Consumer Goods - Sector Update

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    Strictly Private and Confidential

    ,

    Abn eesh Roy Har sh Meh t a

    +91-22-6620 3141 +91-22-4063 5543

    [email protected] [email protected]

    May 2012

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    Key trends in Q4FY12

    A sizeable number of consumer companies have reported March quarter numbers. We attempt to highlight a few keytrends:

    Ov e ra ll r o b u s t v o l u m e g ro w th : Volume for 5 out of 8 companies in line or better than expectation; positive

    , .

    CSD sa les d isappo in t , bu t reasonab le r ecovery l i k e ly : Sales in Feb and March were seriously impacted due to

    order freeze. GSK, Emami (across all categories) and Maricos Saffolamost impacted. We expect recovery in Junequarter, but YoY growth unlikely.

    Ad spend a m ixed bag : Four companies (out of 10) cut it in terms of % of sales (v/s. 6 out of 13 in Q3FY12).

    Two decreased it on absolute basis (ad spends in PP for HUL softened after many quarters).

    St r a in on g r oss m arg in pe rs i s ts : Gross margins of eight companies (out of 13) dipped significantly (v/s 12 out

    of 21 in Q3FY12), and increased for Nestle, Marico, GCPL, Zydus Wellness and Agro Tech.

    EBI DTA m arg in d ips : EBITDA margin of 7 (out of 13) companies declined, but much lower than gross margin

    (Dabur, Marico, Zydus Wellness, Bajaj Corp posted dip due to high ad spends).

    Pr i c ing pow er r i ses : Majority took calibrated price hikes. Quality of sales growth was better with balanced blend

    of price and volume growth.

    New launches on ho ld : Most companies have reduced pace of introducing new products.

    M o d ern t r a d e: Companies are increasing focus on widening reach of modern trade.

    I n t e rna t iona l bus inesses ca r ry on good run : In most cases, businesses reported healthy growth despite global

    economic pressures. Africa continues to hurt Emami.

    2

    Q4FY12 resu l t s Hi ts : HUL, Asian Paints, Emami, GCPL, Marico. Misses: Nestle, GSK Consumer

    Top p icks : Dabur, GCPL, Emami, HUL and ITC.

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    Outlook for coming quarters: Upbeat

    V o l u m e: To remain healthy as penetration levels and per capita usage will remain attractive for years to come.Both rural and urban India to drive demand. Normal rainfall holds key.

    Ad spend: To see a slow revival, largely in H2FY13.

    Gross m arg in : Gross margin pressure likely peaked out. Coming quarters likely to see expansion in gross

    margins, part of which will be ploughed back into ad spends.

    I n d i a g ro w i n g m u c h f a ste r t h a n w o r l d av e ra g e: In March quarter, Indian volume growth continues to be much

    as er an res o e wor , us y ng prem um mu p es.

    HUL reported 10.1% YoY volume growth against parent companys 3.5%.

    Coca-Cola India reported healthy 20% YoY volume growth v/s single digit growth for parent company.

    Packag ing law : The new packaging legislation could impact categories like biscuits, detergents, tea, coffee andsoaps, which in turn could affect affordability and thereby overall sales. We see possibility of delay/relaxation in the

    legislation.

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    Some unanswered questions

    Some discretionary food categories like soups facing slowdown for six months. Our sense is that items which arenot part of core Indian meal, will be the first to face the axe in the event of a slowdown. Other discretionary items

    at risk could be MFD, pasta, chocolates and noodles.

    . . ,

    from CSD could take a knock.

    Will liquor companies be more impacted due to CSD issue?

    s ren reversa o s ow own n a spen s: ome consumer compan es e a ur, ar co, s arp y s eppe

    up ad spends in Dec quarter.

    Six out of 10 companies increased ad spend in terms of % of sales (7 out of 13 in Q3FY12).

    Only two companies cut ad spend in absolute terms (4 out of 13 cut in Q3FY12).

    Laggards in margins like soaps & detergents posted sharp recovery in margins. Is it sustainable?

    Marked increase in action in toothpaste segment. Is P&G finally entering toothpaste in India?

    Is cut in ad spends in personal products a trend or just a one off?

    Has India stepped up usage of hair oils, as seen in strong volume growth by all hair oil companies?

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    Risks

    Further MTM impact will depend on how the INR moves from INR51 (March end).

    Difficulty in price hikes in lower SKUs, new packaging norms.

    .

    Increase in ad spends, entry of new players.

    CSD needs to be closely monitored as it may impact sales, margins and working capital.

