INSTITUTIONAL EQUITY RESEARCH Oral Care

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

Oral Care

It’s an era of specialized toothpastes INDIA | FMCG | Sector Update

3 March 2021

We believe the highly penetrated (>95%+) toothpaste industry can revive growth either through increased volumes (by driving a shift towards brushing twice – a change in personal habits that could take decades to materialise) or via premiumization (where Colgate, market leader despite having strong HH index score (>2500), has significantly lagged its peers). In this note, we analyse why Colgate has missed the bus in the fast-growing and premium ‘sensitive’ segment, while Sensodyne (brand owner – GSK Consumer Healthcare; distribution partner - HUL) is grinning away at #1 position. The sensitive segment now forms 10% of the overall toothpaste market (vs. being negligible a decade ago) and has the potential to grow in double-digits in the medium term. The overall toothpaste category volume growth (in the best case) will be in low single digits.

We maintain a high conviction SELL on Colgate and BUYs on HUL and Dabur. Dabur (strong tailwinds due to increased consumer preference for ‘naturals’) and HUL (distribution synergies emerging out of the GSK Consumer merger, will help to increase cross-selling opportunities) are our preferred plays within the Rs 105bn oral-care industry.

What led to Sensodyne creating quite a ‘sensation’ in Colgate’s premium segment?

Our ground research indicates the following reasons why Sensodyne became a #1 player (it now has 50% market share in the Rs 11bn sensitive category) even when both Colgate and GSK Consumer Healthcare were running neck-and-neck till FY13-14.

First-mover advantage: GSK had the first-mover advantage; it grabbed an excellent opportunity to create awareness about dental sensitivity (customers weren’t very informed about this), which it backed by increased sampling activity, chill-test activations in urban areas, and a high-decibel media campaign – where it used doctors (trust factor) to convey the message.

Best-in-class product efficacy: Sensodyne is based on the Novamin technology (although it is patented, it is offered to competitors). However, it is the only one that uses sodium fluoride in its toothpaste, which makes the product highly efficacious vs. competitors. In fact, our consumer survey findings revealed: (1) customers perceive Sensodyne as a ‘science oriented’ brand, while Colgate is seen as a mass market brand. (2) most had not heard about Colgate Sensitive (since it hardly advertises the product) and even while some customers had used it, they did not find it fully effective.

Strong connect with experts/influencers – i.e. the doctors/chemists channel: Our ground checks showed that GSK ’s sales representatives spend considerable time with dentists explaining the USP of Sensodyne – i.e., the science behind the brand – leaving the final prescription choice to them, while Colgate believes in doing more sampling exercises. Notably, GSK has a pharma-skewed portfolio; it has entrenched distribution links in the chemists’ channel, making its job easier (since chemists are usually the first point-of-contact for minor health/dental issues). Word-of-mouth referrals and high media advertisement with experts (doctors wearing a stethoscope) has provided a lot of credence to the brand Sensodyne.

What’s next in store for Sensodyne? Sensodyne has the ambition of becoming a Rs 10bn brand in the next three years (from the current run-rate of Rs 5.5-6.0bn) and it is taking the following actions to achieve this ambition.

Market opportunity not yet fully explored: Media reports indicate that 33% of Indians have sensitivity issues, but only 1/5 th of them take the required action, suggesting a huge potential for Sensodyne to drive penetration-led gains.

Making advertisement more mainstream: Realizing that all customers might not be able to relate to pure-vanilla and simple doctor-led advertising, GSK has changed its tone and tried to make it more relatable with food (for The Love Of Food campaign), so that customers can consume hot / cold food, despite having sensitivity issues (if they regularly brush with Sensodyne).

Companies Colgate Palmolive (CLGT IN) Reco SELL CMP, Rs 1617 Target Price, Rs 1200 Hindustan Unilever Ltd (HUVR IN) Reco BUY CMP, Rs 2194 Target Price, Rs 2800 Dabur India Ltd (DABUR IN) Reco BUY CMP, Rs 518 Target Price, Rs 625 Vishal Gutka, Research Analyst (+ 9122 6246 4118) [email protected]

