3QFY16 Consumer Sector Summing It Up - Spark Capitalmailers.sparkcapital.in/uploads/Consumer/3QFY16...

3QFY16 Consumer Sector – Summing It Up

TEJASH SHAH, [email protected] +91 22 4228 8155

GNANA SUNDAR [email protected] +91 44 4344 0062

MADHAV PVR [email protected] +91 44 4344 0061

Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

“….Because that's what we storytellers do. We restore order with imagination. We instil hope again and again and

again” –Walt Disney (Tom Hanks) in movie ‘Saving Mr. Banks’

At some level, the above statement sums up the tone of the consumer sector results and earnings commentaries for 3QFY16. Revenue

growth is not coming as per our ‘imagination’ and corporate guidance. However, we are trying to ‘restore the order’ in our projections.

Thankfully, volume growth has remained healthy in pockets (paints, adhesives, some categories of hair oils, etc.) but deflationary

environment has muted the numbers at nominal levels. Volume growth continues to dwarf value growth across our coverage universe.

Spark’s consumer coverage universe (SCCU) had ~6.9% sales growth and ~8.4% PAT growth in 3QFY16. Average downgrade in

earnings in SCCU was -3% and -5% for FY16 and FY17 respectively. Going forward, we see the earnings downgrade cycle tapering off

in FMCG and retail stocks, while in Paints, earnings growth is highly susceptible to volatility in crude oil prices. Overall, growth revival

expectations are gradually accumulating around rural revival and hence a normal monsoon will be the much awaited trigger.

When life gives you lemons….. – As we have been highlighting for past many quarters that elusive demand growth and benign input

prices led GM (Gross Margins) expansion are the key resident features in the results. Interestingly, many consumer companies (Dabur,

Emami, Marico, Berger Paints, etc.) are reinvesting the GM bounty to strengthen future growth drivers (new geographies, new products,

brand extension, etc.) In our opinion; this is the best window of opportunity available to identify, experiment and invest behind potential

growth drivers. We believe that the companies which are shying away from experimenting in this cycle would find it very difficult to do the

same once the GM advantage starts shrinking.

Season of Disruption – ‘Disruption’ seems to be the parallel theme running across most of the consumption categories. Retail oriented

sectors were facing disruption with the increasing intensity of e-commerce for last 6-8 quarters; however, the intensity had a notable

reduction in this quarter. Interestingly, FMCG sector has started facing an unusual ‘disruption’– Patanjali FMCG products (slide 4).

Patanjali’s scale, speed of execution and more importantly ambitions has forced the incumbents to create strategies to combat the

challenge. Though expectedly, disruption is painful in the near term, but it is bringing back focus on the key value proposition of FMCG –

Product’s efficacy.

Overvalued or Undervalued? Hmm It’s ‘Cortisol free’ – At the outset, let us confess that there are no secular positive trends visible in

the sector yet and that with a very few pockets of inexpensive valuations, makes it difficult to spot absolute return ideas. Ceteris Paribus

on RM scenario, we see limited scope for massive earnings upgrades. SCCU is already expecting ~17% yoy growth in earnings in FY17.

However, valuation re-rating depends on whether market takes last 18 months, 3 years or 10 years average as mean valuations. BUT

(there’s always one), when we zoom out and understand the challenges faced by other sectors, then the challenges faced by consumer

sector look miniscule as they are restricted only to P&L and are cyclical in nature. Hence, in spite of slightly stretched valuations, we

remain relative outperform rating on the sector with the few bottom-up absolute rating ideas. Amidst the mayhem and volatility at macro

level, consumer sector continues to offer a 'cortisol free’ shelter.

“…….Time spent engaged in activities which reduce cortisol is paid back exponentially in terms of productivity” –

Anonymous

Upgrades/Downgrade: HUVR (TP: Rs.921) and ITC (TP: Rs.351) raised to BUY while Dabur has been downgraded to Reduce (TP:

Rs.252), Zydus Wellness downgraded to Sell (TP: Rs.621) and Akzo Nobel has been downgraded to Reduce (Rs. 1223). Marico

(Add, TP: Rs. 234), Jyothy Labs (Add, TP: Rs.301) & Berger paints (Reduce, TP: Rs. 256) have been downgraded on valuation

concerns.

Date Feb 19th, 2016

Stock Performance (%)

Company 1m 3m 12m

AKZO -3 -4 -16

APNT -1 1 0

ARVND -11 -10 -10

BATA 1 -1 -26

BJCOR 2 -9 -13

BRGR -4 10 9

CLGT -8 -12 -11

DABUR -2 -11 -9

HMN 0 2 2

HUVR 2 4 -9

ITC -3 -13 -22

ITFL -9 -12 -14

JYL -1 -9 -8

KEKC -12 -12 1

KNPL -1 6 10

LOG 7 8 49

MRCO 3 10 31

PAG -18 -21 -11

PIDI 15 16 7

RLXF -6 -21 18

SKB -6 -5 -3

TTAN -2 -10 -23

VIP 3 3 -8

WONH -3 -9 25

ZYWL -15 -21 -24

Consumer Sector 3QFY16 - Zero Dark Thirty


FMCG (y-o-y )

14% 18% -1%

Paints & Chemicals (y-o-y) Discretionary/Retail (y-o-y)

Emami (C)

Sales*

76% 234% N.A

3% 5% 13%

3% 4% 1%

3% 7% 6%

Manpasand

Beverages(SA)

Zydus

Wellness (C)

ITC (SA)

Hindustan

Unilever (SA)

Bajaj Corp (C) 4% 15% 15%

2% 7% 13%

7% 24% 18%

7% 40% 7%

Dabur India (C)

Marico (C)

Jyothy Labs

(C)

EBITDA PAT**

Asian Paints

(C) 14% 37% 35%

10% 32% 38%

9% 6% 11%

9% 26% 29%

11% 53% 48%

Sales*

Berger Paints

(SA)

Akzo Nobel

(SA)

Kansai Nerolac

(SA)

Pidilite (C)

EBITDA PAT**

17% 27% 23%

15% 35% 83%

15% 105% 162%

Relaxo

Footwear (SA)

Indian Terrain

Fashions (SA)

VIP Industries

(SA)

Page

Industries (SA) 15% 19% 30%

9% 4% 2%

17% 12% 18%

15% 30% 28%

27% 44% 53%

Kewal Kiran

Clothing (SA)

Titan (C)

Bata India (C)

La Opala RG

(SA)

Sales* EBITDA PAT**

Source: Company filings, Spark Capital Research; Sales refers to operating income and PAT is adjusted; SA refers to standalone operations & C refers to Consolidated operations

Lifestyle retail & Paint companies delivered superior earnings growth

6% -13% -4% Wonderla (C)

Revenue growth across FMCG companies

remains muted as offtakes were under stress,

lack of inflationary pricing environment

further pressurised value growth. Paints and

lifestyle retail companies reported optically

better revenue growth due to late festive

season this year and earlier commencement

of End Of Season Sale by few players. Gross

margin drivers continue to be favourable

enabling superior profit growth across

consumption universe.

