans to launch fast card in the HI segment and new mix of liquid vaporizer in the same segment in Q4FY15under its brand name “Maxo”. In personal care segment, Margo has recently launched liquid face wash to compete with various brands available in this segment. Margo glycerine is already launched in soap segments last year competing with HUL’s “Pears” and similar brands in the same segment.

JLL has recently launched Pril with a gel based formulation and named as Pril Kraft-Gel in dish wash segment. Overall Pril Liquid is showing a good growth since it has been launched. In Q2FY15 it has grown by more than 20% and as a brand, grown by 17% in the same quarter. JLL has also re-launched Margo soap brand with Margo face wash in two variants; one is the original Neem and the other is Neem& Saffron variant.

JLL has introduced Henko LINTelligent for washing machines which have been about more than 5 months since the launch of product in the market place. JLL has spent significantly on the promotion of this brand and expected to continue investing behind Henko both from a marketing as well as distribution standpoints. The company has grown this business by about 39% during the quarter.

JLL is likely to keep their spending on Advertising and Promotion to 12.4% of the total sales from 9% in Q3FY14 due to new launches they have made in the recent past. As per the management, the major portion of A&P spend will be on Henko.

Investments in high growth brands to aid JLL improve its margins.



HI segment to grow strong on lower base going forward The HI segment has rebounded and registered a robust growth of 48% in Q3FY15 on back of lower base of 24% in Q2FY15 and a growth of 20% in nine month ending December of FY15. The growth is mainly backed by liquid vaporizer in the HI segment whereas the coil segment has registered a flat growth and expected to de-grow considering the industry trend. Coil segment subdued growth will be offset by growing demand in liquid vaporizers. Moreover the company has plans to launch a new mix of liquid vaporizers in Q4FY15 with fast cards in the HI segment. Maxo liquid vaporizer is among top three players in the HI segment following Good Knight (Godrej Consumer Products Ltd.) and All Out (SC Johnson).

Exhibit 1: Segmental revenue growth (Y-o-Y)


Exhibit 2: Revenue Growth in 9 month ending Dec FY15 (Y-o-Y)


0200400600800

1,0001,2001,4001,6001,800

Fabric Care Dishwashing MosquitoRepellant

Personal Care Other Products LaundryServices

Q3FY14 Q3FY15

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Fabric Care Dishwashing MosquitoRepellant

Personal Care Other Products LaundryServices

YTD FY14 YTD FY15

Robust growth in HI segment in Q3FY15 due to lower base formed in previous quarters, expected to be strong going forward.




The EBITDA Margins for the Q3FY15 stood at 13.5% as against 13.2% reported in Q3FY14. As per the management the impact of lower crude is yet to be seen in Q4FY15. Due to inventory issues in Q3FY15 there was not much improvement in the profit margins but at the start of Jan’15 month there has been an improvement of 400 bps in their gross margins. We expect EBITDA margin to see an improvement of 300 bps to 16% in FY15E and FY16E on back of lower commodity prices whereas PAT margins too will see a range of 10%-12% in FY15E-FY16E from 8% in FY14.

Healthy ROE & ROCE visibility going forward

The company’s RoCE and RoE have been on the lower side in FY13 and FY14 due to capacity expansion, sluggish industry growth and higher costs. Nonetheless, we expect profitability to improve led by earnings traction and increased capital efficiency (as capex cycle plays out). 25% earnings CAGR over FY12-16E and lower capital requirement would enable return ratios to reach higher (RoCE of 36%, RoE of 17% in FY16E).

Exhibit 3: HDPE Prices (INR/Kg)

Source: http://www.recycleinme.com, Bonanza Research

Exhibit 4: Profit Margins


Exhibit 5: Total Revenues, EBITDA and PAT


Exhibit 6: Performance Ratios (ROE &ROCE)


140145150155160165170175180

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Lower raw material cost aid JLL to see better margins going forward.



Power brands presence expanding geographically With a single brand (Ujala) and only presence in south India, JLL has now become a multi product brand with geographic expansion. JLL has increased their presence in non south Indian regions and has increased their share from 52% in FY13 to 58% till date in FY15. The company has now power brands which are adding significantly to its revenues. JLL’s power brands (Ujala, Henko, Maxo, Pril, Exo and Margo) has seen pick up in volumes Q3FY15 on back of lower base formed in Q2FY15 and Q1FY15. We expect JLL will focus on maintaining the market share of its power brands and invest in innovation and re launching its power brands. All the power brands are profitable crossing revenues of INR 1 bn and the power brands can fund their own growth and don't need to be cross-subsidised.