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

FMCG SECTOR UPDATE

Capitalizing on unique use-cases: During the course of our ground research, we observed that there is a unique set of users who buy Sensodyne for altogether different reasons such as: (1) they do not like the fizz while brushing; Sensodyne creates minimum fizz among available toothpastes. (2) High tobacco consumers need this toothpaste to feel ( regular consumption of tobacco damages jaw lines/gums and customers feels numbness). We gathered that 4 out of top-10 Sensodyne-selling cities were in Bihar and Jharkhand. Sensodyne will do even better one’s it starts leveraging HUL’s r distribution network Brief history of the HUL and GSK Consumer merger HUL acquired GSK Consumer Ltd’s business (Horlicks and Boost brands) for Rs 320bn via a stock-swap deal in the ratio of 1 : 4.32 shares. HUL also got the distribution rights of GSK Consumer Healthcare (sister concern of the GSK group) brands such as Sensodyne, Iodex, Crocin, etc. Under this arrangement, HUL will get a commission for distributing GSK Consumer Healthcare products. Earlier, GSK Consumer used to carry out distribution of GSK Consumer Healthcare brands on commission (% of sales) basis. GSK Consumer used to derive c.90% of its revenues from south and east India and had a strong presence in the chemist channel. Historically, north and west India have been the weakest regions for the GSK group; with HUL coming into the picture, things are likely to change for the better. HUL has a distribution reach of 9mn+ outlets while GSK Consumer (erstwhile distribution partner for Sensodyne) had a reach of 1.5mn + outlets, that too heavily concentrated in south and east India. The on-going integration of GSK Consumer’s distribution network with HUL should enable HUL to take GSK Consumer Healthcare premium toothpaste brands to chemist outlets in north and west India, which earlier was cumbersome. We believe this will make the premiumization journey for Colgate that much more difficult, as HUL is a behemoth that has the entire oral care portfolio to distribute and at the same time, it will enhance cross-selling opportunities for HUL for its other products, because earlier it did not have a foot in the door in the chemist channel, since none of its products fit into that profile. Moreover, HUL’s strong presence in north and west India will help to further fortify Sensodyne in sensitive segment. Scaling up LUP programme Foreseeing HUL’s distribution moat is even stronger in rural hinterlands, GSK Consumer Healthcare does not want to leave any stone unturned to capture growth opportunities and has started a pilot programme for driving penetration-led gains in low-income households via access packs/low unit packs (Rs 10/25 packs) in West Bengal. If GSK gets its execution and consumer acceptance right in rural areas (65% of India’s population stays there), then the sky is the limit – because so far Sensodyne has being restricted to urban areas. Is it possible for other pharma companies to shake up the ultimate Messiah (Sensodyne) in the sensitive segment? Sensodyne has become a generic brand name in the sensitive toothpaste category and the company has priced it at a considerable premium to medicated prescribed products of pharma companies such as Thermsoseal, Sensoform, or Sensodent. Our discussions with medical representatives suggests that Vantage (Dr Reddy) is the only brand that is priced at premium to Sensodyne and is putting up a good fight via increasing engagement levels with doctors.


FMCG SECTOR UPDATE

GSK Consumer is a dominant player in the Rs 11bn sensitive segment

Source: Phillip Capital India Research estimates Sensodyne brand has seen 17% CAGR over the past decade

Source: Phillip Capital India Research estimates Most of the well known medicated brands (except Vantage) sell at a discount to Sensodyne Brand Company Size (g) Price (₹) Premium/ (Discount) Sensodyne - Repair & Protect GSK Consumer healthcare 100 200 - Colgate Sensitive Colgate Palmolive (India) 100 155 -23% Vantage Dr. Reddy 100 262 31% Thermoseal ICPA Health Products Ltd 100 105 -48% Sensodent IDOCO Remedies ltd 100 115 -43% Sensoform IDOCO Remedies ltd 100 115 -43% Senolin IDOCO Remedies ltd 100 113 -44% Emoform J L Morison India Ltd 100 76 -62%

Source: 1mg, Amazon, Phillip Capital India Research

50%

10%

40%

Market Share (%)

Sensodyne

Colgate Sensitivity

Others(Ventej,Thermsoseal,Sensoform, Sensodent etc.)