4% -2% -5% Arvind (C)

15% 16%

11.9% 35.6%

3.5% 3.3%


Source: Company commentary, Spark Capital Research

Popular themes that were witnessed across consumption portfolio in 3QFY16

FMCG Subdued RM

basket

Price

deflation

Slowdown in

Nepal A&P outlay

Delayed

Winter

Advent of

Patanjali

Paints &

Chemicals Auto demand

Subdued RM

cycle

Increasing

contribution

of mass end

offerings

Innovative

initiatives

Selective

price cuts

Festive

season sales

Discretionary/

Retail

Lower

impact of

e-commerce

Rains in

South India

Expansion

slow down

Western

brands comp

intensity

Advanced

‘End Of

Season Sale’

Festive

season

offtakes

Macro-economic weakness led lower growth in rural/smaller towns and failure of upticks in urban were common theme

across consumption universe.


“All that we are keen to get on is a solid intervention that could work across

platforms. There are multiple models in which Naturals get moved, do you

go one category deep, do you go one brand across categories, what are the

various offerings which we are inconsistent to, what can you claim, because

it's also an important point that we will need to be in a position to actually

prove whatever that we claim. So there is a lot of work that happens on the

Naturals space, which are, what I would call as fundamental work, what is

the psyche of Naturals we need to create. So that is the space it is. And we

are focused on the consumer looking at Naturals in a positive way, and

that's what we react to.”

- P. B. Balaji, CFO, Hindustan Unilever

“ He's got a presence in practically every category, and a majority of our categories he

has got some offering. Now, quite frankly, how the Patanjali initiative will play out, I really

don't know, because there has been no – there is really no precedence for this. Our faith

based product offerings which caters to obviously a significant number of consumers,

and it's something which – whether it's going to be of enduring nature, whether it's going

to be a passing thing, it's very hard to say. So I won't even go down that path of just

trying to predict what Patanjali will become. But having said that, there is overlap in terms

of categories. So Honey and Chyawanprash are the most evident ones, but we'll have

even in others. So I think the way forward is to really strengthen our own value

proposition, cater to the more premium end of the market. And what good can Patanjali

do actually over a long period of a time, is to really enhance the whole market for herbal

and natural products.”

- Sunil Duggal , CEO, Dabur India

Comments from FMCG companies on Patanjali Ayurveda in 3QFY16

Minimal competitive intensity, high margins and need for minimal brand investments make Ayurveda categories lucrative

Ayurveda Vs Western products

Impact due to advent of Patanjali Ayurveda was keenly discussed across FMCG earnings calls…


Source: Company filings, Spark Capital Research

Despite being a nascent player in the Indian FMCG sector, Patanjali poses a significant threat to players across our coverage

HUL Dabur Emami Colgate GSK

Consumer GCPL

Zydus

Wellness Marico

Jyothy

Labs Bajaj Corp Manpasand

FMCG

Skincare 14% 4% 23% 5% 30% 5% 5%

Soaps 21% 17% 5%

Haircare 8% 14% 21% 35% 95%

Cosmetics 1%

Oral Care 6% 9% 95%

Mens grooming 1% 10%

Homecare 1% 4% 10%

Foods

Milk

Ghee 30%

Edible Oil 14%

Atta 0%

Staples

Juice & Fruit Drinks 7% 100%

Confectionaries

Snacks (Includes Biscuits) 6%

Sauces, Pickles

6% Sweets

Noodles 4%

Healthcare

Health drinks 90%

Chavanprash 8%

Digestives 4%

Nutrition & Honey 11% 8%

Balms 21%

…with few companies already witnessing revenue pressure due to the fast expanding Patanjali Ayurveda


Festive season demand, lower discounts from E-Commerce and Rainfall in Chennai were the key themes in discretionary

Rain in days

leading to

Diwali certainly

have been a

dampener to

retail offtakes.

June…….....….August..............……..October…..…...…….……November…...……….....December………….......…January

Marriage

Season

2015

August

28 -

Onam

June 15 – August 15 Aug 15 –

Sep 15 Sep 15 – Oct 15 Oct 15 – Dec 15 Dec 15 – Jan 16

September

17- Ganesh

Chathurthi

October 21, 22

Ayudha Pooja,

Saraswati Pooja

& Vijaya

Dasami

November

2-5 - Diwali

December 25-

January 1 –

Christmas and

English New Year

January

14,15–

Pongal

October

24-

Muharram

Festive

Season

2015

July 18-

Ramzan

Flipkart: Big Billion Days

Snapdeal: Diwali Sale, Preview monday

Amazon: Great Indian Festive Sale, Diwali sale

17-21 October & 26-28th October

Flipkart: Freedom Sale

Snapdeal: Freedom Week

Amazon: Great Indian Freedom sale

August 10-16

July 15 –

August 15

End Of Season

Sale (EOSS)

0

10

20

30

40

50

60

01-O

ct

05-O

ct

09-O

ct

13-O

ct

17-O

ct

21-O

ct

25-O

ct

29-O

ct

02-N

ov

06-N

ov

10-N

ov

14-N

ov

18-N

ov

22-N

ov

26-N

ov

30-N

ov

04-D

ec

08-D

ec

12-D

ec

16-D

ec

20-D

ec

24-D

ec

28-D

ec

Actual Normal

0

1020

30

40

50

60

70

80

01-J

un

06-J

un

11-J

un

16-J

un

21-J

un

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un

01-J

ul

06-J

ul

11-J

ul

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ul

21-J

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26-J

ul

31-J

ul

05-A

ug

10-A

ug

15-A

ug

20-A

ug

25-A

ug

30-A

ug

04-S

ep

09-S

ep

14-S

ep

19-S

ep

24-S

ep

29-S

ep

Actual Normal

Kerala Rainfall pattern from South West Monsoon Tamil Nadu Rainfall pattern from North East Monsoon

December 15

– January 16

End Of Season

Sale (EOSS)


Revenue growth across FMCG categories – 3QFY16

Category Bajaj

Corp.

