INSTITUTIONAL EQUITY RESEARCH Consumerbackoffice.phillipcapital.in/Backoffice/Researchfiles/PC... · 2015-09-15 · INSTITUTIONAL EQUITY RESEARCH ... global raw material prices has

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

Consumer The dark side of deflation INDIA | CONSUMER | Sector Update

14 September 2015

The sharp decline in global raw material prices has led to certain large categories such as detergents, paints, oils, and shampoos seeing price deflation. With the global phenomenon of exporting deflation, FMCG product price appreciation is likely to remain tepid over the medium term, which limits revenue growth prospects for staples and highly penetrated categories. However, deflation affects consumer discretionary categories positively because of lower consumer penetration; besides, lower price points provide ample avenues for sharper volume growth. Low inflation/deflation also affords opportunities to upgrade consumers to premium products and for launching new products at attractive price points. New product launches and premiumisation help improve volume growth and gross margins —hence we prefer companies with higher gross margins, higher share of discretionary products, and a premium portfolio. Our key arguments are: Dark side of deflation — rise in competition and lower operating leverage: Consumer stocks’ performance has a very high positive correlation with inflation. During times of high inflation, consumer companies hike prices in line with inflation, thereby enjoying the twin benefits of operating leverage and high earnings growth. Diversified consumer companies’ product price growth tracks the WPI index more closely than the CPI. WPI has been negative for a while and considering the current global scenario, commodity prices are likely to remain low. Low price growth negatively impacts the staples categories like detergents which have higher operating leverage, thereby limiting their operating profit growth but discretionary categories like branded foods benefit on account of superior volume growth. Distribution expansion scope is limited: The most critical component of Indian FMCG companies is their distribution network. Distribution growth primarily depends on revenue growth as new distributors are appointed based on expanding scale of operations. During periods of high inflation, distribution expansion takes place at rapid pace, such as in the last three years. However, with sluggish revenue likely, ensuing distribution gains are likely to be limited. Moreover, distributors’ cost structures tail CPI, but revenue growth tracks WPI (significantly lower than CPI), which will result in most companies experiencing consolidation of their distribution networks. Consumer discretionary, low penetration categories, new products —key revenue drivers: In the absence of price levers, volume growth will drive revenue for consumer companies. Categories with lower penetration, which primarily include discretionary categories, offer the best plays as they correlate negatively with inflation. Rising disposable income fuels discretionary spending. Seventh‐pay commission is round the corner and its implementation will aid consumption growth in categories such as foods. The critical factor will be the ad‐spend‐to‐volume‐growth sensitivity which indicates a company’s ability to take advantage of the fall in raw material prices to grow its brands. Dabur and Emami stand out for their higher sensitivity of ad spend to volume growth ratio. Valuations likely to undergo protracted period of slow correction: Consumer sector offers strong earnings visibility because of a decline in raw material prices. Consumers’ disposable incomes will rise over the medium term ensuring spending will remain at reasonable levels over the medium to long term. However, slower revenue growth will mean slower earnings growth, leading to a protracted period of de‐rating. We value the FMCG sector by basing our target PER average sector multiple in line with HUL’s (32x vs. 35x earlier) on FY17E earnings. Top picks: Combining the themes discussed above, our top picks are Jubilant Foodworks (discretionary spends), Dabur (deflation warrior), Britannia (discretionary spends), and Bajaj Corp (premiumisation play). We remain negative on Nestle and ITC, and downgrade Marico and HUL to Sell.

Companies DABUR Reco Buy CMP, Rs 281 Target Price, Rs 325 BRITANNIA Reco Buy (upgrade) CMP, Rs 2987 Target Price, Rs 3450 JUBILANT FOODWORKS Reco Buy CMP, Rs 1662 Target Price, Rs 2000 BAJAJ CORP Reco Buy CMP, Rs 468 Target Price, Rs 520 ITC Reco Sell CMP, Rs 313 Target Price, Rs 270 HUL Reco Sell (Downgrade) CMP, Rs 796 Target Price, Rs 730 MARICO Reco Sell (Downgrade) CMP, Rs 409 Target Price, Rs 360 NESTLE Reco Sell CMP, Rs 6048 Target Price, Rs 5430 GCPL Reco Neutral (Downgrade) CMP, Rs 1247 Target Price, Rs 1240 Naveen Kulkarni, CFA, FRM (+ 9122 6667 9947) [email protected] Jubil Jain (+ 9122 6667 9766) [email protected]


FMCG SECTOR UPDATE

Table of Contents Story in pictures ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 3

Dark side of Deflation ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 5

It is a Buyers’ market ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 8

Low price growth begets volume growth improvement:

A&P vs. volume sensitivity is the key ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 13

Operating leverage a Double edged sword: Volume growth will be the saviour ∙∙∙∙∙∙ 14

Rural growth continues to surpass urban growth ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 15

Innovations and premiumisation will be the dominant strategy for companies ∙∙∙∙∙∙ 16

Appendix ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 53

Companies Section Dabur ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 20

Britannia ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 23

Bajaj Corp ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 26

Jubilant Foodworks ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 29

ITC ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 32

HUL ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 35

Marico ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 39

Nestle ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 43

GCPL ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 47


FMCG SECTOR UPDATE

Story in pictures WPI, CPI, Crude oil are in deflationary zone Companies have taken price cuts to pass benefit back to consumers

While, low input prices boosted gross margins in past, increased competitive activity kept profit growth in bounds

With A&P spends expected to shoot up, companies with high sensitivity to Ad spends & discretionary categories will win

Source: PhillipCapital India Research Estimates, Companies

‐60%

‐40%

‐20%

0%

20%

40%

60%

‐12%

‐8%

‐4%

0%

4%

8%

12%

WPI CPI Crude (RHS)

‐20%

‐15%

‐10%

‐5%

0%

5%

10% Price growth in Q2FY16 (yoy %)

(4.0)

(2.0)

‐

2.0

4.0

6.0

8.0

10.0 WPI India (% yoy)Sector Price growth (% yoy)

46%

47%

48%

49%

50%

51%

52%

53%

‐

5.0

10.0

15.0

20.0

25.0

30.0

35.0 PAT growth (% yoy)Sector Gross Margins (RHS)

0%

2%

4%

6%

8%

10%

12%

‐10%

0%

10%

20%

30%

40%

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

FY20

12

FY20

13

FY20

14

FY20

15

FMCG Ad growth WPI (RHS)Bajaj Corp

Britannia

Colgate DaburEmami

HULMarico

Nestle

Average

0%

2%

4%

6%

8%

10%

12%

14%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0%

Volume grow

th

Growth sensitivity to A&P spends


FMCG SECTOR UPDATE

Key Recommendations Stock Theme Recommendation Trade Bajaj Corp Premiumisation in Hair oil category Buy Tactical buy Britannia Margin expansion, Discretionary Buy Structural buy Dabur Deflation warrior Buy Structural buy Jubilant Foodworks Discretionary consumption Buy Structural buy HUL Price cuts and competitive pressures Sell Tactical sell during times of deflation ITC Adverse regulatory environment Sell Structural Sell due to regulatory issues Marico Price cuts and sluggish growth in edible oils Sell Tactical sell during times of deflation Nestle Sluggish growth and low operating leverage Sell Structural Sell due to low growth and low perating leverage

Source: Company, PhillipCapital India Research Valuation

Target multiple for FY17 earnings

Stock Reco FY15‐17 PAT

CAGR (%) FY17 PATrevision Earlier New

CMP (Rs)

Target Price(Rs)

Upside / (Downside)

Bajaj Corp Buy 14.8 1.4% 26 26 468 520 11%Britannia Buy 37.6 40 40 2987 3450 16%Dabur Buy 22.7 1.6% 35 35 281 325 16%Jubilant Foodworks Buy 53.4 46 46 1662 2000 20%Asian Paints Neutral 22.7 35 35 838 780 ‐7%Colgate Neutral 12.2 35 35 1849 1970 7%Emami Neutral 30.5 40 35 1213 1170 ‐4%GCPL Neutral 20.8 ‐7.3% 35 32 1210 1238 2%HUL Sell 13.7 ‐4.9% 35 32 796 730 ‐9%ITC Sell 8.8 22 20 313 270 ‐14%Marico Sell 15.9 ‐7.2% 32 30 409 360 ‐12%Nestle Sell 8.1 38 38 6048 5370 ‐11%

Source: Company, PhillipCapital India Research Estimates Company financials Stock __Revenue gwth (%)__ __EBITDA mrgn (%)__ __EPS growth (%)__ __EPS (Rs/share)__ _____P/E(x) _____

FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17Bajaj Corp 14.5 18.2 29.9 29.7 15.3 14.4 17.5 20.0 26.8 23.4Britannia 13.7 15.6 13.3 14.0 55.0 22.2 70.1 85.7 42.6 34.9Dabur 13.2 15.4 19.3 19.9 28.8 16.9 7.8 9.1 36.0 30.9Jubilant Foodworks 27.7 30.6 14.7 16.5 56.8 50.0 28.8 43.2 57.7 38.5Asian Paints 9.7 15.8 18.4 19.2 25.8 19.6 18.7 22.3 44.8 37.6Colgate 8.2 13.8 22.3 22.6 9.6 14.9 45.0 51.8 41.1 35.7Emami 29.6 23.0 29.0 29.8 33.9 27.1 26.3 33.4 46.1 36.3GCPL 12.5 14.4 18.4 18.1 28.7 13.4 34.4 39.0 35.2 31.0HUL 7.1 11.7 20.9 21.1 14.3 13.1 20.3 22.9 39.2 34.8ITC 7.1 10.0 36.8 37.1 5.8 11.9 12.1 13.6 25.9 23.0Marico 11.0 13.3 16.1 16.2 16.8 15.1 10.4 12.0 39.3 34.1Nestle (9.7) 24.8 18.9 21.6 (9.2) 28.6 111.7 143.6 54.1 42.1

Source: Company, PhillipCapital India Research Estimates


FMCG SECTOR UPDATE

Dark side of deflation "One real challenge that looms ahead appears not to be the price inflation but the possible price deflation," Arvind Subramanian, Chief Economic Advisor to GoI. Strong brands have an advantage in periods of high inflation as: • They are able to pass on input cost pressure with ease because of gross margin

benefit. • Competitive activity declines and market share gains ensue. • Operating leverage benefits lead to robust earnings growth. FMCG Sector Projections Particulars FY11 FY12 FY13 FY14 FY15 FY16E FY17EVolume Growth,% 13.4 10.3 6.4 6.0 5.1 7.9 8.9Price Growth, % 4.4 7.3 9.4 5.3 6.0 1.7 4.5Revenue Growth, % 18.4 18.3 16.5 11.6 11.4 10.3 14.2COGS, Growth % 21.3 21.8 13.2 9.7 9.7 6.7 13.6Gross Profit, Growth % 15.3 14.5 20.2 13.8 13.2 14.6 15.1Gross Margin, % 48.2 46.6 48.1 49.1 49.8 51.0 51.3Advertising Expenses, Growth % 16.9 8.4 25.8 15.0 10.6 12.6 15.1Advertising Expenses, % of Sales 10.7 9.9 10.6 11.0 10.9 11.8 11.9EBITDA, Growth % 9.7 21.2 16.3 14.5 13.9 25.2 17.3EBITDA, Margin % 14.8 15.1 15.1 15.5 15.9 17.4 17.9PAT, Growth % 11.2 20.6 20.9 12.2 11.6 22.1 16.3PAT, Margin % 11.6 11.7 12.0 12.0 12.0 13.2 13.4

Source: PhillipCapital India Research Estimates, Companies Only companies in PC FMCG universe ex ITC have been considered for calculations, Nestle numbers not considered for FY16/17 Periods of high inflation are dictated by factors such as global commodity prices, domestic demand, and government policies — all of which are currently undergoing a transition. Commodity prices are likely to remain subdued for a significant period and government policy veers primarily towards capacity creation (not capacity distribution as it was during UPA 2 [2009‐14]). Thus, inflation is likely to remain low for prolonged periods, which will put pressure on the revenue growth of companies — therefore, earnings growth is not likely to be as inspiring as it was in 2009‐14. Indian CPI is on downward trajectory, Indian WPI is in Deflation zone

Source: IMF Our study of leading FMCG companies in inflationary and deflationary periods revealed that profit growth, and in turn stock performance, correlate positively to inflation.

‐4%‐2%0%2%4%6%8%

10%12%14%16%18% CPI WPI

Periods of high inflation are dictated by factors such as global commodity prices, domestic demand, and government policies — all of which are currently undergoing a transition.

Inflation is likely to remain low for prolonged periods, which will put pressure on the revenue growth of companies — therefore, earnings growth is not likely to be as inspiring as it was in 2009‐14.

Study of leading FMCG companies ininflationary and deflationary periodsrevealed that profit growth, and in turnstock performance, correlate positivelyto inflation.


FMCG SECTOR UPDATE

Stock price performance HUL and Colgate India

Source: IMF, Bloomberg *Preceding three year WPI and stock price change has been annualized for each year. Stock returns for FMCG companies in mature markets clearly show that the relationship with inflation is particularly strong. Colgate, P&G and General Mills have seen better returns in periods of higher inflation as compared to periods of low inflation. Mature market (US) stock price performances

Source: MF, Bloomberg *Preceding three year WPI and stock price change has been annualized for each year.

0%

2%

4%

6%

8%

10%

‐20%

‐10%

0%

10%

20%

30%

40%

50%

60% HUL stock price changeIndia WPI (RHS)

0%1%2%3%4%5%6%7%8%9%10%

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%

50%

60%Colgate India stock price changeIndia WPI (RHS)

0%

1%

2%

3%

4%

5%

6%

‐20%

‐10%

0%

10%

20%

30%

40%

50%

Dec

‐83

Dec

‐85

Dec

‐87

Dec

‐89

Dec

‐91

Dec

‐93

Dec

‐95

Dec

‐97

Dec

‐99

Dec

‐01

Dec

‐03

Dec

‐05

Dec

‐07

Dec

‐09

Dec

‐11

Dec

‐13

General Mills stock price change

US WPI (RHS)

0%

1%

2%

3%

4%

5%

6%

‐20%

‐10%

0%

10%

20%

30%

40%

50%

Dec

‐83

Dec

‐85

Dec

‐87

Dec

‐89

Dec

‐91

Dec

‐93

Dec

‐95

Dec

‐97

Dec

‐99

Dec

‐01

Dec

‐03

Dec

‐05

Dec

‐07

Dec

‐09

Dec

‐11

Dec

‐13

Colgate stock price change

US WPI (RHS)

0%

1%

2%

3%

4%

5%

6%

‐15%‐10%‐5%0%5%

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

Dec

‐83

Dec

‐85

Dec

‐87

Dec

‐89

Dec

‐91

Dec

‐93

Dec

‐95

Dec

‐97

Dec

‐99

Dec

‐01

Dec

‐03

Dec

‐05

Dec

‐07

Dec

‐09

Dec

‐11

Dec

‐13

P&G stock price changeUS WPI (RHS)

There is a high correlation between inflation and stock performance for Indian and international FMCG companies. FMCG companies perform poorly during deflationary times.


FMCG SECTOR UPDATE

For India’s FMCG sector, the decline in crude prices is likely to see protracted periods of sluggish price appreciation providing ample room for competition to pick up in categories such as detergents, solvent‐based paints, and other categories that depend heavily on crude derivatives. Highly penetrated categories are particularly vulnerable as their growth is dependent on both price appreciation and volume growth. Premiumisation and mix improvements are other avenues of growth in mature categories, but the benefits of mix improvement are generally protracted and medium‐term benefits tend to be limited. The market has currently entered a period of very low price appreciation. Recent quarterly results indicate that price growth has seen significant deceleration and in some cases deflation (detergents and some soap brands). Price growth for leading FMCG companies

Source: Companies, PhillipCapital India Research

0

5

10

15

20

25 Q1FY15 Q1FY16

(4.0)

(2.0)

‐

2.0

4.0

6.0

8.0

10.0 Sector Price growth (% yoy)WPI India (% yoy)

‐40.0%

‐20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

‐6%

‐4%

‐2%

0%

2%

4%

6%

8%

10%

12%

14%

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

HUL price hike Crude oil price change (RHS)

For most categories in FMCG sector, realization growth has been falling on the back of moderation in commodity costs and passing of benefits to consumers.

The market has currently entered a period of very low price appreciation. Recent quarterly results indicate that price growth has seen significant deceleration and in some cases deflation


FMCG SECTOR UPDATE

It is a buyer’s market The market is flooded with new products and offers across categories — the highest offers seem to be in foods, shampoos, and toothpaste. Categories such as detergents and soaps are seeing discount offers. Our survey on key products and SKUs revealed that shampoo, detergents, and coconut‐oil brands are seeing pricing deflation. Apart from these categories other major categories (soaps, skin care, and hair oils) are seeing marginal price inflation. Price growth for different FMCG categories in Q2FY16 (% yoy)

Source: Companies, PhillipCapital India Research A closer look at the offers shows that all major companies (including market leader Hindustan Unilever) are aggressive in passing on raw material benefits (across categories) to the end consumer. We compared prices for current offers vs. the last major round in May 2013 and found that although current raw material prices are much lower than 2013,prices and offers are similar to 2013 — this indicates that more are yet to come. Heavy discounts make their presence felt in all major FMCG categories ______________May 2013______________ ____________September 2015____________Brand Company Category SKU (gm) MRP Offer Pricing

discount (%)

SKU (gm) MRP Offer Pricing discount

(%)Lifebuoy Hindustan Unilever Personal

Wash 60+10 10 10 gm free 14.3 59+9 10 9 g free 13.2

Lux Hindustan Unilever Personal Wash

4*100 80 Rs. 10 off 12.5 3*100 75 Rs 5 off 6.7

Pears Pure & Gentle Hindustan Unilever Personal Wash

3*125 145 Rs. 10 off 6.9 3*125 174 Rs 6 off 3.4

Dove Hindustan Unilever Personal Wash

3*100 138 Rs. 10 off 7.2 3*100 174 Rs 10 off 5.7

Dettol Reckitt Benckiser Personal Wash

3*125 105 Rs. 12 off 11.4 3*125 123 Free soap worth Rs 25

20.3

Dettol Cool Reckitt Benckiser Personal Wash

3*75 69 Rs. 2 off 2.9 3*75 78 Rs 9 off 11.5

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Oral Care Soaps Skin Care Other hair oils

Coconut oil Detergents Shampoo

Price growth in Q2FY16 (yoy %) While shampoos and detergents have

borne the brunt of price cuts so far, we expect more price cuts in oral caer and soaps in short term on account of increasing competitive activity in these categories.


