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Equity Resear

17 October 20

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companiescovered in its research reports. As a result, investors should be aware that the firm may have aconflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

This research report has been prepared in whole or in part by equity research analysts based outsidethe US who are not registered/qualified as research analysts with FINRA.

PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE

243.

India Consumer

Positioning for rising rural consumption;

Overweight on ITC and DaburWe initiate coverage on the Indian Consumer sector with ITC and Dabur as our top

OW picks. ITCs Cigarettes business is likely to sustain long term positive volume

growth, as we believe the peak inflection point for per capita consumption could be

~15 years away. Near-term, we view FY14 as a year of acclimatisation for ITC and

expect a rebound in cigarette volumes post two years of high-teens price hikes. In

the Indian FMCG market, we believe long-term positive consumption trends are

balanced by near-term concerns. However, pockets of strong growth exist in the

rural and exports market, with Dabur our preferred pick on this theme. In this

report we also initiate coverage on GCPL at EW and on HUL and Nestle India at UW.

ITC (OW; PT Rs409): Global consumption evolution points to positive volume outlook:

Contrary to studies (WHO) estimating cigarette PED as -0.4, we estimate ITC posted

volume CAGR of 3.3%, despite price CAGR of 9.7% over FY03-FY13. Analysis of global

trends points to an explanation, where cigarette consumption/capita peaks at ~US$20k

GDP (PPP)/capita, and assuming a 12% Nominal GDP CAGR then India could hit this

peak around 2027. Near-term, FY14 is likely to be a year of acclimatisation after two years

of consecutive high-teens price hikes and volumes could rebound. Improving profitability

in ITCs FMCG Others segment should further help OPM expansion (120bps by FY16E),

and we forecast revenue/EPS CAGR of 18%/20% over FY13-FY16E.

Dabur (OW; PT Rs199) best play on rural growth: Rural India spend is growing at 400-

500bps higher than urban spend, as urban consumers downtrade from premium

products. We believe Dabur, with 48% of its domestic FY13 revenues from the rural

market, offers the best exposure to this growth, while firms like HUL and Nestle India face

bleaker volume prospects in the near-term. Our longer term growth outlook for the India

consumer sector is still positive, and while staples deceleration is seen in most economies

at a per capita GDP of US$5,500, we believe this is still 10 years away for India (link).

Parent company a better way to play EM theme vs HUL (UW; PT Rs521)? For global

emerging market (EM) consumption exposure, Unilever (OW; PT GBp2,900) trading at

16.5x CY14E EPS may be a cheaper way to play the theme versus HUL on 35x FY15E.

De-rating possible for valuation leaders; prefer alpha over beta:Our India consumer

coverage trades at a 1-yr fwd P/E of 29.6x, a ~26% premium over the 15-yr average. The

expanded premium (95% vs Sensex) is a function of defensive shift, which may not be

sustained with the receding volume growth outlook. With HUL and Nestle India (UWs)

looking expensive at 35x and 36x P/E FY15E respectively, we see stock selection as key.

Risks: 1) OPM pressure due to adverse commodity price movements; 2) liquidity shift

from defensive sectors; 3) monsoon season/government support driving rural growth.

INDUSTRY UPDATE

Asia ex-Japan Cosmetics and HPCNEUTRAL

from N/A

Asia ex-Japan Staples

NEUTRAL

Unchanged

For a full list of our ratings, price target andearnings changes in this report, please seetable on page 2.

Asia ex-Japan Staples

Balaji Prasad, M.D.+91 22 6719 6295

[email protected]

BSIPL, Mumbai

Rohit Goel

+91 22 6719 6029

[email protected]

BSIPL, Mumbai

Vineet Sharma, CFA

+852 2903 4609

[email protected]

Barclays Bank, Hong Kong

European Staples

Simon Hales

+44 (0)20 3555 2107

[email protected]

Barclays, London

Liam Rowley

+44 (0)20 3134 3200

[email protected]

Barclays, London

Iain Simpson

+44 (0)20 3555 3598

[email protected]

Barclays, London
https://live.barcap.com/go/publications/content?contentPubID=FC1837020https://live.barcap.com/go/publications/content?contentPubID=FC1837020https://live.barcap.com/go/publications/content?contentPubID=FC1837020https://live.barcap.com/go/publications/content?contentPubID=FC1837020


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Barclays | India Consumer

17 October 2013 2

Summary of our Ratings, Price Targets and Earnings Estimates in this Report

Company Rating Price Target EPS FY1 (E) EPS FY2 (E)

Old New Date Price Old New %Chg Old New %Chg Old New %Chg

Asia ex-Japan Cosmetics and HPC NR Neu

Dabur India Ltd. (DABUR IN / DABU.NS) N/A OW 14-Oct-2013 169.30 N/A 199.00 - N/A 5.16 - N/A 6.62 -

Godrej Consumer Products Ltd. (GCPL IN / GOCP.NS) N/A EW 14-Oct-2013 826.50 N/A 901.00 - N/A 25.00 - N/A 32.18 -

Hindustan Unilever Ltd. (HUVR IN / HLL.NS) N/A UW 14-Oct-2013 598.05 N/A 521.00 - N/A 16.35 - N/A 17.35 -

Asia ex-Japan Staples Neu Neu

ITC Ltd. (ITC IN / ITC.NS) N/A OW 14-Oct-2013 339.50 N/A 409.00 - N/A 10.81 - N/A 13.07 -

Nestle India Ltd. (NEST IN / NEST.NS) N/A UW 14-Oct-2013 5095.30 N/A 4224.00 - N/A 122.73 - N/A 140.79 -

Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.

FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research.

Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended

Industry View: Pos: Positive; Neu: Neutral; Neg: Negative
http://my.barcapint.com/BC/composite/GER_COMPANY?ticker=DABU.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=GOCP.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=HLL.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=ITC.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=NEST.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=NEST.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=ITC.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=HLL.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=GOCP.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=DABU.NS


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17 October 2013 3

KEY CHARTS HIGHLIGHTING OUR INDIA CONSUMER INVESTMENT THESISFIGURE 1Five phases of growth for Indian FMCG market, 1994-2016

FIGURE 2P/E vs EPS CAGR comparison with Global Consumer sectors

Source: Reserve Bank of India (RBI), Barclays Research estimates Note: CAGR over FY13-16E.

Source: Company data, Barclays Research estimates

FIGURE 3Staples deceleration tipping point at US$5.5k GDP; It takes

an average of 9-10 years to reach US$5.5k from US$1.5k

(Indias current GDP/capita)

FIGURE 4Global evolution of annual per capita cigarette consumption

Source: International Monetary Fund (IMF), Barclays Research Source: Euromonitor, Company data, Barclays Research

FIGURE 5Indian Consumer rural vs urban split of FY13 revenues

FIGURE 6Indian Consumer P/E rerating of 120% in last four years

Source: Company data, Barclays Research Source: Company data, Barclays Research estimates

0%

5%

10%

15%

20%

25%

0%

5%

10%

15%

20%

25%30%

35%

40%

45%

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014E

2016E

Coverage Revenue Growth Nominal GDP Growth (RHS)

Ph5 Declining

growth phase

as macro

slowsPh2 Revenuegrowth dipped

sharply with GDP

Ph3 '03 - '10: Growth pickup

inline with macro recovery

Ph4 Inorganicgrowth spike

Ph1 Spurt in consumptionpost liberalization

US Food US Cosmetics& HPCUS B&T

Japan food,B&T

JapanCosmetics &

HPC

European

food

European

HPC

EuropeanB&T

Asia ex Japan

Staples (exIndia)

DaburGCPL

HUL

ITC

Nestle

IndianConsumer

Coverage

10

15

20

25

30

35

40

0% 5% 10% 15% 20% 25%

PEx

EPS 3 yr CAGR

500

1,500

2,500

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4,500

5,500

6,500

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

China Korea Taiwan India

India

Trajectory from ~$1,5k -

~$5,5k

China: 2002 - 2011

Korea: 1980 - 1990

Taiwan: 1978 - 1988China

Russia

USAIndonesia

JapanVietnam

India

Brazil

Germany

UK

0

500

1,000

1,500

2,000

2,500

3,000

0 10,000 20,000 30,000 40,000 50,000

Stickspercapita

GDP per capita ($)

Bubble size representstotal market volume(mn equivalent sticks)