Godrej

Consumer Dabur Marico Jyothy Labs Colgate

GSK

Consumer HUL Emami

Tata

Global

Beverages

Gillette

Hair Oil 6% - High teens 21% - - - - -6% - -

Refined Oil - - - 15% - - - - - - -

Detergents - - - - 4% - - Double digit

volume growth - - -

Soaps - 2% - - 12% - - Strong volume

growth - - -

Dishwashing - - - - 9% - - - - - -

Skincare -25% - 10% - - - - 5% 8% - 9%

Homecare - - 8% - - - - - - - -

Toothpaste/Oral care - - 16% - - 7% - Subdued

performance - - 6%

Hair care - -1% - - - - - Volume led double

digit growth - - -

Health Supplements - - -7% - - - - - 25% - -

Insecticides - 15% - - 25% - - - - - -

Dairy - - - - - - - - - - -

Packaged Foods - - - - - - - 12% - - -

Beverages - - -24% - - - 7% 7% - 1% -


Trends and Near term triggers/pressures from the C-Suite

“So for us the urban growth has been slightly

higher because led by mostly Kesh King in this

quarter and because you know because the

winter has been pretty poor and BoroPlus

sachets and some of the brands, small sachets

sell very well in the rural markets, so and also

Navratna. So the urban growth is slightly

higher compared to the rural growth in this

quarter.”

- Mohan Goenka - Emami

“I think the volume growth outlook near-term

doesn't really offer much promise. We don't

see any tailwinds happening in terms of rival

of growth. A couple of triggers could happen

one is the budget and perhaps the time

around the budget could see a significant

acceleration in rural stimuli, no I'm not saying

that'll necessarily happen, but there is every

possibility that it will...... So there is every

possibility that the demand improving from

the first probably more likely the second

quarter of next year, but even in the first, but I

don't think much anything significant

happening in the current quarter and perhaps

the early part of next quarter, but its again like

I said a very hypothetical. So, definitely the

volumes have moderated”

- Sunil Duggal, CEO, Dabur

Source: 2QFY16 Earnings Calls

“So we have maintained this last quarter

and we continue to see -- this demand

continues to be soft. And in my mind, at

least expected to remain so for at least

three to four more quarters. Price

competition, we do think it will stabilize in

laundry and dishwash. I don't think it can

go any worse that's my personal opinion.

We are already at a competitive level and I

don't see further price competition

happening, wherever we are on laundry

and dishwash.”

- Raghunandan, MD, Jyothy Labs

“We believe that the urban consumption

will gradually pick up in India. We have

already seen some marginal improvement

in modern trade this quarter. The situation

in rural continues to be a little soft,

especially in the states which have

experienced two consecutive years of

drought. Therefore affordability using the

pricing strategy lever will be the key driver

to maintain growth in a sluggish

environment.”

- Saugata Gupta, MD & CEO, Marico

“I don't think what we are calling

it as a slowdown even, if you

look at the market that we are

talking about, we definitely would

love to see some of the more

growth coming through in rural,

for instance. And that is

something which is now called

out across the board. Most

players are calling it out, we see

that as well and not just FMCG

players, other players as well.

And hence that is something, and

you all know that there's real

threat there, and that's probably

the only call out that we have

done. And other than that I think,

compared to last year's volume,

this year's volume growth in the

market has really gone up, has

definitely gone up. And so, I don't

think there is maybe a price

growth challenge and not

necessarily an outpace challenge

on volumes.”

- P.B Balaji, CFO, Hindustan

Unilever


Weak volumes along with persisting price deflationary environment…

Source: Company Filings, Spark Capital Research

Delayed winter and increase in competitive intensity coupled with…

Source: Company Filings, Spark Capital Research; ITC volumes refers to cigarettes only

…led to revenue growth being lower than 1HFY16

Source: Company Filings, Spark Capital Research;

…slowdown in rural offtakes limited volume growth


FMCG – Muted volume led growth across categories

4% 2% 7% 7%

3% 3% 3%

14%

76%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Ba

jaj C

orp

Dabur

Ma

rico

Jyoth

y L

ab

Zydus W

ell

ITC

HU

L

Em

am

i

Ma

npasand

Be

vera

ges

3QFY16 Revenue value growth

3%

-2%

10% 9%

-5%

6%

-6%-4%-2%0%2%4%6%8%

10%12%

Ba

jaj C

orp

Dabur

Ma

rico

Jyoth

y L

ab

ITC

HU

L

3QFY16 Volume growth

-7% -9%

6%

2%

11%

-1%

-15%

-10%

-5%

0%

5%

10%

15%

Ba

jaj C

orp

Dabur

Ma

rico

Jyoth

y L

ab

ITC

HU

L

Volume growth delta in percentage points (3QFY16 Vs 1HFY16)

Adjusting for Kesh King revenues, Emami

organic revenue growth was also in low single

digits (~4%) in 3QFY16

4% 2% 7% 7%

3% 3% 3%

14% 13% 10%

7% 8%

3%

-4%

5%

20%

26%

-10%-5%0%5%

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

Ba

jaj C

orp

Dabur

Ma

rico

Jyoth

y L

ab

Zydus W

ell

ITC

HU

L

Em

am

i

Ma

npasand

Beve

rages

3QFY16 Revenue value growth 1HFY16 Revenue value growth


Despite price cuts, trade promotions and increasing LUP prominence…


EBITDA margins were robust despite higher A&P with several…


…gross margin expanded in 3QFY16 led by lower RM prices


…companies reporting highest ever margins in as many quarters


FMCG – Margin expansion continues to be the saving grace in a deflationary environment

66%

57% 52% 52%

71% 64%

53%

71%

43%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Ba

jaj C

orp

Dabur

Ma

rico

Jyoth

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ab

Zydus W

ell

ITC

HU

L

Em

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Ma

npasand

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vera

ges

3QFY16 Gross Margin

110

215

420

72

-116

17

169

260

20

-200

-100

0

100

200

300

400

500

Ba

jaj C

orp

Dabur

Ma

rico

Jyoth

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ab

Zydus W

ell

ITC

HU

L

Em

am

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Ma

npasand

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vera

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In b

ps

Gross Margin delta (bps) (3QFY16 Vs 1HFY16)

31%

18% 19%

13%

22%

39%

18%

32%

20%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Ba

jaj C

orp

Dabur

Ma

rico

Jyoth

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ab

Zydus W

ell

ITC

HU

L

Em

am

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Ma

npasand

Be

vera

ges

3QFY16 EBITDA Margin

17 35

199

19 83

-42

29

1,000

-133 -200.00

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

Ba

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orp

Dabur

Ma

rico

Jyoth

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Zydus W

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ITC

HU

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In b

ps

EBITDA Margin delta (bps) (3QFY16 Vs 1HFY16)