FMCG SECTOR UPDATE

Offers in shampoos are up significantly with P&G initiating price cuts. HUL will see significant improvement in volume growth but value growth is likely to be tepid. Our channel checks indicate that promotional offers in the category are here to stay as P&G is focused on reviving the category market share lost in the last three years to HUL’s Dove and Tressmme brands. ______________May 2013______________ ____________September 2015____________Brand Company Category SKU (gm) MRP Offer Pricing

discount (%)


(%)Dove Hindustan Unilever Shampoo 6.5+1.5 3 20% free 18.8 180 ml 165 Rs 50 off 30.3Sunsilk Hindustan Unilever Shampoo 180+40 110 Rs. 56 worth

conditioner free33.7 340 ml 225 Rs 35 off 15.6

Head & Shoulders Procter & Gamble Shampoo 6.5+1 3 15% free 13.3 180 163 Rs 28 off 17.2Pantene Procter & Gamble Shampoo 6.5+1 3 15% free 13.3 180 155 Rs 45 off 29.0Pantene Pro ‐ V Procter & Gamble Shampoo 340+75 273 Rs. 59 worth

conditioner free21.6 340 264 Rs 64 off 24.2

Promotional activity in the toothpaste category is increasing. However, more importantly, the category is seeing significant marketing activity such as display offers for retailers to enable them to push premium products. Brand Company Category SKU (gm) MRP Offer Pricing

discount (%)


(%)Close Up Hindustan Unilever Toothpaste 2*150 144 Rs. 17 off 11.8 2*150 162 Rs 17 off 10.5Colgate Strong Teeth Colgate Toothpaste 200 + 100 +

toothbrush125 Rs. 16 off 12.8 200 + 100 +

toothbrush 138 Rs 16 off 11.6

Colgate Total Colgate Toothpaste 2*150 Rs. 21 off 2*150 Rs 21 off ‐ Detergents was the first category to initiate discount offers because of the commoditised nature of the products and strong regional brands. Market leader HUL initiated the offers, particularly in its premium category in order to upgrade consumers to premium products, which tend to have greater stickiness. The category is also seeing more push from regional and smaller players. Brand Company Category SKU (gm) MRP Offer Pricing

discount (%)


(%)Surf Excel Top load Hindustan Unilever Detergent 1000 207 Rs. 22 off 10.6 1000 215 Rs 30 off 14.0Surf Excel Front Load Hindustan Unilever Detergent 1000 227 Rs. 32 off 14.1 1000 235 Rs 30 off 12.8Surf Excel Front Load Hindustan Unilever Detergent 2000 447 Rs. 64 off 14.3 2000 465 Rs 30 off 6.5Ariel Complete Front & Top Load

Procter & Gamble Detergent 1000 216 Rs. 31 off 14.4 2000 453 Rs 65 off 14.3

Tide Plus Procter & Gamble Detergent 4000 359 Rs. 61 off 16.7 4000 382 1 kg free 25.0Tide Plus Jasmine & Rose

Procter & Gamble Detergent 4000 368 Rs. 27 off 7.3 4000 382 1 kg free 25.0

Source: PhillipCapital India Research Our channel checks indicate that the offers seem more likely to continue for prolonged periods. Some channel partners even alluded to the early 2000s cycle, which, after the frenzied inflation cycle of late 1990s, led to price wars across some key categories such as detergents. This indicates the beginning of a protracted slow growth cycle. While the offers are already significant, considering low raw material prices, it is likely that they could increase in the forthcoming quarters.


FMCG SECTOR UPDATE

Discounts/extra grammage is the flavor of the season – August 2015 product offers


FMCG SECTOR UPDATE

Discounts/extra grammage is the flavor of the season– August 2015 product offers


FMCG SECTOR UPDATE

Discounts/extra grammage is the flavor of the season– August 2015 product offers


FMCG SECTOR UPDATE

Low price = volume; key ‐ A&P vs. volume sensitivity Price growth will be a challenge for most FMCG companies because of commodity deflation. Companies will pass on the benefits to end consumers to maintain their business model saliency. While price growth is a challenge because of commodity price deflation, this deflation also provides significant cost‐structure cushion with gross margin expansion. Companies have significant room to increase A&P spending and drive volume growth. Volume growth sensitivity to A&P spending is a critical factor for driving volume growth. Volume growth vs Ad spends/Gross Profit (FY11‐15 average)

Volume growth vs Growth sensitivity to A&P spends** (FY11‐15 average)

Source:Companies, PhillipCapital India Research ** Growth sensitivity to ad spends is defined as the ratio of volume growth to A&P spends growth (5‐year CAGR) Dabur has the highest volume growth sensitivity to brand investments among the large caps we cover. We have plotted the average volume growth to average advertising to gross profit ratio for the last five years (refer chart above) and note that most FMCG companies (except Nestle) have similar advertising to gross profit ratios, but significantly different volume growth profiles. Volume growth is a factor of categories of operation, market positioning, and strategy of the company. For Dabur, the sensitivity of volume growth to advertising spending is significantly higher than the sector’s average. Dabur’s volume growth is likely to be faster than most FMCG companies of similar size. Apart from Dabur, Emami also has very high advertising to volume growth sensitivity.

Bajaj Corp

Britannia

Colgate

DaburEmami

HULMarico

Nestle

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Bajaj Corp

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Colgate DaburEmami

HULMarico

Nestle

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Bajaj Corp, Dabur, Emami and Colgate have a high volume growth profile but Dabur is more efficient in Ad spends due to lower A&P/gross profit ratio. HUL is inefficient compared to Emami and Colgate. In spite of high A&P spend/GP, it achieves a considerably low volume growth

Combining both the charts, we see that Dabur has highest efficiency in A&P spends because it has lower A&P/GP ratio and high growth sensitivity to Ad spends. On the other hand, Nestle suffers from low volume growth and has low growth sensitivity to A&P spends making it difficult to accelerate growth.


FMCG SECTOR UPDATE

Op leverage double edged; savior ‐ volume growth Operating leverage is a double‐edged sword — it provides high earnings growth visibility in periods of high growth, but in periods of sluggish growth, profitability declines significantly. Companies with high operating leverage have categories with lower gross margins. They see strong contribution growth during periods of high price appreciation. Categories such as soaps, detergents, paints, edible oils, hair oils, and foods benefit from operating‐leverage gains because of price appreciation, even as their gross margins could shrink. In commodity‐deflation periods, highly penetrated categories receive the temporary benefits of lower commodity costs, but as companies begin to pass of these benefits, high operating leverage significantly impacts profit growth. Highly penetrated categories are generally characterized by lower gross margins but volume growth depends on product penetration. Staples like detergents have lower volume growth but discretionary categories like personal care or branded foods have better volume growth profile. Another categorization could be in terms of grocery or impulse categories. Grocery products like edible oils have lower price elasticity while impulse categories have higher. Biscuits are both impulse as well grocery but with Premiumisation the category could have a higher share of impulse purchases making it more discretionary in nature. Operating leverage vs. Volume growth (FY11‐15 CAGR)

Gross margin vs Volume growth (FY11‐15 CAGR)

Source: Company, PhillipCapital India Research .

Bajaj Corp

Britannia

Colgate

DaburEmami

HUL

Marico

Nestle

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Dabur and Emami’s higher A&P‐spend‐to‐volume‐growth sensitivity will work in their favor as they also have high operating leverage. Britannia has very high operating leverage and average adspend to volume growth sensitivity but in an environment marked by stable or declining raw material prices, Britannia sees significant gross profit and earnings growth. Nestle, with low volume‐growth and low operating leverage, has uninspiring prospects. Given that Nestle has shown very low volume growth in FY11‐15 and that its volume‐growth sensitivity toad spends is very low, a volume disappointment is very probable, which in turn would lead to a magnified disappointment in earnings.


FMCG SECTOR UPDATE

Rural growth continues to surpass urban growth As per a study by IMRB, rural growth has seen a revival in 2015 while urban growth has deteriorated. We expect rural growth to be stronger in FY16and in‐line with urban growth in FY17. This will benefit players such as Dabur, Emami, and Bajaj Corp, which have high share of revenues from rural areas. The following are some of the comments by FMCG companies on rural growth made recently to media: "Rural consumption has not declined; it is urban consumption that has been affected. If there is any slowdown rural areas have felt, it is in discretionary categories like automobile and durables, and not items of daily consumption." — Saugata Gupta, CEO &MD, Marico Industries. "I think urban India will now finally react to an easing in inflationary pressures and the likelihood of a rate cut. That will boost sentiment." — Dabur CEO Sunil Duggal "Rural growth is ahead of urban. But our outlook is that urban growth will pick up in the second half," — Godrej Consumer Products MD Vivek Gambhir Household FMCG consumption volume growth in H1 for CY13/14/15

Source: IMRB

Share of Rural sales in total portfolio in 2015 Company Rural sales shareDabur 45Emami 45Bajaj Corp 40Colgate 37HUL 35Marico 33GCPL 27GSK 25ITC <30%Britannia <30%Nestle <30%

Source: Company, PhillipCapital India Research

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Rural 2013 Urban 2013 Rural 2014 Urban 2014 Rural 2015 Urban 2015

Personal care Household care Food & beverages Overall FMCG

Rural growth picked up pace from ‐4.2% yoy in H1CY14 to 5.5% yoy in H1CY15 whereas urban growth has slowed down from 6.1% yoy in H1CY14 to 2.6% yoy in H1CY15.


FMCG SECTOR UPDATE

Key strategies – Innovation and premiumisation In an environment marked by sluggish price growth and gross margin benefit, the scope for launching new products at attractive price point and upgrading consumers to premium products is relatively high. Increasing revenues from existing products is a challenge because of lack of pricing and distribution levers. Companies with wider portfolio, flexibility to quickly launch new products, or a greater share of premium products will benefit from this phase. Dabur, HUL, Colgate, Emami and Marico have been quite active in launching new products while Nestle, GSK Consumer, and Bajaj Corp have not had an inspiring track record in launching new products. We have analysed companies based on Ansoff Matrix on their long‐term strategies. In the current environment: • Dabur, Britannia, HUL, Colgate and Emami will be the biggest gainers because

their dominant strategy of product development will be beneficial. • Nestle, Bajaj Corp and GSK Consumer will be less impacted (even with their

market penetration strategy) because of their premium portfolios, but an absence of innovation will lead to underperformance in terms of growth.

• GCPL will be at a disadvantage due to its diversification strategy because it will find it very difficult to consolidate existing international markets and develop new international markets as these countries, mostly commodity markets, are seeing a slowdown in growth. Even though a higher share of premium products will soften the blow to growth, GCPL will be an underperformer among peers.

Source: PhillipCapital India Research

Market Penetration•Asian Paints•Nestle•GSK consumer•Marico

Market Development•Bajaj Corp

Product Development•Britannia•Emami•HUL•Colgate Palmolive•Dabur

Diversification•Godrej Consumer Healthcare

•Agro Tech Foods

Present Products

New Products

Present Markets

New Markets


FMCG SECTOR UPDATE

Market development to get tougher For most FMCG companies, margins provided to distributors are directly proportional to the sales value. During times of high inflation, the distributors’ profits rise faster because of high growth in realization. This enables companies to significantly expand distribution network (seen in FY12‐15). However, in times of low inflation, the price cuts and low price hikes limit profit growth for distributors. Hence, we believe that development of new markets will require more effort and market consolidation will be the key. Companies like GCPL (international markets) and HUL (rural markets)) will face difficulties in their market‐development operations. HUL, which had significantly expanded direct reach over the last three years, will face difficulties in consolidating the stretched network. Direct reach (‘000 outlets) Share of international portfolio in consolidated sales in FY15

Source: Company, PhillipCapital India Research Market penetration strategy to face heat from increased competition: Low inflationary environment leads to an increase in competitive activity, as was seen in 2010‐11. We believe that a dominant market penetration strategy will not be beneficial to FMCG companies, as increased competition from regional and national players will lead to pressure on margins and lower return on marketing investments. A&P spends growth for PC FMCG universe vs. India WPI


0

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FMCG Ad growth has a strong negative correlation to WPI which implies that FY16/17 will see a strong growth in Ad spends.


FMCG SECTOR UPDATE

New product development and Premiumisation to hold key Since market development will be difficult and market penetration will be very expensive, companies with a preference towards expanding into new categories or towards Premiumisation of their portfolios in the existing markets will gain. Britannia, Emami, Dabur and HUL plan to grow through innovations and have a consistent history of introducing innovations into the market— this will help them sail through. Premium portfolio share to total revenue for major FMCG companies

Source: Company, PhillipCapital India Research Recent product innovations and new brand campaigns Company Brand Category Activity Period of

introduction Description

Dabur Real Wellnezz‐ Jamun Juice New variant Q1FY16 Launched in India Dabur Dabur Baby Massage Oil Hair Oil New launch Q1FY16 Launched in India Dabur Hajmola Yoodley‐ Juice New launch Q1FY16 Six flavours. Launched in India

Dabur Activ 100% Mixed Fruit Juice New variant Q1FY16 Launched in India Dabur Dermoviva Baby Range‐ Skin Care New launch Q1FY16 Olive Enriched Powder and Olive Baby Soap launched in

international markets Dabur Vatika Naturals Damage

Repair Leave On Cream Hair Care New launch Q1FY16 Launched in international markets

Dabur Vatika Shampoo‐ Black Olive Shampoo New variant Q1FY16 Launched in international markets Dabur Hajmola Chatpat Digestives New variant Q4FY15 Launched in India Dabur Keratex Hair Oil Hair Oil New launch Q4FY15 Launched in India Dabur Odomos Roll On Home care New launch Q4FY15 Launched in India Dabur Honitus Madhuvaani OTC & Ethicals New launch Q4FY15 Launched in India Dabur Vatika Oil Replenishment Hair Care New launch Q4FY15 Launched in international markets Dabur Vatika Brillantine AD Hair Care New launch Q4FY15 Launched in international markets Dabur Dermoviva Face Mask Skin Care New launch Q4FY15 Launched in international markets Dabur Vatika Argan Cream Hair Care New launch Q4FY15 Launched in international markets

0%

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FMCG SECTOR UPDATE

Company Brand Category Activity Period of


Emami Zandu Balm Ultra Power Balm New launch FY15 Brand extension Emami HE Deodarants Deodarants New category FY15 Venture into new category Emami Zandu Balm Nityam Tablets Health care

division New launch FY15 Zandu Nityam Churna launched in May 2015 is enriched with

seven powerful laxatives ensuring regular bowel movements. Emami Zandu Gel Balm Junior Balm New launch FY15 Launched in June 2015, Zandu Gel Bam Jr. is India’s first mild gel

balm for children



HUL Dove oxygen moisture Shampoo New variant Q1FY16 HUL Lakme Absolute Skin Care New launch Q1FY16 Gloss HUL Knorr Cup‐a‐soup Packaged foods New variants Q1FY16 New small SKU launched to increase packaged foods penetration

HUL Ponds White Beauty pearl gel facewash

Skin Care New variant Q1FY16

HUL Lakme 9to5 instalight Skin Care New launch Q1FY16 HUL Fair & Lovely BB cream Skin care Relaunch Q4FY15 HUL Lakme Absolute sculpt Skin care New launch Q4FY15 HUL Lakme Lip love Skin care New launch Q4FY15 HUL Magnum choco cappuccino Ice cream New variant Q4FY15 HUL Knorr Chinese chaska Packaged foods New variants Q4FY15 HUL Axe signature Deodarants New launch Q4FY15



Colgate Colgate Active Salt Neem Toothpaste New launch FY15 Colgate Colgate Zigzag black Toothbrush New launch FY15 Colgate Colgate Sensitive pro‐relief

enamel repair Toothpaste New launch FY15

Colgate Colgate plax active salt Mouthwash New launch FY15 Colgate Colgate visible white plus

shine Toothpaste New launch FY15

Colgate Colgate slimsoft charcoal Toothbrush New launch FY15



Marico Livon Hair Gain for women Hair Serum New launch Q1FY16 Marico Parachute Aromatherapy in

Mumbai Hair Oil New launch

Marico Nihar Naturals Sarson Kesh Tel

Hair Oil New launch

Marico Parachute Advansed Aloe Vera Enriched Coconut Hair Oil

Hair Oil New launch

Marico Set Wet Gel Gels Relaunch Marico Set Wet Infinity Deodarants New launch Marico Saffola sweet oats Oats New launch Marico Parachute tender coconut oil Hair Oil New launch Marico Parachute summer lotion Hair Oil New launch in spray format



Bajaj Corp Bajaj Amla Hair Oil Hair Oil New launch Q4FY15 Bajaj Corp NoMarks Skin care,

creams and personal wash

Relaunch FY16

Source: Companies, PhillipCapital India Research



Dabur (DABUR IN) The deflation warrior INDIA | SECTOR | Company Update

14 September 2015

Dabur is the archetypical low‐inflation high‐volume‐growth play in the FMCG sector. Its above‐sector‐average gross margins and highest ad‐spends‐to‐volume‐growth sensitivity ensure above‐sector‐average volume growth in a low inflation cycle. Its above‐average exposure to the rural market is not necessarily negative, as this has continued to grow fast and responds better to deflationary cycles. Considering valuations (at 10% discount to sector), and possible surprises in terms of volume growth and cost structure, Dabur is the best placed among diversified FMCG companies to harness low inflation/deflation cycle. Our key arguments are as follows: Strong performer in periods of deflation: Dabur is market leader in niche categories with limited competition — this puts the onus on the company to grow the category and it is a challenger in categories with high degree of competition. Both cases require high brand investments (to develop the categories); thus, Dabur’s advertising‐spending‐to‐volume‐growth sensitivity is one of the highest in the industry. It typically outperforms its peers during such cycles and the present cycle is unlikely to be any different as Dabur has stepped up its brand investments and new product launches. Robust product pipeline ensures volume and revenue visibility: Dabur has a robust pipeline of new product launches and innovations. It launched 15 new products in Q1FY16 and Q4FY15, which is significantly higher than its peers. With the cushion of commodity prices, the pace of new product launches is likely to be maintained providing visibility on volume and revenue growth. International markets, low base provide growth visibility: Dabur’s international operations have been sluggish due to Namaste’s channel problems and sluggish trading environment in the Middle East. With improving growth in Europe and the US, channel corrections in Namaste, and the Middle East’s low base, international operations are likely to surprise positively in the forthcoming quarters. Rural market exposure balances long‐term growth prospects: 45% of Dabur’s portfolio is geared towards the rural market, which is among the highest in the industry. Rural markets have slowed down but are still growing faster than the urban ones. Recent data and management commentary indicates that small‐ticket consumption has not seen a marked slowdown and with lower inflation, we cannot rule out a faster recovery in this. Dabur’s balanced portfolio is well‐placed to deliver superior returns compared with peers. Valuations reasonable; maintain Buy: Dabur trades at 31x FY17earnings vs. the sector’s 33x. The discount is significant considering improving earnings visibility, possibility of earnings surprises, and superior operating performance. We marginally cut our price target to Rs 325 (earlier Rs 342), valuing the company at 35x (earlier 38x) FY17E earnings. Considering the significant upside from the current levels, we maintain our Buy recommendation.