30% 30% 35%40%

50%

70% 70% 65%60%

50%

0%

20%

40%

60%

80%

100%

Nestle GCPL ITC HUL Dabur

Rural Urban

0

10

20

30

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50

Sep-01

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

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Sep-11

Sep-12

Sep-13

Coverage PE multiple Average

+1 SD -1 SD


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17 October 2013 4

FIGURE 7Indian Consumer revenue & EPS CAGR snapshot

FIGURE 8ITC Cigarettes segment sustained EBIT margin expansion

and volume growth to result in strong revenue growth

Note: CAGR over FY13-16E.Source: Company data, Barclays Research estimates


FIGURE 9HUL 72% of revenues are from highly penetrated segments

FIGURE 10Dabur strong revenue growth/OPM expansion

Note: Column bars denote penetration levels end-FY13.Source: Company data, Barclays Research estimates


FIGURE 11Nestle India portfolio skewed towards urban consumption

FIGURE 12GCPL improvement in cash returns important for re-rating

Milk

Products

Prep

dishesBeverages

Choc /

Confectio

nary

0

4

8

12

0 4 8 12

Category/segmen

tprospects

Company positioning in the segment

Strong

Weak

StrongWeak

Moderate

Moderate

42%

32% 31%

18%

29%

15%14% 15%

16%17% 18%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

FY16E

Cash Returns (CROCI)

Sharp decline due to a spateof international acquisitions

Material Improvmentneeded

Note: Size of bubble indicates categorys proportional contribution to FY13 revs.Source: Company data, Barclays Research

Source: Thomson Reuters Datastream, Barclays Research estimates

18.4%

23.8%

21.2%

17.3%

12.2%

4.6%

18.3%19.7%

11.6%

14.0%

0%

5%

10%

15%

20%

25%

Rev Growth EPS Growth

Dabur GCPL HUL ITC Nestle

15.0%16.6%

13.4%

17.0%19.2%

15.5%

-2.8%

6.5%

1.0%

-0.1%

4.0% 4.0%

45%

50%

55%

60%

65%

70%

-5%

0%

5%

10%

15%

20%

2011

2012

2013

2014E

2015E

2016E

Revenue Growth Volume Growth OPM (RHS)

Acclimatisation to the price hikes

96%92%

87%

63% 63%

45%

26%

12%

0%

20%

40%

60%

80%

100%

120%

Soaps

Detergents Tea

HairCare

OralCare

SkinCare

Foods

Coffee

72% of revenues 28% ofrevenues

19% 21% 20% 30% 16% 17% 19% 19%

15.1%

16.9%

16.5%

14.8% 14.9%

15.9%

16.6%

16.9%

14%

15%

16%

17%

18%

10%

15%

20%

25%

30%

35%

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

FY16E

Revenue Growth EBIT Margin (RHS)

Acquisition driven


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17 October 2013 5

INVESTMENT SUMMARY: SELECTED OPPORTUNITIES EXIST IN DECLININGGROWTH ENVIRONMENT

We initiate coverage of five Indian consumer stocks, highlighting ITC and Dabur India

(both rated OW) as our top sector picks. We rate Godrej Consumer Products (GCPL) as

EW and suggest investors avoid Hindustan Unilever (HUL) and Nestle India (both rated

UW). We think the long-term positive consumption trends are balanced by near-term

concerns, where the confluence of declining volume growth and peak multiples (95%

premium vs Sensex) limits returns to investors, and see stock selection as key. We

identify two strong pockets of growth: 1) rural India, where consumption spending has

overtaken urban Indian spend over past few years, and is further boosted by a strong

monsoon season and government spending support; and 2) export growth, which we

believe is looking increasingly attractive against the backdrop of a depreciated INR. Our

stock initiations bring additions to our Asia ex-Japan Staples coverage (where we add ITC

and Nestle; Neutral industry view) and to a new industry Asia ex-Japan Cosmetics and

HPC on which we initiate coverage with a Neutral view (adding Dabur, GCPL and HUL).

Framework to generate alpha when the beta play fades out

With 4-5 years of continuous outperformance of the consumer sector in general, andspecifically our coverage group, we believe that the beta play is fading in relevance. In such

a scenario, we lay out our framework to identify potential alpha generation opportunities

and highlight our preferred picks that screen well on these parameters.

Rural market exposure: Rural Indian income is still holding strong, despite broad

weakness in the consumer market, and consumption spend in rural regions is still on

average 400-500bps above its urban counterparts. This is also a view corroborated by

companies on a bottom-up basis, and hence our bias is towards companies with greater

percentage of revenues from this geographic section.

Leaders in niche segments: We believe companies that have a unique or niche portfolio

and are relatively resistant to economic dips (parts of the Dabur and Godrej portfolios), or

where consumption demand is inelastic (ITC), could be reliable havens to generate alpha.

Exports to newer emerging markets: Following a 12% average depreciation in the

rupee this year, companies with a significant export component (Dabur 32%; Godrej

44% of FY13 revenues) also appear favourably poised to deliver growth. Further, it also

de-risks the business model from being dependent on just the Indian growth narrative.

Further market penetration: In our view, companies with a greater component of

products in markets that are not yet fully saturated can continue to deliver growth.

Additionally, the ability to create new markets or shift market preferences are positives

like Godrejs paper-based Good Knight mosquito repellent, which we believe has the

potential to enhance further market penetration.

ITC Ltd; Overweight; 12-month PT Rs409 (20% potential upside)Cigarette consumption on a roll; improving cash generation to sustain valuations

Global consumption evolution points to positive volume outlook: Contrary to studies

pointing to the price elasticity of demand (PED) of cigarettes being around -0.4, we

estimate ITC posted volume CAGR of 3.3% and price CAGR of 9.7% over FY03-FY13.

Analysis of global trends points to an explanation, where ~US$20k GDP/capita (PPP basis)

has generally been an inflection point for per capita cigarette consumption to peak, with

volumes declining thereafter. Assuming 12% Nominal GDP CAGR then we estimate India

could hit this peak around 2027. A more direct explanation could be that as rural

disposable income rises steadily (i.e. rural spend accelerating faster than urban), a shift to

cigarettes from chewable tobacco is likely to be a longer-term structural driver of growth.


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17 October 2013 6

Volume growth recovery in Cigarettes drives 3-year revenue/EPS CAGR of

18.3%/19.7%: ITC has hiked the prices of cigarettes by around 15%+ in the last three

years, explaining the muted volume CAGR of 1.5% over the same period. As these price

hikes are absorbed we forecast stronger volume CAGR of 2.5% over the next three years

(FY13-16E). Considering the material profit contribution from cigarettes (81% of EBIT in

FY13), we expect operating leverage to increase further and thus forecast revenue

CAGR of 18.3% over FY13-16E and stronger EPS CAGR of 19.7%.

ROIC to improve further by 600bps; 120bps OPM expansion over next three years:

The expected improvement in ROIC is not just driven from Cigarettes, but is also due to

the improving profitability from FMCG (Fast-Moving Consumer Goods) and Hotels.

Other metrics like ROE (stable despite significant growth in equity base) and CROCI

(cash return on cash invested, on the rise) point to further improving operating

fundamentals.

Valuation:We value ITC using sum-of-the-parts (SOTP) as our primary methodology.

We use P/E methodology to value all of ITCs segments, except FMCG Others where

we use P/S as it is in an investment phase and has yet to generate sustainable earnings.

Our 12-month price target of Rs409 implies potential upside of 20% and an implied P/E

of 31x, broadly in-line with the average FY15E P/E for the Indian Consumer sector.

Downside risks: 1) adverse tobacco industry regulations, as segment contributes 81%

of ITCs operating profits; 2) strong recovery in broader Indian equity market and

liquidity flows from defensives to cyclicals; and 3) any delay in FMCG & Hotel business

profitability due to macro slowdown or increased competition.

Dabur: Overweight; 12-month PT Rs199 (18% potential upside)

Best play on resilient rural growth; potential to rerate further

Our preferred play on resilient rural growth; 3-year revenue CAGR of 18%: Dabur

currently derives 48% of its domestic revenues (33% of group revenues as of FY13)

from the rural segments, where monthly per capita expenditure continues to see healthy

mid- to high-teens y/y growth, and we believe this should continue to rise

incrementally. This places it on a strong growth trajectory and we forecast 3-year

revenue CAGR (FY13-16E) of 18.4% (vs the peer average of 16.3%).

Niche portfolio, most insulated from declining macro growth: We expect volume

growth to pick up, especially for key categories like Hair Oil (Vatika should see increased

volume growth following price rationalisation of 1QFY14) and Foods (better

performance expected in 2HFY14 driven by increased traction in trade channels).

International segment business flux due to Namaste rebranding should end :

Following a challenging FY13 for Namaste (Daburs US subsidiary) owing to a

rebranding of the portfolio, we believe FY14 onwards should witness a recovery as

branding efforts gain ground. Further, a steeply depreciated rupee brings in significant

translation gains, helping boost profitability at the consolidated level by c50-75 bps.

