Marico - result update-Nov-12-EDEL - The Smart...

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Marico’s Q2FY13 sales were in line with our estimate; however, PAT came below expectation due to higher tax rate. Key positives include: (i) 684bps YoY expansion in gross margin (largely ploughed back into ad spends); (ii) 260bps YoY market share gain in value added hair oil; and (iii) 28% YoY growth in youth brands (Paras). Key negatives were: (i) slow 6% YoY volume growth in Saffola (12% YoY in Q1FY13; impacted due to slowdown in CSD and discretionary); and (ii) slow pace of international business (constant currency sales growth 3% YoY). Maintain ‘BUY’. This report also contains Q2FY13 conference call highlights. Gross margin gain partly ploughed back into ad spends

Marico’s revenue grew 19.4% YoY and volume surged 14% YoY (organic volume growth at 9% YoY) in Q2FY13. Gross margin expanded due to soft copra prices. EBITDA margin jumped 79bps only due to ad spends inching up 453bps YoY (rolled out Saffola Oats and Muesli nationally; high spend on youth and skin cream brands). Tax rate surged 438bps as growth in Saffola (enjoys tax benefits) and Middle East (zero tax) was slower than Parachute (no tax benefits).

Volume growth dips for Saffola

Parachute coconut oil rigid packs and value added hair oil volumes grew 9.0% and 20.0% YoY, respectively. Saffola posted 6% volume growth due to slowdown in discretionary demand and impact of CSD (13‐15% of sales). International business grew 16% YoY, but constant currency growth was 3% YoY. Kaya sales grew by 38% YoY (25% YoY in constant currency) and same store growth was 10% YoY. It posted a positive PBIT of INR57mn (loss of INR48mn YoY in Q2FY12). International business grew at 16% YoY (3% YoY in constant currency) and EBITDA margin stood at 10% (up 150bps YoY).

Outlook and valuations: Positive; maintain ‘BUY’

We remain enthused by Marico’s focus on new growth drivers like mass skin care, youth and food category while existing business continues to grow strongly. At CMP, the stock is trading at 31.8x FY13E and 26.5x FY14E. We maintain ‘BUY’ recommendation and ‘Sector Outperformer’ rating.

RESULT UPDATE

MARICO Packing a punch

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Outperformer

Risk Rating Relative to Sector Medium

Sector Relative to Market Underweight

MARKET DATA (R: MRCO.BO, B: MRCO IN)

CMP : INR 204

Target Price : INR 231

52‐week range (INR) : 218 / 134

Share in issue (mn) : 644.7

M cap (INR bn/USD mn) : 132/ 2,448

Avg. Daily Vol.BSE/NSE(‘000) : 339.8

SHARE HOLDING PATTERN (%)

Current Q1FY13 Q4FY12

Promoters *

59.8 59.8 62.7

MF's, FI's & BK’s 6.7 7.0 4.5

FII's 26.4 25.7 25.6

others 7.1 7.5 7.2 * Promoters pledged shares (% of share in issue)

: Nil

PRICE PERFORMANCE (%)

Stock Nifty

EW Consumer Goods Index

1 month 0.6 (0.4) 4.9

3 months 5.5 9.0 13.5

12 months 35.9 8.4 45.0

Abneesh Roy +91 22 6620 3141 [email protected] Hemang Gandhi +91 22 6620 3148 [email protected] Pooja Lath +91 22 6620 3075 [email protected]

India Equity Research| Consumer Goods

November 2, 2012

Financials (INR mn)