BUY (Maintain) CMP RS 281 TARGET RS 325 (+16%) COMPANY DATA O/S SHARES (MN) : 1757MARKET CAP (RSBN) : 494MARKET CAP (USDBN) : 7.452 ‐ WK HI/LO (RS) : 317 / 197LIQUIDITY 3M (USDMN) : 6.1PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % PROMOTERS : 68.2FII / NRI : 21.1FI / MF : 4.6NON PROMOTER CORP. HOLDINGS : 1.6PUBLIC & OTHERS : 4.5 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐8.5 10.0 23.8REL TO BSE 0.4 14.6 29.1 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15 FY16E FY17ENet Sales 78,064 88,380 101,967EBIDTA 13,164 17,042 20,291Net Profit 10,658 13,731 16,058EPS, Rs 6.1 7.8 9.1PER, x 46.3 35.9 30.7EV/EBIDTA, x 37.8 28.8 23.8P/BV, x 6.4 5.6 4.7ROE, % 31.8 33.1 31.9Debt/Equity (%) 21.9 17.7 14.6

Source: PhillipCapital India Research Est. Naveen Kulkarni, CFA, FRM (+ 9122 6667 9947) [email protected] Jubil Jain (+ 9122 6667 9766) [email protected]

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Apr‐13 Apr‐14 Apr‐15Dabur BSE Sensex


DABUR COMPANY UPDATE

Change in Estimates (Rs mn) ___ Earlier estimates ___ ___ Revised estimates ___ Upgrade/(downgrade) (%) FY16E FY17E FY16E FY17E FY16E FY17ENet Sales 88,649 102,816 88,380 101,967 ‐0.3 ‐0.8EBITDA 16,800 20,024 17,042 20,291 1.4 1.3PBT 16,958 20,362 17,200 20,629 1.4 1.3Adj PAT 13,537 15,850 13,731 16,058 1.4 1.3Adj PAT margin (%) 15.3 15.4 15.5 15.7Adj EPS (Rs) 7.7 9 7.8 9.1 1.5 1.6

Source: Company, PhillipCapital India Research Estimates Focus charts


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DABUR COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eNet sales 70,541 78,064 88,380 101,967Growth, % 14.8 10.7 13.2 15.4Other income 212 208 240 275Total income 70,753 78,272 88,620 102,242Raw material expenses ‐34,000 ‐37,201 ‐40,252 ‐45,992Other Operating expenses ‐25,155 ‐27,907 ‐31,325 ‐35,960EBITDA (Core) 11,598 13,164 17,042 20,291Growth, % 15.7 13.5 29.5 19.1Margin, % 16.4 16.9 19.3 19.9Depreciation ‐975 ‐1,150 ‐1,256 ‐1,349EBIT 10,623 12,014 15,786 18,942Growth, % 15.8 13.1 31.4 20.0Margin, % 15.1 15.4 17.9 18.6Interest paid ‐542 ‐401 ‐403 ‐403Other Non‐Operating Income 1,281 1,581 1,818 2,090Pre‐tax profit 11,363 13,194 17,200 20,629Tax provided ‐2,191 ‐2,509 ‐3,440 ‐4,538Profit after tax 9,172 10,685 13,760 16,091Net Profit 9,146 10,658 13,731 16,059Growth, % 19.1 16.5 28.8 16.9Net Profit (adjusted) 9,146 10,658 13,731 16,058Unadj. shares (m) 1,744 1,757 1,757 1,757Wtd avg shares (m) 1,744 1,757 1,757 1,757 Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17eCash & bank 5,194 2,760 9,798 17,978Debtors 6,753 7,964 8,838 10,197Inventory 9,723 9,733 10,736 11,845Loans & advances 2,797 3,198 2,996 2,996Total current assets 24,467 23,655 32,368 43,016Investments 10,765 18,134 18,134 18,134Gross fixed assets 24,128 25,409 27,912 30,012Less: Depreciation ‐6,459 ‐6,638 ‐7,894 ‐9,244Add: Capital WIP 217 503 0 0Net fixed assets 17,886 19,274 20,018 20,768Total assets 53,382 61,345 70,802 82,199Current liabilities 18,869 19,417 20,910 23,371Total current liabilities 18,869 19,417 20,910 23,371Non‐current liabilities 7,796 8,205 8,205 8,205Total liabilities 26,665 27,622 29,115 31,576Paid‐up capital 1,743 1,757 1,757 1,757Reserves & surplus 24,817 31,785 39,720 48,624Shareholders’ equity 26,719 33,723 41,687 50,623Total equity & liabilities 53,385 61,345 70,802 82,199 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY14 FY15 FY16e FY17ePre‐tax profit 11,363 13,194 17,200 20,629Depreciation 975 1,150 1,256 1,349Chg in working capital 5,829 ‐919 ‐183 ‐6Total tax paid ‐2,220 ‐2,527 ‐3,440 ‐4,538Other operating activities ‐968 ‐936 ‐1,524 ‐1,656Cash flow from operating activities 14,979 9,962 13,309 15,777Capital expenditure ‐2,116 ‐2,538 ‐2,000 ‐2,098Chg in investments ‐4,446 ‐7,369 0 0Cash flow from investing activities ‐6,562 ‐9,907 ‐2,000 ‐2,098Free cash flow 8,417 55 11,309 13,679Equity raised/(repaid) 387 1,212 700 800Debt raised/(repaid) ‐5,495 254 0 0Dividend (incl. tax) ‐3,273 ‐4,609 ‐4,078 ‐6,379Cash flow from financing activities ‐8,368 ‐3,147 ‐3,378 ‐5,579Net chg in cash 49 ‐3,092 7,931 8,100 Valuation Ratios

FY14 FY15 FY16e FY17ePer Share data EPS (INR) 5.2 6.1 7.8 9.1Growth, % 19.0 15.7 28.8 16.9Book NAV/share (INR) 15.2 19.1 23.6 28.7FDEPS (INR) 5.2 6.1 7.8 9.1CEPS (INR) 5.8 6.7 8.5 9.9CFPS (INR) 8.4 5.3 7.4 8.7DPS (INR) 1.7 2.6 2.1 3.1Return ratios Return on assets (%) 18.9 19.1 21.2 21.4Return on equity (%) 34.4 31.8 33.1 31.9Return on capital employed (%) 27.6 28.6 30.5 30.1Turnover ratios Asset turnover (x) 3.5 4.2 4.3 4.8Sales/Total assets (x) 1.4 1.4 1.3 1.3Sales/Net FA (x) 4.1 4.2 4.5 5.0Working capital/Sales (x) 0.0 0.0 0.0 0.0Fixed capital/Sales (x) 0.6 0.6 ‐ ‐Working capital days 2.1 6.9 6.9 6.0Liquidity ratios Current ratio (x) 1.3 1.2 1.5 1.8Quick ratio (x) 0.8 0.7 1.0 1.3Interest cover (x) 19.6 29.9 39.1 46.9Dividend cover (x) 3.0 2.3 3.7Total debt/Equity (%) 26.7 21.9 17.7 14.6Net debt/Equity (%) 7.1 13.6 (5.9) (21.1)Valuation PER (x) 53.6 46.3 35.9 30.7Price/Book (x) 18.4 14.7 11.9 9.8Yield (%) 0.6 0.9 0.8EV/Net sales (x) 7.0 6.4 5.6 4.7EV/EBITDA (x) 42.4 37.8 28.8 23.8EV/EBIT (x) 46.3 41.5 31.1 25.5



Britannia (BRIT IN) Margin expansion story INDIA | SECTOR | Company Update

14 September 2015

Britannia has given consistent volume growth and EBITDA margin expansion in last few quarters on the back of frequent new launches and cost saving programs. Since the appointment of Mr. Varun Berry as the MD in March 2014, volume growth in FY15 jumped to 9% and EBITDA margins expanded by 200bps led majorly by cost savings. We also expect the low commodity price environment to help the company improve its gross margins in FY16/17 considerably. Savings through cost reduction programs in supply chain and higher A&P spends due to higher competitive activity will lead to considerable EBITDA margin expansionin FY16/17. Inspite of an increase in tax rate by 450 bps in FY16, we estimate the PAT to growth by 31% CAGR in FY15‐17, thereby outperforming the sector. The recent stock market rout has depreciated the stock by around 15% from recent highs and we believe that the valuations of the stock look attractive. We believe that a higher multiple of 40x FY17 earnings (25% premium to sector) for Britannia is justified in view of higher earnings potential. Valuing the company at Rs 3450, we upgrade the stock to ‘Buy’. Biscuits category growth robust; Innovations to continue to drive growth and premiumisation: We expect foods and biscuits category in particular to be a beneficiary of the low inflationary environment. Due to high real savings, consumption of discretionary goods like cream biscuits and cookies is expected to pick up in FY16/17. Britannia with a highly diverse portfolio and a market leader is expected to win in the current environment. Also the company has introduced six new innovations last year, most of them in premium categories. In Q1, the company introduced Pure Magic Choco Lush biscuits in the super‐premium range and also relaunched Tiger biscuits at a 5‐15% premium to Parle‐G biscuits. Cost reduction programmes to continue aiding margin expansion: Britannia has brought down its trade spends/trade returns in the last four years by 35%/30%. It has reduced the distance travelled by finished goods from factories to distributor locations (average) by 10% yoy. The company is also implementing other cost reduction programmes such as wastage reduction, energy usage optimization, and manufacturing‐efficiency increase. While short‐term margin expansion will be driven majorly by cost reduction; impact of premiumisation will start playing out majorly in the long term. Expansion into newer categories, international markets to give a fillip to sales: Britannia plans to become a total foods company in the long term. The company will expand the product offerings in dairy products, cakes, rusks, and macro snacking gradually. We believe that given the strong distribution reach, experience in Indian foods markets and the strong brand equity, Britannia is well poised to successfully develop into newer foods categories. Currently International business currently accounts for less than 10% of total sales. However, the company plans to scale its international business and the growth has been very robust both in terms of exports and Middle East operations. We believe that the international business offers huge potential because of huge Indian diaspora, strong brand equity and a diverse mix of cookies, cream, health and super premium biscuits in the portfolio Upgrade to Buy: We have fine tuned our estimates in view of recent fall in commodity prices and increased competitive activity. Due to high volume growth and margin expansion potential, we believe that the company will outperform the sector on bottomline. Expansion into newer categories and international markets may also lead to positive surprises on bottomline. We value the stock at 40x (target multiple maintained) FY17E earnings at Rs 3450 (maintained) and upgrade the stock to ‘Buy’.

Buy (Upgrade) CMP RS 2987 TARGET RS 3450 (+16%) COMPANY DATA O/S SHARES (MN) : 120MARKET CAP (RSBN) : 358MARKET CAP (USDBN) : 552 ‐ WK HI/LO (RS) : 3435 / 1287LIQUIDITY 3M (USDMN) : 2.3PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % PROMOTERS : 50.7FII / NRI : 20.0FI / MF : 9.0NON PROMOTER CORP. HOLDINGS : 3.7PUBLIC & OTHERS : 16.6 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐13.3 10.4 119.9REL TO BSE ‐4.5 14.9 125.2 PRICE VS. SENSEX



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COMPANY UPDATE BRITANNIA

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COMPANY UPDATE BRITANNIA

Financials

Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eNet sales 68,293 77,751 88,418 102,237Growth, % 11.3 13.8 13.7 15.6Total income 68,293 77,751 88,418 102,237Raw material expenses ‐41,710 ‐46,918 ‐51,306 ‐59,040Employee expenses ‐2,627 ‐2,806 ‐3,261 ‐3,704Other Operating expenses ‐18,508 ‐20,221 ‐22,086 ‐25,160EBITDA (Core) 5,448 7,806 11,765 14,333Growth, % 46.8 43.3 50.7 21.8Margin, % 8.0 10.0 13.3 14.0Depreciation ‐837 ‐1,445 ‐1,330 ‐1,450EBIT 4,611 6,361 10,435 12,882Growth, % 54.8 38.0 64.0 23.5Margin, % 6.8 8.2 11.8 12.6Interest paid ‐83 ‐39 ‐39 ‐39Other Non‐Operating Income 1,170 1,713 1,970 2,265Pre‐tax profit 5,698 9,496 12,366 15,109Tax provided ‐1,736 ‐2,611 ‐3,957 ‐4,835Profit after tax 3,962 6,885 8,409 10,274Net Profit 3,962 6,885 8,409 10,274Growth, % 52.6 36.9 55.0 22.2Net Profit (adjusted) 3,962 5,424 8,409 10,274Unadj. shares (m) 120 120 120 120Wtd avg shares (m) 120 120 120 120 Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17eCash & bank 1,091 2,263 1,824 9,829Debtors 1,087 1,358 1,549 1,812Inventory 4,203 4,040 4,956 5,720Loans & advances 3,042 5,563 6,189 7,157Other current assets 121 372 372 372Total current assets 9,543 13,596 14,890 24,890Investments 1,979 5,179 5,179 5,179Gross fixed assets 15,999 17,171 22,171 24,171Less: Depreciation ‐7,524 ‐8,731 ‐10,061 ‐11,511Add: Capital WIP 1,071 484 484 484Net fixed assets 9,546 8,924 12,594 13,144Total assets Current liabilities 21,068 27,933 32,897 43,447Total current liabilities 11,300 13,856 13,295 17,175Non‐current liabilities 11,300 13,856 13,295 17,175Total liabilities 1,761 1,602 1,602 1,602Paid‐up capital 13,061 15,458 14,897 18,777Reserves & surplus 240 240 240 240Shareholders’ equity 7,743 12,211 17,736 24,405Total equity & liabilities 8,007 12,475 18,000 24,670 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY14 FY15 FY16e FY17ePre‐tax profit 5,698 9,496 12,366 15,109Depreciation 837 1,445 1,330 1,450Chg in working capital 1,619 ‐324 ‐2,294 1,885Total tax paid ‐1,775 ‐2,933 ‐3,957 ‐4,835Cash flow from operating activities 6,379 7,863 7,445 13,609Capital expenditure ‐1,543 ‐1,003 ‐5,000 ‐2,000Chg in investments ‐897 ‐3,201 0 0Cash flow from investing activities ‐2,440 ‐4,204 ‐5,000 ‐2,000Free cash flow 3,940 3,659 2,445 11,609Equity raised/(repaid) 2,405 4,468 5,525 6,670Debt raised/(repaid) ‐2,323 ‐70 0 0Dividend (incl. tax) ‐1,682 ‐2,309 ‐2,884 ‐3,605Cash flow from financing activities ‐1,599 2,089 2,641 3,065Net chg in cash 2,341 5,748 5,086 14,674 Valuation Ratios