0

1

2

3

4

5

6

7

FY13 FY17 FY21

Reve

nue

(In B

n)

Sensodyne Revenue (In Bn)


FMCG SECTOR UPDATE

Sensodyne should be earning a hefty gross margin, as it pays a high distribution margin Even with Sensodyne pricing its variant – Repair and Protect – at a considerable premium (70%) to others, the paste has been able to outsell most other brands; this, despite paying hefty trade and distribution margins. Apart from paying commission to HUL for distribution (which we believe is in range of 10-12% of sales), it also has to pay 15-20% trade margins to distributors. This means it must shell out 25-30% for distributing its product. It has been able to outsell most pharma brands due to its strong dentist connect network, first-mover advantage, and solid distribution network vs. other pharma peers. Many prescription brands (Rx) have a strong OTC demand From Digene to Becosules, consumers buy hundreds of Rx brands repeatedly. But pharma companies do not advertise in mass media, since they fear that doctors will stop prescribing a brand once they see ads on TV. Moreover, pharma companies have an ideological barrier when it comes to spending big money on mass media. However, even when Crocin ‘went OTC’ a couple of decades ago, it still gets Rx support. Differentiated product / pricing and SKU strategy has its own merits GSK Consumer Healthcare has started penetrating rural hinterlands via Rs 10/25 SKUs, mainly to encourage trials amongst rural households. It is also running a pilot project in West Bengal. Notably, these LUPs are not in core medicated variants – i.e., Sensodyne Repair and Protect and Sensodyne Rapid Relief, as both these products require certain a threshold quantity (minimum usage) for results to show. In urban areas, standard SKUs (80 grams, 100 grams) are priced lower on a per gram basis than LUP SKUs (40 grams). Although this seems -quite contradictory, there is a logic – by doing intense research, we found that since the cap circumference for the large toothpaste is much broader, it makes lot of sense for the company to price it at a slight discount, leading to higher volumes. Moreover, we found that the consumers need to use medicated versions of Sensodyne i.e., Repair and Protect (top-selling SKU) for at least 10-15 days for the problem to resolve to a large extent. As a result, minimum SKU size for Sensodyne Repair and protect is 70 grams. However, another variant, i.e., Sensodyne Rapid Relief (second top-selling SKU) that comes in a 40-gram SKU is recommended to patients for hyper-sensitivity issues during dental procedures; and as the name suggests, Rapid Relief is meant to provide immediate relief. Our ground checks suggest that customers feel relief after applying this for 4-5 days, so this product can be sold at lower grammage SKUs, which might not be viable for Sensodyne Repair and Protect. Larger SKUs of Sensodyne are priced at a discount to low unit packs / access packs

Company Brand Product Original Calculated

Category-wise Size (g) Price (₹) Size (g) Price (₹)

GSK Consumer Healthcare Sensodyne

Sensitive Toothpaste - Repair & Protect 70 175 100 250

Core Sensitive Toothpaste - Repair & Protect 100 200 100 200 Sensitive Toothpaste - Rapid Relief 40 90 100 225 Sensitive Toothpaste - Rapid Relief 80 160 100 200 Sensitive Toothpaste - Herbal Multi Care 70 120 100 171 Natural Sensitive Toothpaste - Fresh Mint 40 70 100 175

Regular

Sensitive Toothpaste - Fresh Mint 150 180 100 120 Sensitive Toothpaste - Fresh Gel 75 110 100 147 Sensitive Toothpaste - Fresh Gel 150 200 100 133 Sensitive Toothpaste - Whitening 70 125 100 179 Sensitive Toothpaste - Deep Clean 70 120 100 171

Polident Polident Denture Fixative Cream 20 315 100 1,575 Source: 1mg, Amazon, Phillip Capital India Research

We believe it will be difficult for pharma companies to make any dent in the Sensodyne business, since it has a dominating market leadership, which is likely to get even more entrenched once the distribution synergies with HUL play out