Operating leverage coming into play could offset commodity price rise pressure: Our

OPM expansion forecasts are supported by: 1) increasing revenue contribution from

rural segments; 2) easing ad spends; 3) favourable move in Palm and Mustard Oil prices,

helping offset adverse price moves of commodity basket (LLP, Honey, Sugar); 4)

translation benefits due to INR depreciation; and 5) price increase of 2%-3% in Foods

segment.


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17 October 2013 7

Valuation: We value Dabur using one-year forward P/E as our primary methodology,

and applying a target multiple of 30x on FY15E which imputes a price target of Rs199.

The company currently trades on a one-year forward P/E of 26x (a 14% discount vs

peers), which is in-line with its historical trading range of 15-28x. We believe the stock is

likely to re-rate to higher end of its trading range, given its more resilient portfolio,

improving cash returns and ROE as operating leverage plays out.

Downside risks: 1) commodity pricing pressure on GM; 2) no margin expansion in theInternational segment; 3) rural growth decline and slowdown in Project Double traction;and 4) strong recovery in Indian equity market and liquidity shift from defensives.

Godrej Consumer: Equal Weight; 12-month PT Rs901 (9% potential upside)

Emerging market FMCG play; strong growth outlook priced in

Above peer growth (21.2% revenue CAGR vs 16.3% for coverage): We believe GCPL

will deliver one of the best revenue growth rates in our coverage over FY13-16E,

leveraging its unique hair care and household insecticides portfolio and also its

international market exposure. Hence, our forecast of 21.2% revenue CAGR over FY13-

16E (including organic CAGR of 17%) is ~490bps above our forecast for the industry of

16.3% CAGR.

Well positioned to cross sell its niche portfolio into newer markets: GCPLs household

insecticide and hair care portfolio in domestic markets are unique offerings vs other

FMCG peers. Hence, GCPL is a market leader in most categories, with dominant #1 or

#2 positions. With the spate of acquisitions over past few years, GCPL has also created

an international presence and distribution, where we believe these products can be

cross sold, driving organic growth over the near term. Hence, we forecast the

international business to grow at 25.3% CAGR (FY13-16E), even better than our

domestic revenue forecast of 17.8% CAGR.

Improved cash generation key for further re-rating: Rapid expansion of the companys

business through M&A has taken its toll on the returns profile, with most metrics

including ROE and ROIC showing a steep decline. In our view, GCPL needs to improve its

returns profile from these businesses to narrow the valuation discount vs peers at which

it trades, before we could get more constructive on the name.

Valuation: We value GCPL using one-year forward P/E as our primary methodology,

applying a target multiple of 28x (10% discount to peer average to reflect its weaker

cash returns profile) on FY15E which imputes a price target of Rs901. GCPL currently

trades at a P/E of 25.7x FY15E, which is a 24% premium to its 10-year historical trading

average of 21x, having re-rated materially in the past few years.

Risks:Downside risks: 1) heightened competition in the household insecticide segment;and 2) international market volatility, including currencies and socio-political changes.

Upside risks include: 1) better operating leverage than anticipated; and 2) better cross

selling of hair color products in international markets.

Hindustan Unilever: Underweight; 12-month PT Rs521 (13% potential

downside)

Receding volumes meet expensive multiples; better exposure through Unilever PLC

70% of sales are from high-penetration segments; needs premiumisation support:

HULs growth rates have decelerated over the past few quarters due to: 1) a broader

economic slowdown leading to a deceleration in consumption spend; and 2) stalling of

premiumisation, which has been the driver of growth for mature segments with high

penetration (Soaps, Detergents, Tea, and Oral Care). On a bottom-up basis, we forecast

a weak 3-year volume CAGR of 5%, down from the past 5-year volume CAGR of 8%.


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17 October 2013 8

Intensifying competitive landscape coincides with senior management change: Rising

competitive activity in Personal Care, including Skin Care (with launches by Dabur and

Emami) and Oral Care (P&Gs Oral B entered India in July2013).This also coincides with

recently announced senior management changes and the new management will need

to tackle these growth issues in HULs core categories.

No downside protection in a weakening macro environment: Owing to a flight

towards defensives in the past few years (exaggerated in the past year), the Indianconsumer sector in general, and HUL in particular, are trading at P/E valuations much

higher than their historical range. HUL currently trades at a 25% premium vs the higher

end of its historical range and at a 127% premium vs BSE Sensex (vs an average

premium of 75% over the last 20 years).

Valuations: 10-year peak multiples not justified; HUL exposure through Unilever?We

value HUL using one-year forward P/E (target P/E multiple of 30x, in-line with peers).

The stock trades at a current P/E of 34.5x FY15E vs its10-year trading range of 20-30x.

As we discuss in more detail inside, for global EM consumption exposure, we believe

HULs parent company Unilever PLC (ULVR.L; OW; PT GBp2,900) trading at 16.5x P/E

for CY14E (ex-EM subsidiaries) may be a better way to play the theme vs HUL.

Upside risks: 1) a sharp recovery in staples and discretionary spending on the back of aneconomic recovery; 2) stronger-than-expected traction in rural areas (40% of FY13 HUL

revenues); 3) moderation of pricing pressures in the Soaps & Skin Care segments.

Nestle India: Underweight; 12-month PT Rs4,224 (17% potential downside)

Sub-optimally positioned; mean reversion to sector multiples

Portfolio skewed towards urban consumers: Nestle generates ~70% of its revenues

from urban areas, because a large component of its portfolio is discretionary and

aspirational (higher-end products). However, the urban segment is facing pressure on

spending capability due to the weak macro environment, high inflation, and continued

discretionary spending headwinds.

Strategy of focusing on margins in lieu of volume growth limits ability to rebound : Inour view, over the last two years Nestle has focused more on pricing-driven growth than

expanding in a large market like India. While Nestle has managed to post healthy growth

rates, the economic downturn does limit its ability to consistently raise prices and focus

on premium products. The larger drawback of this strategy is that when the economy

rebounds, Nestle could be left significantly lagging peers who have gained overall

market share and enhanced their presence with consumers in rural communities.

Limited catalysts to support expanded multiples: Looking ahead, we see limited

catalysts over the near-term, either in the form of new product launches, focused efforts

to increase brand recall, or a rebound in the economy. Hence, we believe multiples that

have expanded by 75% in last five years may not be supported at the current levels.

Valuation: We value Nestle using one-year forward P/E as the primary methodology

and set our target P/E at 30x, in-line with the sector average and on par with its 20-year

historical average (a 20% discount to the current CY14E P/E of 36.2x) in view of its

modest revenue/earnings CAGR over CY12-15E of 11.6%/14.0%. Our 12-month price

target of Rs4,224 offers potential downside of 17%.

Upside risks:1) a sharp spike in discretionary segment demand like Chocolates, Milk,and Milk Foods on the back of a solid economic recovery; 2) less competitive pressure

than anticipated in beverages; and 3) sharper-than-expected recovery in urban market

consumption.


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17 October 2013 9

Sector risks

Changes to the macro outlook:Volume growth levels and valuation premium levels of

Indian Consumer stocks are highly correlated to the overall macro environment.

Discretionary spends & premiumisation trends:Changes could affect Indian consumer

stocks both in terms of volumes & margins (product mix changes and realisations).

Growth in emerging markets (EMs):Following a spate of EM acquisitions in the last fewyears (in particular by GCPL and Dabur), most companies are in consolidation mode but

may be affected if these geographies witness slower/faster recovery and worse/better

synergies than expected, along with any further volatility due to INR depreciation.

Rural consumption growth levels: Growth in rural areas and changes in disposable

incomes can be affected by multiple factors, including the monsoon season and also

government support for rural areas.

Liquidity shift: The Indian Consumer sector saw strong liquidity inflows following the

Global Financial Crisis in 2008, as the market rotated towards defensive sectors. Any

reversal of this could see liquidity flowing from defensives to cyclical.