Year to March Q2FY13 Q2FY12 % change Q1FY13 % change FY12 FY13E FY14E

Net sales 11,595 9,708 19.4 12,703 (8.7) 40,083 47,846 56,391

EBITDA 1,512 1,189 27.2 1,879 (19.5) 4,844 6,215 7,438

Core PAT 859 783 9.7 1,238 (30.7) 3,189 3,950 4,737

Dil. EPS (INR) 2.0 1.3 53.9 2.0 0.0 5.2 6.4 7.7

Dil. P/E (x) 39.6 31.8 26.5

EV/EBITDA (x) 26.6 20.6 16.9

ROAE (%) 31.0 30.2 28.5

Consumer Goods

2 Edelweiss Securities Limited

Key takeaways from conference call Consumer products business (CPB) India: CPB India clocked revenue of INR7930mn, up 19% YoY, with 17% volume growth. The operating margin was ~17%. Revenue from youth brands (acquired Paras brands: Set Wet, Zatak and Livon) amounted to INR460mn, which grew 28% YoY. LTL domestic volume growth (without considering the impact of Paras acquisition) was 10% YoY. Paras’ integration process has been completed and higher sales have been achieved due to distribution synergies. Paras’ business EBITDA margin is around 17‐20% and management expects margin to stabilise at 14%. Volume growth: Marico posted 14% YoY volume growth in Q2FY13 on consolidated basis (including inorganic growth). However, excluding acquisition of youth brands, LTL volume growth stood at 9% YoY. Volume of Parachute coconut oil rigid packs and value added hair oil in rigid packs stood at 9.0% and 20.0% YoY respectively. However, Saffola oil’s volume growth of 6% YoY was impacted by slowdown in CSD. The company has maintained its leadership across segments. Parachute: Volume of Parachute coconut oil in rigid packs grew 9% YoY (18% YoY growth in Q1FY13). Market share improved 390bps YoY. During the 12 months ended September 2012, the company’s volume share represented by Parachute and Nihar was ~57.2% against 53.3% in Q2FY12. Management may take a temporary price reduction in a couple of months, and has guided for 7‐8% volume growth over the long term. However, volume growth is likely to remain 1‐2% higher in the near term compared to the long term average. Value added hair oil (Parachute Advansed, Nihar and Hair & Care): The segment posted 23% YoY value growth with 20% YoY growth in volume. Market share improved 260bps YoY with the volume market share being 25.3% for 12 months ended September 2012. Nihar Shanti Amla rode steady, achieving volume market share of 22% for 12 months ended September 2012 (up 670bps YoY and 100bps QoQ). Management expects volume growth of 17‐18% YoY in the next couple of years. Cooling hair oil has not been extended nationally. Saffola (refined edible oil): The franchise posted 6% YoY volume (down from 12% in Q1FY13) and 13% value growth. The lower growth was attributed to slowdown in discretionary categories, large gap between Saffola prices and other edible oils and slowdown in CSD. Price hikes have not been effected by the company to offset the high inflation in commodity prices. However, Marico may take pricing actions in order to make the product more competitive. Management maintains that no down trading is being witnessed. The brand maintained its leadership in the super premium refined edible oils segment with a market share of about 58.6% during the 12 months ended September 2012 (Q2FY12: 54.8%). Management expects volume growth of 10% YoY for FY13 (12% YoY in Q1FY13 and 6% YoY in Q2FY13). Saffola‐healthy foods: It clocked 14% value market share in oats (12% in Q1FY13) and continued to be the second largest player. Oats were rolled out nationally during the quarter. The company has been successful in gaining market share every quarter through its differentiated offerings (Masala Oats and sachet at INR10). The category is expected to grow at 35% YoY, as penetration is low. Marico has also launched Muesli (breakfast category) on national basis. Market size of Muesli category is estimated to be ~INR800mn to INR1000mn and is growing over 40% YoY.