JLL has a strong distribution network of total 2.9 mn outlets (Direct coverage of 1 mn outlets) with backward integrated operations into manufacturing bottles enhancing penetration across India. The company’s distribution strength compares well with most other FMCG majors like HUL and ITC considering size and scale of operations.

Ujala has close to 70% market share making it the undisputed leader in fabric whitener category, with the closest competitor (Robin Blue) having market share less than 5%. JLL sells approximately 1 mn bottles of Ujala Supreme every day.

Exhibit 7: Shifting focus to Pan India Presence from just being a south Indian player


Exhibit 8: Market Share (Volume)


Exhibit 9: Market Share (Value)


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South India Non South India

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Maxo Coil Maxo Liquid Pril Liquid Exo Bar

Q3FY13 Q2FY14 Q3FY14

Lower raw material cost aid JLL to see better margins going forward.



Valuations and Outlook The company is a leader in fabric whitening product through its brand “Ujala” with market share close to 70%. In household segment the company has witnessed a robust growth in dish wash segment with presence of its brands Exo and Pril. Exo has now become a number two player in the dish wash segment after HUL’s Vim in terms of market share. Moreover Henko is expected to deliver higher volumes going forward in washing machine detergent powder category.

We expect an overall growth of 16% in JLL’s revenues FY15 and 20% in FY16 and FY17. JLL at CMP of INR 273 is trading at 25x of its FY16E EPS of INR 11 and at 21x of its FY17E EPS of INR 13. We believe the stock price is valued at par considering the overall outlook for the FMCG sector hence we assign a conservative P/E of 25x to its FY17E earnings which gives us a target price of INR 325.



Key Risk& Concerns

Increase in raw material prices

Competitors capturing the market share

Weakness in economic environment lead to slower growth

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Actual Price INR Px = 214.65 @ p/e of 45 Px = 176.49 @ p/e of 37

Px = 138.33 @ p/e of 29 Px = 100.17 @ p/e of 21 Px = 62.01 @ p/e of 13



Financials

P&L

Particulars (Rs mn) FY14 FY15E FY16E FY17E Sales 13,062 15,146 18,175 21,810 Less : Excise Duty 460 530 636 981 Net Sales 12,602 14,616 17,539 20,828 Cost of Materials 6,711 7,573 9,087 10,905 Change in Inventory Operating & Other expenses 4,168 4,709 5,651 6,758 Total Operating Expenses 10,934 12,282 14,738 17,663 EBITDA 1,668 2,334 2,801 3,166 Depreciation 616 665 719 776 EBIT 1,052 1,669 2,082 2,390 Other exceptional Income (23) Interest Expenses 531 531 464 516 Other income 565 450 450 451 EBT 1,063 1,587 2,068 2,325 Tax 2 3 4 4 Profit After tax 1,061 1,585 2,064 2,321 No. of shares 181 181 181 181 EPS 6 9 11 13 Source: Company, Bonanza Research

Balance Sheet

Particulars (Rs mn) FY14 FY15E FY16E FY17E Share Capital 181 181 181 181 Share warrants Reserves and Surplus 8,624 10,208 12,272 14,593 Loan Funds 5,159 5,159 5,159 5,159 Secured Loans 5,150 5,150 5,150 5,150 Unsecured Loans 9 9 9 9 Deferred tax Liability 265 265 265 Other long term liability 1,472 53 53 53 Total 15,436 15,866 17,930 20,251 Application of Funds Fixed Assets 8,298 8,962 9,679 10,453 Less : Depriciation 1,950 2,616 3,334 4,110 Net Block 6,299 6,346 6,345 6,343 Capital Work in Progress 35 Non Current Investments Investments 939 939 939 939 Non Current Assets 55 Long Term Loan and Advances 6,982 8,392 10,070 13,096 Current Assets 4,030 4,615 5,204 5,932 Inventories 1,612 2,006 2,407 2,858 Sundry debtors 556 2,291 2,749 3,264 Cash and Bank Balances 556 (1,249) (1,833) (2,425) Other Current Assets 751 788 945 1,122 Loans and Advances 554 781 937 1,112 Current Liablities & Provisions 2,905 4,426 4,628 6,058 Current Liablities 1,463 2,272 2,353 2,726 Short & Long Term Provisions 1,443 2,154 2,275 3,332 Net Current Assets 1,125 189 576 (126) Total 15,436 15,866 17,930 20,251 Source: Company, Bonanza Research