FMCG SECTOR UPDATE

Looking at life beyond Sensodyne We believe GSK would like to increase its revenue pie beyond Sensodyne within oral care. For this, it will look to fully utilize its first-mover advantage in specialized toothpaste, its image of being a ‘science’ brand , its strong dentist network, and will fully leverage the distribution network of FMCG behemoth (HUL). In our view, it will follow up with more specialized toothpaste launches from its parent’s stable. GSK healthcare has taken baby steps in diversifying its product portfolio beyond Sensodyne; we are yet to see meaningful results from this. Paradontax – It launched Paradontax in 2017 to tackle issue of bleeding gums, but then withdrew the product despite it being efficacious. Our ground checks suggest that the taste was not amenable to customers (customer found it too salty) and it is planning to launch this with a more amenable taste. Polident – GSK launched Polident in 2020; it is meant for denture wearers, since these customers require specialized toothpaste due to facial discomfort while eating, speaking, or even smiling with dentures. Globally, GSK Healthcare derives 50% of its business from this brand out of its Rs 125bn denture care category. Anurita Chopra, Area Marketing Director, Oral Health, GSK Consumer Healthcare commented on the market opportunity in the following manner: “In fact, one of every seven Indians above the age of 45 wears a denture and only five per cent of these people use specialist care products.” (Source: The Economic Times). Toothbrush: It has recently forayed into the Rs 20bn toothbrush category, given it is more of an adjacency. Although it is a lower gross-margin category, it can earn a decent EBITDA margin, if it gets execution and proposition right (GSK has been focusing on soft bristles). Why do we maintain a high-conviction SELL on Colgate – a pure-play oral care company? Elongated road to recovery; Colgate has all the ingredients of an “essentials play” in its favour, but increased competitive intensity and slowing category growth are key challenges that the management needs to tackle for a meaningful recovery. The recent integration of GSK Consumer with HUL (gives HUL access to GSK's premium toothpaste brands in the chemist channel), will make the premiumization journey for Colgate that much more difficult, but enhance cross-selling opportunities. We like Colgate’s new CEO’s strategy of: (1) Increasing frequency of consumption in rural areas (rural households brush only 2-3 times in a week), (2) prioritizing volumes over profit across sub-segments via innovation, launch of access packs, and higher A&P spends to regain lost market share, and (3) intensifying focus on the naturals portfolio (which forms 25-30% of the oral-care market, and has been growing 16-18% per annum), which has been the weakest link for the company. We remain in wait-and-watch mode and would like to see initial results of the new strategy coming through as incumbents (HUL/ Patanjali and Dabur) have enough firepower to deal with any eventuality and are likely to put best foot forward to defend its turf. We maintain SELL with a target of Rs 1,200 (30x FY23 EPS). The market seems to believe that the consumer staples sector could underperform in the medium term, given increased risk appetite for high beta / cyclicals names. If this holds true, then laggards within the FMCG index will significantly underperform, even within the Consumer Index. In our view, Colgate is one these laggards, and one should significantly trim positions, given muted volumes / earnings growth in the medium


FMCG SECTOR UPDATE

term. There could be significant downgrades in EPS, given increasing packaging-material prices and increased competitive intensity . Downside risk to our call: (1) Colgate launches a spicier toothpaste (currently it is not doing so, in order to be compliant with protocol/guidelines stated by its parent), which can take Dabur and Patanjali head-on; (2) Patanjali collapses due to some reason, which benefits incumbents; and (3) scaling up of non-oral-care portfolio – which we believe is unlikely given the high competitive intensity in its core toothpaste segment.

Annexure The making of a ‘real dentist-wala’ ad Due to Indian laws, Sensodyne cannot use dentists practicing in India in its commercials. So, it typically scouts for dentists abroad, mainly the UK. They are usually first-generation immigrants with not so pronounced accents, so as not to alienate Indian audiences while retaining the brand’s premium edge. Anurita Chopra, Area Marketing Director, Oral Health, GSK Consumer Healthcare said:, “Indians also have high aspiration for international brands, so frankly that’s also rubbed off on the brand. Sensodyne is a premium brand and we also command a premium over regular toothpaste because we are a specialized brand. So, it’s worked both ways.” Sensodyne’s dentist selection process begins with a list of doctors that has all key Indian languages represented. The agency shoots with eight dentists to start with, and the films are not dubbed. Even the back-up has a back-up – for every language shoot there are three dentists. Said Anurita Chopra in the media report: “It’s a nightmare, but we get these dentists who speak the right way. And we are unscripted when we shoot. The beauty is that authenticity is so core to us that if there’s any kind of artifice we will just walk away.” Apparently, once the team rejected a dentist on filming-day when they found the doctor had visited a hair salon the evening before. “Because it’s not authentic. You have to be very clear how authentic is authentic though. It has to be premium. They have to be well turned out and well-groomed but not made up”. Other brands use glamour, blinding white teeth and million-dollar smiles (literally, because celebrities don’t come cheap) and actors playing doctors in white lab coats spouting scripted lines. “We don’t do that. Even if there’s a mispronunciation we will not edit it out. And the work responds because it’s so simple and sharp. You see the beauty in business and numbers.” Source: Economic Times, Phillip Capital India Research