Marico


Kaya: Kaya posted revenue of INR915mn, up 38% YoY (in constant currency terms, growth was about 25%). Kaya same store collection growth was 10% YoY (12% YoY in Q1FY13) each in India and Middle East. Management believes that this high growth may not sustain in the long run, but will maintain double digit growth YoY with new strategies. It posted a positive PBIT of INR57mn against a loss of INR48mn YoY in Q2FY12. About 23‐25% of revenues was contributed by sale of products. Prototype stores will be launched in Q4FY13. Derma Rx products clocked healthy double digit top line growth. International operations: International business grew at 16% YoY, with constant currency growth being 3% YoY. EBITDA margin stood at 10% and improved 150bps YoY. Bangladesh (Marico has 80% market share), the biggest international market, posted a decline of ~1% in revenue YoY in constant currency terms as the geography is witnessing a challenging macro environment with high inflation, volatile currency and high RM costs. Reported growth stood at 13% YoY due to forex impact. The company’s revenues in Egypt grew by about 11% YoY and maintained its market share of about 57%. The environment in Egypt is seen stable and is reviving. Middle East (ex Egypt) did not post good growth YoY as the region faced distribution issues. However, these issues were resolved, and September saw growth revival. South African business recorded a flat top line at 3% YoY primarily due to a transportation strike. Vietnam business posted good recovery YoY and is growing fast (30% YoY growth). CSD: CSD sales grew a mere 2% YoY and volume declined YoY in Q2FY13. This has impacted the whole Marico portfolio, but higher impact on Saffola (CSD contributes 13‐15% to Saffola sales). However, management expects a comeback in CSD growth in Q4FY12 largely due to base effect. A&P: A&P increased by 453bps YoY, as most of the benefits of input cost correction were ploughed back into ad spends. Management has guided A&P to remain at ~12% of sales. Major A&P spending would be done on new product launches, Paras portfolio and in Middle East. Interest costs: Interest costs were higher by 40.1% YoY mainly due to acquisitions made earlier and new office space acquired for outlay of INR1200mn. RM costs: COGS declined 648bps YoY, mainly due to price correction in copra. However, the benefits were ploughed back into A&P spends. Copra prices hit a bottom in September; however, prices are now hardening. On the other hand, safflower prices are cooling off a bit. Tax rate: Tax rate is higher because Saffola profits are growing slower than Parachute profits. Factories of Saffola enjoy tax benefits while Parachute does not. Also, Middle East, which is zero tax, is not growing well, so overall tax rate becomes higher. Hence, PAT grew at 9.7% YoY. Marico has guided for full year tax rate of 24‐25%.

Outlook and valuations: Positive; maintain ‘BUY’ We assign a higher multiple of 30x (28x earlier) primarily due to increased focus on new growth drivers like skin care, foods categories like Oats (Marico has outpaced GSK Consumer) and Muesli; and youth brands like deodorants, hair gels and hair creams which have been growing at a fast pace. We arrive at target price of INR231 (earlier INR215). We have increased our EBITDA margins by 300bps for both FY13E and FY14E factoring in the benefits from softening raw material prices. However, tax rate would increase to ~24% for FY1E & FY14E, leading to no increase in our EPS estimate of INR6.4 and INR7.7 for FY13 and FY14 respectively. We maintain ‘BUY’ and rate it ‘Sector Outperformer’.

Consumer Goods


Table 1: Summary of growth

* Including Paras personal care brands

Source: Company, Edelweiss research Table 2: Volume growth in sales of key business

* Reported value growth (% YoY) in INR

Source: Company, Edelweiss research Table 3: Volume growth across segments (%)

* Excluding Paras personal care brands

Source: Company, Edelweiss research

Category / BusinessReported growth in

Q2FY13 (%)

Indicative share to Group’s Turnover basis FY12 results

Group: total reported value growth 19.0Group: total volume growth 14.0Group: organic volume growth 9.0CPB (India)* 19.0 69.0Parachute Coconut Oil (rigid packs) 9.0 24.0Value added hair oil 20.0 14.0Saffola (refined edible oil) 6.0 15.0International business group: total 16.0 24.0Kaya (ME and India) 38.0 7.0

Key business Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13Parachute coconut oil in rigid packs 10 5 5 10 10 13 11 18 9Value added hair oil 14 31 21 32 26 20 18 25 20Saffola 18 13 14 15 11 15 3 12 6International* 18 28 21 26 19 39 37 17 16