Valuation comparison

FIGURE 13

Indian Consumer coverage summary valuation comparison

Stock

Stock Info Growth Metrics Valuation Metrics

Current

Price

12-mth

PT Pot. Up /

Mkt

Cap (FY13E - FY16E CAGR) FY2015E

Ticker Rating (in Rs) (in Rs) Downside (US$B) Sales EBIT EPS P/E EV/ EBITDA P/B ROE

2-yr

PEG

PT Implied

P/E

Dabur DABUR IN OW 169 199 18% 5.3 18.4% 23.6% 24.0% 25.6 18.4 8.1 32% 1.1 30.0

GCPL GCPL IN EW 827 901 9% 5.0 21.2% 23.1% 17.3% 25.7 18.3 5.7 22% 1.5 28.0

HUL HUVR IN UW 598 521 -13% 23.1 12.2% 11.4% 4.6% 34.5 25.9 25.9 73% 7.5 30.0

ITC ITC IN OW 340 409 20% 48.3 18.3% 19.7% 19.7% 26.0 18.0 8.2 32% 1.3 31.3

Nestle* NEST IN UW 5,095 4,224 -17% 8.8 11.6% 11.3% 14.0% 36.2 22.1 14.5 36% 2.6 30.0

Indian Consumers 90.5 16.3% 17.8% 15.9% 29.6 20.5 12.3 39% 2.8 29.9

US Food 5% 9% 9% 18.1 10.4 5.1 28% 1.8

US Cosmetics & HPC 4% 9% 11% 17.7 10.4 9.2 50% 1.9

US Beverages & Tobacco 3% 5% 9% 16.7 10.9 5.5 40% 2.1

Japan Food, Beverages & Tobacco 4% 7% 12% 21.5 7.2 1.8 9% 2.0

European Food 4% 6% 7% 15.7 9.3 2.2 16% 2.4

European HPC 3% 6% 7% 19.3 11.6 3.7 22% 5.1

European Beverages & Tobacco 6% 9% 11% 17.1 11.4 3.5 27% 1.8

Asia ex Japan Staples (ex India) 14% 15% 19% 23.1 22.9 5.0 24% 1.6

Notes: *Nestle is calendar year end, thus estimates are for CY14E.

Pricing as of close on 14 October 2013.



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17 October 2013 10

CONTENTS

KEY CHARTS HIGHLIGHTING OUR INDIA CONSUMER INVESTMENTTHESIS .................................................................................................................. 3

INVESTMENT SUMMARY: SELECTED OPPORTUNITIES EXIST INDECLINING GROWTH ENVIRONMENT........................................................ 5

INDUSTRY OVERVIEW NEAR-TERM CHALLENGES ABOUND.......... 11

DIVERGENT PROSPECTS ACROSS PRODUCT SEGMENTS................... 15

LONG-TERM DRIVERS INTACT: 10+ YEARS TO US$5,500-6,000 GDPPER CAPITA....................................................................................................... 22

CONSUMER EVOLUTION: THE GLOBAL GROWTH COMPARISON.... 30

DEEP DIVE INTO OPERATING FUNDAMENTALS.................................... 33

VALUATIONS LOOK EXPENSIVE NEED TO BE SELECTIVE................. 45

KEY RISKS .......................................................................................................... 53

COMPANIES...................................................................................................... 54

ITC (OW; PT INR409; +20%): CIGARETTE CONSUMPTION ON AROLL; INITIATE AT OVERWEIGHT.............................................................. 55

DABUR (OW, PT INR199, +18%): BEST PLAY ON RESILIENT RURALGROWTH; INITIATE AT OVERWEIGHT...................................................... 93

GODREJ CONSUMER PRODUCTS (EW; PT INR901; +9%): EMERGINGMARKET FMCG PLAY; INITIATE AT EQUAL WEIGHT......................... 130

HUL (UW; PT INR521; -13%): RECEDING VOLUMES MEETEXPENSIVE MULTIPLES; INITIATE AT UNDERWEIGHT....................... 165

NESTLE INDIA (UW; PT INR4,224; -17%): SUB-OPTIMALLYPOSITIONED; INITIATE AT UNDERWEIGHT........................................... 199

APPENDIX....................................................................................................... 229

GLOBAL VALUATION SHEETS .................................................................. 230


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17 October 2013 11

INDUSTRY OVERVIEW NEAR-TERM CHALLENGES ABOUND

Slowing GDP taking its toll revisiting 2000-2004?

FMCG market remains highly correlated to the macro environment

The Indian Consumer industry structurally remains highly correlated to the overall macro

environment with revenue levels broadly tracking nominal GDP growth. As shown in Figure

14, revenue growth levels dipped materially for the 2000-04 period, thus tracking the overall

moderation in nominal GDP growth.

Analysing the last twenty years of consumer revenue growth trends in India, we identify

four phases and discuss what we see as the fifth phase of growth for the FMCG market

(which includes all five companies being initiated on):

Phase 1 (1994-1999):There was a significant burst of growth post the 1991 economic

reforms and economic liberalisation. Following this, as consumer awareness grew and

nascent categories emerged in India, growth for the industry was strong and tracked at

least mid-teens even in the weak years.

Phase 2 (2000-2004):Following global recession in the 2000s, industry growth againmirrored the decline in GDP trends, with a prolonged period of mostly single-digit

growth from around 2000 till 2004.

Phase 3 (2005-2009):A steady growth phase driven mostly by the economic burst of

growth in India, growth in income levels (especially urban), and significant inflows &

investments into multiple sectors. Industry growth recovered from the troughs of the

early part of the decade to mid- to high-teen levels.

Phase 4 (2010-2013):Along with the continuing domestic consumption growth, the

post GFC 2008 phase also saw companies like Dabur and Godrej expanding into other

emerging markets, fuelling a burst of inorganic growth.

Phase 5 (2014-2016): We believe this phase is more likely to see muted growth asdeclining GDP and broader macroeconomic concerns affect consumption spend and

urban income growth, while keeping inflation at high levels. During this period, we

believe the broader FMCG market growth may be in low double-digits.

FIGURE 14

India Consumer revenue growth is highly correlated to the macro environment

Note: Coverage includes Dabur, GCPL, HUL, ITC and Nestle

Source: Thomson Reuters Datastream, Barclays Research estimates

26%

19%

13%

40%

14% 15%

6%8%

17%

4%

5%10%

20%20%

17%

20%22%

30%

24%

18%

14%17%

17%

0%

5%

10%

15%

20%

25%

0%

5%

10%

15%

20%25%

30%

35%

40%

45%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014E

2015E

2016E

Coverage Revenue Growth Nominal GDP Growth (RHS)

Phase 5 Muted growth

phase as macro slowsPhase 2 Revenue growth dippedsharply as GDP growth declined to7.8% from 15.7%

Phase 3 Revenue growth pickup inline with macro recovery

Phase 4 Acquisitionfuelled spike in growth

Phase 1 Spurt in consumptionpost liberatlization


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17 October 2013 13

FMCG revenue growth of 12% in FY14E, lowest expectationin last eight years

We expect near-term challenges in the Indian FMCG market to persist, owing to a

prolonged slowdown in the economy over the past 4-6 quarters. CII in its FMCG Roadmap

to 2020 estimates discusses base and bull case growth rates of 12% and 17% respectively

over the remaining part of this decade, predicting that the Indian FMCG market could be

worth Rs3,380-6,250bn by 2020. While our medium to long-term domestic CAGR forecastof 14% for the FMCG market in India is higher than the base case forecast of CII, we are

cognizant of potential selection bias as our coverage universe consists of a select few

companies that are market leaders across multiple/niche categories.

As a result of the macro concerns discussed earlier, our expectations for the FMCG market

(current size is Rs2,020bn or US$37bn) are muted in the near-term, despite the intuitive

long-term attractiveness of an emerging markets consumption sector. Hence, despite the

last 10-year market CAGR of 15%, we expect domestic consumption growth for our

coverage to report 14% CAGR over FY13-16E, with most of the impact playing out in FY14E.

FIGURE 18

Indian Consumer industry is expected to grow ~12-17% pa over the next 5-6 yearsFor our coverage, we forecast

domestic CAGR of 14% over

the next three years (above the

base case forecast of CII)

Divergent performances we

forecast HUL and Nestle as

having the weakest revenue

outlook, while Dabur, GCPL and

ITC are expected to continue to

thrive

3380

1,300

2,300

620

550

2,250

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY10 FY15E FY20E

INRBn

17%

12%

12%

17%

Bull case

Base Case

Bear case

8%

Source: CII FMCG roadmap to 2020 estimates, Barclays Research estimates

FIGURE 19

with the rural segment contributing one-third to the sector

FIGURE 20

along with a relatively unorganised supply chain network

Rural

33.5%

Urban

66.5%

Grocers59%

GeneralStores13%

Chemists

8%

Paan plus6%

Food stores3%

Moderntrade6%

Others5%

Note: Data as per FY13

Source for both charts: India Brand Equity Foundation (IBEF), Barclays Research

The size of the Indian FMCG

market is currently around

Rs2trn (US$37bn)


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17 October 2013 14

India Equity Strategy

Bhuvnesh Singh

+91 22 6719 6314

[email protected]

BSIPL, Mumbai

Views on economic recovery from Barclays India Strategy team

We have a defensive stance on Indian equities and prefer to avoid domestic cyclicals.