FMCG SECTOR UPDATE

Financials - Colgate Palmolive (CLGT IN)

Income Statement Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Net sales 44,876 47,708 51,944 56,583 Growth, % 1.2 6.3 8.9 8.9 Other operating income 375 293 322 354 Total income 45,251 48,001 52,266 56,937 Raw material expenses -15,729 -15,336 -17,253 -18,978 Employee expenses -3,323 -3,738 -3,925 -4,219 Other Operating expenses -14,182 -14,462 -15,850 -17,287 EBITDA (Core) 12,017 14,465 15,238 16,453 Growth, % (2.8) 20.4 5.3 8.0 Margin, % 26.8 30.3 29.3 29.1 Depreciation -1,979 -1,824 -1,933 -2,042 EBIT 10,037 12,641 13,305 14,411 Growth, % (6.8) 25.9 5.3 8.3 Margin, % 22.4 26.5 25.6 25.5 Other Income 492 320 352 370 Non-recurring Items 0 0 0 0 Pre-tax profit 10,434 12,881 13,577 14,701 Tax provided -2,269 -3,349 -3,530 -3,822 Profit after tax 8,165 9,532 10,047 10,878 Net Profit 8,165 9,532 10,047 10,878 Growth, % 9.6 16.8 5.4 8.3 Net Profit (adjusted) 8,165 9,532 10,047 10,878 Unadj. shares (m) 272 272 272 272 Wtd avg shares (m) 272 272 272 272 Balance Sheet Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Cash & bank 4,213 7,193 10,038 13,839 Debtors 1,326 1,409 1,534 1,671 Inventory 2,969 3,157 3,437 3,744 Loans & advances 1,135 1,135 1,135 1,135 Other current assets 478 478 478 478 Total current assets 10,120 13,371 16,622 20,867 Investments 186 186 186 186 Gross fixed assets 18,624 19,772 20,919 22,067 Less: Depreciation -7,395 -9,219 -11,152 -13,194 Add: Capital WIP 1,900 1,900 1,900 1,900 Net fixed assets 13,129 12,453 11,668 10,774 Non-current assets 357 357 357 357 Total assets 26,040 28,615 31,080 34,432 Current liabilities 8,703 9,090 9,668 10,301 Provisions 488 488 488 488 Total current liabilities 9,191 9,578 10,156 10,789 Non-current liabilities 907 907 907 907 Total liabilities 10,098 10,485 11,063 11,696 Paid-up capital 272 272 272 272 Reserves & surplus 15,670 17,858 19,745 22,464 Shareholders’ equity 15,942 18,130 20,017 22,736 Total equity & liabilities 26,040 28,615 31,080 34,432 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Pre-tax profit 10,434 12,881 13,577 14,701 Depreciation 1,979 1,824 1,933 2,042 Chg in working capital -1,144 116 173 189 Total tax paid -3,271 -3,349 -3,530 -3,822 Cash flow from operating activities 7,997 11,472 12,153 13,109 Capital expenditure -1,213 -1,148 -1,148 -1,148 Chg in marketable securities 772 -84 1,409 0 Cash flow from investing activities -226 -1,034 -2,123 -1,148 Free cash flow 7,772 10,438 10,029 11,962 Equity raised/(repaid) -45 0 0 0 Dividend (incl. tax) -9,792 -7,344 -8,160 -8,160 Cash flow from financing activities -9,837 -7,344 -8,160 -8,160 Net chg in cash -2,065 3,094 1,869 3,802 Valuation Ratios

FY20 FY21E FY22E FY23E

Per Share data EPS (INR) 30.0 35.0 36.9 40.0

Growth, % 9.6 16.8 5.4 8.3 Book NAV/share (INR) 58.6 66.7 73.6 83.6 FDEPS (INR) 30.0 35.0 36.9 40.0 CEPS (INR) 37.3 41.8 44.0 47.5 CFPS (INR) 27.2 41.0 43.4 46.8 DPS (INR) 36.0 27.0 30.0 30.0 Return ratios