Seasonality

impact


A&P outlay behind brand investments remained high…


Other expenses growth was marginally above revenue growth…


…leading to many companies witnessing peak A&P as a % of sales


…and was broadly in line with historical levels


FMCG – Gross margin cushion aided higher brand investments to revive growth and maintain market share

-5%

10%

23%

15%

22%

16%

26%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Ba

jaj C

orp

Dabur

Ma

rico

Jyoth

y L

ab

Zydus W

ell

HU

L

Em

am

i

3QFY16 A&P growth y-o-y

18% 16%

12% 13%

22%

14%

19%

0%

5%

10%

15%

20%

25%

Ba

jaj C

orp

Dabur

Ma

rico

Jyoth

y L

ab

Zydus W

ell

HU

L

Em

am

i

3QFY16 A&P as a % of Sales

13% 13%

21%

7%

-11%

13%

8%

14% 12%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Ba

jaj C

orp

Dabur

Ma

rico

Jyoth

y L

ab

Zydus W

ell

ITC

HU

L

Em

am

i

Ma

npasand

Be

vera

ges

3QFY16 Other expenses growth y-o-y

11% 13%

15% 15%

18% 19%

16%

13%

20%

0%

5%

10%

15%

20%

25%

Ba

jaj C

orp

Dabur

Marico

Jyoth

y L

ab

Zydus W

ell

ITC

HU

L

Em

am

i

Ma

npasand

Be

vera

ges

3QFY16 Other expenses as a % of Sales


Earnings growth though lackluster was higher than revenue growth on the back of margin expansion

Company Depreciation

(y-o-y growth)

Other Income

(y-o-y growth)

Interest

(y-o-y growth)

PBT

(y-o-y growth)

Reported

PAT

(y-o-y growth)

Adjusted

PAT

(y-o-y growth)

Adjusted

EPS

(y-o-y growth)

Bajaj Corp 4% 22% 62% 19% 19% 15% 15%

Dabur India 5% 57% 14% 13% 13% 13% 12%

Marico 5% 68% 8% 28% 24% 18% 18%

Jyothy Labs -3% 70% -79% 71% 47% 7% 7%

Zydus Wellness -12% 28% 33% -38% -39% 13% 13%

ITC 10% 16% 92% 5% 1% 1% 0%

Hindustan Unilever 12% 16% -99% -20% -22% 6% 6%

Emami 0% -85% 758% -28% -27% -1% -1%

Manpasand Beverages 226% 1174% -89% NA NA NA NA



FMCG – Downward revision post 3QFY16 miss and weak near term outlook

Source: Bloomberg, Spark Capital Research

We have lowered our revenue numbers to factor the impact of

ADHO’s subdued growth in near term and the impending weakness

in Nomarks revenues. Margins to remain steady

Earnings miss this quarter on account of delayed winter, lower than

anticipated have led to sales estimates being downgraded, interest

cost & lower other operating income have led to higher EPS revision.

Though earnings were in line with estimates, increase in competitive

intensity and weak winter offtakes have led to slight downgrade to

revenue estimates. Margins to improve slightly.

Hefty price cuts across categories to impact value growth, which has

led us to downgrading our revenue assumptions, margin estimates

though revised upwards to account for benign commodity cycle.

we have downgraded our assumption to factor in for the persisting

price deflationary environment and continuing subdued performance

of Ujala. Margins though to remain steady

Continuing disappointment in revenues and lack of any foreseeable

near term growth levers have led to massive revenue downgrade to

revenue estimates. Dwindling gross margin benefits to impact PAT.

Lower than anticipated growth across segments along with

impending weakness in the cigarette business have led to marginal

revenue and PAT downgrade this quarter.

Current quarter’s disappointing performance coupled with sustained

price deflationary environment have led to revenues being revised

downwards, increase in A&P leads to higher PAT revision.

-5%

-2%

-3%

-4%

-7%

-2%

-2%

-2%

-4%

-1%

1%

-4%

-10%

-2%

-3%

-4%

-12% -10% -8% -6% -4% -2% 0% 2%

Bajaj Corp

Dabur

Marico

Jyothy Lab

Zydus Well

ITC

HUL

Emami

EPS Sales


Company

Sales (Rs. mn) EBITDA (Rs. mn) Adj. PAT (Rs. mn) EPS (Rs.)

FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E

Bajaj Corp 8,195 8,755 10,140 2,391 2,743 3,135 2,104 2,389 2,702 14.3 16.2 18.3

Dabur India 78,064 84,180 93,993 13,164 15,141 17,600 10,658 12,406 14,298 6.1 7.1 8.1

Marico 57,203 61,224 67,561 8,701 10,598 12,550 5,735 7,235 8,638 4.4 5.6 6.7

Jyothy Labs 15,148 16,343 18,432 1,917 2,454 2,748 1,232 1,762 1,805 6.8 9.6 9.8

Zydus Wellness 4,208 4,267 4,589 998 874 1,059 1,090 987 1,155 27.9 25.3 29.6

ITC 3,65,074 3,60,835 4,01,617 1,34,736 1,38,473 1,58,023 96,077 98,768 1,12,482 12.0 12.3 14.0

Hindustan

Unilever 3,19,722 3,33,228 3,66,643 54,137 59,820 68,765 38,928 42,684 49,499 18.0 19.7 22.9

Emami 22,172 26,191 31,667 5,401 6,817 8,503 4,894 5,334 6,337 21.4 23.5 27.9

Manpasand

Beverages 3597 5434 7810 641 1053 1517 299 484 795 8.0 9.7 15.9

FMCG – Coverage companies earnings estimates

Source: Spark Capital Research


FMCG - Valuations though down from peak levels, in no way less than expensive

Company

P/E (x) EV/EBITDA (x) ROE(%) ROCE(%)

CMP

(Rs)

Mkt Cap

(Rs.