Category / Business Q2FY13 (%) CPB (India)* 10.0Parachute Coconut Oil (rigid packs) 9.0Value added hair oil 20.0Saffola (refined edible oil) 6.0

Marico


Table 4: Marico's market share (volume) position

* Value market shares


Table 5: Kaya clinics and growth

* Includes Derma Rx Revenues


Table 6: International FMCG business growth


Table 7: International business performance in Q2FY13


Brands Category

Indicative market

share range RankParachute, Oil of Malabar, Nihar Coconut Oil (India) 57.0 1Hair Oil (Hair & Care, Parachute Jasmine, Parachute Advansed, Nihar Naturals, Nihar Shanti Amla, Parachute Advansed Ayurvedic hair oil, Parachute Advansed Cooling oil)

Hair Oils (India) 25.0 1

Saffola Super Premium refined Edible Oils

59.0 1

Kaya Skincare solutions Kaya (India) 35+ 1Setwet and Zatak Deodorants (India) 5.8 3Livon and Silk & Shine Post wash Leave– On Serums 82.0 1Setwet* Hair Creams/Gels 38.0 1Parchute (Bangladesh) Coconut Oil (Bangladesh) 80.0 1X‐Men* Men's shampoo (Vietnam) 47.0 1Hair Code & Fiancee* Hair care (Egypt) 57.0 1

Key business Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13No. of clinics 101 102 103 105 105 107 107 107 106Sales (INR mn)* 624 620 691 627 662 750 745 810 915Y‐o‐Y growth (%) 28.0 40.0 54.0 24.0 7.0 21.0 7.7 29.2 38.2

FactorQ2FY13 YoY

growth %Organic growth Existing Geographies 3.0 Total Underlying Growth 3.0 Other Factors 13.0 Net Reported Growth 16.0

Region Reported growth % YoY

Bangladesh 13.0 Middle East and North Africa 6.0 South Africa 3.0 South East Asia 30.0

Consumer Goods


Financial snapshot (INR mn) Year to March Q2FY13 Q2FY12 % Change Q1FY13 % Change FY12 FY13E FY14E Net revenues 11,595 9,708 19.4 12,703 (8.7) 40,083 47,846 56,391 Cost of goods sold 5,606 5,358 4.6 6,411 (12.6) 20,987 24,263 28,646 Gross profit 5,989 4,350 37.7 6,292 (4.8) 19,096 23,583 27,744 Staff costs 967 724 33.6 947 2.1 3,073 3,636 4,257 Advt. sales & promotions 1,586 889 78.5 1,559 1.8 4,490 5,837 6,767 Other expenses 1,923 1,548 24.2 1,908 0.8 6,689 7,895 9,282 Total exp. (excl. cogs) 4,476 3,161 41.6 4,414 1.4 14,252 17,368 20,306 EBITDA 1,512 1,189 27.2 1,879 (19.5) 4,844 6,215 7,438 Depreciation & amortization 225 177 26.8 193 16.2 725 859 1,034 EBIT 1,288 1,012 27.2 1,686 (23.6) 4,119 5,357 6,404 Other income 39 96 (59.2) 145 (72.9) 326 425 350 EBIT including other income 1,327 1,109 19.7 1,831 (27.5) 4,445 5,782 6,753 Interest 145 104 40.1 170 (14.6) 424 504 423 Profit before tax 1,182 1,005 17.6 1,660 (28.8) 4,021 5,278 6,330 Tax 293 205 42.8 403 (27.2) 783 1,267 1,519 Core profit 889 800 11.1 1,258 (29.4) 3,238 4,011 4,811 Extraordinary items (18) Minority interest (30) (17) NA (19) NA (50) (61) (74) Net profit 859 783 9.7 1,238 (30.7) 3,171 3,950 4,737 Diluted EPS (INR) 2.0 1.3 53.9 2.0 0.0 5.2 6.4 7.7 As % of net revenues COGS 48.4 55.2 50.5 52.4 50.7 50.8 Employee cost 8.3 7.5 7.5 7.7 7.6 7.5 Adv. & sales promotions 13.7 9.2 12.3 11.2 12.2 12.0 Other expenditure 16.6 15.9 15.0 16.7 16.5 16.5 EBITDA 13.0 12.3 14.8 12.1 13.0 13.2 EBIT 11.1 10.4 13.3 10.3 11.2 11.4 EBIT incl. other income 11.4 11.4 14.4 11.1 12.1 12.0 PBT 10.2 10.3 13.1 10.0 11.0 11.2 Adjusted net profit 7.4 8.1 9.7 7.9 8.3 8.4 Tax rate 24.8 20.4 24.2 19.5 24.0 24.0