Return on assets (%) 31.6 35.2 33.9 33.5 Return on equity (%) 51.2 52.6 50.2 47.8 Return on capital employed (%) 49.9 52.2 49.5 48.1 Turnover ratios

Asset turnover (x) 4.9 5.3 6.3 7.9 Sales/Total assets (x) 1.7 1.7 1.7 1.7 Sales/Net FA (x) 3.3 3.7 4.3 5.0 Working capital/Sales (x) (0.1) (0.1) (0.1) (0.1) Receivable days 10.8 10.8 10.8 10.8 Inventory days 24.2 24.2 24.2 24.2 Payable days 67.3 70.9 69.9 69.6 Working capital days (22.7) (22.3) (21.7) (21.1) Liquidity ratios Current ratio (x) 1.2 1.5 1.7 2.0 Quick ratio (x) 0.8 1.1 1.4 1.7 Net debt/Equity (%) (26.4) (39.7) (50.1) (60.9) Valuation PER (x) 53.4 45.7 43.4 40.1 PEG (x) - y-o-y growth 5.6 2.7 8.0 4.8 Price/Book (x) 27.3 24.0 21.8 19.2 EV/Net sales (x) 9.6 9.0 8.2 7.5 EV/EBITDA (x) 35.8 29.5 27.9 25.6 EV/EBIT (x) 42.9 33.8 32.0 29.3


FMCG SECTOR UPDATE

Financials - Hindustan Unilever Ltd (HUVR IN)

Income Statement Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Net sales 3,82,730 4,55,692 5,24,963 5,90,525 Growth, % 2 19 15 12 Other operating income 5,120 6,888 7,627 8,447 Total income 3,87,850 4,62,580 5,32,590 5,98,972 Raw material expenses -1,77,930 -2,16,185 -2,43,208 -2,72,393 Employee expenses -16,910 -22,659 -25,379 -27,916 Other Operating expenses -97,010 -1,10,057 -1,28,058 -1,42,691 EBITDA (Core) 96,000 1,13,679 1,35,946 1,55,972 Growth, % 6.2 18.4 19.6 14.7 Margin, % 25.1 24.9 25.9 26.4 Depreciation -9,380 -10,420 -11,844 -13,302 EBIT 86,620 1,03,259 1,24,102 1,42,670 Growth, % 6.0 19.2 20.2 15.0 Margin, % 22.6 22.7 23.6 24.2 Interest paid -1,060 -1,378 -1,516 -1,667 Other Income 7,330 5,717 6,575 7,561 Non-recurring Items -1,970 0 0 0 Pre-tax profit 90,920 1,07,599 1,29,161 1,48,564 Tax provided -23,540 -27,976 -33,582 -38,627 Profit after tax 67,380 79,623 95,579 1,09,937 Growth, % 10.8 14.8 20.0 15.0 Net Profit (adjusted) 67,380 79,623 95,579 1,09,937 Unadj. shares (m) 2,160 2,349 2,349 2,349 Wtd avg shares (m) 2,160 2,349 2,349 2,349 Balance Sheet Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Cash & bank 50,170 94,997 1,19,058 1,46,658 Marketable securities at cost 12,480 12,480 12,480 12,480 Debtors 10,460 12,454 14,347 16,139 Inventory 26,360 29,963 34,518 38,829 Other current assets 19,610 19,610 19,610 19,610 Total current assets 1,19,080 1,69,505 2,00,013 2,33,716 Investments 20 20 20 20 Gross fixed assets 73,750 4,30,678 4,41,678 4,52,678 Less: Depreciation -23,190 -33,610 -45,454 -58,756 Add: Capital WIP 5,130 5,130 5,130 5,130 Net fixed assets 55,690 4,02,198 4,01,354 3,99,052 Non-current assets 5,960 5,960 5,960 5,960 Total assets 1,96,020 5,92,953 6,22,617 6,54,018 Current liabilities 91,040 98,942 1,13,090 1,26,481 Provisions 11,980 14,264 16,432 18,484 Total current liabilities 1,03,020 1,13,206 1,29,522 1,44,965 Non-current liabilities 12,690 10,203 10,203 10,203 Total liabilities 1,15,710 1,23,409 1,39,725 1,55,168 Paid-up capital 2,160 2,345 2,345 2,345 Reserves & surplus 78,150 4,67,199 4,80,547 4,96,505 Shareholders’ equity 80,310 4,69,544 4,82,891 4,98,850 Total equity & liabilities 1,96,020 5,92,952 6,22,617 6,54,018 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Pre-tax profit 90,920 1,07,599 1,29,161 1,48,564 Depreciation 9,380 10,420 11,844 13,302 Chg in working capital -4,420 2,101 9,868 9,340 Total tax paid -22,760 -27,976 -33,582 -38,627 Other operating activities -70 9,487 0 0 Cash flow from operating activities 73,050 1,01,631 1,17,292 1,32,579 Capital expenditure -11,160 -3,56,928 -11,000 -11,000 Chg in marketable securities 14,450 0 0 0 Other investing activities 15,930 2,60,670 0 0 Cash flow from investing activities 19,260 -96,258 -11,000 -11,000 Free cash flow 92,310 5,373 1,06,292 1,21,579 Equity raised/(repaid) 110 4,02,415 0 0 Debt raised/(repaid) 0 0 0 0 Dividend (incl. tax) -54,000 -92,804 -82,231 -93,979 Other financing activities -12,870 -3,17,157 0 0 Cash flow from financing activities -66,760 -7,546 -82,231 -93,979 Net chg in cash 25,550 -2,173 24,060 27,600 Valuation Ratios