We expect the revenue growth environment for Indian corporates to remain weak in

the near term, pointing to macro-concerns from persistently high inflation, a fiscal

deficit, and currency vulnerability to external flows.

We expect Indias growth momentum to remain weak in the near term and forecast a

GDP growth rate of 4.7% in FY14E versus 6.2%/5.0% in FY12/FY13 (link). Owing tothe healthy monsoon rainfalls this year, we expect consumption to be supported,

although the weak fiscal health of the government could act as a drag on overall

spending in the economy. We expect inflation to moderate in 2HFY14 as food prices

should lower on the back of healthy monsoons. We forecast a WPI inflation rate of

5.7%/6.0% at end-FY14E/FY15E (versus 9.0/7.4% in FY12/FY13).

We expect revenues and earnings of domestic cyclicals to remain strained in the

context of the weak macro growth environment and note that RoEs have not yet

bottomed (seeIndia Equity Strategy: No fishing in troubled waters,29 August 2013, for

more details). We expect weak domestic investment cycle to continue to persist given

elevated interest rates and upcoming national elections.
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17 October 2013 15

DIVERGENT PROSPECTS ACROSS PRODUCT SEGMENTS

In the charts below we discuss key categories of the FMCG market, the current trends, and

also the penetration of each segment, which helps us to identify the future growth potential

of each category.

FIGURE 21

Key growth drivers for the FMCG market

Source: Federation of Indian Chambers of Commerce and Industry, Barclays Research

FIGURE 22

Structure of the Indian FMCG market

Note: Milk Products are included in the Beverages segment. DW* = Dishwashing

Source: Company information, Barclays Research

Newer Product Categories

Favorable Govt Policies

Infrastructure Development

Consumer Industry Growth Drivers

Increasing Discretionary Income

Supply side Drivers

Growth of Modern Retail

Innovation & new product launches

Demand Side Drivers

Consistent GDP Growth

Increasing Consumer Income

High Private Consumption

Rising Urbanization Systemic Drivers

Low Labour Cost

FMCG(US$37bn)

Personal

Care24%

Beverages

30%

Food

35%Home Care

11%

Hair Care

24%

Oral Care

14%

Skin Care

12%

Soaps /

Bath29%

Rest

21%

Biscuits38%

Noodles

5%

Ice

Cream4%

Ready to

eat14%

Choco &

Confectiona

ry16%

Condiments

7%

Sweets

11%Rest

5%

Tea

14%

Coffee

4%

Juices

2%

Milk

Products80%

Insecticides

34%

Detergents

26%

DW*

15%

Rest

25%


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17 October 2013 16

Key product segments in FMCG

Personal Care: Including skin care, hair care, and oral care, this category is ubiquitous

with a current market size of ~Rs481bn in India. It is the most mature segment across

the Staples landscape, with very high penetration levels. As a consequence, we believe

future growth of this category will not depend on volume growth, but instead

premiumisation (selling products with a higher price point, with incremental benefits or

ease of use, e.g. dispenser bottles instead of a bottle with a cap). In the currentenvironment of a slowdown in the discretionary segments, this category is likely to take

the deepest hit as consumers avoid buying at higher price points, hence we have muted

expectations for this category. Sub-segments within this category, like deodorants or

creams, could still grow at a much stronger rate than soaps or toothpaste, in our view.

Foods: This segment varies widely in terms of format and presence. Categories like

soups, packaged cereals, etc, are still in an emerging phase, while biscuits are widely

present in India. That said, we think there is healthy growth potential for this category.

Beverages: Apart from tea, which has a very high penetration in India, other categories

including coffee continue to be relatively underpenetrated. This explains the number of

launches in the last few years of premium coffee (from Nestle and HUL) and juice

variants (from Dabur). However, the beverages segment could come under pressure as

consumers shift from milk in tetra packs to lower priced milk sachets or from milk

sachets to even loose milk.

Home Care: This segment, which includes detergents and cleaners, has mixed

penetration levels in India, with detergents being almost fully penetrated. Cleaning

agents, like floor cleaners and toilet cleaners, are still in a growth phase.

FIGURE 23

Segment categorisation in India penetration levels vs historical volume growth CAGRs (over FY08-13)


Milk

TeaJuices

Coffee

Deodorants

Hair OilCream

Shampoos

SoapsToothpaste

Cleaning

Detergents

Soups

Atta

Edible Oils

NoodlesIce-cream

Biscuits

5

15

25

35

0 25 50 75 100

Last5yrvolumeCAGR(%)

Underpenetrated with

high potential: 0 - 25%

Underpenetrated

with moderate

potential: 25 - 50%

Moderate

penetration: 50 - 75%

Mature segments with

low volume growth

potential: 75 - 100%


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17 October 2013 17

Penetration levels driving growth across segments

Volume growth levels broadly track the penetration levels, as can be seen from Figures 24

and 25. New smaller categories like deodorants, soups and packaged milk have emerged

over the past few years which, on account of the low penetration levels, have been

registering high growth levels.

FIGURE 24High growth categories have, as expected, been a result of low segment penetration levels

0

20

40

60

80

100

M

ilkTea

Juices

Coffee

Deodora

nts

HairOil

Cre

am

Shamp

oos

So

aps

Toothpaste

Clean

ing

Deterge

nts

Soups

A

tta

EdibleOils

Noodles

Ice-cre

am

Biscuits

%Penetration levels

Beverages Personal Care Home Care Food

Note: Data as FY13.


Significant growth divergence among categories

Of the 20+ categories our coverage companies operate in, we note a high divergence in

volume growth levels over the past five years (from 10%-25%). We believe product mix &

positioning have become all the more important in the current moderate demand

environment.

FIGURE 25

Growth levels (5-yr growth CAGR over FY08-13) vary sharply across different categories and segments


5

10

15

20

25

30

Milk

Tea

Juices

Coffee

Deodorants

HairOil

Cream

Shampoos

Soaps

Toothpaste

Cleaning

Detergents

Soups

Atta

EdibleOils

Noodles

Ice-cream

Biscuits

%

Beverages Personal Care Home Care Food

Lowest penetrated segments

have witnessed the highest

CAGR in the last five years


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17 October 2013 18

Premiumisation a long-term driver; substantial near-termpressures

Driven by increasing disposable incomes, exposure to alternate lifestyles, and rising

urbanisation, many FMCG companies (examples for HUL given below) have focused

proactively on the premium segment of their portfolios in a bid to: 1) sub-segment the

existing categories, whichhelps increase the overall market and create new categories that

Indian consumers have erstwhile been relatively unexposed to; and 2) take advantage ofincreasing disposable incomesacross both the rural and urban categories.

FIGURE 26

Premiumisation trends across the different product categories of HUL

Category

Lifebuoy INR 20.5 Lux INR 60.0 Dove INR 132.0

Rexona INR 22.0 Breeze INR 30.0 Pears INR 150.0

Fair & Lovely INR 86-110

Ponds INR 54

INR 110.0 Dove INR 135.0

INR 140-220

INR 220.0

Surf Excel

INR 110.0 Lakme INR 140-200

Yellow Label INR 280.0Red labelTea

Hair Care

Active Wheel INR 45.0 Rin

Clinic Plus SunsilkINR 90-100

Skin Care Ponds

Taaza INR 150.0

Mass Market Middle Premium

Skin Cleansing

Laundry INR 76-115

Source: Company data, localbayana.com, Barclays Research

We believe that while these trends are positive over the long term, there are substantial

challenges in the near term that should put these advantages to the test. Based on our

discussions with the companies, along with our industry channel checks, there are signs of

a stalling of the premiumisation trends. This is primarily being driven by:

High inflationary levels (Figure 16)

Growth driven by rural segments instead of urban segments (Figures 31-33) and

Decline in volume growth levels across most of the FMCG companies, thus putting

pressure on price hikes (Figures 93-94).

One such example is HUL where growth in the Soaps segment, as per management, is now

being driven by the mass market product Lifebuoy rather than the premium offering of

Dove.


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17 October 2013 19

Product portfolio: Competitive positioning vs sectorprospects

Following on from penetration and outlook discussions for the industry, we now look at

each of the companies we are initiating on and their associated positioning in key relevant

categories. We assess the positioning of the companies based on market dominance, brand

recalls and association, management outlook vs our views on sector penetration, and also

growth prospects as previously discussed. We conclude that:

Companies which are niche players with the ability to expand market size or create new

market categories are still enjoying growth (e.g. Dabur in Digestives, Godrej with

Household Care);

Competitive activity is intensifying across a few categories, especially in the HPC

(Household and Personal Care) segments, followed by the Foods segments. Beverages

(with the exclusion of Coffee) still seem to be dominated by individual companies for

specific categories (e.g. Nestle in Milk, Dabur in Juices, and HUL in Tea).