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    Valuation snapshot and top picks

    Marke t McapDiv

    yield

    (%)CAGR

    (%)

    Company Reco Price(INR) (INRbn) FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E FY13E FY12E14E

    FMCG

    ROE(%)P/E(x) EV/EBITDA(x)DilutedEPS(INR)

    AsianPaints Buy 3,697 35 3 1 03.1 1 15 .7 13 9.8 35 .9 31.9 26.4 23.5 20.0 16.4 41.0 38.5 39.0 1.5 16.5Colgate Hold 1,216 165 32.2 37.8 44.1 37.8 32.1 27.6 27.4 22.9 19.6 104.4 103.8 102.4 2.3 17.0Dabur Buy 108

    187 3.7 4.2 5.2 29.3

    25.4

    20.7

    21.0 18.0 14.5 43.6 39.3 38.4 1.4 19.1

    Emami Buy 476 72 17.1 20.0 24.5 27.9 23.9 19.5 23.9 19.8 16.0 36.2 38.8 42.3 1.5 19.7GSKConsumer* Buy 2,780 116 84.4 99.2 1 16.7 32.9 28.0 23.8 21.0 18.0 15.1 34.9 34.3 33.7 1.4 17.5GodrejConsumer Buy 514 174 16.9 21.1 25.5 30.4 24.3 20.1 21.5 17.7 14.6 28.1 28.8 29.2 1.3 22.8HindustanUnilever Buy 434 933 12.4 14.4 16.9 34.9 30.2 25.6 29.6 24.7 20.6 86.2 78.3 74.2 2.0 16.7ITC Buy 235 1825 7.9 9.0 10.5 29.9 26.0 22.4 20.2 17.6 15.2 35.7 37.2 38.6 2.2 15.5Marico Buy 174 106 5.2 6.5 7.8 33.6 26.9 22.3 22.5 17.9 14.6 30.5 29.6 28.2 0.5 22.9Nestle* Hold 4,665 448 99.7 116.5 139.1 46 .8 40.0 33.5 29.4 25.4 20.9 90.3 77.9 73.9 1.6 18.1United S irits Hold 630 82 30.6 38.6 4 9.4 20.6 16.3 12.8 11.2 9.9 8.5 9.0 10.6 12.6 1.8 27.0FMCG Mean 32.7 27.7 23.2 22.9 19.3 16.0 49.1 47.0 46.6 1.6 19.3

    FMCG Mean(marketcapwtdaverage) 33.3 28.7 24.3 23.7 20.2 17.0 54.1 51.5 50.8 1.9 17.1

    FMCG

    Mean(ex

    Nestle) 31.3x 26.5x 22.1x 22.2x 18.6x 15.5x 45.0 43.9 43.9 1.6 19.3

    Based on our analysis, our top picks currently are Dabur, GCPL, Emami, HUL and ITC.

    Source: Company, Edelweiss research *CYnumbers

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    A detailed analysis of trends

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    Trend 1: Volumes surge

    Consumer companies continue to surprise positively in terms of volume growth despite several price hikes, with 5out of 8 companies posting volume growth in line/better than expectations.

    No signs of down-trading so far against the historic trend of the same in high inflationary environment.

    HULs volumes grew 10.1% YoY (v/s 9.1% in Q3FY12) led by a strong growth in soaps & detergents and personal

    products. However, oral care and Knorr portfolio failed to deliver growth.

    GCPLs soaps business grew 30% YoY led by strong volume growth of 17% v/s category volume growth of 4%.

    a ur s omes c vo ume grow re oun e o ~ . o aga ns n an n , e y

    volume-led growth in shampoos, foods and skin care.

    Emamis domestic volumes grew a handsome 15% YoY in Q4FY12 (10% YoY in Q3FY12).

    .

    (affected due to CSD issues).

    VolumegrowthYoY Q4FY12(%) vs.expectations

    AsianPaints 13.0

    Emami 10.0

    GodrejConsumer Soap* 17.0

    HindustanUnilever(domestic) 10.1

    MaricoParachute 11.1

    MaricoSaffola 3.3

    Nestle ~01

    Dabur(domestic) 9.5

    GSKConsumer 7.0

    CocaColaIndia ~20

    UnileverPLC(Parent) 3.5

    8

    Source: Company, Edelweiss research * Domestic nos.

    es e aren .