Marico


Company Description Marico has evolved into one of the leading Indian FMCG companies from a coconut oil manufacturer over the past few years. It has positioned itself on the beauty and wellness platform and caters to hair care, health care, and skin care. Its brands include Parachute, Nihar, Hair & Care, and Fiancee in hair care, Saffola, and Ingwe in health care and Kaya in skin care. The company has been at the forefront of launching innovative products and services such as Saffola Cholestrol Control Atta Mix and Kaya Skin clinics to provide Indian consumers with premium personal care products. Over the past two years, Marico has captured inorganic growth opportunities to spread its base across geographies and increase the range of products at its disposal. It has acquired two hair care brands in Egypt, Fiancee and Haircode, which give it control of 50% of the hair care market in the country. Further, it has acquired three soap brands in Bangladesh and skin care brand Derma Rx in Singapore to expand its presence there. Marico announced 100% acquisition of Paras Personal Care Business. This has given Marico access to brands like Set Wet, Livon and Zatak, ranked amongst top three in respective categories. Acquisition of this business is likely to further reduce Marico’s dependence on edibles oils and hair oils besides giving it an opportunity to participate in the rapidly growing categories in India.

Investment Theme Marico is amongst the leading beneficiaries of the changing preference of Indian consumer for better personal care, food products and services. The company has been able to distinguish itself by offering niche products and services through brands such as Saffola, and Kaya, while extending Parachute to various new generation hair care products such as hair creams and value‐added hair oils. Kaya has gained an impressive premium positioning by offering an impressive bouquet of skin care services along with extensive care.

Key Risks Coconut oil forms the biggest share of Marico’s top line and bottom line. Copra prices have been hardening over the past few months. A greater‐than‐expected inflation can hurt the bottom line substantially. Appreciation of rupee against Egyptian pound, Bangladeshi taka and other international currencies puts the growth in revenues and profits at risk. Disruptive competition in hair oils. Slowdown in discretionary demand could impact volume growth especially Saffola


Consumer Goods

Financial Statements

Key Assumptions Year to March FY10 FY11 FY12 FY13E FY14EMacro ‐ GDP(Y‐o‐Y %) 8.4 8.4 6.5 5.8 6.5 Inflation (Avg) 3.6 9.9 8.8 7.8 6.0 Repo rate (exit rate) 5.0 6.8 8.5 7.5 6.8 USD/INR (Avg) 47.4 45.6 47.9 53.5 52.0 Company ‐ Domestic volume growth (%) 14.0 12.8 12.2 11.2 12.3 Kaya growth (%) 10.4 12.0 33.8 10.0 12.0 COGS as % of sales 47.4 51.6 52.4 50.7 50.8