ITCs Cigarettes segment is in a unique positioning of its own, with penetration at 15%

and strong volume growth prospects.

ITCs entry into the FMCG segment has been disruptive for market leaders like HUL in

the past five years, and we expect ITC will continue to gain greater share in this segment

given its strong distribution reach.

FIGURE 27

Indian Consumer company positioning

Note: Size of the bubble indicates the categorys proportional contribution to FY13 revenues.

Source: Company data, Barclays Research

Dabur

GCPLHUL

ITC

Nestle

-

4.00

8.00

12.00

4.50 8.50

Categorypositioning

Company positioning

Strong

Weak

StrongWeak

Moderate

Moderate


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17 October 2013 20

Deep dive into the Indian consumer coverage companies

FIGURE 28

ITC strong market position; relatively insulated from any discretionary slowdown

Cigarettes no promotions or

ads, but this is still a strong

category of growth for ITC

FMCG ITCs disruptive entry

and market share gain

continues, and we expect new

launches to intensify

Hotels increased capacity

and slowing macro

environment make this the

weakest segment, despite ITCs

well known hotel brands

CigarettesFMCG

Hotels

Agri Business

Paperboard

0

4

8

12

0 4 8 12

Category/segmentprospects


S

trong

Weak

StrongWeak

Moderate

Moderate



FIGURE 29

Dabur significant presence in the niche segments is a strong positive

Digestives Dabur is uniquely

associated with most products

in this category, especially

Hajmola, its flagship brand

Hair Care strong positioning

in Perfumed Hair Care Oilthrough the Amla brands, and

volume recovery is expected

Foods Dabur has the best

known brand of honey, with

increasing use by households



Hair Care

Digestives

OTC & EthicalsHealth Sup

Home Care

Oral Care

Skin Care

Foods

0

4

8

12

0 4 8 12

Category/

segmentprospects


Strong

Weak

StrongWeak

Moderate

Moderate


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17 October 2013 21

FIGURE 30

Nestle high exposure to urban/discretionary segments which are facing downward

pressure

Prepared Dishes strong

brand recall for Nestle with

moderate growth prospects

Milk Products volume

growth likely to stall as

consumers may downtrend

Chocolates similar to other

discretionary segments,

Chocolates also face a dip in

growth

FIGURE 31

HUL highly competed segments constitute the bulk of its portfolio

Personal Care intensifying

competition and slowing urban

income growth are affecting

HULs Personal Care segments

Detergents strong

positioning, but likely muted

growth prospects

Coffee intensifying

competition in a growth

segment

Soaps

Detergent

Tea

Coffee

FoodsSkin Care

Hair Care

Oral Care

0

4

8

12

0 4 8 12

C

ategory/segmentprospects


Strong

Weak

StrongWeak

Moderate

Moderate

FIGURE 32

GCPL leadership presence across the key segments

Hair Color GCPL is aleader in

this space, with strong growth

potential

Household Insecticides dominant positioning with

innovative launches provide an

edge

Soaps weak positioning with

moderate growth outlook

Note for all charts: Size of the bubble indicates the categorys proportional contribution to FY13 revenues.

Source for all charts: Company data, Barclays Research

BeveragesPrep dishes

Choc /

Confectionary Milk Products

0

4

8

12

0 4 8 12Category/segmentprospects


Strong

Weak

StrongWeak

Moderate

Moderate

Soaps

Hair Color

HouseholdInsecticides

0

4

8

12

0 4 8 12

Category/segm

entprospects


Strong

Weak

StrongWeak

Moderate

Moderate


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17 October 2013 22

LONG-TERM DRIVERS INTACT: 10+ YEARS TO US$5,500-6,000 GDP PER CAPITA

While we have discussed near-term concerns (macro slowdown, stalling of premiumisation

trends, etc.) in the previous sections, we believe the longer term outlook also needs to be

analysed, as it could have a significant bearing on the Indian Consumer sectors 95%

premium vs BSE Sensex. Assessing the drivers of growth for the next 5-10 years, we believe

the industry can still see healthy growth, as multiple drivers exist. We also include analysis

from the Barclays Research regional team on GDP per capita evolution and how a level of

US$5,500 acts as a threshold for staples deceleration, which we think is likely another 10

years away for India.

Structural deceleration comes in at US$5,500 GDP per capita

GDP per capita in India is currently around US$1,450 (2012) according to World Bank

estimates, one of the lowest in the world and ranking the country at #79. We believe that a

multi-year multi-decade phase of development is still likely for the Indian economy. Analysis

by our Barclays Research regional counterparts covering the Asia ex-Japan Staples sector

(see Life slows at 55(00), 9 July 2012), points to an interesting evolution of the

consumption trend in an economy. After comparing the evolution of Japan, Korea, Taiwan

and China over a period of 40 years, the key conclusions were:

Consumption spending decelerates structurally once an economy reaches US$5,500-

6,000 GDP per capita.

Further, this is also the phase at which growth of the consumer industry starts to lag

growth in nominal GDP.

This deceleration is more evident in the staples sector (especially in Food, Beverages,

etc), while the discretionary segment typically continues to grow at a faster rate.

From an Indian Consumer perspective, the key takeaway for us is that India is likely still

around 10+ years away from reaching this threshold GDP per capita. Indian GDP per capita

has grown at 11.9% CAGR in the last ten years. Assuming it continues at this pace, weexpect the Indian economy could hit this threshold level of US$5,500 GDP per capita

somewhere around 2023-2024.

FIGURE 33

Evolution of per capita GDP ($US) among different economies

Source: IMF, Barclays Research

500

1,500

2,500

3,500

4,500

5,500

6,500

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

China Korea Taiwan India

India

Trajectory from ~$1,500 - ~$5,500

China: 2002 - 2011 (15.8% CAGR)

Korea: 1980 - 1990 (14.8% CAGR)

Taiwan: 1978 - 1988 (14.4% CAGR)

We believe a decade-long

period of growth in the AeJ

Staples sector is still likely and

that the consumer industry by

then would have transformed

itself and evolved into

substantially differentiatedsegments, with higher-end

discretionary segments

continuing to drive growth
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17 October 2013 23

Favourable dependency ratio

As shown in Figure 34, India has one of the lowest dependency ratios compared to other

geographies, indicating a high percentage of people in the income-generating class and a

lesser proportion of dependants. Industry forecasts suggest that even by 2050, Indias

dependency ratio could be in the mid-teens, pointing to at least three or four decades of

young/adult population in the working class, who could fuel consumption growth.

FIGURE 34

Dependency ratio in India remains favourable vs other

geographies

FIGURE 35

Number of households in the higher income category

expected to increase sharply

7% 7%5% 5%

15%12%13%

17%

11%

8%

22%

19%

23%

27%

21%

15%

29%

21%

0%

5%

10%

15%

20%

25%

30%

35%

China Korea Thailand India Europe NorthAmerica

2005 2025P 2050P

91%

74%

41%

8%

22%

50%

2% 4% 9%

0%

20%

40%

60%

80%

100%

2004 2009 2015E

LSM 1-4 LSM 5-7 LSM 8+

Source: K S Oils, Barclays Research Notes: LSM = Living Standard Measures; Higher LSM points to higher standards

of living.

Source: HUL estimates, Barclays Research

Rural economy is a key driver for the FMCG industry

The rural segment currently constitutes c33% of the overall FMCG market in India, and hasbeen fast outpacing the urban segment in terms of growth. This has been driven by:

Low penetration levels: despite stronger growth levels in the last three years,

penetration levels in rural areas still remain much lower than in urban areas;

Rural income growth: increasing income levels driving the overall improvement in living

standards along with a higher disposable income; and

Expansion of rural distribution networksthrough efforts like Daburs Project Double

and HULs Shakti Project.