    ColgatePalmoliveCo(Parent) 3.5

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    Trend 1: Volumes surge (Contd)

    Revenues(INR

    mn) Q4FY12 Q4FY11 growth

    (%)

    HindustanUnilever 57,659 49,684 16.1

    AsianPaints 25,460 19,696 29.3

    Dabur 13,636 11,082 23.0

    GodrejConsumer 13,230 10,110 30.9

    Marico 9,177 7,468 22.9

    Emami 4,036 3,499 15.3

    Nestle 20,475 18,100 13.1

    AgroTech

    1,752

    1,776

    (1.4)

    GSKConsumer 8,364 7,274 15.0

    Source: Company, Edelweiss research

    ZydusWellness 809 781 3.6

    KansaiNerolac 6,668 5,211 28.0

    TataCoffee 3,820 3,352 14.0

    BajajCorp 1,470 1,101 33.5

    Asian Paints reported healthy volume growth of ~13% as demand in the decorative segment remained attractive inQ4FY12 across all divisions.

    Discretionary spends on personal products still strong; evident from HULs volumeled growth in this category of

    17.1% YoY (vs 14% in Q3FY12).

    Volume growth for food category has been soft. Discretionary categories like noodles, soups and popcorn faced

    some slowdown.

    GSKs Q1CY12 volume grew 7% YoY (9.5% growth ex-CSD) led by 9.4% YoY volume growth in Horlicks.

    Nestle disappointed with a flattish volume growth, affected by capacity constrains and CSD sales issues.

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    Trend 2: CSDA new monitorable

    All the consumer results announced so far indicates a dip in CSD sales. This was mainly on account of absence ofsales to CSD in February and March. CSD sales likely to revive in June quarter but unlikely to pick pace.

    For Marico, sales to CSD contribute ~7% of overall sales with Saffola (CSD contribute 1315% to Saffola sales)

    . .

    GSKs volume growth of 7% (exCSD volume growth of 9.5%) was muted. CSD forms ~8% of GSKs sales.

    Emamis CSD sales (impacted across all categories) declined 50%.

    HULs tea business reported flat volumes largely impacted by CSD sales issue.

    In our view, liquor companies like Radico Khaitan and United Spirits are likely to face a higher impact on sales as a

    larger portion of their sales comes through CSD route.

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    Trend 5: EBITDA margin dips, but a few manage better

    EBITDA margin of seven out of 13 companies declined (12 out of 21 companies in Q3FY12). However, fall inEBITDA margin is much lower than fall in gross margin in most cases.

    EBITDA margin of most companies declined primarily on account of raw material inflation.

    However, EBITDA margin dip was cushioned by moderation in ad spending.

    HUL, GCPL, Emami, Nestle and Agro Tech have managed margins well.

    EBITDAmargins Q4FY12 Q4FY11 ChangeinbpsYoY

    HindustanUnilever 14.5 12.9 153

    AsianPaints 15.0 14.9 11

    Dabur 16.3

    19.5

    (315)

    GodrejConsumer 18.8 17.0 173

    Marico 12.0 14.2 (222)

    Emami 20.4 15.4 496

    es e . .

    AgroTech 10.1 8.8 131

    GSKConsumer 22.1 22.4 (24)

    ZydusWellness 30.5 35.6 (505)

    Kansai

    Nerolac 10.9

    11.1

    (16)

    Source: Company, Edelweiss research

    . .

    BajajCorp 23.1 28.2 (509)

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    Trend 6: Pricing power continues

    Quality of sales growth was better with balanced blend of price and volume growth.

    Most companies have taken calibrated price hikes, but not completely to the extent of rise in commodity prices.

    Hence, EBITDA margins have contracted.

    Empirically, it has been observed that with deflation in raw material, companies seldom roll back prices completely,

    which could lead to margin expansion. Also, they roll back prices with a lag.

    Pr ice h ik e Pr odu ct w ise p r ice h ik e

    Category Pricehike(%)

    Marico

    ConsumerProductsBusiness(India) 9.7

    ParachuteCoconutOi l (Rigidpacks) 6.9

    Company Pricehike(%)

    Marico 8.1

    AsianPaints 13.0

    Dabur(domestic) 9.7

    Source: Company, Edelweiss research

    CoconutOil 8.9

    ValueAdded

    Hair

    Oils 13.5

    Saffola 7.7

    GCPL

    Soaps 13.0

    HindustanUnilever(domestic) 10.4

    GSKConsumer 8.0

    Emami(domestic) 5.0

    GSKConsumer

    Horlicks 8.5

    Boost 7.1

    Biscuits 11.0

    Emami

    Source: Company, Edelweiss research

    .