Asset turnover (x) 25.7 2.4 1.5 1.7 Sales/Total assets (x) 2.0 1.2 0.9 0.9 Sales/Net FA (x) 7.0 2.0 1.3 1.5 Working capital/Sales (x) (0.1) (0.1) (0.1) (0.1) Receivable days 10.0 10.0 10.0 10.0 Inventory days 25.1 24.0 24.0 24.0 Payable days 92.5 92.2 93.4 94.1 Working capital days (33.0) (29.6) (31.0) (32.1) Liquidity ratios Current ratio (x) 1.3 1.7 1.8 1.8 Quick ratio (x) 1.0 1.4 1.5 1.5 Interest cover (x) 81.7 74.9 81.9 85.6 Net debt/Equity (%) (62.5) (20.2) (24.7) (29.4) Valuation PER (x) 67.8 64.3 53.5 46.5 PEG (x) - y-o-y growth 6.3 11.6 2.7 3.1 Price/Book (x) 58.6 10.9 10.6 10.3 EV/Net sales (x) 12.1 11.0 9.5 8.4 EV/EBITDA (x) 48.4 44.1 36.7 31.8 EV/EBIT (x) 53.6 48.5 40.2 34.8


FMCG SECTOR UPDATE

Financials - Dabur India Ltd (DABUR IN)