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17 October 2013 24

FIGURE 36

% increase in monthly per capita expenditure in India; rural

has overtaken urban for first time in the last three years

FIGURE 37

along with a sharp increase in absolute incremental

consumption expenditure as well

7.3% 7.5%

13.2%

19.2%

14.0%

11.8%

13.9%

17.2%

0%

5%

10%

15%

20%

25%

1987-94 1993-05 2004-10 2009-12

Rural Urban

2,994

3,750

2,000

2,500

3,000

3,500

4,000

Urban Rural

INRMn

+25%

Source: NSSO, Accenture, Barclays Research Source: NSSO, Accenture, Barclays Research

FIGURE 38Lower penetration levels offer significant growth

opportunities

FIGURE 39FMCG rural consumption growth has outpaced that of urban

in the last three years

42%37%

67%

18% 18%

3% 2%

77%

57%

80%

32%

59%

19%

5%

0%

20%

40%

60%

80%

100%

Toothp

aste

Sham

poo

Ha

iroil

SkinCream

Mos-Repellants

InstantNoo

dles

HairDyes

Rural Urban

3%

10%

13%11%

16%

-8%

1%

14%

18%

14%

-10%

-5%

0%

5%

10%

15%

20%

CY03 CY05 CY07 CY09 CY11

Urban Rural

Source: Dabur, Barclays Research Source: Dabur, Barclays Research


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17 October 2013 25

Rural economy being driven by concerted government efforts

High spending on rural development, through measures such as NREGA (National Rural

Employee Guarantee Scheme) and Minimum Support Prices (MSPs), has witnessed robust

growth over the years. However, we see a relative softening in FY14, partly because of

already high inflation levels.

FIGURE 40

Strong growth levels in Minimum Support Prices

Strong increment levels across

minimum support prices in key

agricultural crops have helped

raise overall income levels for

the rural segment

but we see some tapering of

growth levels in FY14; one-third

of the crop categories have

seen no increase in MSPs.

Note: 3-year CAGR is from FY11-14

Source: Commission for Agricultural Costs and Prices, Barclays Research

FIGURE 41

Government spending on rural development in India remains high

213 243 288 569 566 721 642

0.20.5

0.7

1.3

1.9

2.6

3.2

0

0.5

1

1.5

2

2.5

3

3.5

0

100

200

300

400

500

600

700

800

FY06 FY07 FY08 FY09 FY10 FY11 FY12

INRTn

INRbn

Government spend (LHS) Cummulative spend (RHS)

Source: Dabur, Barclays Research

Crop FY11 FY12 FY13 FY14 3 yr CAGR FY14 y/y

Paddy 1,000 1,080 1,250 1,310 9% 5%

Wheat 1,100 1,120 1,285 1,350 7% 5%

Jowar 880 980 1,500 1,500 19% 0%

Bajra 880 980 1,175 1,250 12% 6%

Maize 880 980 1,175 1,310 14% 11%

Soybean 1,400 1,650 2,200 2,500 21% 14%

Cotton 2,500 2,800 3,600 3,700 14% 3%

Groundnut 2,300 2,700 3,700 4,000 20% 8%

Sunflower 2,350 2,800 3,700 3,700 16% 0%

Urad 2,900 3,300 4,300 4,300 14% 0%

Sesaum 2,900 3,400 4,200 4,500 16% 7%

Niger Seed 2,450 2,900 3,500 3,500 13% 0%

Ragi 965 1,050 1,500 1,500 16% 0%

Minimum Support Prices (INR / quintal)


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17 October 2013 26

along with an increased focus by the FMCG companies

Sharp expansion of distribution networks and overall reach: Rural reach has been

more than doubled by most of the major companies, in a bid to tap the unexplored

market and take advantage of increasing income levels.

An increasing number of product innovations to cater to the rural segment: Many

companies have altered their product portfolio for new offerings especially aimed at

rural areas.

Management comments across different consumption categories highlight the increasing

prominence of rural areas in the overall strategy of big consumer players. Higher purchasing

power trends along with positive macro trends (better monsoons, Government support,

etc.) should help drive near-term revenues.

FIGURE 42

Dabur sharp increase in direct village coverage

FIGURE 43

HUL rural reach has increased by 4x in the last three years

14,865

17,882

30,091

10,000

15,000

20,000

25,000

30,000

35,000

FY11 FY12 FY13

Direct village coverage

+20%

+68%

0.3

0.8

1.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2009 2010 2011

Direct rural coverage

4x

Source: Company data, Barclays Research Source: Company data, Barclays Research

FIGURE 44

Promising annual income levels (rural household income

distribution)

FIGURE 45

could result in further improvement in the social indicators

for rural India

61%41%

26%

35%

50%

48%

3% 7%22%

1% 2% 4%

0%

20%

40%

60%

80%

100%

2005 2015 2025

< INR 90k INR 90 - 200k INR 0.2 - 0.5mn INR > 0.5mn

22%

46%

36%

59%

27%

59%

0%

10%

20%

30%

40%

50%

60%

70%

#Pucca houses Below poverty line Rural literacy

1981 2007

Source: CII - FMCG roadmap to 2020, Barclays Research # Pucca houses are concrete establishments

Source: CII - FMCG roadmap to 2020, Barclays Research


27/254


17 October 2013 27

Distribution expansion is reaching out to untapped villages

With the rural segment contributing just one-third of overall FMCG revenues, along with

low segment penetration levels across segments, distribution networks play a key

differentiating role among the FMCG players. HULs Project Shakti covers over 135k villages

and c3.3mn households in the rural segment.

We note that an extensive distribution network not only helps companies expand their

markets, gain consumer insights, and enhance earnings potential of the channel partners,but it is also a sustainable advantage which can be leveraged for cross-segment revenues.

For instance, HUL through a network of over 700 rural distributors as part of its Project

Express distributes telecom products for Tata Teleservices in 95,000 telecom outlets.

We note that while the players have erstwhile been focusing extensively on enhancing the

number of touchpoints, there have been efforts to increase the quality of the reach in terms

of more revenues per store through innovative schemes, customised product launches, etc.

We expect these schemes to gain more traction in future, especially in a moderate demand

environment, and help improve average realisations.

Case Study: Quality of the expansion in distribution

According to a study by Nielsen (November 2011), the top 5 FMCG companies in India

(in terms of growth) have focused not only on increasing the overall number of

touchpoints but also on quality of the increased touchpoints in terms of offtake per

store.

Sharp divergence in the top 5 players and bottom 5 players (from the top 20) can be

seen in Figure 46, with the top players having witnessed a sharp uptick in revenue

growth/store (average of 16% vs 6% average for the bottom 5 for FY11).

FIGURE 46

Success of the top players is driven by well rounded growth across both distribution

reach and quality of the reach

There is a clear distinction

between the top 5 and bottom

5 companies, with the former

falling towards the top-right

side

which indicates that for the

same amount of distribution

growth, a top 5 company tends

to see much higher growth in

revenue per dealer

0%

5%

10%

15%

20%

25%

30%

0% 5% 10% 15% 20% 25%Growthinperdealerofftake

Distribution growth %

Bottom - 5 growth co Top - 5 growth co

Increasing offtakeper store

Note: Analysis based on rural stores only.

Source: Nielsen, Barclays Research


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17 October 2013 28

Indias organised retail growth momentum

India lags significantly compared to its Asian peers in terms of retail penetration levels, as

illustrated by Figure 47. Estimated to be valued at US$26bn in 2011, as per industry sources

(Ernst & Young), the organised retail market is expected to grow at a CAGR of 26% over the

next five years, thus increasing overall penetration levels to c20% by FY21. In our view, this

should be driven by: 1) inroads made by key players in rural areas, both in terms of the

penetration levels (volumes sold) as well as the improving product mix; and 2) increasingincome levels to expose more population to branded products versus unbranded products

sold earlier. The launch of low volume shampoo sachet packets costing Rs1/Rs2 was a

pioneering example of this. In our view, these should both drive supply chain efficiencies,

and in the long term help reduce SG&A expenditure for firms.

FIGURE 47

Indias retail penetration levels are low compared to Asian peers

Organized retail relates to

corporate retail channels, while

unorganized retail is related to

local grocery shops etc.

Indias organised retail

penetration is at the lower end

of the spectrum compared to

global peers 15%19%

45%

60%70%

80%94%

85% 81%

55%

40%30%

20%6%

0%

20%

40%

60%

80%

100%

US Taiwan Malaysia Thailand Indonesia China India

Unorganised retail penetration Organised retail penetration

Source: E&Y (2011), Barclays Research

FIGURE 48and are expected to grow sharply as per industry estimates

and is expected to rise

sharply to c20% (from 6% in

2011), thus offering significant

opportunities wrt growth and

supply chain efficiencies to the

FMCG players

94% 91%80%

6% 9%20%

0%

20%

40%

60%

80%

100%

2011 2016E 2021E

Unorganised retail penetration Organised retail penetration

Source: Deloitte (2011), Barclays Research

Strong momentum in

organised retail should help

increase overall penetration

levels and drive supply chain

efficiencies for FMCG

companies; HUL expects

modern retail to contribute

c25% of its revenues in five

years (from 12-15% currently)


29/254


17 October 2013 29

Emergence of alternative distribution channels

Pharmacies seeing a big push; increasing share of private labels a challenge

We are beginning to see worrying signs of consumer down-trending in the form of an

increasing share of private label products in modern trade (private labels are generally

considered cheaper). As shown in Figure 49, private labels are growing faster than modern

retail trade and are gaining market share, as consumers increasingly prefer lower-priced

products to national brands.