FY14 FY15 FY16e FY17ePer Share data EPS (INR) 33.1 45.2 70.1 85.7Growth, % 52.2 36.8 55.0 22.2Book NAV/share (INR) 66.6 103.8 149.9 205.5FDEPS (INR) 33.1 45.2 70.1 85.7CEPS (INR) 40.1 45.1 81.2 97.8CFPS (INR) 43.5 49.8 45.7 94.6DPS (INR) 12.0 16.0 20.0 25.0Return ratios Return on assets (%) 20.1 28.2 27.7 27.0Return on equity (%) 49.6 43.6 46.8 41.7Return on capital employed (%) 41.2 58.0 50.1 44.9Turnover ratios Asset turnover (x) 9.5 11.9 9.4 8.7Sales/Total assets (x) 3.4 3.2 2.9 2.7Sales/Net FA (x) 7.4 8.4 8.2 7.9Receivable days 5.8 6.4 6.4 6.5Inventory days 22.5 19.0 20.5 20.4Payable days 46.3 50.2 41.2 50.1Working capital days (15.2) (11.8) (0.9) (7.5)Liquidity ratios Current ratio (x) 0.8 1.0 1.1 1.4Quick ratio (x) 0.5 0.7 0.7 1.1Interest cover (x) 55.6 164.8 270.3 333.7Dividend cover (x) 2.8 2.8 3.5Total debt/Equity (%) 20.9 12.9 8.9 6.5Net debt/Equity (%) 7.3 (5.3) (1.2) (33.4)Valuation PER (x) 90.3 66.0 42.6 34.9PEG (x) ‐ y‐o‐y growth 1.7 1.8 0.8 1.6Price/Book (x) 44.8 28.8 19.9 14.5Yield (%) 0.4 0.5 0.7EV/Net sales (x) 5.2 4.6 4.0 3.4EV/EBITDA (x) 65.8 45.8 30.4 24.4EV/EBIT (x) 77.7 56.2 34.3 27.2



Bajaj Corp (BJCOR IN) Well oiled for growth INDIA | SECTOR | Company Update

14 September 2015

Bajaj Corp is an attractive play in the Rs 15bn light hair oil space and the Rs 88bn overall hair oil segment. The company’s key brand Bajaj Almond Drops (c. 90%) is the primary category growth driver. It has significantly expanded its market share by 750 bps in FY10‐15to 61% in the light hair oil category driven by robust volume CAGR of ~15%. Bajaj Corp has considerably outperformed its peers in FY07‐15 sales growth, and given its strong brand power and high growth potential in almond hair oil, we believe Bajaj Corp will continue to be an outperformer in the hair care space. We reiterate our Buy recommendation and value it at Rs 520 (26x our FY17EPS). Light hair oil to see high growth, driven by focus on category expansion and leadership: Light hair oil category saw robust 23.5% CAGR (FY07‐15) with rising consumer awareness fuelling demand, greater market presence, consumer conversion, and retention of alternate hair oil users. Bajaj Corp has been instrumental in driving this category’s development by undertaking sufficient investment in A&P (37% CAGR in A&P spends in FY11‐15) and distribution (35% CAGR in direct distribution reach). Light hair oil has significant scope to grow indicated by the Rs 88bn market size of the larger hair oil category (6x of light hair oil), which saw 17% CAGR in FY07‐15. With Bajaj Corp maintaining focus on category and market share expansion, light hair oil category traction will continue to rise. Competitive intensity expected to support growth; Bajaj Almond Drops key beneficiary: Increase in focus on light hair oils by larger players (Dabur, Marico, and HUL) should provide support to category growth momentum and dynamics. We believe that Bajaj Almond Drops, being the market leader with well‐entrenched market presence (2.9mn outlets) and capability to mitigate competitive risks, is well placed to leverage traction in the light hair oil category. Volume CAGR robust @ 13% in FY16/17 aided by ad spend; pricing ability and soft inflation to drive margins: Bajaj Corp has sufficient balance sheet strength to foray into new categories (reentered amla hair oil with Bajaj Amla Hair Oil) to establish new levers of growth. We estimate A&P sales ratio to be marginally higher at 18% in the medium term, enough for BJCorp to sustain robust volume growth and remain competitive. Bajaj Almond Drops can mitigate input cost pressure because of strong pricing power. Also, it is rebranding No Marks from a problem solution brand to a personal care brand, which we believe will help improve its customer base and help deliver quantum growth in the medium term. With current inflationary scenario benign, we estimate average pricing growth of 4% over FY16/17. Hence, with stability in A&P/sales ratio and limited input inflation concerns, we expect EBITDA margin expansion of ~220 bps to 29.7% in FY14‐17. Maintain Buy: Being primarily a single‐product company, BJCORP trades at 23x FY17, a significant discount to the FMCG sector trading at 33x FY17. We expect strong operating performance to provide scope of multiple re‐rerating. We value the company at 26x FY17 (assigning discount of 20% to the sector because of single‐product risk), with target price of Rs 520. With an upside of 11% and room for positive surprises, we reiterate our BUY rating.

BUY (Maintain) CMP RS 468 TARGET RS 520 (+11%) COMPANY DATA O/S SHARES (MN) : 148MARKET CAP (RSBN) : 69MARKET CAP (USDBN) : 152 ‐ WK HI/LO (RS) : 522 / 252LIQUIDITY 3M (USDMN) : 1PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % PROMOTERS : 66.9FII / NRI : 23.7FI / MF : 2.3NON PROMOTER CORP. HOLDINGS : 1.1PUBLIC & OTHERS : 6.0 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐3.1 5.3 59.6REL TO BSE 5.8 9.9 64.9 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15 FY16E FY17ENet Sales 8,195 9,385 11,089EBIDTA 2,404 2,810 3,294Net Profit 2,236 2,579 2,951EPS, Rs 15.2 17.5 20.0PER, x 30.9 26.8 23.4EV/EBIDTA, x 28.1 23.8 20.1P/BV, x 13.8 12.8 11.3ROE, % 44.6 47.7 48.2


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BAJAJ CORP COMPANY UPDATE

Change in estimates (Rs mn) ___Earlier estimates___ __Revised estimates____ Upgrade/(downgrade) (%) FY16E FY17E FY16E FY17E FY16E FY17ENet Sales 9,385 11,089 9,385 11,089 0.0 0.0EBITDA 2,772 3,251 2,810 3,294 1.4 1.3EBITDA margin (%) 29.5 29.3 29.9 29.7Adj PAT 2,546 2,911 2,579 2,951 1.3 1.4Adj PAT margin (%) 27.1 26.3 27.5 26.6Adj EPS (Rs) 17.3 19.7 17.5 20.0 1.1 1.5Source: Company, PhillipCapital India Research Estimates

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BAJAJ CORP COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eNet sales 6,707 8,195 9,385 11,089Growth, % 11 22 15 18Total income 6,707 8,195 9,385 11,089Raw material expenses ‐2,688 ‐3,155 ‐3,533 ‐4,235Employee expenses ‐339 ‐381 ‐440 ‐508Other Operating expenses ‐1,832 ‐2,255 ‐2,601 ‐3,051EBITDA (Core) 1,848 2,404 2,810 3,294Growth, % 7.6 30.1 16.9 17.2Margin, % 27.5 29.3 29.9 29.7Depreciation ‐37 ‐33 ‐41 ‐47EBIT 1,811 2,371 2,768 3,247Growth, % 7.5 30.9 16.8 17.3Margin, % 27.0 28.9 29.5 29.3Interest paid ‐58 0 0 0Other Non‐Operating Income 412 335 371 440Pre‐tax profit 1,878 2,236 2,670 3,502Tax provided ‐382 ‐470 ‐561 ‐736Profit after tax 1,496 1,766 2,109 2,767Net Profit (Reported) 1,496 1,766 2,109 2,767Growth, % 6.5 25.5 15.3 14.4Net Profit (adjusted) 1,782 2,236 2,579 2,951Unadj. shares (m) 148 148 148 148Wtd avg shares (m) 148 148 148 148 Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17eCash & bank 1,290 1,432 2,059 2,967Debtors 84 117 115 159Inventory 395 393 459 539Loans & advances 333 373 422 499Total current assets 2,101 2,314 3,055 4,163Investments 2,107 2,378 2,378 2,378Gross fixed assets 1,726 1,726 1,876 1,986Less: Depreciation ‐124 ‐627 ‐1,138 ‐1,371Net fixed assets 1,609 1,106 744 622Total assets 5,817 5,798 6,178 7,163Current liabilities 596 782 767 1,041Total current liabilities 596 782 767 1,041Non‐current liabilities 0 0 0 0Total liabilities 596 782 767 1,041Paid‐up capital 148 148 148 148Reserves & surplus 5,073 4,868 5,264 5,974Shareholders’ equity 5,221 5,016 5,411 6,121Total equity & liabilities 5,817 5,798 6,178 7,163 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY14 FY15 FY16e FY17ePre‐tax profit 1,878 2,236 2,670 3,502Depreciation 37 33 41 47Chg in working capital ‐139 115 ‐129 74Total tax paid ‐394 ‐470 ‐561 ‐736Cash flow from operating activities 1,267 2,067 2,141 2,659Capital expenditure ‐1,466 0 ‐150 ‐110Chg in investments 1,088 ‐271 0 0Cash flow from investing activities ‐745 46 201 306Free cash flow 522 2,113 2,341 2,964Equity raised/(repaid) 0 0 0 0Dividend (incl. tax) ‐1,122 ‐1,971 ‐1,714 ‐2,057Cash flow from financing activities ‐1,122 ‐1,971 ‐1,714 ‐2,057Net chg in cash ‐600 142 627 908 Valuation Ratios

FY14 FY15 FY16e FY17ePer Share data EPS (INR) 12.1 15.2 17.5 20.0Growth, % 6.5 25.5 15.3 14.4Book NAV/share (INR) 35.4 34.0 36.7 41.5FDEPS (INR) 12.1 15.2 17.5 20.0CEPS (INR) 14.3 18.6 20.9 21.6CFPS (INR) 7.1 10.7 11.2 16.6DPS (INR) 6.5 11.5 10.0 12.0Return ratios Return on assets (%) 27.0 30.4 35.2 41.5Return on equity (%) 34.1 44.6 47.7 48.2Return on capital employed (%) 30.5 34.5 40.5 48.0Turnover ratios Asset turnover (x) 5.6 5.4 8.6 12.7Sales/Total assets (x) 1.2 1.4 1.6 1.7Sales/Net FA (x) 6.5 6.0 10.1 16.2Working capital/Sales (x) 0.0 0.0 0.0 0.0Working capital days 11.7 4.5 8.9 5.1Liquidity ratios Current ratio (x) 3.5 3.0 4.0 4.0Quick ratio (x) 2.9 2.5 3.4 3.5Interest cover (x) 31.0 Dividend cover (x) 1.9 1.3 1.7Net debt/Equity (%) (24.7) (28.5) (38.1) (48.5)Valuation PER (x) 38.7 30.9 26.8 23.4Price/Book (x) 13.2 13.8 12.8 11.3Yield (%) 1.4 2.5 2.1EV/Net sales (x) 10.1 8.2 7.1 6.0EV/EBITDA (x) 36.7 28.1 23.8 20.1EV/EBIT (x) 37.4 28.5 24.2 20.3



Jubilant Foodworks (JUBI IN) A recipe for growth INDIA | CONSUMER | Company Update

14 September 2015

Jubilant Foodworks is well placed to benefit from the uptrend in consumer discretionary spending driven by lower inflation and interest costs. It has significantly expanded its store count in the last 3 years to 465 from 930, building up significant capacity to take advantage of an upturn. The company’s rigorous focus on product and customer‐outreach innovation is complemented by best in the category supply‐chain and cost‐structure management. Its Dunkin venture is now profitable at the store level. In 2‐3 years, with enhanced scale, the venture will start contributing to the company’s profitability. With the recent sharp stock‐price correction, valuation for this exceptionally high‐growth story (EBIDTA CAGR of 33% over FY15‐20) has become attractive. Hence, it is our top pick in the discretionary consumption space. Unrivalled business model to harness the cycle upturn: Store economics provide business flexibility in managing downturns and leveraging upturns. Dominos, with a payback period of just 2 to 3 years, provides far superior return than competitors (McDonald, KFC), which have payback periods of around 5 years. This provides significant visibility for scaling up the business model at lower cost. Jubilant has added 465 outlets in the last three years, which is significantly higher than McDonald’s, KFC, and Pizza Hut together (added 461 outlets). This significant capacity creation is backed by unmatched execution, which provides visibility towards utilizing its assets better. Positive SSSG in a highly challenging environment: In the highly challenging environment of the last three quarters, Jubilant reported positive SSSG while competitors have reported far lower or negative SSSG. Jubilant’s SSSG performance is because of superior execution and new product innovations. The management expects SSSG of high single digits to low double digits over the next 2‐4 quarters. Dunking Donuts breakeven on store level dispels business model concerns: Dunkin Donuts operations led to EBIDTA margin pressure of 200bps over the last three years because of losses. However, Dunkin is now profitable at the store level and its losses are currently because of supply chain and other overheads, which can be contained. With increasing scale of operations, the venture will turn profitable. The management has indicated that Dunkin will be profitable at a store count of 120, which will take another 2 years. Dunkin Donuts turning profitable will lead to a sharp increase in profitability. Valuations sustainable; Maintain target price and recommendation: Jubilant Foodworks trades at 37x our FY17 earnings. We have built FY16/17 SSSG at 6.5%/10% vs. flattish in FY15. Considering improving SSSG and robust store additions, EBIDTA and earnings growth will continue to remain sharp. We value the company on DCF‐based methodology at Rs 2,000 taking into account of Rs 100 for its IRCTC distribution venture. Considering significant upside, we maintain Buy.

BUY (Maintain) CMP RS 1662 TARGET RS 2000 (+20%) COMPANY DATA O/S SHARES (MN) : 66MARKET CAP (RSBN) : 109MARKET CAP (USDBN) : 1.652 ‐ WK HI/LO (RS) : 1984 / 1177LIQUIDITY 3M (USDMN) : 6.7PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % PROMOTERS : 48.8FII / NRI : 41.5FI / MF : 4.5NON PROMOTER CORP. HOLDINGS : 0.5PUBLIC & OTHERS : 4.7 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐15.6 ‐6.6 22.7REL TO BSE ‐6.8 ‐2.1 28.1 PRICE VS. SENSEX



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JUBILANT FOODWORKS COMPANY UPDATE

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JUBILANT FOODWORKS COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eNet sales 17,235 20,745 25,784 33,867Growth, % 22 20 24 31Total income 17,235 20,745 25,784 33,867Raw material expenses ‐4,487 ‐5,212 ‐6,404 ‐8,438Employee expenses ‐3,369 ‐4,388 ‐5,487 ‐7,060Other Operating expenses ‐6,828 ‐8,517 ‐10,012 ‐12,774EBITDA (Core) 2,551 2,628 3,882 5,595Growth, % 4.4 3.0 47.7 44.2Margin, % 14.8 12.7 15.1 16.5Depreciation ‐767 ‐982 ‐1,254 ‐1,630EBIT 1,784 1,647 2,627 3,965Growth, % (5.9) (7.7) 59.6 50.9Margin, % 10.4 7.9 10.2 11.7Other Non‐Operating Income 93 74 126 136Pre‐tax profit 1,877 1,721 2,753 4,102Tax provided ‐619 ‐488 ‐867 ‐1,313Profit after tax 1,258 1,233 1,886 2,789Net Profit 1,258 1,233 1,886 2,789Growth, % (6.9) (2.0) 53.0 47.9Net Profit (adjusted) 1,258 1,233 1,886 2,789Unadj. shares (m) 65 65 65 65Wtd avg shares (m) 65 65 65 65 Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17eCash & bank 228 304 498 1,755Debtors 90 119 176 220Inventory 324 423 493 633Loans & advances 1,316 1,424 1,436 1,583Total current assets 1,960 2,271 2,606 4,193Investments 1,286 1,303 1,303 1,303Gross fixed assets 7,857 10,539 13,488 17,434Less: Depreciation ‐2,569 ‐3,375 ‐4,629 ‐6,259Add: Capital WIP 184 181 181 181Net fixed assets 5,471 7,345 9,040 11,356Non‐current assets 4 20 20 20Total assets 8,351 10,383 12,412 16,315Current liabilities 2,601 3,366 3,509 4,624Provisions 114 304 304 304Total current liabilities 2,715 3,670 3,814 4,928Total liabilities 2,715 3,670 3,814 4,928Paid‐up capital 654 656 656 656Reserves & surplus 4,980 6,057 7,942 10,732Shareholders’ equity 5,635 6,712 8,598 11,387Total equity & liabilities 8,350 10,383 12,412 16,315 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY14 FY15 FY16e FY17ePre‐tax profit 1,877 1,721 2,753 4,102Depreciation 767 982 1,254 1,630Chg in working capital 103 703 4 784Total tax paid ‐447 ‐301 ‐867 ‐1,313Cash flow from operating activities 1,047 3,104 3,144 5,203Capital expenditure ‐2,326 ‐2,855 ‐2,949 ‐3,947Chg in investments ‐135 ‐17 0 0Cash flow from investing activities ‐2,461 ‐2,873 ‐2,949 ‐3,947Free cash flow ‐1,415 231 195 1,257Equity raised/(repaid) 1,273 0 0 0Cash flow from financing activities 1,273 0 0 0Net chg in cash ‐142 231 195 1,257 Valuation Ratios