Cash Flow

Particulars (Rs mn) FY14 FY15E FY16E FY17E

Cash Flow From Operating Activities 1,063 1,587 2,068 2,325

Adjustments 585 746 733 842 Operating Profit before working capital changes 1,648 2,334 2,801 3,167 Adjustments for Working Capital changes 10 (869) (971) 110

Cash Generated From Operations 1,658 1,465 1,830 3,277

Income Tax Paid (193) (3) (4) (4) Net Cash flow from Operating Activities 1,465 1,462 1,826 3,273 Net Cash flow from Investing Activities (1,791) (2,039) (2,395) (3,800) Net Cash flow from Financing Activities 447 (1,228) (14) (65) Net Change in cash and cash equivalents 120 (1,805) (584) (592)


Ratio Analysis



PAT Margin 8% 11% 12% 11%

EV/EBITDA 25 24 21 18

Debt / Equity 0.6 0.5 0.4 0.4

ROE 12% 15% 17% 16%

ROCE 14% 26% 30% 38%




Company Profile Jyothy Laboratories, Ltd. manufactures and distributes household products. The Company is engaged in manufacturing and marketing of fabric whiteners, soaps, detergents, mosquito coils and incense sticks. It operates in two segments: Soaps & Detergents and Home Care. Soaps and Detergents include fabric whiteners, fabric detergents, dish wash bar and soaps including ayurvedic soaps and Home Care products include incense sticks, dhoop and mosquito coils and scrubber. Its subsidiaries include Jyothy Fabricare Services Limited, Jyothy Kallol Bangladesh Limited, Associated Industries Consumer Products Pvt Ltd., Jyothy Consumer Products Marketing Ltd, and Diamond Fabcare Private Ltd.

Exhibit 11: Sales Break Up


Exhibit 12: Operating Income



Personal Care Competitors Home Care Competitors

Margo (Soap Bar and Face Wash)

Pears, Lifebuoy, Garnier, Ponds Maxo Good Knight, All Out,

Mortein

FA Axe Exo Floor shine Lizol (Reckitt Benckiser)

Neem Active Toothpaste Colgate, Close-up Maya

Fabric Care

Henko Surf Excel, Tide

Ujala Robin Blue, Revive

Mr. White Rin

New Super Chek Active Wheel

More Light Active Wheel

Dish wash

Exo Vim Bar

Pril Vim Liquid


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Soaps & Detergents Home Care Others

-400-200

0200400600800

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FY11 FY12 FY13 FY14

Soaps and Detergents Home Care Products

Others Laundry Services



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Hindustan Unilever Limited | BUY

INITIATING COVERAGE Bloomberg Code: HUVR IN | Reuters Code: HLL.BO


FMCG Current Price: INR 881 Target Price: INR 1,000


Stock Details Bloomberg Code HUVR IN

Reuters Code HLL.BO

Shares O/S (mn) 2,162

M Cap (INR mn) 19,04,722

52 week H/L (INR) 981/550


FII 15.0%

DII 3.9%

Others 13.9%



Absolute -5% 16% 44%

Relative 0% 9% 17%


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HUL Nifty

“Treading Water” Hindustan Unilever Ltd. has registered a CAGR of 37% from FY09 to FY14 in its revenues and 9% CAGR in its net profits. We expect HUL’s revenue CAGR to sustain at 12% over FY12-16E on back of higher base growth. Foods, personal products and ice cream will be the growth drivers in this phase, while soaps & detergents (S&D) and beverages will see moderation in growth. Innovation and re-launches in higher margin personal products (PP), coupled with lower raw material prices, will drive a 100bps margin expansion to 15% in FY15E and FY16E. While we are positive on HUL’s growth prospects, we note that the stock has outperformed Nifty by 24% in the past one year. Valuations at 44x are also at the higher-end of the 5-year trading range. We base our target price on 40x PE multiple of FY17 earnings and initiate coverage with a BUY.