    Balm 10.0

    Fair&Handsome 10.0

    Boroplus 3.0

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    Trend 7: Pace of new launches slackens

    Q4FY12 saw few new product launches as companies are focusing onconsolidating previous new products launched during the year.

    Emami did not launch any new product during the quarter and has no

    . ,

    variants of existing products.

    HULs Lifebuoy Clini

    Care 10, launched this quarter, put up a good show.

    s new y aunc e o re o. osewater mon s ga ne goo

    traction owing to its aggressive marketing.

    However, most companies are in wait-and-watch mode; pace likely to

    step up in H2FY13.

    New p r oduc ts and i nnova t ions

    HUL Lifebuoyclinicare10,Rin PerfectShineFabricBlue,DoveColorRescuerange

    LakmeSunCompletedamagedefense,VaselineMenzAntispotWhiteningcream,

    Fruttare,SoupyNoodles Chickenflavour.

    Dabur Newvarians

    of

    Real

    and

    Active

    including

    Plum,

    Pomegranate

    and

    Super

    Berries

    Source: Company, Edelweiss research

    GCPL GodrejNo.1 Rosewater&Almonds

    Nestle MilkmaidCreations

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    Trend 9: International sales growth robust for most players

    Companies reported robust growth in international business despite global economic pressure.

    Maricos international business grew a healthy 24% YoY (organic) in Q4FY12 (total growth 37% YoY).

    . .

    GCPLs international margins expanded on back of strong performance in Indonesia and Africa.

    Emamis international business posted robust growth despite slowdown in Africa (where sales declined ~55% YoY).

    Asian Paints posted good growth in South Asian marketsOman, Nepal and Sri Lanka; modest growth in Middle

    East; however, no recovery in Caribbean markets.

    .

    I n te rna t i ona l bus iness

    Company Growth(%)

    AsianPaints 15.7

    Dabur* 45.8

    GCPL 49.0

    Marico* 24.0

    Company Internationalsalesas%oftotalrevenue

    HUL 1.0

    Emami 14.0

    Dabur 20.0

    GCPL

    33.0

    Source: Company, Edelweiss research

    mam .

    * Organic growth

    ar co .

    Note:FY11data

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    Annexure

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    Key raw material: Price trend

    PalmOil Copra

    4,0006,5007,500

    2,080

    2,720

    ,

    (INR)

    3,5004,5005,500

    (INR/Qtl)

    800

    1,440

    ay02

    ay03

    ay04

    ay05

    ay06

    ay07

    ay08

    ay09

    ay10

    ay11

    ay12

    2,500

    May

    07

    Aug

    07

    Nov

    07

    Feb

    08

    May

    08

    Aug

    08

    Nov

    08

    Feb

    09

    May

    09

    Aug

    09

    Nov

    09

    Feb

    10

    May

    10

    Aug

    10

    Nov

    10

    Feb

    11

    May

    11

    Aug

    11

    Nov

    11

    Feb

    12

    May

    12

    Packaging

    LLP Packaging

    HDPE

    80.0

    )

    90

    50.0

    60.0

    70.0

    id

    ParaffinINR/lt

    72

    78

    84

    DPEINR/kg)

    30.0

    40.0

    r

    10

    10

    l10

    10

    10

    11

    r

    11

    11

    l11

    11

    11

    12

    r

    12

    (Liq

    60

    66

    ar

    10

    y

    10

    ul10

    p

    10

    v

    10

    n

    11

    ar

    11

    y

    11

    ul11

    p

    11

    v

    11

    n

    12

    ar

    12

    (

    19

    Source: Company, Edelweiss research

    Ma

    Ma Ju

    Se

    No Ja

    Ma

    Ma Ju

    Se

    No Ja

    Ma

    M MJ

    S N J M MJ

    S N J M

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    Edelweiss commodity index

    CommodityIndex

    20.0

    40.0

    .

    135

    155

    (40.0)

    (20.0)

    0.0

    75

    95

    115

    RM pressure:likely to softenfrom current

    levels

    Source: Company, Edelweiss research

    Ja

    n0

    Apr0

    Jul07

    O

    ct0

    Ja

    n0

    Apr0

    Jul08

    O

    ct0

    Ja

    n0

    Apr0

    Jul09

    O

    ct0

    Ja

    n1

    Apr1

    Jul1

    O

    ct1

    Ja

    n1

    Apr1

    Jul11

    O

    ct1

    Ja

    n1

    Apr1

    YoYInflation(RHS) EdelweissRMPweightedpriceIndex

    20

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