FY14 FY15 FY16e FY17ePer Share data EPS (INR) 19.2 18.8 28.8 42.6Growth, % (7.1) (2.0) 53.0 47.9Book NAV/share (INR) 86.1 102.6 131.4 174.0FDEPS (INR) 19.2 18.8 28.8 42.6CEPS (INR) 30.9 33.8 48.0 67.5CFPS (INR) 33.7 46.6 46.1 77.4Return ratios Return on assets (%) 17.1 13.2 16.5 19.4Return on equity (%) 22.3 18.4 21.9 24.5Return on capital employed (%) 24.7 19.3 23.7 27.1Turnover ratios Asset turnover (x) 4.5 3.9 3.8 4.0Sales/Total assets (x) 2.3 2.2 2.3 2.4Sales/Net FA (x) 3.7 3.2 3.1 3.3Working capital/Sales (x) (0.1) (0.1) (0.1) (0.1)Receivable days 1.9 2.1 2.5 2.4Inventory days 6.9 7.4 7.0 6.8Payable days 64.7 67.8 58.5 59.7Working capital days (18.4) (24.6) (19.8) (23.6)Liquidity ratios Current ratio (x) 0.8 0.7 0.7 0.9Quick ratio (x) 0.6 0.5 0.6 0.8Net debt/Equity (%) (4.0) (4.5) (5.8) (15.4)Valuation PER (x) 86.5 88.2 57.7 39.0Price/Book (x) 19.3 16.2 12.6 9.6EV/Net sales (x) 6.3 5.2 4.2 3.2EV/EBITDA (x) 42.6 41.3 27.9 19.1EV/EBIT (x) 60.8 65.9 41.2 27.0



ITC (ITC IN) New challenges emerge INDIA | SECTOR | Company Update

14 September 2015

ITC, the most profitable FMCG Company in India is facing severe headwinds in cigarettes because of sharp decline in volumes and rising regulatory challenges. Rising regulatory challenges have led to an influx of contraband and smuggled products from other countries. This has impacted cigarette distribution business — this will impact its FMCG distribution (which rides on the cigarettes‐distribution network). It will take some time for ITC to come out of the vicious loop of declining cigarettes business in turn impacting FMCG business and vice versa. We maintain Sell with a target price of Rs 270 (Rs 300 earlier) valuing the company at 20x our FY17 earnings. Our key arguments are as follows: Prohibitive price hikes impact volume growth: The price hikes in cigarettes have been particularly sharp in the last three years (prices rose by 72% for the most popular brand Gold Flake(regular) translating into an annual inflation of 20% over the period vs. just 11% in the prior 10‐year period).Severe product price inflation has dented affordability and it will continue to impact volume growth over the next 2‐3 years. Influx of cheap and contraband products: Cigarettes are cheaper in neighboring countries like Nepal, China, and Bangladesh. Even in India, because of differential VAT rates, cigarette prices vary significant across states. States with higher VAT rates have been severely affected by influx of products from states with lower VAT rates and cheaper products from different countries. Cigarettes business woes to spread to the FMCG segment: ITC has a common distribution network for cigarettes and FMCG. Distributors do not make sufficient return on investment in FMCG because the products are still evolving and inventory turnover tends to be lower. However, with very high inventory turnover, they make superlative returns in cigarettes. Thus, the cigarettes business subsidizes FMCG. In the wake of sluggish cigarettes sales, distributors have lesser incentive to aggressively push FMCG. This could lead to channel consolidation, as distributors with idle capacity will look at better businesses with better returns prospects. Thus, it is likely that the woes of the cigarettes business will even spread to the FMCG segment, dimming its growth prospects. The hope — government slowing tax hikes, uniform GST across states: Excise duty in 2002‐12 was inline with CPI, but in the last three years it has seen a sharp 16% CAGR. Moreover, sharp increases in VAT by various states since their introduction in FY08 have led to a decline in the affordability of the product. In this scenario, slower pace of excise duty hikes and a uniform GST across states will lead to an improvement in business prospects. Tobacco is likely to be excluded from GST and considering the government’s outlook on healthcare, significant moderation in excise duty hikes seems unlikely. Valuations and recommendation: ITC is facing its most challenging times (especially for cigarettes), which are likely to persist for fairly long. Therefore, it is more likely to trade at a discount to its long‐term average of 22x P/E. Valuing the stock at 20x our FY17 earnings we arrive at a price target of Rs 270 (Rs 300 earlier) and maintain our Sell recommendation.

Sell (Maintain) CMP RS 313 TARGET RS 270 (‐14%) COMPANY DATA O/S SHARES (MN) : 8023MARKET CAP (RSBN) : 2511MARKET CAP (USDBN) : 37.852 ‐ WK HI/LO (RS) : 410 / 295LIQUIDITY 3M (USDMN) : 31PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % FII / NRI : 25.9FI / MF : 35.0NON PROMOTER CORP. HOLDINGS : 32.5PUBLIC & OTHERS : 11.5GOCT : 0.25 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐2.2 4.1 ‐10.7REL TO BSE 6.6 8.7 ‐5.4 PRICE VS. SENSEX



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ITC COMPANY UPDATE

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Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eNet sales 328,826 360,832 386,541 425,303Growth, % 11.1 9.7 7.1 10.0Other income 3,560 4,242 4,751 5,321Total income 332,386 365,074 391,292 430,624Raw material expenses ‐131,563 ‐146,720 ‐157,552 ‐172,280Employee expenses ‐16,084 ‐17,800 ‐18,167 ‐19,989Other Operating expenses ‐60,191 ‐65,818 ‐73,333 ‐80,492EBITDA (Core) 124,548 134,736 142,239 157,863Growth, % 17.2 8.2 5.6 11.0Margin, % 37.9 37.3 36.8 37.1Depreciation ‐8,999 ‐9,617 ‐11,931 ‐13,032EBIT 115,549 125,119 130,308 144,831Growth, % 17.5 8.3 4.1 11.1Margin, % 35.1 34.7 33.7 34.1Interest paid ‐30 ‐574 ‐617 ‐664Other Non‐Operating Income 11,071 11,189 15,299 18,032Pre‐tax profit 126,591 135,734 144,990 162,200Tax provided ‐38,739 ‐43,898 ‐47,847 ‐53,526Profit after tax 87,852 91,836 97,143 108,674Net Profit 87,852 91,836 97,143 108,674Growth, % 18.4 4.5 5.8 11.9Net Profit (adjusted) 87,852 91,836 97,143 108,674Unadj. shares (m) 7,921 7,995 7,995 7,995Wtd avg shares (m) 7,921 7,995 7,995 7,995 Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17eCash & bank 32,894 75,886 92,518 120,254Debtors 21,654 17,224 18,003 18,643Inventory 73,595 78,368 82,014 84,960Loans & advances 32,832 23,498 25,741 28,028Total current assets 160,975 194,977 218,278 251,887Investments 88,234 84,055 84,055 84,055Gross fixed assets 185,449 217,270 247,275 277,280Less: Depreciation ‐65,321 ‐75,485 ‐87,416 ‐100,448Add: Capital WIP 22,957 21,141 21,141 21,141Net fixed assets 143,085 162,926 181,000 197,973Total assets 396,739 446,635 488,010 538,592Current liabilities 56,195 55,758 55,758 55,758Provisions 58,847 61,061 61,061 61,061Total current liabilities 115,042 116,819 116,819 116,819Non‐current liabilities 19,077 22,458 22,458 22,458Total liabilities 134,119 139,277 139,277 139,277Paid‐up capital 7,953 8,016 8,016 8,016Reserves & surplus 254,667 299,342 340,717 391,299Shareholders’ equity 262,620 307,358 348,733 399,315Total equity & liabilities 396,739 446,635 488,010 538,592 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY14 FY15 FY16e FY17ePre‐tax profit 126,591 135,734 144,990 162,200Depreciation 8,999 9,617 11,931 13,032Chg in working capital ‐10,186 10,570 ‐6,669 ‐5,874Total tax paid ‐37,807 ‐40,552 ‐47,847 ‐53,526Cash flow from operating activities 87,598 115,370 102,406 115,833Capital expenditure ‐25,112 ‐29,459 ‐30,005 ‐30,005Chg in investments ‐17,631 4,180 0 0Cash flow from investing activities ‐42,743 ‐25,279 ‐30,005 ‐30,005Free cash flow 44,855 90,091 72,401 85,828Equity raised/(repaid) 39,748 44,737 41,375 50,582Dividend (incl. tax) ‐55,829 ‐59,990 ‐55,768 ‐58,092Cash flow from financing activities ‐16,081 ‐15,252 ‐14,393 ‐7,510Net chg in cash 28,774 74,838 58,008 78,318Pre‐tax profit 126,591 135,734 144,990 162,200 Valuation Ratios

FY14 FY15 FY16e FY17ePer Share data EPS (INR) 11.1 11.5 12.1 13.6Growth, % 17.4 3.6 5.8 11.9Book NAV/share (INR) 33.2 38.4 43.6 49.9FDEPS (INR) 11.1 11.5 12.1 13.6CEPS (INR) 12.2 12.7 13.6 15.2CFPS (INR) 9.7 13.0 10.9 12.2DPS (INR) 6.0 6.3 6.0 6.3Return ratios Return on assets (%) 23.7 21.9 20.9 21.3Return on equity (%) 33.5 29.9 27.9 27.2Return on capital employed (%) 27.7 25.2 23.7 23.8Turnover ratios Asset turnover (x) 1.7 1.6 1.6 1.6Sales/Total assets (x) 0.9 0.9 0.8 0.8Sales/Net FA (x) 2.4 2.4 2.2 2.2Working capital/Sales (x) 0.2 0.2 0.2 0.2Working capital days 79.8 64.1 66.1 65.1Liquidity ratios Current ratio (x) 2.9 3.5 3.9 4.5Quick ratio (x) 1.6 2.1 2.4 3.0Interest cover (x) 3,916.9 217.9 211.1 218.3Dividend cover (x) 1.8 1.8 2.0 2.2Net debt/Equity (%) (12.5) (24.7) (26.5) (30.1)Valuation PER (x) 28.2 27.3 25.8 23.0Price/Book (x) 9.4 8.1 7.2 6.3Yield (%) 1.9 2.0 1.9 2.0EV/Net sales (x) 7.4 6.7 6.2 5.6EV/EBITDA (x) 19.6 18.0 16.9 15.1EV/EBIT (x) 21.2 19.4 18.5 16.4



Hindustan Unilever (HUVR IN) A lever less INDIA | SECTOR | Company Update

14 September 2015

HUL initiated price cuts in multiple categories like detergents, soaps, shampoos and toothpaste to defend its market share in anticipation of rise in competitive activity driven by sharp fall in crude oil prices. But correspondingly higher volume growth is unlikely to materialise because of subdued demand, below‐average monsoons and increased competitive activity (even management commentary is similar). As per our analysis, HUL volume growth has ~40% correlation with rainfall deficiency. Since monsoon in 2015 has been 14% below average, we expect a subdued volume growth in FY16. Also, high competitive activity will lead to higher spends in A&P which will impact margins in FY16/17. We also see operational challenges in consolidation of expanded rural distribution network due to low sales growth. The company can surprise negatively on volume growth and margins, we downgrade the stock to ‘Sell’ and value the stock at Rs 730 (32x FY17 earnings) as we cut our earnings estimates by 2.1%/5% for FY16/FY17 incorporating sluggish price growth and higher competitive activity.

Growth driver Soaps & Detergents (S&D) to lose steam due to price cuts, poor monsoon: Over the last 3 years, the revenue and profit growth for HUL was led primarily by S&D for which sales grew at 11.8% CAGR (vs. 11% for PP and 11.6% for HUL). Despite lower margins, S&D EBIT grew disproportionately by 18.8% in FY12‐15 (vs 11.5% for PP and 17.2% for HUL). S&D accounted for 48%/37% of HUL Sales/EBIT in FY12 and contributed to 49%/41% to additional HUL sales/profit over next 3 years. However, the recent price cuts across various products like Surf Excel, Rin, Dove and others, will lead to flat realization growth in FY16 as against 6% average price hike for FY11‐15. Also, as per our analysis, HUL S&D volume growth has ~40% correlation with rainfall deficiency. Poor monsoons in 2015 (16% deficient) and subdued demand will lead to disappointment in volume growth. While premiumisation will continue, we do not estimate the mix growth to contribute majorly to value growth for soaps and detergents in FY16/17.

Skin Care to see resurgence; Shampoos and Oral Care seeing heightened competitive activity: Fair and Lovely (FAL) has been doing well after its relaunch as per the management. We expect FAL, Lakme, Ponds and entire Skin Care portfolio to benefit from impetus to discretionay spends due to low inflation environment. However, as per our channel checks, P&G and Colgate have significantly increased the competitive intensity in shampoos and oral care respectively with huge price cuts. While HUL has also slashed prices to defend the market share and sustain volume growth, we believe that this will impact the value growth and profitability in shampoos and oral care.

Foods to benefit from innovations and high real savings; Beverages growth to be mediocre: We believe that a low inflationary environment will stimulate demand in discretionary products like packaged foods due to high real savings. HUL has consistently launched innovations in Ketchups, Ice creams and others which will aid in growth. However, subdued demand & subdued prices of tea and coffee, will keep beverages growth mediocre.

Margins to come under pressure due to high A&P spends and passing of benefits: As was seen in FY10/FY13 (40%/23% A&P growth), the low inflationary environment will increase competitive activity and will significantly increase A&P spends in categories like oral care, shampoos and detergents. Also the high competitive activity will force the company to pass back benefits in categories like detergents, skin care, oral care and shampoos. As a result EBITDA margins for HUL will come under pressure.

Newly developed rural distribution areas may become unviable: In the last 3 years, HUL significantly expanded its direct distribution reach by 40% by adding new distributors (primarily in rural areas). Now it plans to consolidate the network. We believe that price cuts and low volume growth will put pressure on distributor profitability and may make many new rural distribution areas unviable.

Downgrade to Sell, Reduce estimates: We have reduced our estimates for FY16/17 by 2%/5% incorporating slower volume growth and price cuts in some categories. We value the company at Rs 730 (32x FY17 earnings). Considering the significant downside and the high probability of negative surprises, we downgrade the stock to ‘Sell’.

Sell (Downgrade) CMP RS 796 TARGET RS 730 (‐9%) COMPANY DATA O/S SHARES (MN) : 2164MARKET CAP (RSBN) : 1722MARKET CAP (USDBN) : 25.952 ‐ WK HI/LO (RS) : 979 / 708LIQUIDITY 3M (USDMN) : 19.7PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % PROMOTERS : 67.2FII / NRI : 14.6FI / MF : 4.2NON PROMOTER CORP. HOLDINGS : 0.7PUBLIC & OTHERS : 13.3 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐12.7 ‐3.6 5.6REL TO BSE ‐3.9 0.9 10.9 PRICE VS. SENSEX



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HINDUSTAN UNILEVER COMPANY UPDATE

Segment operating performance Sales schedule as per annual report CY2006 CY2007 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 (15 months)Total 121034 137178 202393 175238 193810 217356 252064 274083 301705Soaps 28,087 30,408 43,019 37,273 39,397 43,034 53,626 56,945 61,412Synthetic Detergents 25,084 29,552 49,085 39,092 41,601 53,737 60,779 65,398 71,760Total Soaps & Detergents 53,171 59,960 92,104 76,365 80,998 96,771 114,406 122,344 133,171Personal products 34,575 38,608 56,161 51,073 59,262 65,098 74,288 80,927 89,967Tea 14,095 15,512 21,567 19,251 20,975 19,824 22,246 25,780 28,119Frozen Desserts & Ice Creams 1,344 1,585 2,294 2,289 2,720 3,543 4,134 4,549 5,515Canned & processed fruits & vegetables 2,332 2,929 4,831 4,273 5,757 6,479 6,767 7,702 9,057Branded Staple Foods 1,779 2,773 3,854 3,242 3,389 3,776 4,250 4,348 4,651Others** 12,493 14,713 20,856 18,469 20,548 21,673 25,794 28,201 30,987 Growth yoy % Soaps 10.5 8.3 19.1 (13.4) 5.7 9.2 24.6 6.2 7.8Synthetic Detergents 15.9 17.8 43.3 (20.4) 6.4 29.2 13.1 7.6 9.7Total Soaps & Detergents 13.0 12.8 30.9 (17.1) 6.1 19.5 18.2 6.9 8.9Personal products* 15.4 11.7 29.7 (9.1) 16.0 9.8 14.1 8.9 11.2Tea (0.9) 10.1 29.8 (10.7) 9.0 (5.5) 12.2 15.9 9.1Frozen Desserts & Ice Creams 38.5 17.9 20.8 (0.2) 18.8 30.3 16.7 10.0 21.2Canned & processed fruits & vegetables 34.1 25.6 44.4 (11.5) 34.7 12.5 4.4 13.8 17.6Branded Staple Foods 6.1 55.8 20.9 (15.9) 4.5 11.4 12.6 2.3 7.0Others 47.1 17.8 35.0 (11.4) 11.3 5.5 19.0 9.3 9.9 Contribution % Soaps 23.2 22.2 21.3 21.3 20.3 19.8 21.3 20.8 20.4Synthetic Detergents 20.7 21.5 24.3 22.3 21.5 24.7 24.1 23.9 23.8Total Soaps & Detergents 43.9 43.7 45.5 43.6 41.8 44.5 45.4 44.6 44.1Personal products 28.6 28.1 27.7 29.1 30.6 30.0 29.5 29.5 29.8Tea 11.6 11.3 10.7 11.0 10.8 9.1 8.8 9.4 9.3Frozen Desserts & Ice Creams 1.1 1.2 1.1 1.3 1.4 1.6 1.6 1.7 1.8Canned & processed fruits & vegetables 1.9 2.1 2.4 2.4 3.0 3.0 2.7 2.8 3.0Branded Staple Foods 1.5 2.0 1.9 1.9 1.7 1.7 1.7 1.6 1.5Others 10.3 10.7 10.3 10.5 10.6 10.0 10.2 10.3 10.3