Strong brand positioning and distribution network - Retaining leadership Hindustan Unilever Ltd. (HUL) has a strong brand positioning in Household & Personal Care (HPC) segment. In the soap segment, HUL is present in economy as well as premium class. Brand “Lifebuoy” has a largest market share in the economy class segment and brand “Lux” and “Dove” are present in the premium segment with a strong presence. The soap segment is clearly leading by HUL though we may expect a subdued growth for this segment going forward on back of increasing competition from P&G and growth nearing saturation in the soap segment. With large distribution network, HUL may likely to see robust growth from its other segments like Hair care, Skin care and F&B segment.

Pickup in growth across segments on lower base, F&B to remain healthy HUL has registered a growth pick up in Q3FY15 in its skin care and Hair care portfolio. Its major brands Fair & Lovely, Pond’s and Lakme has witnessed a double digit growth and expected to remain show a healthy growth on back of higher scope of penetration in the cosmetics segment whereas Hair care segment is driven by double digit growth in volumes from Dove and Clinic Plus. TREsemme is showing signs of progress in hair care segment. We expect PP segment to register a growth of 10-11% in FY15E-FY16E. Meanwhile F&B segment will continue to keep its growth healthy with an average growth of 13-15% in FY15E-FY16E.

Re-launching existing brands to derive higher demand and keeping market share intact HUL has been re launching its existing brands across varied segments. The company has made re-launches in detergents and skin care segment. Launch of new “RIN” variant and Lakmé exciting innovations. Lakmé skin forayed into the anti-aging segment with the launch of Youth Infinity skin cream. In addition, a new Complexion Care (CC) cream was introduced, the Perfect Radiance range was re-launched and the facial cleansing portfolio was revamped with the addition of new Clean Up range.

Growth overhangs in rural segment, volumes still to pick up The demand from rural areas has not been picking up from past few quarters and still not in sight for the coming quarters. We expect that rural growth will be dependent on the monsoon conditions starting Jun’15, till that time we may expect a subdued growth from the rural segment. Moreover with growth near saturation in soap and detergents, HUL is more dependent on its other brand portfolio in Skin Care, Hair care and F&B segment for its growth. In the last three quarters, the growth in domestic business has been declining from 13% in Q1FY15 to 8% in Q3FY15. Key Financials


Net Sales (Rsmn) 2,80,191 3,12,348 3,51,777 3,99,948 13%

EBITDA (Rsmn) 44,442 53,961 60,772 64,331 13%

PAT (Rsmn) 38,675 45,896 51,157 53,713 12%

EBITDA Margin (%) 16% 17% 17% 16% -

EPS (Rs) 17.9 21.2 23.7 25 12%

EV/Sales (x) 36.4 36.5 32.1 31.1 -


Hindustan Unilever Limited


Hindustan Unilever Limited Hindustan Unilever Limited is expected to grow at a CAGR of 13% in FY12-16E on back of higher base growth witnessed in the prior period. HUL has a strong brand positioning across various segments and a strong distribution network close to 7 million stores across India to cater to the large population of the country. The company is a leader in Soap & Detergent Segment with its popular brands Lifebuoy, LUX, Surf Excel, RIN and Active Wheel. In Skin Care segment Fair & Lovely is a leading brand with highest market share.

Investment Rationale Strong brand positioning and distribution network - Retaining leadership

Pickup in growth across segments on lower base, F&B to remain healthy

Re launching existing brands to derive higher demand and keeping market share intact

Growth overhangs in rural segment, volumes still to pick up

At CMP of INR 881, the stock is trading at 37x of FY16E and 35x of FY17E EPS. We assign a BUY rating on the stock valuing the Company 40x on FY17E EPS of INR 25 to arrive at target price of INR 1,000 proposing an upside of ~14%.




Strong brand positioning and distribution network - Retaining leadership Hindustan Unilever Ltd. (HUL) has a strong brand positioning in Household& Personal Care (HPC) segment and a leading player across its various segments. The company has a large distribution network with a total coverage close to 8 million stores and a direct coverage close to 4 million stores. They have a presence in 70 locations for their manufacturing unit in India. With such a large distribution network and holding a strong brand portfolio which leads with highest market share stands tall against its peers.