We believe this poses an additional challenge for FMCG firms as most companies rely on a

modern retail format to drive future growth, especially those in the premium segment. A

sharp increase in the share of private labels could help expand the markets size by offering

cheaper alternatives, but it could also signal a shift in consumer loyalties from the known

brands to these cheaper products.

FIGURE 49

Private labels growing faster than modern trade; gaining market share

Private labels are gaining

market share from established

brands, which points to: 1) an

expanded market size by

offering cheaper alternatives,

and b) a shift in customer

loyalties

45%

34%

55%49%

12%

46%

64%

32% 31%26%

36%

25%

9%

22%26%

0%

10%

20%

30%

40%

50%

60%

70%

Tissue

Paper

Floor

Cleaners

Washing

Powder

Glass

Cleaners

Refined Oil Spices Packaged

Tea

Biscuits

Modern Trade growth Private label growth

420%

Note: Bars represent category revenue growth y/y in FY12Source: Nielsen, Barclays Research

FIGURE 50

still, we see significant headroom for growth, as private label share in overall organised

retail sales remains low in India vs developed countries

India is under-branded and

under-penetrated in many

categories. It makes immense

sense to build own brands to

do market and category

development, leading toaccelerating consumption

Devendra Chawla, President of

Food Bazaar at Future Group

46%

40% 35%29% 27%

21% 20%11%

20%

0%

10%

20%

30%

40%

50%

Switzerland

UK

Germany

Spain

France

Australia

USA

India

WorldAverage

Source: CII - FMCG roadmap to 2020, Barclays Research

Private label spend is

estimated to grow 5x from

current levels to US$500mn by

2015, as per Nielsen


30/254


17 October 2013 30

CONSUMER EVOLUTION: THE GLOBAL GROWTH COMPARISON

Consumer industry follows an S-shaped consumption curve

The Consumer sector tends to follow an S-shaped consumption curve relating to the per

capita expenditure along with per capita GDP. The framework is widely accepted as having

three broad stages:

1. Warm up zone: The industry is still in the nascent stages and products are stillexpensive for most potential customers. As a result, market penetration (as captured

by consumption expenditure per capita) grows much slower than GDP per capita.

2. Hot zone:As GDP per capita grows further, the product categories eventually reaches

takeoff point wherein penetration levels increase sharply as more customers adopt

the product.

3. Cool down zone:At a still higher level of GDP per capita, categories tend to reach a

saturation point post which penetration generally remains flat despite potential GDP

growth as consumers start to direct their incremental expenditure to other product

categories.

While growth patterns, along with the occurrence of take-off/saturation points, would varywith products, services and countries, the broad trend remains consistent across the board.

FIGURE 51

S-shaped consumption curve for the Consumer industry

Source: McKinsey (November 2011), Barclays Research

PerCapitaConsumptio

nExpenditure

GDP er ca ita

Warm up Zone Cool down zoneHot Zone

- Products stillexpensive for mostconsumers

- Market growth ratebelow income growth

- Product reacheshigh penetrationlevels

- Market growthslows down

- Products becomeaffordable

- Sharp increase in the

market growth levels

Takeoff point

Saturationpoint

India is at the lower end of the

S- shaped consumption curve

vs global peers

and while different segments

are likely to follow different

trajectories, we believe there is

still significant headroom for

growth in India over the long

run.


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17 October 2013 31

We use examples of the Footwear and the Healthcare Insurance industries in the US to

show the different stages of evolution for these sectors and where they are on this

consumption curve.

FIGURE 52

The footwear industry in the US is currently in the high penetration/cool down mode

Per capita expenditure trends

in the US footwear industry,

show that after a sharp

increase in growth penetration

from 1995-2004, the industry is

now in a cool-down zone

60

70

80

90

100

110

120

130

25 30 35 40 45

Expenditure/capita(USD)

GDP / capita ('000s USD) Source: United States Consensus Bureau, Barclays Research

FIGURE 53

The health insurance industry in the US is still in the incremental penetration/hot zone

mode

Per capita expenditure trends

in the US health insurance

industry show that the industryis still in hot zone mode

0

100

200

300

400

500

600

700

25 30 35 40 45

Expenditure/capita(USD)

GDP / capita ('000s USD) Source: United States Consensus Bureau, Barclays Research


32/254


17 October 2013 32

While India is growing ahead of global peers, there is still a long way to go

FIGURE 54Revenue growth for top 50 FMCG players (India vs global)

FIGURE 55GDP per capita remains at the lower end of spectrum

Source: OC&C Strategy, Barclays Research Note: Data as per FY12

Source: IMF, Barclays Research

FIGURE 56 coupled with the low contribution of FMCG to GDP

FIGURE 57resulting in a low per capita FMCG consumption

7.5%

4.6% 4.6%

2.9%2.4% 2.2%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Philippines

Thailand

Nigeria

China

Indonesia

India

FM

CGconsumptionasa%ofGDP

214

161

128

7259

31

0

50

100

150

200

250

Thailand

Philippines

China

Indonesia

Nigeria

India

PercapitaFMCGconsumption(USD)

Source: KS Oils, Barclays Research Source: KS Oils, Barclays Research

FIGURE 58India has low penetration levels in the key FMCG categories (examples of Skin Care and Shampoo shown below)

Note: Data as per FY13

Source: HUL, Barclays Research.

8% 8% 7%

1% 0%

-1%

17% 16%

26%

17%

11%

18%

-5%

0%

5%

10%

15%

20%

25%

30%

HPC

Food

Spirits

Tobacco

Diversified

Pharma

Global 50 (CAGR 10 yrs) India 50 (CAGR 10 yrs)

36.7

20.3

12.110.3

8.96.1 5.7

3.9 3.0 2.9 2.6 1.5 1.5 1.3 0.9 0.9 0.6 0.6

0

5

10

15

20

25

30

35

40

HongKong

Taiwan

Brazil

Malaysia

Mauritius

China

Thailand

Indonesia

Bhutan

SriLanka

Philippines

Vietnam

India

Pakistan

Burma

Bangladesh

Nepal

Afghanistan

Thousand USD

3.2

0.80.3

7.47.7

0

1

2

3

4

5

6

7

8

9

China Indonesia India Malaysia Thailand

Percapitaconsumption(USD)

Skin Care

1.01.1

0.3

2.7

2.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

China Indonesia India Malaysia Thailand

Percapitaconsumption(USD)

Shampoo


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17 October 2013 33

DEEP DIVE INTO OPERATING FUNDAMENTALS

While EBIT margins in the Indian Consumer sector have remained fairly robust and relatively

resilient in the last 15 years, we also analyse other variants driving the ROE of FMCG

companies:

International acquisitions: Both Dabur & GCPL have opted for a sharp expansion mode

through ventures in emerging markets like Africa. While both expect these to be highgrowth areas, we believe this strategy has had a dampening effect on returns (because

of a sharp increase in the asset base) in the recent past

Corporate actions:The last 4-5 years have witnessed a significant amount of corporate

actions involving share buybacks (HUL) and share splits (GCPL) among others, all of

which have added to volatility in the return metrics.

FIGURE 59

Indian Consumer coverage EBIT margins have displayed strong resilience and are

showing an uptrend

EBIT Margins = EBIT/Sales

EBIT margins have remained

healthy for the FMCG

companies, showing strong

resilience levels even in the

demand slowdown

environment

Source: Thomson Reuters Datastream, Barclays Research

FIGURE 60

along with a stable interest burden ratio (declined in the last four years)

Interest Burden = PBT/EBIT

The interest burden ratio has

remained broadly stable over

the last 10-15 years as debt

levels remained at manageable

levels for most companies

under our coverage

Source: Thomson Reuters Datastream, Barclays Research

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

10%

12%

14%

16%

18%

20%

22%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

EBIT Margin ROE (RHS)

'96-'01: Sharp OPM expansionunderlines the recovery in ROE

'09-'13: Decilne in ROEsdespite strong margins

0%

10%

20%30%

40%

50%

60%

70%

80%

90%

60%

70%

80%

90%

100%

110%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Interest Burden ROE (RHS)

Improvement in interest burden

across all players

'09-'13: High interest costs for Dabur,

GCPL & Nestle - c300bps decline inInterest burden ratio


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17 October 2013 34

FIGURE 61

although a slightly increasing tax burden in 2013

Tax Burden = PAT/PBT

We note that the tax burden

has gradually come down toc75% from 80-81% (in 2005-

06); increasing tax rates has

been an industry wide

phenomenon

FIGURE 62

and a sharp drop in

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