Note: *Personal Products sales in FY12 are lower being adjusted for Other Operating Income. Reported growth is 17% yoy for FY12 ** Other business includes Water Source: Company, PhillipCapital India Research Change in Estimates (Rs mn) ___ Earlier estimates ___ ___ Revised estimates ___ Upgrade/(downgrade) (%) FY16E FY17E FY16E FY17E FY16E FY17ENet Sales 324,594 364,396 323,169 360,887 (0.4) (1.0)EBITDA 68,824 79,611 67,438 76,155 (2.0) (4.3)PBT 65,519 76,016 64,133 72,560 (2.1) (4.5)Adj PAT 44,881 52,071 43,931 49,703 (2.1) (4.5)Adj PAT margin (%) 13.8 14.3 13.6 13.8 (21) (53)Adj EPS (Rs) 20.7 24.1 20.3 22.9 (2.1) (4.9)




Growth assumptions Growth (in % yoy) FY16 FY17Toilet Soaps 7.1 10.3 ‐ Volume 5.0 5.0 ‐ Price 2.0 5.0Detergents (1.1) 10.2 ‐ Volume 2.0 6.0 ‐ Price (3.0) 4.0Personal Products 13.3 14.4 ‐ Volume 10.0 10.0 ‐ Price 3.0 4.0Beverages 11.3 11.3 ‐ Volume 7.0 7.0 ‐ Price 4.0 4.0Packaged Foods 12.7 14.5 ‐ Volume 7.7 9.4 ‐ Price 4.6 4.6

Source: Company, PhillipCapital India Research Estimates Soaps and detergents volume growth has a significant correlation (40%) with rainfall deviation


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Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eNet sales 274,083 301,705 323,169 360,887Growth, % 8.7 10.1 7.1 11.7Other income 12,319 12,535 13,616 15,052Total income 286,402 314,240 336,785 375,939Raw material expenses ‐143,436 ‐156,236 ‐162,605 ‐180,498Employee expenses ‐14,360 ‐15,789 ‐17,466 ‐19,207Other Operating expenses ‐77,643 ‐83,949 ‐89,275 ‐100,079EBITDA (Core) 50,963 58,266 67,438 76,155Growth, % 10.5 14.3 15.7 12.9Margin, % 18.6 19.3 20.9 21.1Depreciation ‐2,606 ‐2,867 ‐3,137 ‐3,426EBIT 48,357 55,399 64,301 72,729Growth, % 10.5 14.6 16.1 13.1Margin, % 17.6 18.4 19.9 20.2Interest paid ‐360 ‐168 ‐168 ‐168Pre‐tax profit 47,997 55,240 64,145 72,573Tax provided ‐11,014 ‐16,795 ‐20,202 ‐22,856Profit after tax 36,983 38,445 43,943 49,716Net Profit 36,983 38,445 43,943 49,716Growth, % 10.5 4.0 14.3 13.1Net Profit (adjusted) 36,983 38,445 43,943 49,716Unadj. shares (m) 2,162 2,162 2,168 2,168Wtd avg shares (m) 2,162 2,162 2,168 2,168 Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17eCash & bank 22,210 25,376 31,493 37,334Debtors 8,164 7,829 8,658 10,048Inventory 27,475 26,027 27,523 29,548Loans & advances 11,432 12,407 12,765 14,039Other current assets 719 593 593 593Total current assets 70,000 72,232 81,032 91,561Investments 30,941 32,779 32,779 32,779Gross fixed assets 44,429 47,214 51,714 56,714Less: Depreciation ‐20,208 ‐22,638 ‐25,775 ‐29,202Add: Capital WIP 3,198 4,790 4,790 4,790Net fixed assets 27,418 29,365 30,729 32,302Non‐current assets 7 4 4 4Total assets 129,984 136,341 146,504 158,606Current liabilities 78,180 75,590 80,376 87,489Provisions 19,034 23,502 27,981 31,361Total current liabilities 97,214 99,093 108,357 118,851Non‐current liabilities 0 0 0 0Total liabilities 97,214 99,093 108,357 118,851Paid‐up capital 2,163 2,164 2,164 2,164Reserves & surplus 30,608 35,084 35,984 37,592Shareholders’ equity 32,770 37,248 38,147 39,756Total equity & liabilities 129,984 136,341 146,504 158,606 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY14 FY15 FY16e FY17ePre‐tax profit 47,997 55,240 64,145 72,573Depreciation 2,606 2,867 3,137 3,426Chg in working capital 7,775 ‐1,653 2,103 2,425Total tax paid ‐12,966 ‐15,920 ‐14,642 ‐21,639Cash flow from operating activities 45,412 40,535 54,743 56,784Capital expenditure ‐4,939 ‐4,814 ‐4,500 ‐4,999Cash flow from investing activities ‐12,573 ‐6,649 ‐4,496 ‐4,995Free cash flow 32,839 33,886 50,247 51,789Dividend (incl. tax) ‐29,485 ‐35,561 ‐44,113 ‐45,931Cash flow from financing activities ‐25,533 ‐35,424 ‐44,113 ‐45,931Net chg in cash 7,306 ‐1,539 6,133 5,858 Valuation Ratios

FY14 FY15 FY16e FY17ePer Share data EPS (INR) 17.1 17.8 20.3 22.9Growth, % 10.5 4.0 14.0 13.1Book NAV/share (INR) 15.2 17.2 17.6 18.3FDEPS (INR) 17.1 17.8 20.3 22.9CEPS (INR) 18.3 19.1 21.7 24.5CFPS (INR) 19.6 18.7 25.2 26.2DPS (INR) 13.0 15.0 17.0 19.0Return ratios Return on assets (%) 30.4 29.0 31.1 32.7Return on equity (%) 112.9 103.2 115.2 125.1Return on capital employed (%) 125.1 110.1 116.9 127.9Turnover ratios Asset turnover (x) (158.3) (257.9) 1,236.8 (675.2)Sales/Total assets (x) 2.2 2.3 2.3 2.4Sales/Net FA (x) 10.4 10.6 10.8 11.5Working capital/Sales (x) (0.2) (0.2) (0.2) (0.2)Working capital days ~15% (63.2) (66.4) (65.4)Liquidity ratios Current ratio (x) 0.7 0.7 0.7 0.8Quick ratio (x) 0.4 0.5 0.5 0.5Interest cover (x) 134.2 329.4 382.3 432.4Dividend cover (x) 1.3 1.2 1.2 1.2Net debt/Equity (%) (67.8) (68.1) (82.6) (93.9)Valuation PER (x) 46.5 44.8 39.3 34.7Price/Book (x) 52.5 46.2 45.2 43.4Yield (%) 1.6 1.9 2.1 2.4EV/Net sales (x) 6.2 5.6 5.2 4.7EV/EBITDA (x) 33.3 29.1 25.1 22.2EV/EBIT (x) 35.1 30.6 26.4 23.2



Marico (MRCO IN)

Parachute missing INDIA | SECTOR | Company Update

14 September 2015

Marico is a play on its mature brands’ pricing power and ability to deliver volume growth in a high inflationary environment. These two aspects of its business will be come under immense pressure in an environment marked by deflation and rising competitive activity. While the Value Added Hair Oils (VAHO) segment continues to report sharp growth, we believe the earnings disappointments are more likely because of sluggish pricing growth in Saffola and Parachute. We have cut our price growth assumptions for FY17 and find consensus expectations are 8% (significantly) higher. We value the company at 30x our FY17 earnings to arrive at a new TP of Rs 360 (Rs 415 earlier). Considering significant downside from current levels, we downgrade the stock to Sell from Neutral. Parachute brand (c.35% of group revenues) to grow at sluggish pace: Marico’s stock price is positively correlated to copra prices. Higher copra prices translate to higher price growth and positive volume growth surprise due to decline in competitive activity. Copra prices have been trending lower and copra being a perennial crop is not significantly impacted by deficient rainfall. Statistically, copra prices do not have a significant correlation to rainfall. Copra prices are also linked to palm oil prices. Our PhillipCapital Commodities Research is bearish on palm oil and hence it is unlikely that Copra prices might appreciate much in the medium term. With low inflation in copra prices, and Parachute brand price hikes in the base, revenue growth for the largest brand is likely to be tepid in the forthcoming quarters. Competitive activity is likely to pick up and thus volume growth may not be inspiring either. We have reduced our price growth assumption for FY17 for Parachute to 2% from 5% and maintained our volume growth estimates at 6% (lower than Q1FY16 volume growth of 8%). Saffola (c.14% of group revenues) continues to see significant competitive activity: Apart from sluggish price growth in Parachute, Saffola will also see sluggish growth because of hyper competitive activity in the category. Saffola’s premium over sunflower oils has increased to 61% from 13% in August 2014. Considering the company’s strategy of volume led growth, and hyper‐competition in the category, the premium is unlikely to sustain in the near to medium term. This will lead to sluggish price growth translating to uninspiring revenue growth in the medium term. Limited exposure to crude derivatives translating to limited gross margin expansion: Marico has one of the lowest exposure to crude derivatives (at 25%) translating into lower gross margin benefits that its peers. Lower gross margin expansion means the ability to invest in brands is also lesser. It has lower than sector average volume growth to advertising spend sensitivity and lower than sector average gross margins. Thus, with lower volume growth, earnings growth is likely to be sluggish over the medium term. Valuations expensive; downgrade to Sell: Marico currently trades at a premium to the sector at 35x FY17 earnings. This limits the chances of positive surprise. Our estimates are 8% below consensus estimates for FY17 because of lower price growth expectations. Valuing the company at a marginal discount to the sector average multiple at 30x FY17 earnings (Rs 360) translates to a 12% downside; therefore, we downgrade the stock to Sell from our current Neutral rating.

Sell (Downgrade) CMP RS 409 TARGET RS 360 (‐12%) COMPANY DATA O/S SHARES (MN) : 645MARKET CAP (RSBN) : 264MARKET CAP (USDBN) : 3.9752 ‐ WK HI/LO (RS) : 466 / 277LIQUIDITY 3M (USDMN) : 3.1PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % PROMOTERS : 59.7FII / NRI : 32.9FI / MF : 4.2NON PROMOTER CORP. HOLDINGS : 0.8PUBLIC & OTHERS : 6.0 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐9.5 ‐6.4 38.0REL TO BSE ‐0.6 ‐1.9 43.3 PRICE VS. SENSEX



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MARICO COMPANY UPDATE

Change in Estimates (Rs mn) __Earlier estimates__ ___Revised estimates___ Upgrade/(downgrade) (%) FY16E FY17E FY16E FY17E FY16E FY17ENet Sales 64,116 73,375 63,524 71,981 ‐0.9% ‐1.9%EBITDA 10,503 12,555 10,220 11,694 ‐2.7% ‐6.9%EBITDA margin (%) 16.4 17.1 16.1 16.2PBT 10,101 12,152 9,818 11,291 ‐2.8% ‐7.1%Adj PAT 6,894 8,307 6,698 7,709 ‐2.8% ‐7.2%Adj PAT margin (%) 10.8 11.3 10.5 10.7Adj EPS (Rs) 10.7 12.9 10.4 12.0 ‐2.8% ‐7.2% Focus charts


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Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eNet sales 46,762 57,203 63,524 71,981Growth, % 2 22 11 13Other income 103 127 144 162Total income 46,865 57,330 63,667 72,143Raw material expenses ‐23,992 ‐31,190 ‐34,143 ‐38,617Employee expenses ‐2,847 ‐3,251 ‐3,609 ‐4,114Other Operating expenses ‐12,547 ‐14,187 ‐15,695 ‐17,718EBITDA (Core) 7,480 8,701 10,220 11,694Growth, % 14.6 16.3 17.5 14.4Margin, % 16.0 15.2 16.1 16.2Depreciation ‐769 ‐844 ‐873 ‐975EBIT 6,711 7,857 9,347 10,719Growth, % 18.5 17.1 19.0 14.7Margin, % 14.4 13.7 14.7 14.9Interest paid ‐345 ‐229 ‐178 ‐178Other Non‐Operating Income 579 589 650 750Pre‐tax profit 6,946 8,216 9,818 11,291Tax provided ‐1,905 ‐2,368 ‐2,995 ‐3,444Profit after tax 5,041 5,849 6,824 7,847Others (Minorities, Associates) ‐187 ‐114 ‐126 ‐138Net Profit 4,854 5,734 6,698 7,709Growth, % 24.5 18.1 16.8 15.1Net Profit (adjusted) 4,854 5,734 6,698 7,709Unadj. shares (m) 645 645 645 645Wtd avg shares (m) 645 645 645 645 Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17eCash & bank 4,064 2,049 5,335 9,552Debtors 2,232 1,767 2,088 2,564Inventory 7,962 9,947 10,957 12,003Loans & advances 3,366 3,861 3,861 3,861Other current assets 0 0 0 0Total current assets 17,624 17,625 22,242 27,981Investments 3,105 2,838 2,838 2,838Gross fixed assets 9,634 9,998 11,198 12,498Less: Depreciation ‐3,301 ‐4,144 ‐5,018 ‐5,993Add: Capital WIP 44 44 44 44Net fixed assets 6,378 5,898 6,224 6,550Non‐current assets 2,543 4,891 4,891 4,891Total assets 29,554 31,174 36,117 42,181Current liabilities 9,473 8,409 9,173 10,106Provisions 857 1,039 1,039 1,039Total current liabilities 10,330 9,448 10,213 11,146Non‐current liabilities 5,260 3,343 3,343 3,343Total liabilities 15,590 12,791 13,556 14,488Paid‐up capital 645 645 645 645Reserves & surplus 12,961 17,602 21,780 26,911Shareholders’ equity 13,964 18,383 22,561 27,692Total equity & liabilities 29,554 31,174 36,117 42,181 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY14 FY15 FY16e FY17ePre‐tax profit 6,946 8,216 9,818 11,291Depreciation 769 844 873 975Chg in working capital 4,811 ‐5,264 ‐565 ‐589Total tax paid ‐1,905 ‐2,368 ‐2,995 ‐3,444Other operating activities ‐2,547 ‐820 ‐563 215Cash flow from operating activities 8,074 609 6,569 8,448Capital expenditure 912 1,375 ‐400 ‐400Chg in investments ‐1,589 267 0 0Cash flow from investing activities ‐678 1,642 ‐400 ‐400Free cash flow 7,396 2,251 6,169 8,048Equity raised/(repaid) ‐1,437 0 0 0Debt raised/(repaid) ‐3,470 ‐1,917 0 0Dividend (incl. tax) ‐913 ‐2,013 ‐2,508 ‐3,157Cash flow from financing activities ‐6,000 ‐4,266 ‐2,633 ‐3,295Net chg in cash 1,397 ‐2,015 3,535 4,753 Valuation Ratios

FY14 FY15 FY16e FY17ePer Share data EPS (INR) 7.5 8.9 10.4 12.0Growth, % 23.8 18.1 16.8 15.1Book NAV/share (INR) 21.1 28.3 34.8 42.7FDEPS (INR) 7.5 8.9 10.4 12.0CEPS (INR) 8.7 10.2 11.7 13.5CFPS (INR) 13.1 4.9 10.1 11.6DPS (INR) 1.2 2.7 3.3 4.2Return ratios Return on assets (%) 15.8 19.7 20.6 20.3Return on equity (%) 35.7 31.4 29.9 28.0Return on capital employed (%) 20.9 28.0 27.9 27.0Turnover ratios Asset turnover (x) 2.9 4.9 4.7 5.0Sales/Total assets (x) 1.4 1.9 1.9 1.8Sales/Net FA (x) 4.5 9.3 10.5 11.3Working capital/Sales (x) 0.1 0.1 0.1 0.1Fixed capital/Sales (x) 0.7 0.6 0.5 0.5Working capital days 31.9 45.7 44.4 42.2Liquidity ratios Current ratio (x) 1.9 2.1 2.4 2.8Quick ratio (x) 1.0 0.9 1.2 1.6Interest cover (x) 19.5 34.2 52.4 60.1Dividend cover (x) 6.3 3.3 3.1Total debt/Equity (%) 38.7 18.3 14.9 12.1Net debt/Equity (%) 8.8 7.1 (8.9) (22.5)Valuation PER (x) 54.3 46.0 39.4 34.2Price/Book (x) 19.4 14.5 11.8 9.6Yield (%) 0.3 0.7 0.8EV/Net sales (x) 5.7 4.6 4.1 3.6EV/EBITDA (x) 35.4 30.5 25.6 22.0EV/EBIT (x) 39.5 33.7 28.0 24.0



Nestle India (NEST IN) Growth challenges ahead INDIA | SECTOR | Company Update

14 September 2015

Nestle India has been a laggard in the FMCG pack. For the last three years, it has underperformed the sector in terms of volume, sales, and profit growth (‐1%/7.5%/8% vs. 6%/13%/15% for PC’s FMCG stocks) due to weak growth in beverages and chocolates and confectionary. Nestle also took sharp price hikes in the last few years when consumer environment was subdued, thereby impacting volumes. While its milk products and nutrition businesses did well, growth from CY12‐14 was primarily due to expansion of lower‐margin prepared dishes and cooking aids businesses (primarily Maggi noodles). However, due to the recent controversy (detection of excessive lead in Maggi and ensuing court case), Maggi, which accounted for Rs 25bn or 24% of its CY14 sales, continues to be absent from the Indian markets (withdrawn on 5thJune 2015). The matter is sub‐judice and the product is expected to be reintroduced only by end of 2015. Since three out of its four businesses suffer from operational or regulatory challenges, we maintain our Sell recommendation on Nestle India and maintain our price target of Rs 5430 (38x our CY16 earnings). Maggi noodles banned in India until it receives fresh regulatory clearance: In June 2015, Nestle India filed a case in the Bombay High Court seeking review of the orders passed by Maharashtra Food and Drug Administration (FDA) and the Food Safety and Standards Authority of India (FSSAI) banning the sale, distribution, and production of Maggi noodles. On 13th August, the Bombay High Court allowed Nestle to resume noodles production and sale if a fresh sample is cleared by regulatory authorities. The process is expected to be completed by September/October 2015. Stocking Maggi to normal levels in shelves will take a quarter after court‐case resolution: We expect a lag of three months after the court case is resolved for Nestle to manufacture enough Maggi noodles to distribute these from factories to own warehouses and to distributors, traders, and wholesalers. Beverages and chocolates and confectionary categories will continue to see sluggishness: Due to sharp price hikes in recent years, moderation in prices of raw coffee, and subdued demand in overall beverages/chocolates category, we expect Nestle India to continue to see sluggish growth in these. Packaged foods category will take time to recover; A&P spends to rise: As per our channel checks, the Maggi controversy has impacted consumer trust on the packaged foods category as awhole. Despite a plethora of similar noodles available in the market (ITC’sYippee, Top Ramen’s noodles, Knorr Soupy Noodles),the category and individual brands have seen a significant decline in demand. Redeveloping the category and winning the trust of consumers will take time and will also lead to higher marketing spends for Nestle India, which will impact profitability in short term. Share buyback by parent company may not happen in near term: We believe that the notion of giving a higher multiple to Nestle India’s stock because of chances of a share buyback by the parent is not valid. During the recent controversy, a share buyback would have helped demonstrate the conviction of the parent company in the subsidiary and would have also elevated consumer sentiments. However, since the parent company did not do so during the recent controversy, we believe it unlikely that it will happen in near future. Maintain Sell: We have accounted for the loss of Maggi sales for six months in CY15 and a gradual recovery in CY16. We value the stock at 38x CY16 earnings at Rs 5,430 and maintain Sell.