S&D Segment (Soap & Detergents Segment)

In the soap segment, HUL is present in economy, medium and premium segment. Brand “Lifebuoy” has a largest market share in the economy class segment and brand “Lux” and “Dove” are present in the premium segment with a strong presence. The soap segment is clearly leading by HUL with highest value market share of 45% in 2014 comprises of its leading brands like Lifebuoy, Lux, Dove, Liril and Rexona in the soap segment though we may expect growth to remain stagnant in this segment going forward on back of increasing competition and penetration nearing saturation in the soap segment. Likewise detergent segment is leading by HUL with its brands Surf Excel, Wheel and Rin bars. The growth in sales from soaps segment in FY13 stood at 25% which declined to 6% in FY14 whereas detergent segment sales in FY13 has registered a growth of 13% which declined to 8% in FY14. The trend is expected to remain the same in FY15 though we may expect a slight pickup in sales from S&D segment to 9-10% on back of lower base formed in FY14.

Exhibit 1: Total Revenues


Exhibit 2: Operating Margins


Exhibit 3: Detergent Per capita consumption (Per Kg)

Source: Euromonitor

Exhibit 4: Soap Market Share

Source: IBEF

96,771114,406 122,344

135,378152,330

172,063

020,00040,00060,00080,000

100,000120,000140,000160,000180,000200,000


S&D

14%

9%

12%13% 13%

0%

2%4%6%8%

10%12%

14%16%


S&D

2.73.7 3.7

10.0

2.2 2.1

0

2

4

6

8

10

12

India Malaysia Philippines USA China Thailand

Detergent per capita consumption (Kg per annum)

14.4% 14.4%

8.8%7.8%

6.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Lifebuoy Lux Santoor Dettol Godrej No.1

Growing strong distribution channel with a total coverage of 8 million stores approx. leading to higher revenues



PP Segment (Personal Product)

HUL likely to witness relatively a better growth from Hair & Skin care segment compared to S&D segment. The level of penetration is still less in PP segment and leaves a higher scope of growth compared to the S&D segment though the segment is as competitive as S&D segment. The PP segment has witnessed a growth of 14% in FY13 and a growth of 9% in FY14 we may expect a growth of 10-11% in FY15 and to retain a growth of 11-12% in FY16 on back of momentum picked up by its power brands Fair & lovely, Ponds and Lakme after re launch of Fair and lovely and premium products offered by Lakme and Pond in their facial cleansing portfolio. The growth is expected to be volume led rather than value led in coming quarters on back of lower commodity prices.





Beverages Segment

HUL offers tea and coffee brands under its beverages segment and has witnessed a growth of 12% in FY13 and 16% in FY14. The segment will see a growth of 9-10%by the end of FY15 on back of high competition from the small players like Wagh Bakri, Society Tea etc. and the tea price growth remained muted in first 3 quarters of FY15. We expect an average growth of 14% in FY16 on back of pick up from a lower base of 9-10% expected in FY15.





65,09874,288

80,92789,020

98,828

112,664

0

20,000

40,000

60,000

80,000

100,000

120,000


PP

25%

25%

27%

26%

25%

24%

25%

25%

26%

26%

27%

27%


PP

19,82422,246

25,78029,403

33,53438,452

0

5,00010,000

15,00020,000

25,00030,000

35,000

40,00045,000


Beverages

15% 15%14%

16%18%

0%2%4%6%8%

10%12%14%16%18%20%


Beverages

PP segment to register a pickup in growth on back of higher spending on premium products from growing disposable income



Packaged Foods Segment

The packaged foods segment comprises of Kissan Jams and Ketchups, Annapurna Wheat Flour, Knorr Soups, Modern Breads, cakes, rusks and cookies. The segment as a whole registered a growth of 15% in the first 3 quarters of FY15 driven by a robust growth in processed triglycerides segment though other segment growth remained muted. The staple foods segment has witnessed a growth of 13% in FY13 and dropped to 2% in FY14, Canned and processed fruits and vegetable segment grew by 14% in FY14 against 4% in FY13 and we expect it to grow by 10-12% in FY15 and FY16. Frozen Desserts segment grew by 10% in FY14 against a growth of 17% in FY13. We expect a growth of 13% in FY15 and FY16 as HUL’s ice cream brand Magnum has grown itself geographically in the last quarter of FY15 through making its presence in 5 more cities across India.





Distribution Network (HUL)

Exhibit 11: Direct Distribution Network


Exhibit 12: Total Distribution Outlets


13,99115,330

16,83218,628

20,63623,353

0

5,000

10,000

15,000

20,000

25,000


Food

1%

3%

2%

2%

4%

0%

1%

1%

2%

2%

3%

3%

4%

4%


Foods

900,000

4,000,000

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

FY09 FY15E

CAGR - 28%

6,400,000

8,000,000

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

FY13 FY15E



HUL has adopted a new low cost distribution model to leverage the increasing penetration of mobile phones among the bottom of the pyramid retailers. Taking orders through tele-calling saved time and led to a significant cut in front end distribution cost. Reduction in servicing cost enabled to reach more shoppers who purchase from those marginal outlets outside the purview of traditional distribution model.