Mn)

Target

Rating

FY15 FY16E FY17E FY15 FY16 E FY17E FY15 FY16E FY15 FY16E P/E Price

Bajaj Corp 27.6 24.3 21.5 22.6 19.6 16.8 41.5% 48.7% 41.5% 48.7% 393 57,982 26x 484 Buy

Dabur India 41.2 35.4 30.7 32.4 27.8 23.6 35.5% 33.4% 28.6% 28.4% 250 4,40,313 31x 252 Reduce

Marico 50.5 40.0 33.5 32.9 26.6 22.1 36.0% 35.5% 29.2% 31.8% 225 2,89,643 34x 234 Add

Jyothy Labs 39.7 28.0 27.6 25.5 20.1 17.6 16.3% 21.5% 9.6% 13.0% 270 48,891 31x 301 Add

Zydus

Wellness 23.6 26.1 22.3 22.0 24.2 19.1 29.8% 22.4% 29.5% 22.2% 659 25,747 21x 621 Sell

ITC 25.2 24.6 21.6 17.0 16.8 14.7 33.7% 30.4% 32.0% 28.9% 302 24,26,348 25x 351 Buy

Hindustan

Unilever 44.8 40.9 35.3 31.1 28.0 24.2 103.0% 104.8% 77.3% 80.7% 807 17,45,486 40x 921 Buy

Emami 47.1 43.2 36.4 41.1 34.6 27.4 45.3% 40.9% 43.0% 31.5% 1,015 2,30,440 32x 893 Reduce

Manpasand

Beverages 54.0 44.5 27.1 34.7 18.9 13.1 20.9% 11.8% 17.4% 11.4% 430 21,533 30x 483 Buy



Source: Spark Capital Research & Concall transcripts

Company Key thoughts and management commentary

Bajaj

Corp

We remain sanguine on the prospects of BJCOR as we believe the company would certainly be one of the outperformers as rural

offtakes improve. Healthy dividend yield (~3%) & strong FCF yield (~2.8%) further adds to our comfort. We maintain our Buy rating.

“The primary cause for concern is that for the first time in 12 quarters, the growth of light hair oil in the rural sector has fallen below the growth

shown in the urban sector in the period October-November '15, we don't have the December figures, Nielsen figures as yet, the growth in the rural

sector is just 3.9% versus 6.4% volume growth registered in the urban areas.”

“In the current quarter, the revenue growths were adversely affected by, A, the high base in the third quarter of last year, the growth in turnover in

that quarter was 29%; B, slowdown in rural demand; C, disruption in sales in Nepal and Nepal is a significant portion of our international business;

and lastly, a major destocking that has been seen in the Canteen Stores depot stocks during the period November -- October and November of

this year.”

Dabur

India

Though we continue to remain positively biased towards the niche Ayurveda/herbal positioning of Dabur from a longer term

perspective, we note that there are minimal near term tailwinds. With near term macroeconomic triggers also not encouraging, we

believe the stock is fairly valued at current prices and downgrade our ratings to a REDUCE rating.

“gross margin expansion would continue at a far more moderate pace, but and perhaps it will payout fully by the second quarter of the next year,

first or second quarter of next year. We would see some modern passion happening even this quarter on a Y-on-Y basis but the gap would narrow

in terms of increase in the gross margin...... Having said that, if you're able to even maintain the current margin profile, I think that's a very

satisfactory situation to be in, provided of course our top-line growth at a reasonable pace. Further margin, margin expansion we should take as a

bonus not as a given and we should really focus a lot more on the top-line”

Jyothy

Labs

Though results were in line with our estimates and we are excited about the prospects of several brands, we have marginally

downgraded our assumption to factor in for the persisting price deflationary environment and continuing subdued performance of

Ujala. Margins though have been slightly upgraded to account for benign raw material scenario. We maintain our optimistic stance on

JYL on the back of impending call options albeit with an ADD rating.

“what I mean by stabilizing competition is the current margins seem to be sustainable. So even if costs have dropped a little bit over the period in

March quarter, even if you spend a little bit more, your existing margins seem to be protected at the current level of inflation or deflation.”

Marico

Given the persisting weakness and pessimistic outlook indicated by several managements across the FMCG spectrum, we believe

MRCO provides us the relative comfort in comparison to other FMCG names. We upgrade our numbers marginally and retain our

positive stance albeit with an ‘ADD’ rating

“strongly believe that if we drive full potential of our execution as well as clawback substantial portion of our input cost savings into pricing and

innovation, we'll be able to maintain 8% to 10% volume growth in India and ride the wave of the anticipated urban recovery in the coming

quarters.”

FMCG - Key thoughts and management commentary


Source: Spark Capital Research & Concall transcripts


Zydus

Wellness

We note that ZYWL’s attempts to revive category growth over the past 12 quarters undertaking product/ pricing/ promotions/

distribution /personnel reinvigoration has yielded in little success despite sustaining and consolidating market share consistently,

leading us to ponder whether the growth potential in the current portfolio has played out. Though we acknowledge that consumption

weakness prolongs, we are worried with ZYWL unable to find a strategy for sustained profitable growth with the current portfolio. We

downgrade ZYWL to a Sell

ITC

Though incessant price hikes continue to impact volume growth, we believe higher incidence of illegal cigarettes (smuggled) is

impacting cigarette volume growth to a greater extent. FMCG and Hotels businesses are expected to witness better traction as

consumption economy recovers while lack of trading opportunity in key commodities and cheap imports from China could keep Agri

business and Paper & Packaging business respectively under pressure in near term. Given the recent price decline despite no new

negative triggers emerging, we revise our rating to a BUY

Hindustan

Unilever

With incessant product and marketing restructuring (WIMI), we believe HUVR is well positioned to take advantage of both the rural

and/or urban growth revival. Having performed in tough times and with macro triggers anticipated to improve in medium term, we

believe HUVR at current price provides an attractive medium term opportunity. Superior returns, attractive pay-outs (scheme of

arrangement proposing to pay out unused reserves back to share holders) and humongous cash on books should provide further

comfort. We upgrade to a BUY

“We can't be held hostage to what is happening in price growth in a market. Let's start by seeing that, volume growth is still 6% despite all these

corrections that we have done, and therefore, we are able to pull it off without creating too much havoc in the market. And the key thing that you

must notice is the reason why you see turnover growth coming in are for two reasons why they are lower, one is one segment of the portfolio

we've got a commodity deflation, and it's just provident to the fiscal impact that's happening at the same time.”

Emami

Growth revival in the power brands portfolio and improved revenues from CIS region to be the key near to medium term growth levers.

We retain our long term positive stance on HMN but maintain our near term neutral stance in the absence of any near term triggers. We

maintain our optimistic view on the business prospects however recommend accumulation at lower price points; maintain our reduce

rating

“I don't think there is any kind of risk on core business growth , I'm still very positive because in the last -- at least I can confidently say in the last

40, 45 days I have seen some kind of a spud”

“So there has been an gross margin expansion almost 350 basis points in this quarter and the prices are quite blind, yes. So it looks like it should

remain at these levels and if these remains at these levels then next year we would be able to do yes 68%, 69% gross margin looks visible.”