Sell (Maintain) CMP RS 6048 TARGET RS 5430 (‐10%) COMPANY DATA O/S SHARES (MN) : 96MARKET CAP (RSBN) : 583MARKET CAP (USDBN) : 952 ‐ WK HI/LO (RS) : 7500 / 5499LIQUIDITY 3M (USDMN) : 1.3PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % PROMOTERS : 62.8FII / NRI : 12.7FI / MF : 4.4NON PROMOTER CORP. HOLDINGS : 8.7PUBLIC & OTHERS : 11.5 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐5.8 ‐0.7 ‐5.6REL TO BSE 3.0 3.8 ‐0.3 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn CY14 CY15E CY16E Net Sales 98,063 88,510 110,477EBIDTA 20,613 16,720 23,846Net Profit 11,862 10,766 13,845EPS, Rs 123.0 112 144PER, x 49.2 54.2 42.1EV/EBIDTA, x 27.8 34.4 23.9P/BV, x 20.6 23.4 21.0ROE, % 41.8 43.2 50.0Debt/Equity (%) 0.7 0.8 0.7


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Financials

Income Statement Y/E Dec, Rs mn CY13 CY14 CY15E CY16E Net sales 90,619 98,063 88,510 110,477Growth, % 9 8 ‐10 25Total income 90,619 98,063 88,510 110,477Raw material expenses ‐41,224 ‐45,239 ‐39,847 ‐49,754Employee expenses ‐7,415 ‐8,197 ‐8,197 ‐9,413Other Operating expenses ‐22,176 ‐24,013 ‐23,746 ‐27,463EBITDA (Core) 19,804 20,613 16,720 23,846Growth, % 8.5 4.1 (18.9) 42.6Margin, % 21.9 21.0 18.9 21.6Depreciation ‐3,399 ‐3,457 ‐3,631 ‐3,898EBIT 16,405 17,156 13,088 19,948Growth, % 6.4 4.6 (23.7) 52.4Margin, % 18.1 17.5 14.8 18.1Interest paid ‐365 ‐142 ‐142 ‐142Other Non‐Operating Income 1,222 1,359 1,495 1,644Pre‐tax profit 16,642 17,759 13,887 20,758Tax provided ‐5,609 ‐5,897 ‐3,120 ‐6,912Profit after tax 11,033 11,862 10,766 13,846Net Profit 11,033 11,862 10,766 13,846Growth, % 3.3 7.5 (9) 29Net Profit (adjusted) 11,079 11,862 10,766 13,845Unadj. shares (m) 96 96 96 96Wtd avg shares (m) 96 96 96 96 Balance Sheet Y/E Dec, Rs mn CY13 CY14 CY15E CY16E Cash & bank 13,661 9,432 8,452 12,823Debtors 843 991 658 1,400Inventory 7,359 8,441 5,096 5,809Loans & advances 2,291 1,972 1,726 2,099Total current assets 24,154 20,836 15,932 22,132Investments 2,343 3,145 3,145 3,145Gross fixed assets 49,032 50,090 52,090 55,090Less: Depreciation ‐15,339 ‐18,323 ‐21,955 ‐25,854Add: Capital WIP 2,947 2,448 2,448 2,448Net fixed assets 36,640 34,215 32,583 31,684Total assets 60,988 55,968 49,433 54,733Current liabilities 25,406 27,400 24,285 26,833Total current liabilities 25,406 27,400 24,285 26,833Non‐current liabilities 11,895 197 197 197Total liabilities 37,301 27,597 24,482 27,030Paid‐up capital 964 964 964 964Reserves & surplus 22,723 27,408 23,987 26,739Shareholders’ equity 23,687 28,372 24,951 27,703Total equity & liabilities 60,988 55,968 49,433 54,733 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Dec, Rs mn CY13 CY14 CY15E CY16E Pre‐tax profit 16,642 17,759 13,887 20,758Depreciation 3,399 3,457 3,631 3,898Chg in working capital 3,507 1,089 809 720Total tax paid ‐5,075 ‐5,824 ‐3,120 ‐6,912Cash flow from operating activities 18,616 16,465 15,207 18,464Capital expenditure ‐4,555 ‐1,031 ‐2,000 ‐2,999Chg in investments 1,305 ‐801 0 0Cash flow from investing activities ‐3,250 ‐1,832 ‐2,000 ‐2,999Free cash flow 15,366 14,632 13,207 15,465Debt raised/(repaid) 1,393 ‐11,699 0 0Dividend (incl. tax) ‐5,471 ‐7,166 ‐9,670 ‐11,093Cash flow from financing activities ‐4,075 ‐18,861 ‐9,670 ‐11,093Net chg in cash 11,292 ‐4,229 3,537 4,372 Valuation Ratios

CY13 CY14 CY15E CY16E Per Share data EPS (INR) 114.4 123.0 111.7 143.6Growth, % 3.3 7.5 (9.2) 28.6Book NAV/share (INR) 245.7 294.3 258.8 287.3FDEPS (INR) 114.4 123.0 111.7 143.6CEPS (INR) 149.7 158.9 149.3 184.0CFPS (INR) 168.5 163.2 148.0 181.6DPS (INR) 48.5 63.0 85.0 97.5Return ratios Return on assets (%) 20.0 20.4 20.6 26.8Return on equity (%) 46.6 41.8 43.2 50.0Return on capital employed (%) 34.3 37.3 40.4 52.5Turnover ratios Asset turnover (x) 4.1 4.9 5.2 7.4Sales/Total assets (x) 1.6 1.7 1.7 2.1Sales/Net FA (x) 2.5 2.8 2.7 3.4Working capital/Sales (x) (0.2) (0.2) (0.2) (0.2)Fixed capital/Sales (x) 0.7 0.7 0.7 0.6Working capital days (60.1) (59.5) (69.3) (57.9)Liquidity ratios Current ratio (x) 1.0 0.8 0.7 0.8Quick ratio (x) 0.7 0.5 0.4 0.6Interest cover (x) 44.9 120.6 92.0 140.2Dividend cover (x) 2.4 2.0 1.3 1.5Total debt/Equity (%) 50.2 0.7 0.8 0.7Net debt/Equity (%) (7.5) (32.6) (33.1) (45.6)Valuation PER (x) 52.9 49.2 54.2 42.1Price/Book (x) 24.6 20.6 23.4 21.0EV/Net sales (x) 6.4 5.9 6.5 5.2EV/EBITDA (x) 29.4 27.8 34.4 23.9EV/EBIT (x) 35.4 33.5 43.9 28.6



Godrej Consumer Products (GCPL IN) International portfolio to disappoint INDIA | SECTOR | Company Update

14 September 2015

Among Indian FMCG peers, GCPL has the highest amount of international exposure in its sales portfolio at around 47%. The company has major exposure in other emerging markets (Indonesia, South Africa, Argentina, Chile and others). However, most of these countries are driven primarily by commodities and hence moderation in commodity prices has affected the GDP growth in these countries. Also, currencies of most of these countries have depreciated sharply against the dollar (vs. INR’s limited depreciation). As a result we expect low constant‐currency growth and even lower reported currency growth for GCPL’s international business in FY16. In the domestic business, we expect strong growth in Hair Care and Home Care segments and moderate growth in Personal Wash in FY16. While low input costs will help in margin expansion for domestic and international business, low overall sales growth may lead to disappointment on earnings. We have reduced our estimates for FY16/17 by 4%/7% taking into account lower realisation growth and low international business growth. We downgrade the stock to Neutral and value it at Rs 1240 using SOTP (implied multiple of 32 on our FY17 earnings) Personal wash growth to be impacted by low realisation growth and deficient monsoon: Most companies have taken price cuts on some soap SKUs as per our channel checks. This is because they are passing on benefits of a fall in palm oil prices. We expect palm oil prices to remain subdued in FY16 and hence estimate flattish/low‐single‐digit price hike in FY16/17. Domestic hair care/home care businesses to show robust growth: We expect hair care and home care businesses in domestic markets to grow in double digits in FY16/17. In these two categories, GCPL has recently introduced various innovations like Godrej Nupur Coconut Henna Crème, new variants in air fresheners, Good Knight Fast Card, and new variants in premium hair care brand BBlunt. We believe that new innovations will help drive volume and value growth for GCPL in FY16/17. International markets will disappoint on worsening GDP growth/ depreciating currencies: GCPL has business exposure in commodity‐driven markets like Indonesia, Argentina, Chile, Brazil, and various African countries. As per our analysis, most of these markets are seeing slowdown in GDP growth by 10‐100 bps because of a recent fall in commodity prices. Also, currencies of most of these countries have depreciated not only against USD but also against INR by 5‐10%. Our discussion with a market expert in Indonesia also confirmed that global commodity rout has taken a toll on Indonesian FMCG demand environment. Hence, we expect GCPL’s international portfolio to disappoint on constant currency and reported currency growth. Reduce estimates; downgrade to Neutral: We have reduced our estimates for FY16/17 taking into account low realisations growth and subdued demand and currency depreciation in other emerging economies in which GCPL operates. We value the stock using SOTP at Rs 1240 (implied multiple of 32 FY17 earnings). Due to limited upside and chances of negative surprises, we downgrade the stock to neutral.

NEUTRAL (Downgrade) CMP RS 1247 TARGET RS 1240 (‐1%) COMPANY DATA O/S SHARES (MN) : 341MARKET CAP (RSBN) : 425MARKET CAP (USDBN) : 652 ‐ WK HI/LO (RS) : 1459 / 835LIQUIDITY 3M (USDMN) : 4PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % PROMOTERS : 63.3FII / NRI : 28.7FI / MF : 2.0NON PROMOTER CORP. HOLDINGS : 0.3PUBLIC & OTHERS : 5.8 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐13.9 7.7 14.7REL TO BSE ‐5.1 12.2 20.0 PRICE VS. SENSEX



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GODREJ CONSUMER PRODUCTS COMPANY UPDATE

Segment details (Rs. Mn) Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q1FY16

Growth YoY,%

Domestic business 9,230 10,240 10,450 10,330 9,770 10,910 11,670 11,340 10,950 12.1Soaps 3,794 3,229 3,117 2,868 3,865 3,649 3,459 3,297 4,367 13.0Hair Colour 1,130 1,222 1,217 1,148 1,288 1,332 1,338 1,286 1,442 12.0Household Insecticide 3,473 5,040 4,580 5,141 3,786 5,141 5,313 5,706 4,353 15.0Others 436 426 1,230 666 436 468 1,255 666 337 (22.7)Exports 394 323 308 509 394 323 308 387 450 14.3International Business Sales 8,030 9,410 9,460 9,050 9,170 9,650 10,690 9,560 9,860 7.5EBITDA 830 1,060 1,170 1,210 960 1,150 1,673 1,350 1,310 36.5EBITDA Margin, % 10.3 11.3 12.4 13.4 10.5 11.9 15.7 14.1 13.3Indonesia Sales 3,190 3,610 3,430 3,440 3,490 3,660 3,900 3,400 3,530 1.1EBITDA 351 469 466 478 426 556 659 646 741 74.1EBITDA Margin, % 11.0 13.0 13.6 13.9 12.2 15.2 16.9 19.0 21.0Africa Sales 2,140 2,500 2,910 2,475 2,500 2,740 3,790 2,820 3,140 25.6EBITDA 278 360 501 384 350 304 652 341 399 13.9EBITDA Margin, % 13.0 14.4 17.2 15.5 14.0 11.1 17.2 12.1 12.7Latin America Sales 1,300 1,540 1,680 1,525 1,260 1,470 1,690 1,750 1,560 23.8EBITDA 78 106 148 296 49 184 194 362 140 185.7EBITDA Margin, % 6.0 6.9 8.8 19.4 3.9 12.5 11.5 20.7 9.0UK Sales 1,150 1,380 1,110 1,150 1,640 1,330 910 1,130 1,550 (5.5)EBITDA 104 132 70 106 138 117 78 95 141 2.4EBITDA Margin, % 9.0 9.6 6.3 9.2 8.4 8.8 8.6 8.4 9.1Contribution % Domestic business Soaps 41.1 31.5 29.8 27.8 39.6 33.4 29.6 29.1 39.9Hair Colour 12.2 11.9 11.6 11.1 13.2 12.2 11.5 11.3 13.2Household Insecticide 37.6 49.2 43.8 49.8 38.7 47.1 45.5 50.3 39.8Others 4.7 4.2 11.8 6.4 4.5 4.3 10.8 5.9 3.1Exports 4.3 3.2 3.0 4.9 4.0 3.0 2.6 3.4 4.1International Business Indonesia 39.7 38.4 36.3 38.0 38.1 37.9 36.5 35.6 35.8Africa 26.7 26.6 30.8 27.3 27.3 28.4 35.5 29.5 31.8Latin America 16.2 16.4 17.8 16.9 13.7 15.2 15.8 18.3 15.8UK 14.3 14.7 11.7 12.7 17.9 13.8 8.5 11.8 15.7

Source: PhillipCapital India Research

Change in estimates (Rs mn) Earlier estimates Revised estimates Upgrade/(downgrade) (%) FY16E FY17E FY16E FY17E FY15E FY16ENet Sales 95,257 111,088 92,733 106,130 (2.6) (4.5)EBITDA 17,734 20,625 17,029 19,235 (4.0) (6.7)EBITDA margin (%) 18.6 18.6 18.4 18.1 (24) (48)Adj PAT 12,255 14,341 11,709 13,278 (4.5) (7.4)Adj PAT margin (%) 12.9 12.9 12.6 12.5 (27) (39)Adj EPS (Rs) 36 42.1 34.4 39.0 (4.4) (7.3)




SOTP valuation (Rs mn) EBITDA for FY17E Target EV/EBITDA Target EVIndia 11,585 23.0 266,466Africa 3,244 18.4 59,690Indonesia 2,590 20.7 53,622UK 650 23.0 14,948LatAm 1,142 20.7 23,647Total 418,373 GCPL EBITDA for FY17E EV 418,373 Implied EV/EBITDA 22.3 Net Debt 21,984 Cash 25,104 Market Cap 421,494 Share Price 1,238

Source: Company, PhillipCapital India Research Growth assumptions Reported currency sales growth (in % yoy) FY16 FY17Domestic 12.5 14.8Personal Wash 12.0 15.0Hair Care 12.0 15.0Home Care 13.0 15.0Others 12.0 12.0

International 12.3 13.8Africa 15.0 15.0Indonesia 8.0 10.0UK 15.0 20.0LatAm 15.0 15.0

Source: PhillipCapital India Research Estimates GDP growth and currency valuations for key international markets of GCPL Country GDP

growth Q1FY15

GDP growth Q1FY16

1 INR to Q2FY15 Q2FY16 INR change vsrespectivecurencies

India 6.7 7.0

Indonesia 5.0% 4.7% Indonesian Rupiah 194.1 211.4 8.9%

Argentina 0.7% *1.1% Argentinian Peso 0.118 0.121 2.5%

Chile 2.1% 1.9% Chilean Peso 9.53 10.40 9.1%

Brazil ‐1.2% ‐2.6% Brazilian Real 0.0375 0.0529 41.1%

Nigeria 6.5% 2.4% Nigerian Niara 2.681 3.071 14.5%

South Africa 1.3% 1.2% South African Rand 0.1777 0.1981 11.5%

Kenya Kenyan Shilling 1.457 1.583 8.6%

*For Q4FY15 for Argentina

In all major international markets of GCPL, GDP growth has slowed down which will impact constant currency growth. Also, Indian currency has appreciated against most emerging market currencies which will further lower reported currency growth.