Pickup in growth across segments on lower base, F&B to remain healthy HUL has posted a double digit growth in Q3FY15 in its skin care and Hair care portfolio. Its major brands Fair & Lovely, Pond’s and Lakme has witnessed a double digit growth from a growth of 9% in FY14 for PP segment and expected to remain show a healthy growth on back of higher scope of penetration in the cosmetics segment whereas Hair care segment is driven by double digit growth in volumes from Dove and Clinic Plus. TREsemme is showing signs of progress in the premium segment of hair care.

Exhibit 13: Category wise Penetration

Source: IBEF F&B segment exhibit a potential to grow

Packaged foods category is still at a nascent stage and holds a huge potential to grow. HUL in this segment has witnessed a consecutive double digit growth from past 5 quarters mainly driven by Kissan Jams and Ketchups, Knorr Soups and Kwality Walls and Magnum Ice creams. As we can refer to the chart below, F&B segment barely contributes 18% to the total revenues and as we believe the growth in soap and detergent segment to remain constant at single digits or lower double digits, room for growth in F&B segment is expected to be more than 15% from FY14 to FY16.

Exhibit 14: Packaged Soup Market Share


Exhibit 15: Ketchup Market Share


020406080

100120

Toile

t Soa

ps

Was

hing

Pow

der

Det

erge

nt B

ars

Hai

r Oil

Toot

hpas

te

Sham

poo

Talc

um P

owde

r

Fairn

ess

Cre

am

Antis

eptic

Cre

am

Col

d C

ream

CY12 CY13

62%

25%

13%

Knorr Maggi Ching

47%

26%

27%

Maggi Kissan Others

F&B segment registering a healthy growth from past 5 quarters and expected to grow by 15% in FY14-FY16E.



Exhibit 16: Ice-Cream Market Share


Exhibit 17: F&B Product Mix

Food Beverages

Kissan Jam BRU Coffee

Kissan Ketchup Brooke Bond – Red Label

Modern Bread Lipton

Knorr – Soup, Pasta, Manchurian etc.

Annapurna - Flour, Salt

Magnum Ice Cream (Premium)

Kwality Walls Ice Cream Source: Company and Bonanza Research

Re launching existing brands to derive higher demand and keeping market share intact HUL has been re launching its existing brands across varied segments. The company has made re-launches in detergents and skin care segment recently.

S&D Segment -Vim had a new SKU coming into its portfolio and Launch of new “RIN” variant last year.

PP Segment - The company has launched the Lakme lipsticks and the ‘Best Ever’ Fair & Lovely with Vaseline Healthy White last year and Pond’s BB+ andLakmé CC cream in India to leverage on the global beauty trend catering to consumers looking for instant optical radiance.

Hair Care and Skin Care brands were premiumised with Lakmé Pro-Stylist, TRESemmé and Toni & Guy being some of the innovations last year. In beverages, green tea was added to the Lipton and Taj Mahal range. Magnum, Unilever’s most premium ice cream brand globally, was launched in Chennai in 2013 and has been extended to more cities this year. Pureit, launched the water purifier, Pureit Ultima RO + UV. Through Axe, HUL continued to deploy innovations and implementing a project to establish deodorants manufacturing facility in India. This facility will provide a regular supply of high quality deodorant products to cater to markets across the world.

38%

20%

16%

6%

8%

12%

Amul Regional & Niche Players Kwality Walls Ceam bell Mother Dairy Vadilal



Growth overhangs in rural segment, volumes still to pick up The demand from rural areas has not been picking up from past few quarters which are still not in sight for the coming quarters. We expect that rural growth will be dependent on the monsoon conditions starting Jun’15, till that time we may expect a subdued growth from the rural segment. Moreover with growth near saturation in soap and detergents, HUL is more dependent on its other brand portfolio in Skin Care, Hair care and F&B segment for its growth.

With recent price hikes, we expect the volume growth has bottomed out and we may see stable to positive momentum in the volume growth in coming quarters on back of benign commodity prices. The price growth may remain subdued around 3-4% in coming quarters and the revenue growth is likely to be volume led.