FMCG - Key thoughts and management commentary


High single digit to low double digit revenue growth…


… higher than 1HFY16 growth partly on account of festive demand


Superior volume growth as price deflationary environment persisted


Paints – Relatively better growth backed by festive season demand and price cuts

14%

10% 9% 9%

11%

0%

2%

4%

6%

8%

10%

12%

14%

16%A

sia

n P

ain

ts

Be

rger

Akzo N

obel

Ka

nsai N

ero

lac

Pid

lite


8%

3% 4%

2%

4%

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

Asia

n P

ain

ts

Be

rger

Akzo N

obel

Ka

nsai N

ero

lac

Pid

lite

Revenue growth delta in percentage points (3QFY16 over 1HFY16)

15%

12% 11%

16%

10%

0%2%4%6%8%

10%12%14%16%18%

Asia

n P

ain

ts

Be

rger

Akzo N

obel

Ka

nsai N

ero

lac

Pid

lite



Backed by low crude oil prices gross margins remain robust…


Gross margin expansion largely seeped into operating margins…


…continuing to expand even sequentially


…with companies recording highest EBITDA margins in recent past


Paints – Benign crude oil prices aid robust margin expansion even sequentially

47% 45% 46% 39%

52%

0%

10%

20%

30%

40%

50%

60%A

sia

n P

ain

ts

Be

rger

Akzo N

obel

Ka

nsai N

ero

lac

Pid

lite

3QFY16 Gross Margin

85

248

45

172

127

0

50

100

150

200

250

300

Asia

n P

ain

ts

Be

rger

Akzo N

obel

Ka

nsai N

ero

lac

Pid

lite

In b

ps


19%

16%

11% 14%

22%

0%

5%

10%

15%

20%

25%

Asia

n P

ain

ts

Be

rger

Akzo N

obel

Ka

nsai

Nero

lac

Pid

lite

In b

ps


163

251

129

-127 -108 -150

-100

-50

0

50

100

150

200

250

300

Asian Paints Berger Akzo Nobel Kansai Nerolac Pidlite

In b

ps



Other income growth was healthy in four of the five P&C companies


Other expenses growth though higher than revenue growth…


Interest costs decreased this quarter on back of interest rate cuts


…was in line with historical levels


Paints – Other expenses and other income

17%

-21%

26%

55% 57%

-30%-20%-10%

0%10%20%30%40%50%60%70%

Asia

n P

ain

ts

Be

rger

Akzo N

obel

Ka

nsai N

ero

lac

Pid

lite

Other Income (y-o-y growth)

-22%

-56%

-17%

0%

-44%

-60%

-50%

-40%

-30%

-20%

-10%

0%

Asia

n P

ain

ts

Be

rger

Akzo N

obel

Ka

nsai N

ero

lac

Pid

lite

Interest (y-o-y growth)

16% 13%

15%

30%

20%

0%

5%

10%

15%

20%

25%

30%

35%

Asia

n P

ain

ts

Be

rger

Akzo N

obel

Ka

nsai

Nero

lac

Pid

lite


22% 24%

26%

20% 19%

0%

5%

10%

15%

20%

25%

30%

Asia

n P

ain

ts

Be

rger

Akzo N

obel

Ka

nsai

Nero

lac

Pid

lite



Benign commodity costs and operating leverage led to ~30% plus net profit growth in the paints pack barring Akzo

Company – 3QFY16 PBT

(y-o-y growth)

Reported

PAT

(y-o-y growth)

Adjusted

PAT

(y-o-y growth)

Adjusted

EPS

(y-o-y growth)

Asian Paints 31% 26% 35% 35%

Berger Paints 41% 38% 38% 38%

Akzo Nobel India 22% 25% 11% 11%

Kansai Nerolac 32% 29% 29% 29%

Pidilite 66% 49% 48% 48%



Paints & Chemicals – Estimates change post 3QFY16 results

Though we note that no material change has occurred this

quarter, 3QFY16 superior earnings and PIDI’s ability to sustain

high gross margins makes us revise our earnings estimates.

Revenue numbers have been downgraded to account for the

recent price cuts while margins have been slightly curtailed to

account for increase in trade promotions.

Though numbers were in line with expectations, revenues

have been marginally downgraded to account for weakness in

Nepal, gross margin should continue to fuel earnings growth.


Revenues have been marginally revised downwards to account

for near term demand weakness, margins however have been

revised upwards expecting gross margin expansion -1%

-2%

-1%

-2%

3%

1%

2%

1%

-1%

-1%

-3% -2% -1% 0% 1% 2% 3% 4%

Asian Paints

Berger

Akzo Nobel

Kansai Nerolac

Pidlite

EPS Sales

Revenue growth to remain weak given the hefty price cuts

affected by AKZO towards the end of last quarter. Gross

margin led operating margin expansion to accrue


Company

Sales (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.)


Asian Paints 1,41,828 1,55,205 1,78,518 22,354 28,752 34,241 14,141 18,562 22,546 14.74 19.35 23.51

Berger Paints 43,221 46,994 53,609 5,107 6,970 8,156 2,647 3,981 4,871 3.8 5.7 7.0

Akzo Nobel 25,270 27,117 29,437 2,614 2,866 3,164 1,845 1,885 2,195 39.5 40.4 47.0

Kansai Nerolac 35,324 38,058 43,514 4,448 5,648 6,684 2,717 3,552 4,301 5.0 6.6 8.0

Pidilite 48,441 52,690 60,119 7,708 11,250 13,218 5,162 7,135 8,603 10.1 13.9 16.8

Company

P/E (x) EV/EBITDA (x) ROE(%) ROCE(%) CMP

(Rs)

Mkt Cap

(Rs. bn)

Target

Rating

FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY15 FY16E P/E Price

Asian Paints 57.4 43.7 36.0 35.6 27.6 23.0 32.2% 35.6% 27.9% 31.2% 846 8,11,913 38x 904 Add

Berger Paints 61.9 41.2 33.6 32.6 23.6 19.8 24.0% 28.5% 17.2% 21.0% 236 1,63,869 36x 256 Reduce

Akzo Nobel 31.9 31.2 26.8 21.0 18.9 16.9 20.9% 19.7% 19.0% 18.2% 1,260 60,430 26x 1223 Reduce

Kansai

Nerolac 52.3 40.0 33.0 31.3 24.7 20.8 18.0% 20.6% 16.4% 19.0% 263 1,41,951 35x 283 Add

Pidilite 58.2 42.1 34.9 38.3 25.9 21.8 24.4% 28.4% 23.3% 27.3% 586 3,00,556 32x 545 Reduce

Valuations expensive though marginally down from peak levels over past one year





Asian Paints

Decorative paint industry’s superior growth compared to other consumption categories across cycles and the pricing power

APNT commands given the oligopolistic nature of the industry adds to our long term comfort. Uptick in Industrial paints and

International operations (led by growth in Ethiopia and Middle East) should add momentum to growth. We retain our stance

with an ADD rating as we believe APNT would be a clear outperformer even at current levels with earnings growth expected to

bounce back to support valuations.