Income Statement Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Net sales 87,036 96,164 1,06,051 1,16,963 Growth, % 2.0 10.5 10.3 10.3 Other income 0 0 0 0 Total income -43,602 -47,963 -52,759 -57,507 Raw material expenses -9,477 -10,330 -11,467 -12,843 Other Operating expenses -16,033 -17,116 -18,827 -20,875 EBITDA (Core) 17,924 20,755 22,998 25,738 Growth, % 3.0 15.8 10.8 11.9 Margin, % 20.6 21.6 21.7 22.0 Depreciation -2,205 -2,333 -2,520 -2,707 EBIT 15,719 18,422 20,478 23,031 Growth, % 0.6 17.2 11.2 12.5 Margin, % 18.1 19.2 19.3 19.7 Interest paid -495 -297 -320 -343 Other income 3,053 3,297 3,693 4,136 Other Non-Operating Income -1,000 0 0 0 Pre-tax profit 17,277 21,422 23,851 26,824 Tax provided -2,797 -3,856 -4,293 -4,828 Profit after tax 14,479 17,566 19,558 21,995 Net Profit 14,479 17,566 19,558 21,995 Growth, % 1.7 13.5 11.3 12.5 Net Profit (adjusted) 14,479 17,566 19,558 21,995 Unadj. shares (m) 1,766 1,766 1,766 1,766 Wtd avg shares (m) 1,766 1,766 1,766 1,766 Balance Sheet Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Cash & bank 8,114 15,685 24,491 34,954 Marketable securities at cost 13,910 13,910 13,910 13,910 Debtors 8,139 8,992 9,917 10,937 Inventory 13,796 15,243 16,810 18,539 Loans & advances 131 131 131 131 Total current assets 49,023 58,894 70,192 83,405 Investments 14,092 14,092 14,092 14,092 Gross fixed assets 36,294 39,800 42,550 45,300 Less: Depreciation -13,768 -16,101 -18,621 -21,328 Add: Capital WIP 1,466 1,466 1,466 1,466 Net fixed assets 23,992 25,165 25,395 25,438 Total assets 93,540 1,04,585 1,16,112 1,29,368 Current liabilities 24,639 26,193 27,877 29,735 Provision 629 629 629 629 Total current liabilities 25,268 26,823 28,506 30,364 Non-current liabilities 1,850 2,606 2,606 2,606 Total liabilities 27,118 29,428 31,112 32,970 Paid-up capital 1,767 1,767 1,767 1,767 Reserves & surplus 64,290 73,025 82,868 94,266 Shareholders’ equity 66,422 75,157 85,000 96,398 Total equity & liabilities 93,540 1,04,585 1,16,112 1,29,368 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Pre-tax profit 17,277 21,422 23,851 26,824 Depreciation 2,205 2,333 2,520 2,707 Chg in working capital -8,189 10 -808 -892 Total tax paid -2,856 -3,856 -4,293 -4,828 Other operating activities 0 0 0 0 Cash flow from operating activities 8,435 19,909 21,270 23,811 Capital expenditure -5,869 -3,506 -2,750 -2,750 Chg in investments 12,241 0 0 0 Chg in marketable securities -6,656 0 0 0 Other investing activities 0 0 0 0 Cash flow from investing activities -284 -3,506 -2,750 -2,750 Free cash flow 8,152 16,403 18,520 21,061 Equity raised/(repaid) 1,653 0 0 0 Debt raised/(repaid) 1,368 0 0 0 Dividend (incl. tax) -6,147 -8,832 -9,715 -10,598 Other financing activities 0 0 0 0 Cash flow from financing activities -3,074 -8,831 -9,715 -10,598 Net chg in cash 5,077 7,572 8,806 10,463 Valuation Ratios





Asset turnover (x) 3.3 3.2 3.4 3.7 Sales/Total assets (x) 1.0 1.0 1.0 1.0 Sales/Net FA (x) 3.9 3.9 4.2 4.6 Working capital/Sales (x) 0.0 0.0 0.0 0.0 Fixed capital/Sales (x) - - - - Working capital days 9.9 11.8 13.5 15.0 Liquidity ratios Current ratio (x) 2.0 2.2 2.5 2.8 Quick ratio (x) 1.4 1.7 1.9 2.2 Interest cover (x) 31.7 62.0 64.1 67.0 Dividend cover (x) Total debt/Equity (%) 7.1 6.2 5.5 4.9 Net debt/Equity (%) (5.2) (14.7) (23.4) (31.5) Valuation PER (x) 58.3 51.4 46.1 41.0 Price/Book (x) 13.7 12.1 10.7 9.4 Yield (%) EV/Net sales (x) 10.2 9.1 8.2 7.3 EV/EBITDA (x) 49.4 42.3 37.8 33.4 EV/EBIT (x) 56.3 47.6 42.4 37.3


FMCG SECTOR UPDATE

Stock Price, Price Target and Rating History

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. We have different threshold for large market capitalisation stock and Mid/small market capitalisation stock. The categorisation of stock based on market capitalisation is as per the SEBI requirement. Large cap stocks Rating Criteria Definition BUY >= +10% Target price is equal to or more than 10% of current market price

NEUTRAL -10% > to < +10% Target price is less than +10% but more than -10%

SELL <= -10% Target price is less than or equal to -10%. Mid cap and Small cap stocks Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price

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

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

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

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

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the

B (TP 1275)

B (TP 1350)

B (TP 1250) B (TP 1190)

B (TP 1500)

N (TP 1170) S (TP 930)

S (TP 1130)

S (TP 1075)

S (TP 990)

S (TP 1125) S (TP 1175)

S (TP 1200)

500

700

900

1100

1300

1500

1700

B (TP 1275)M-18M-18 J-18 A-18 S-18 N-18 D-18 F-19 M-19M-19 J-19 A-19 S-19 N-19 D-19 F-20 M-20M-20 J-20 A-20 S-20 N-20 D-20


FMCG SECTOR UPDATE

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FMCG SECTOR UPDATE

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INSTITUTIONAL EQUITY RESEARCH Oral Care

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