Exhibit 18: Quarterly Price/Volume Growth

Source: Company Reports and Bonanza Research

Financial Charts

Exhibit 19: Profitability


Exhibit 20: Sales, EBITDA and PAT


4%

5%

4%3%

6%5%

3%3%

5%6% 6%

7%

5% 5%

0%

1%2%3%

4%5%6%

7%8%

Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15

Volume Growth Price Growth

15% 15% 16% 17% 17%16%

12%15% 14% 15% 15% 13%

0%2%4%6%8%

10%12%14%16%18%20%



050,000

100,000150,000200,000250,000300,000350,000400,000450,000


Sales (mn) EBITDA (mn) PAT (mn)



Valuations and Outlook HUL has witnessed a subdued growth in its volumes in past few quarters due to lower demand across its various segments. The soap and detergent segment has witnessed a growth of 6% y-o-y, Personal Products segment has witnessed a growth of 6.5% y-o-y, and beverages segment has seen a growth of 8% y-o-y and packaged foods has seen a growth of 12.6% y-o-y in its Q3FY15 revenues. The total revenues in Q3FY15 increased by 7.7% y-o-y from 13.2% increase in Q1 FY15 and 10.6% increase in Q2 FY15. We expect in coming quarters revenues growth will be a mix of volume and price led due to lower raw material prices and a recent hike in prices from HUL on its skin care segment. The prices may remain stable and the company is likely to offer discounts in some of its product category to revamp the subdued demand. We believe the growth from personal products and F&B segment will outperform the growth from S&D Segment.

At cmp of INR 881 the stock is trading at 37x of its FY16E EPS of INR 24 and 35x of its FY17E EPS of INR 25. With favourable crude oil prices in current quarter and visible signs of economic growth we expect the volume to pick up from Q4FY15 and Q1FY16. Considering these factors we assign a P/E of 40x to its FY17E EPS of INR 25 which gives us a one year target of INR 1,000.



Key Risk& Concerns Increase in raw material prices

Losing segment market share to the competitors

Weakness in economic environment leading to slower growth

Further decline in volume growth

0

200

400

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1,000

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Jun

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ar 2

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Actual Price INR Px = 747.84 @ p/e of 41 Px = 674.88 @ p/e of 37

Px = 601.92 @ p/e of 33 Px = 528.96 @ p/e of 29 Px = 456 @ p/e of 25



Financials

P&L

Particulars (mn) FY14 FY15E FY16E FY17E Sales 295,579 329,501 371,096 421,913 Less : Excise Duty 15,388 17,154 19,319 21,965 Rate of Excise Duty 5 5 5 5 Net Sales 280,191 312,348 351,777 399,948 Cost of Materials 122,624 133,448 150,294 174,333 Change in Inventory (1,664) Operating & Other expenses 114,790 124,939 140,711 161,284 Total Operating Expenses 235,750 258,387 291,005 335,617 EBITDA 44,442 53,961 60,772 64,331 Depreciation 2,595 2,802 3,025 3,261 EBIT 41,847 51,159 57,747 61,071 Other exceptional Income 2,287 1,766 1,766 1,766 Interest Expenses 360 252 Other income 6,511 6,999 6,999 6,999 EBT 50,284 59,673 66,513 69,836 Tax 11,609 13,777 15,356 16,123 Profit After tax 38,675 45,896 51,157 53,713 No. of Shares 2,162 2,162 2,162 2,162 EPS 18 21 24 25


Balance Sheet

Particulars (mn) FY14 FY15E FY16E FY17E

Share Capital 2,163 2,163 2,163 2,163

Share warrants 427 Reserves and Surplus 30,181 44,051 59,511 71,554

Deferred tax Liability (1,617) Other long term liability 2,788 Total 33,941 46,213 61,673 73,717

Fixed Assets 44,429 47,967 51,786 55,825

Less : Depriciation 20,208 23,010 26,035 29,295

Net Block 24,221 24,957 25,752 26,529

Capital Work in Progress 3,121 Investments 30,941 30,941 30,941 30,941

Long Term Loan and Advances 6,055 7,121 8,020 8,258 Intangible assets under development 84 Current Assets 63,945 85,413 111,763 137,483