Berger Paints

Having established strong brand equity, we believe BRGR is undertaking the next leg of growth through distribution

expansion, establishing relationships with more painters and communication initiatives, which we believe should enable BRGR

to continue outgrowing decorative paint industry growth in near to medium term. Subsidiaries’ performance is expected to

improve with revival in Nepal operations and growth in Bolix. We believe BRGR could even outperform the market leader in

earnings growth given the underlying operating leverage opportunity arising from the Hindupur facility. We maintain our

neutral stance, however with a reduce rating given the current premium valuations.

Kansai Nerolac

Though price cuts affected towards the end of quarter (as per channel checks) could adversely impact decorative paints

revenue growth, we believe it could assist in KNPL recording better volumes in decorative paints. Influenced by better

spending, revival in auto segment volumes, industrial paints revenues should augur well in medium to long term. As witnessed

in FY04-08, operating leverage to kick in as revenue growth bounces back in the industrial segment. We maintain our positive

stance on KNPL, albeit with an Add

Akzo Nobel

With our industry sources indicating that royalty could further increase, our thesis of non-linear earnings growth opportunity in

AKZO by virtue of curtailing operating expenses becomes a challenging probability. We believe impending weakness in

earnings should limit AKZO’s stock price appreciation in comparison to other paint names. We downgrade AKZO to a reduce

Pidilite

PIDI has consolidated its market leadership despite minimal price pass through in a highly fragmented industry which makes

us believe that PIDI revenues should bounce back significantly as macro-economic spending climate improves. Though PIDI

remains competitively strong, absence of foreseeable revenue triggers, waning of gross margin benefits over medium term and

weakness in industrial and International divisions keeps us cautious on our near to medium term stance on PIDI. We remain

neutral on PIDI albeit with a reduce rating as we believe at current valuations does not justify the lack of revenue growth

triggers.

Paints & Chemicals


Robust double digit revenue growth in majority of companies…


Titan witnessed healthy volume growth on back of festive offtakes


…with growth being higher/broadly in line with 1HFY16 run rate

barring a few companies


Sequential volume growth however mixed in discretionary pack


3QFY16 – Healthy revenue growth in discretionary pack barring few companies

15%

9%

17% 15%

27%

17% 15% 15%

-15%

6% 4%

-20%-15%-10%-5%0%5%

10%15%20%25%30%

Pa

ge

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ies

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-2% 0%

34%

8% 11%

-2%

17%

-3% -1% -6%

-2% -10%-5%0%5%

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

Pa

ge

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ies

KK

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Titan

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Revenue growth delta in percentage points (3QFY16 over 1HFY16)

10%

6%

28%

0% 0%

5%

10%

15%

20%

25%

30%

Pa

ge

Industr

ies

KK

CL

Titan G

old

Titan W

atc

hes


-0.2% -4%

38%

2%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Pa

ge

Industr

ies

KK

CL

Titan G

old

Titan W

atc

hes

Volume growth delta in percentage points (3QFY16 over 1HFY16)


Gross margins broadly in line with historical levels, however…


EBITDA margins though…


… majority of companies witnessing margin contraction sequentially


…witnessed sequential improvement in select companies


Margin profile of Discretionary pack remains status quo

238

-81

-242

163

411

-64

-204

-39

-263

-49 -80

-300

-200

-100

0

100

200

300

400

500

Pa

ge

Industr

ies

KK

CL

Titan

Ba

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LA

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20% 18%

9% 13%

37%

14% 14%

7% 9%

36%

13%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Pa

ge

Industr

ies

KK

CL

Titan

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LA

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-136

-469

114 214

498

-31

221

-337 -109

-1370

71

-1500

-1000

-500

0

500

1000

Pa

ge

Industr

ies

KK

CL

Titan

Ba

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LA

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RG

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In b

ps


55% 47%

25%

52%

75%

58% 54%

44% 50%

78%

56%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Pa

ge

Industr

ies

KK

CL

Titan

Ba

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3QFY16 Gross Margin


No ‘out of the blue’ changes witnessed in discretionary pack


Other expenses growth barring few was below revenue growth


Other income growth largely outpaced earnings growth


Other expenses broadly in line with historical trends


Other expenses, depreciation & other income

27%

1% 7% 6%

1%

24% 19%

-9%

7%

-30%

17%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Pa

ge

Industr

ies

KK

CL

Titan

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Depreciation (y-o-y growth)

7%

-3%

19%

-5%

113%

28% 0%

-68%

26% 25%

-100%

-50%

0%

50%

100%

150%

200%

Pa

ge

Industr

ies

KK

CL

Titan

Ba

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LA

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Other Income (y-o-y growth)

15% 14% 14% 6% 6% 15% 22%

4%

-7%

166%

11%

-20%0%

20%40%60%80%

100%120%140%160%180%

Pa

ge

Industr

ies

KK

CL

Titan

Ba

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18%

6%

11%

16%

7%

35% 33%

26% 28%

15%

21%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Pa

ge

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ies

KK

CL

Titan

Ba

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Company

2QFY16

Interest

(y-o-y growth)

PBT

(y-o-y growth)

Reported

PAT

(y-o-y growth)

Adjusted

PAT

(y-o-y growth)

Adjusted

EPS

(y-o-y growth)

Page Industries -15% 6% 16% 30% 30%

KKCL 25% 3% 2% 2% 2%

Titan -46% 18% 18% 18% 18%

Bata -23% 34% 28% 28% 28%

LA Opala RG 20% 50% 53% 53% 53%

Relaxo Footwear 44% 25% 23% 23% 23%

Indian Terrain -11% 83% 83% 83% 47%

VIP Industries 0% 35% 33% 162% 162%

Wonderla

Industries -24% -4% -4% -4% -4%

Arvind -12% 0% -5% -5% -5%


Robust earnings growth led by healthy revenue growth across Discretionary pack sub-segments



Discretionary – Change in FY17 consensus earnings post results

Though earnings were better than estimates, revenues being

downgraded to account for threat from e-commerce and

wholesale channel players. Higher rental to keep margins subdued

We believe near term growth in watches and studded jewellery

segment could be severely challenging on the back of persisting

consumption weakness & ‘End Of Season Sale Advancement’.

Earnings miss this quarter along with weakness in men’s

innerwear segment has led to revenues being downgraded, PAT

downgrade to mirror sales Downgrade

Impending weakness in the textile business have led to revenues

being revised. Increasing contribution from Brands & Retail to

impact margins.

Revenue and margins have been maintained as Relaxo footwear

continues to outperform industry growth. Margins to remain

steady in near to medium term.