Brazil GDP growth and currency valuation Indonesia GDP growth and currency valuation

South Africa GDP growth and currency valuation Argentina GDP growth and currency valuation

Chile GDP growth and currency valuation Nigeria GDP growth and currency valuation


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Financials

Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eNet sales 75,826 82,422 92,733 106,130Growth, % 18.5 8.7 12.5 14.4Other income 198 342 389 440Total income 76,024 82,764 93,122 106,570Raw material expenses ‐35,547 ‐38,415 ‐41,665 ‐47,480Employee expenses ‐7,424 ‐7,770 ‐8,675 ‐10,009Other Operating expenses ‐21,218 ‐22,893 ‐25,753 ‐29,847EBITDA (Core) 11,835 13,686 17,029 19,235Growth, % 16.6 15.6 24.4 13.0Margin, % 15.6 16.6 18.4 18.1Depreciation ‐819 ‐908 ‐941 ‐980EBIT 11,017 12,778 16,088 18,255Growth, % 17.4 16.0 25.9 13.5Margin, % 14.5 15.5 17.3 17.2Interest paid ‐1,074 ‐1,002 ‐1,001 ‐907Other Non‐Operating Income 627 737 1,052 1,210Pre‐tax profit 10,297 12,487 16,140 18,559Tax provided ‐2,104 ‐2,723 ‐3,633 ‐4,363Profit after tax 8,193 9,764 12,507 14,195Others (Minorities, Associates) ‐596 ‐694 ‐798 ‐918Net Profit 7,592 8,899 11,560 13,278Growth, % 6.0 15.6 28.7 13.4Net Profit (adjusted) 7,871 9,097 11,709 13,278Unadj. shares (m) 340 340 340 340Wtd avg shares (m) 340 340 340 340 Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17eCash & bank 7,048 8,942 16,314 25,104Debtors 7,321 8,046 8,957 10,141Inventory 10,821 10,717 11,510 12,986Loans & advances 3,550 3,683 3,958 4,317Other current assets 11 76 76 76Total current assets 28,751 31,464 40,814 52,624Investments 1,363 1,857 1,857 1,857Gross fixed assets 58,035 63,331 63,861 64,541Less: Depreciation ‐6,821 ‐7,821 ‐8,762 ‐9,742Add: Capital WIP 1,671 2,246 2,246 2,246Net fixed assets 52,884 57,756 57,345 57,045Total assets 83,247 91,419 100,360 111,869Current liabilities 19,411 19,448 21,599 24,998Total current liabilities 19,411 19,448 21,599 24,998Non‐current liabilities 23,831 27,244 24,606 22,015Total liabilities 43,242 46,692 46,206 47,014Paid‐up capital 340 340 340 340Reserves & surplus 37,414 42,766 51,395 61,179Shareholders’ equity 40,005 44,727 54,154 64,856Total equity & liabilities 83,247 91,419 100,360 111,869 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY14 FY15 FY16e FY17ePre‐tax profit 10,297 12,487 16,140 18,559Depreciation 819 908 941 980Chg in working capital 2,340 ‐797 172 379Total tax paid ‐2,154 ‐2,817 ‐3,633 ‐4,363Cash flow from operating activities 11,285 9,782 12,111 15,554Capital expenditure ‐7,335 ‐5,779 ‐530 ‐680Cash flow from investing activities ‐4,948 ‐6,273 ‐530 ‐680Free cash flow 6,337 3,508 11,581 14,875Equity raised/(repaid) ‐221 ‐217 0 0Debt raised/(repaid) ‐830 3,428 ‐2,638 ‐2,591Dividend (incl. tax) ‐2,091 ‐2,240 ‐2,931 ‐3,494Cash flow from financing activities ‐6,333 ‐353 ‐5,569 ‐6,085Net chg in cash 4 3,155 6,012 8,790 Valuation Ratios

FY14 FY15 FY16e FY17ePer Share data EPS (INR) 23.1 26.7 34.4 39.0Growth, % 5.9 15.6 28.7 13.4Book NAV/share (INR) 110.9 126.6 152.0 180.7FDEPS (INR) 23.1 26.7 34.4 39.0CEPS (INR) 26.3 29.5 37.2 41.9CFPS (INR) 31.4 26.6 36.9 42.1DPS (INR) 5.3 5.5 7.3 8.7Return ratios Return on assets (%) 11.1 11.9 13.7 13.9Return on equity (%) 20.8 21.1 22.6 21.6Return on capital employed (%) 14.4 15.3 17.4 17.8Turnover ratios Asset turnover (x) 1.4 1.4 1.5 1.8Sales/Total assets (x) 0.9 0.9 1.0 1.0Sales/Net FA (x) 1.5 1.5 1.6 1.9Working capital/Sales (x) 0.0 0.0 0.0 0.0Fixed capital/Sales (x) ‐ ‐ ‐ ‐Working capital days 11.0 13.6 11.4 8.7Liquidity ratios Current ratio (x) 1.5 1.6 1.9 2.1Quick ratio (x) 0.9 1.1 1.4 1.6Interest cover (x) 10.3 12.8 16.1 20.1Dividend cover (x) 4.4 4.9 4.7Total debt/Equity (%) 63.0 63.1 47.5 35.7Net debt/Equity (%) 44.3 42.4 16.0 (5.1)Valuation PER (x) 53.9 46.7 36.3 32.0Price/Book (x) 11.2 9.8 8.2 6.9Yield (%) 0.4 0.4 0.6EV/Net sales (x) 5.8 5.4 4.7 4.0EV/EBITDA (x) 37.3 32.3 25.4 21.9EV/EBIT (x) 40.0 34.6 26.9 23.1


FMCG SECTOR UPDATE

Appendix Bloomberg Consensus EPS Charts

Source: Bloomberg, PhillipCapital India Research

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HUL EPS HUL Price (RHS)

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ITC EPS ITC Price (RHS)

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1/1/20

15

2/1/20

15

3/1/20

15

4/1/20

15

5/1/20

15

6/1/20

15

7/1/20

15

8/1/20

15

9/1/20

15

GCPL EPS GCPL Price (RHS)


FMCG SECTOR UPDATE

Bloomberg Consensus EPS Charts


0

1000

2000

3000

4000

5000

6000

7000

188.0

190.0

192.0

194.0

196.0

198.0

200.0

202.0

8/1/20

14

9/1/20

14

10/1/201

4

11/1/201

4

12/1/201

4

1/1/20

15

2/1/20

15

3/1/20

15

4/1/20

15

5/1/20

15

6/1/20

15

7/1/20

15

8/1/20

15

9/1/20

15

SKB EPS SKB Price (RHS)

0

400

800

1200

1600

2000

34.0

36.0

38.0

40.0

42.0

44.0

46.0

48.0

50.0

8/1/20

14

9/1/20

14

10/1/201

4

11/1/201

4

12/1/201

4

1/1/20

15

2/1/20

15

3/1/20

15

4/1/20

15

5/1/20

15

6/1/20

15

7/1/20

15

8/1/20

15

9/1/20

15

JUBI EPS JUBI Price (RHS)

0

100

200

300

400

500

600

15.0

16.0

17.0

18.0

19.0

20.0

21.0

8/1/20

14

9/1/20

14

10/1/201

4

11/1/201

4

12/1/201

4

1/1/20

15

2/1/20

15

3/1/20

15

4/1/20

15

5/1/20

15

6/1/20

15

7/1/20

15

8/1/20

15

9/1/20

15

Bajaj Corp EPS Bajaj Corp Price (RHS)

0

200

400

600

800

1000

21.0

22.0

23.0

24.0

25.0

26.0

27.0

8/1/20

14

9/1/20

14

10/1/201

4

11/1/201

4

12/1/201

4

1/1/20

15

2/1/20

15

3/1/20

15

4/1/20

15

5/1/20

15

6/1/20

15

7/1/20

15

8/1/20

15

9/1/20

15

APNT EPS APNT Price (RHS)

280

300

320

340

360

380

13.0

14.0

15.0

16.0

17.0

18.0

8/1/20

14

9/1/20

14

10/1/201

4

11/1/201

4

12/1/201

4

1/1/20

15

2/1/20

15

3/1/20

15

4/1/20

15

5/1/20

15

6/1/20

15

7/1/20

15

8/1/20

15

9/1/20

15

ITC EPS ITC Price (RHS)

0

500

1000

1500

2000

2500

52.0

53.0

54.0

55.0

56.0

57.0

58.0

59.0

60.0

8/1/20

14

9/1/20

14

10/1/201

4

11/1/201

4

12/1/201

4

1/1/20

15

2/1/20

15

3/1/20

15

4/1/20

15

5/1/20

15

6/1/20

15

7/1/20

15

8/1/20

15

9/1/20

15

Colgate EPS Colgate Price (RHS)


FMCG SECTOR UPDATE

Bloomberg Consensus EPS Charts

0

500

1000

1500

2000

2500

3000

3500

0.010.020.030.040.050.060.070.080.090.0

8/1/20

14

9/1/20

14

10/1/201

4

11/1/201

4

12/1/201

4

1/1/20

15

2/1/20

15

3/1/20

15

4/1/20

15

5/1/20

15

6/1/20

15

7/1/20

15

8/1/20

15

9/1/20

15

Britannia EPS Britannia Price (RHS)

0

100

200

300

400

500

600

700

800

18.0

19.0

20.0

21.0

22.0

23.0

8/1/20

14

9/1/20

14

10/1/201

4

11/1/201

4

12/1/201

4

1/1/20

15

2/1/20

15

3/1/20

15

4/1/20

15

5/1/20

15

6/1/20

15

7/1/20

15

8/1/20

15

9/1/20

15

ATFL EPS ATFL Price (RHS)


FMCG SECTOR UPDATE

Prices of key commodities are down


0

10

20

30

40

50

60

0

30

60

90

120

150 Brent crude USD/bblBrent crude INR/ltr (RHS)

0

20

40

60 palm oil INR/kg

0

20

40

60

80

100

120

140

160

180 Cochin Coconut OIL INR/kg

0

20

40

60

80

100 Light Liquid Paraffin INR/kg

0

50

100

150

200

250

300

350 TiO2 INR/kg

0

5

10

15

20

25

30

35

40 MCX Sugar spot india INR/kg


FMCG SECTOR UPDATE

Prices of key commodities are down


0200

400600

800

1,0001,200

1,4001,600

1,800MCX wheat index WPI index

0

50

100

150

200

250

300Milk WPI index


FMCG SECTOR UPDATE

NOTES


FMCG SECTOR UPDATE

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%

SELL <= ‐15% Target price is less than or equal to ‐15%.

Stock Price, Price Target and Rating History (Dabur)

Stock Price, Price Target and Rating History (Britannia)

Stock Price, Price Target and Rating History (Bajaj Corp)

B (TP 160

B (TP 170)

B (TP 196)B (TP 205)

B (TP 225)B (TP 265)

B (TP 315) B (TP 300)

B (TP 342)

50

70

90

110

130

150

170

190

210

230

250

270

290

310

330

J‐13 F‐13 A‐13 M‐13 J‐13 A‐13 S‐13 N‐13 D‐13 F‐14 M‐14 M‐14 J‐14 A‐14 S‐14 N‐14 J‐15 F‐15 A‐15 M‐15 J‐15 A‐15

B (TP 635)

B (TP 710)

B (TP 900)

B (TP 900)

N (TP 1600)

B (TP 1050)

B (TP 1370)

B (TP 2230)

N (TP 2600)

N (TP 3430)

0

500

1000

1500

2000

2500

3000

3500

4000

J‐13 F‐13 M‐13 M‐13 J‐13 A‐13 S‐13 N‐13 D‐13 J‐14 M‐14 A‐14 J‐14 J‐14 S‐14 O‐14 D‐14 J‐15 M‐15 A‐15 J‐15 J‐15 A‐15

B (TP 335)

B (TP 335)

B (TP 270) B (TP 240)

B (TP 267)

B (TP 340)

B (TP 510)

B (TP 530)

B (TP 513)

150

180

210

240

270

300

330

360

390

420

450

480

510

540



FMCG SECTOR UPDATE

Stock Price, Price Target and Rating History (Jubilant Foodworks)

Stock Price, Price Target and Rating History (ITC)

Stock Price, Price Target and Rating History (HUL)

N (TP 1075)

N (TP 1020)

N (TP 1020)

S (TP 950)

S (TP 950) S (TP 950)

S (TP 950) B (TP 1750)

B (TP 1850)B (TP 1850)

B (TP 2000)

0

50

100

150

200

250

300

350

400


S (TP 300)S (TP 300)

S (TP 300) B (TP 320)

S (TP 340)

N (TP 300) S (TP 300)

200

250

300

350

400

450

O‐13 N‐13 J‐14 F‐14 M‐14 M‐14 J‐14 A‐14 S‐14 N‐14 D‐14 F‐15 M‐15 M‐15 J‐15 A‐15

S (TP 410)

S (TP 507)S (TP 500)

N (TP 560) N (TP 550)

B (TP 770) B (TP 870)

B (TP 1010)

N (TP 844)

N (TP 844)

100

200

300

400

500

600

700

800

900

1000

1100



FMCG SECTOR UPDATE

Stock Price, Price Target and Rating History (Marico)

Stock Price, Price Target and Rating History (Nestle)

Stock Price, Price Target and Rating History (GCPL)

S (TP 190)

B (TP 230) N (TP 210)

N (TP 230)N (TP 265)

N (TP 355)

B (TP 419)N (TP 413)

N (TP 415)

50

100

150

200

250

300

350

400

450

500


N (TP 4700)

N (TP 4400)

S (TP 4150)

S (TP 4800)N (TP 4950)

N (TP 5700)

N (TP 6680)

S (TP 5110)S (TP 5470)

2000

3000

4000

5000

6000

7000

8000


N (TP 670)

Sell (TP 740)

N (TP 705)N (TP 4200)

N (TP 4700)

N (TP 870)B (TP 1260)

B (TP 1462)

200300400500600700800900

100011001200130014001500



FMCG SECTOR UPDATE

Contact Information (Regional Member Companies)

SINGAPORE: Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA: Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG: Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN: Phillip Securities Japan, Ltd 4‐2 Nihonbashi Kabutocho, Chuo‐ku

Tokyo 103‐0026 Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141

www.phillip.co.jp

INDONESIA: PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A,

Jakarta 10220, Indonesia Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809

www.phillip.co.id

CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318

Shanghai 200 001 Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940

www.phillip.com.cn

THAILAND: Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road,

Silom, Bangrak, Bangkok 10500 Thailand Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921

www.phillip.co.th

FRANCE: King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance

75008 Paris France Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017

www.kingandshaxson.com

UNITED KINGDOM: King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street

London, EC4N 6AS Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835

www.kingandshaxson.com

UNITED STATES: Phillip Futures Inc. 141 W Jackson Blvd Ste 3050

The Chicago Board of Trade Building Chicago, IL 60604 USA

Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA: PhillipCapital Australia Level 37, 530 Collins Street

Melbourne, Victoria 3000, Australia Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309

www.phillipcapital.com.au

SRI LANKA: Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha,

Colombo 2, Sri Lanka Tel: (94) 11 2429 100 Fax: (94) 11 2429 199

www.ashaphillip.net/home.htm

INDIA: PhillipCapital (India) Private Limited No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

Management(91 22) 2300 2999

Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946(91 22) 6667 9735

Research Engineering, Capital Goods Midcap

Dhawal Doshi (9122) 6667 9769 Jonas Bhutta (9122) 6667 9759 Amol Rao (9122) 6667 9952Nitesh Sharma, CFA (9122) 6667 9965 Hrishikesh Bhagat (9122) 6667 9986

Portfolio StrategyAgri Inputs Infrastructure & IT Services Anindya Bhowmik (9122) 6667 9764Gauri Anand (9122) 6667 9943 Vibhor Singhal (9122) 6667 9949

Deepan Kapadia (9122) 6667 9992 TechnicalsBanking, NBFCs Subodh Gupta, CMT (9122) 6667 9762Manish Agarwalla (9122) 6667 9962 Logistics, Transportation & MidcapPradeep Agrawal (9122) 6667 9953 Vikram Suryavanshi (9122) 6667 9951 Production ManagerParesh Jain (9122) 6667 9948 Ganesh Deorukhkar (9122) 6667 9966

MetalsConsumer, Media, Telecom Dhawal Doshi (9122) 6667 9769 Database ManagerNaveen Kulkarni, CFA, FRM (9122) 6667 9947 Yash Doshi (9122) 6667 9987 Deepak Agarwal (9122) 6667 9944Jubil Jain (9122) 6667 9766Manoj Behera (9122) 6667 9973 Oil & Gas Editor

Sabri Hazarika (9122) 6667 9756 Roshan Sony 98199 72726CementVaibhav Agarwal (9122) 6667 9967 Pharma Sr. Manager – Equities Support

Surya Patra (9122) 6667 9768 Rosie Ferns (9122) 6667 9971Economics Mehul Sheth (9122) 6667 9996Anjali Verma (9122) 6667 9969

Sales & Distribution Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747 Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745Sidharth Agrawal (9122) 6667 9934 ExecutionBhavin Shah (9122) 6667 9974 Mayur Shah (9122) 6667 9945

Corporate Communications

Vineet Bhatnagar (Managing Director)

Jignesh Shah (Head – Equity Derivatives)

Automobiles


FMCG SECTOR UPDATE

Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.

Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co‐managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report: Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of thecompany(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No4 PCIL or its affiliates have managed or co‐managed in the previous twelve months a private or public offering of securities for the

company(ies) covered in the Research report No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.


FMCG SECTOR UPDATE

Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.

Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. The recipient should carefully consider whether trading/investment is appropriate for the recipient in light of the recipient’s experience, objectives, financial resources and other relevant circumstances. PCIPL and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by the recipient. The recipient is further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek trading/investment advice before investing. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PCIPL and any of its employees, directors, associates, group entities, affiliates are not inducing the recipient for trading/investing in the financial market(s). Trading/Investment decision is the sole responsibility of the recipient.

For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S.‐regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances, and trading securities held by a research analyst account.

This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by the U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated, and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor.

In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

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