Inventories 27,475 32,251 36,322 41,296

Sundry debtors 8,164 9,592 10,803 12,283

Cash and Bank Balances 22,210 38,047 58,418 76,833

Other Current Assets 2,401 2,751 3,099 3,523

Loans and Advances 3,695 2,771 3,121 3,549 Current Liablities & Provisions 94,425 102,219 114,803 129,495

Net Current Assets (30,480) (16,806) (3,040) 7,988

Total 33,941 46,213 61,673 73,717 Source: Company, Bonanza Research

Cash Flow

Particulars (mn) FY14 FY15E FY16E FY17E Cash Flow From Operating Activities 50,284 59,673 66,513 69,836

Adjustments for: (2,707) 3,053 3,025 3,261

Operating Profit before working capital changes 47,577 62,726 69,538 73,097 Adjustments for Working Capital 4,788 665 6,605

7,388 Cash Generated From Operations 55,953 63,390 76,142 80,485

Income Tax Paid (12,785) (13,777) (15,356) (16,123)

Fringe Benefit Tax Paid (52) (16) - - Net Cash flow from Operating Activities 43,116 49,614 60,787 64,362 Net Cash flow from Investing Activities (5,132) (1,483) (4,719) (4,277) Net Cash flow from Financing Activities (29,168) (32,278) (35,697) (41,669) Net Change in cash and cash equivalents 8,816 15,853 20,371 18,416


Ratio Analysis



PAT Margin 14% 15% 15% 13%

EV/EBITDA 36 37 32 31

Debt / Equity 0.0 0.0 0.0 0.0

ROE 120% 99% 83% 73% Source: Company, Bonanza Research



Company Profile

Hindustan Unilever operates in five segments: S&D, PP, beverages, packaged foods, and others. S&D segment include soaps, detergent bars, detergent powders, detergent liquids, scourers. PP segment include products in the categories of skin care, hair care, oral care, colour cosmetics and deodorants. The foods and beverages portfolio of the Company includes tea, coffee, processed foods, frozen desserts, ice creams, bakery products and out of home operations, including Bru world cafe. The Packaged foods segment of the company includes culinary products such as jams, ketchups and soups, soupy noodles and meal makers; branded staples (atta and salt; bakery products, and frozen desserts/ice creams. Others segment includes exports, chemicals, water business and infant care products. HUL is the largest FMCG Company in India after ITC with a total revenues of more than INR 3,20,000 mn. The company has a strong brand positioning across various segments and a strong distribution network close to 7 million stores across India to cater to the large population of the country. The company is a leader in Soap & Detergent Segment with its popular brands Lifebuoy, LUX, Surf Excel, RIN and Active Wheel. In Skin Care segment Fair & Lovely is a leading brand with highest market share.

Exhibit 22: Segmental contribution in revenues



Soap & Detergent Segment Food & Beverages PP Segment

Lux Kissan – Jam, Ketchup, Squash Lakme

Lifebuoy Modern Bread Ponds

Liril Knorr – Soup, Pasta, Manchurian etc. Axe

Rexona Annapurna - Flour, Salt Fair & Lovely

Dove Magnum Ice Cream (Premium) Tresemme

Breeze Kwality Walls Ice Cream SunSilk

Pears BRU Coffee Clinic Plus

Vim Brooke Bond – Red Label Aviance

Rin Lipton Tigi

Magic Tony & Guy

Sunlight Clear

Surf Excel Elle 18

Active Wheel Vaseline

Comfort Source: Company, Bonanza Research

0%

10%

20%

30%

40%

50%

60%

Soaps andDetergents

Personal Products Beverages Packaged Foods Others

FY12 FY13 FY14



Institutional Equities Team

Kamal Bansal Head of Equity [email protected] Yogesh Nagaonkar Co. Head of Equity & HOR 022-306 3514 [email protected]

Institutional Dealing Hareesh Bohra Sales Trader 022-3086 3786 [email protected] Manoj Pawar Sales Trader 022-3086 3982 [email protected] Nitesh Jalan Sales Trader 022-3086 3758 [email protected]

Corporate Office :Plot No. M-2, Cama Industrial Estate, Walbhat Road, Behind ‘The Hub’ Goregaon (E), Mumbai - 400 063. Tel.: 022-67605500 / 600

Head Office :2/2 A, First Floor, Lakshmi Insurance Building, Asaf Ali Road, New Delhi - 110 002. Tel.: 011-30181290 / 94

Web: www.bonanzaonline.com

Documents

India FMCG Bonanza Apr 2015