Despite exceeding expectations this quarter, revenue growth

have been marginally revised to account for weak offtakes in

traditional channel. PAT revision to mirror sales revision

-5%

-1%

-2%

0%

-1%

-3%

-6%

-3%

-5%

7%

-1%

-8%

-10% -5% 0% 5% 10%

Page Industries

Titan

Bata

Relaxo Footwear

VIPIndustries

Arvind

EPS Sales


Company

Sales (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.)


Page Industries 15,140 18,050 22,185 2,899 3,727 4,690 1,960 2,507 3,145 175.7 224.8 282.0

KKCL 4,051 4,759 5,860 1,045 1,234 1,840 663 767 1,285 53.7 62.2 104.2

Titan 1,19,032 1,19,327 1,38,335 11,534 10,925 13,426 8,231 7,909 9,766 9.3 8.9 11.0

Bata 26,921 24,476 28,024 3,350 2,768 3,742 2,092 1,752 2,334 16.3 13.6 18.2

LA Opala RG 2,233 2,702 3,351 660 893 1,145 417 578 738 7.5 10.4 13.3

Relaxo Footwear 14,728 17,783 21,127 2,006 2,456 3,029 1,030 1,276 1,662 8.6 10.6 13.8

Indian Terrain 2,904 3,338 4,027 335 421 562 180 300 358 5 8.5 9.2

VIP Industries 10,443 12,175 13,814 775 985 1,235 435 588 753 3.1 4.2 5.3

Arvind 78,514 83,876 96,062 10,129 10,770 12,855 3,823 3,697 4,783 14.8 14.3 18.5

Discretionary - Valuation Matrix



Company

P/E (x) EV/EBITDA (x) ROE(%) ROCE(%)

CMP

(Rs)

Mkt Cap

(Rs.

Mn)

Target

Rating

FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY15 FY16E P/E Price

Titan 38.2 39.7 32.2 26.9 28.0 22.7 29.3% 23.6% 26.5% 23.6% 354 3,14,232 30x 330 Reduce

Bata 30.1 35.9 26.9 17.6 21.0 15.3 22.5% 16.7% 22.6% 16.9% 489 62,882 28x 509 Add

LA Opala RG 80.5 58.1 45.5 49.5 36.7 28.2 29.5% 27.6% 26.0% 26.1% 605 33,600 43x 577 Reduce

Indian Terrain 23.3 14.0 11.7 11.7 8.5 6.1 22.1% 21.2% 18.6% 18.1% 117 4190 17x 155 Buy

VIP Industries 30.9 22.9 17.9 17.3 13.7 10.8 14.7% 18.3% 13.8% 16.9% 95 13468 22x 117 Buy

Arvind 19.2 19.9 15.3 9.6 9.2 7.6 14.4% 12.9% 11.9% 10.4% 284 73393 18x 334 Buy

Discretionary - Valuation Matrix





Titan

We believe near term growth in watches and studded jewellery segment could be severely challenging on the back of persisting

consumption spending weakness and due to ‘End Of Season Sale Advancement’. Given the absence of any near term triggers to

indicate either growth or earnings momentum, we believe the stock at current valuations of ~33x FY17E does not offer a favourable

risk-reward ratio. Thereby we downgrade our growth assumptions with a revised target price and rating on TTAN to a reduce.

La Opala

Tracking back our thesis from our first note on LOG we continue to strongly believe that conversion from low value offerings,

increasing need for aesthetic appealing products and rise in penetration remain the key category growth drivers. LOG, as we

believed then has not only ridden on the category drivers but has also successfully driven the 3 ‘P’ growth strategies of

Premiumization, Penetration and Product Expansion and has enhanced our conviction recording ~20% and ~27% revenue and

EBITDA CAGR respectively from FY13-FY15. We remain confident that LOG is well geared up to continue this growth momentum

but our optimism on LOG as a near term investable idea is constrained given that valuations are currently at unchartered steep

territory and any minute negative triggers could impact stock price. With the stock witnessing minimal correction and rallying

~33% in the past 6 months, we believe LOG at current prices is trading at premium valuations. We maintain our reduce rating

Indian Terrain

We decipher that the fund raise has not only de-clogged growth opportunities but is also beginning to aid in bargaining for better

terms of trade from suppliers and distributors leading to better operating performance. Our numbers broadly remain unchanged.

Current quarter’s robust revenue performance despite macro headwinds and margin expansion keeps us sanguine on our thesis

that with better funding capabilities; ITFL has the ability to outgrow the market led by underlying product quality, distribution

expansion and brand extensions. We maintain our positive stance with a BUY rating.

Arvind Ltd

Despite the overall performance of Arvind being below our expectation during 9MFY16, we continue to retain our positive stance

on Arvind given the huge opportunity and growth potential of the apparel space coupled with the robust brand equity of Arvind’s

portfolio of brands. Though we have been very optimistic on the company’s performance since our initiation, we continue to

acknowledge that execution challenges remain and on account of the complexity of the business involved, the ride to success

would be bumpy and remains to be monitored closely. Numbers have been downgraded given this quarter’s miss and higher

interest outlay than expected; however we retain our BUY rating

VIP Industries

Though macroeconomic spending climate remains tepid and structural drivers for VIP haven’t materially changed as yet, we take

comfort from the fact that VIP IN is doing the right things to revive into growth path. With company’s operational performance

broadly in line with our expectations, our revenue assumptions and margins largely remain unchanged. With the next wave of

consumption spending expected to be focussed around discretionary offerings, we believe VIP IN stands at a favourable position

to benefit from this trend on a long term basis. Near term triggers concentrated upon air-passenger traffic growth, revival in CSD

channel offtakes and increasing contribution from new brands. Maintain our positive stance with a BUY.

Discretionary


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Absolute

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Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year

horizon

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Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Disclosure of interest statement DABUR, BJCOR, MANB, HMN, HUVR, ITC, JYL, MRCO,

ZYWL, APNT, BRGR, KNPL, AKZO, PIDI, TTAN, BATA,

KEKC, LOG, ITFL, RLXF, PAG,ARVND,WONH

LBS ITFL

Analyst financial interest in the company No Yes No

Group/directors ownership of the subject company covered No No No

Investment banking relationship with the company covered No No Yes

Spark Capital’s ownership/any other financial interest in the company covered No No No

Associates of Spark Capital’s ownership more than 1% in the company covered No No No

Any other material conflict of interest at the time of publishing the research report No No No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company

covered for in the last twelve months:

Managing/co-managing public offering of securities

Investment banking/merchant banking/brokerage services

products or services other than those above

in connection with research report

No

No No

Whether Research Analyst has served as an officer, director or employee of the subject company

covered No No No

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Subject Company; No No No

Cont’d

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