Income statement (INR mn) Year to March FY10 FY11 FY12 FY13E FY14ENet revenue 26,608 31,350 40,083 47,846 56,391Materials costs 12,616 16,176 20,987 24,263 28,646 Gross profit 13,992 15,174 19,096 23,583 27,744 Employee costs 1,901 2,300 3,073 3,636 4,257 Other Expenses 4,828 5,234 6,689 7,895 9,282 Advertisement & sales costs 3,511 3,460 4,490 5,837 6,767 EBITDA 3,751 4,181 4,844 6,215 7,438 Depreciation & Amortization 601 708 725 859 1,034 EBIT 3,151 3,473 4,119 5,357 6,404 Other income 183 212 326 425 350 EBIT incl. other income 3,333 3,686 4,445 5,782 6,753 Interest expenses 257 410 424 504 423 Profit before tax 3,077 3,275 4,021 5,278 6,330 Provision for tax 643 850 783 1,267 1,519 Net profit 2,433 2,426 3,238 4,011 4,811 Extraordinary income/ (loss) (98) 489 (18) ‐ ‐ Minority interest (19) (50) (50) (61) (74) Profit after minority interest 2,317 2,865 3,171 3,950 4,737 Shares outstanding (mn) 609 615 615 615 615 Diluted EPS (INR) 3.8 4.7 5.2 6.4 7.7 Dividend per share (INR) 0.7 0.7 0.7 1.0 1.2 Dividend payout (%) 17.4 14.2 13.6 15.0 15.0

Common size metrics ‐ as % of net revenues Year to March FY10 FY11 FY12 FY13E FY14EMaterials costs 47.4 51.6 52.4 50.7 50.8Employee expenses 7.1 7.3 7.7 7.6 7.5 Advertising & sales costs 13.2 11.0 11.2 12.2 12.0 EBITDA margins 14.1 13.3 12.1 13.0 13.2 Net profit margins 8.7 9.1 7.9 8.3 8.4

Growth ratios (%) Year to March FY10 FY11 FY12 FY13E FY14ERev. growth (%) 11.4 17.8 27.9 19.4 17.9EBITDA 23.4 11.5 15.9 28.3 19.7 Net profit 22.8 23.7 10.7 24.6 19.9 EPS growth (%) 22.7 22.4 10.8 24.5 19.9


Marico

Balance sheet (INR mn) As on 31st March FY10 FY11 FY12 FY13E FY14EEquity capital 609 614 615 615 615Reserves & surplus 5,930 8,540 10,815 14,076 17,987 Shareholders funds 6,540 9,155 11,430 14,690 18,602 Minority interest (BS) 125 219 249 310 384 Secured loans 1,142 3,544 3,765 3,082 2,632 Unsecured loans 3,317 4,198 4,083 3,766 3,216 Borrowings 4,459 7,742 7,848 6,848 5,848 Deferred tax liability (616) (299) (223) (223) (223) Sources of funds 10,507 16,816 19,304 21,625 24,610Gross block 5,292 7,615 8,648 10,648 12,648Depreciation 2,424 3,365 4,031 4,890 5,924 Net block 2,868 4,251 4,617 5,758 6,724 Capital work in progress 1,129 327 402 600 575 Goodwill 850 3,976 3,955 3,955 3,955 Investments 827 889 2,957 2,957 2,957 Inventories 4,448 6,011 7,202 7,873 9,264 Sundry debtors 1,507 1,779 1,816 2,132 2,498 Cash and equivalents 1,115 2,206 1,588 1,729 3,015 Loans and advances 1,900 1,556 1,995 1,995 1,995 Total current assets 8,970 12,589 14,017 15,146 18,187 Sundry creditors and others 3,369 4,003 5,446 5,593 6,590 Provisions 768 1,213 1,197 1,197 1,197 Total current liabilities & provisions 4,136 5,216 6,643 6,790 7,787 Net current assets 4,833 7,373 7,374 8,356 10,400 Uses of funds 10,507 16,816 19,304 21,625 24,610Book value per share (INR) 10.7 14.9 18.6 23.9 30.3

Free cash flow (INR mn) Year to March FY10 FY11 FY12 FY13E FY14ENet profit 2,317 2,865 3,171 3,950 4,737Add : Non cash charge 974 679 1,216 1,424 1,531 Depreciation 601 708 725 859 1,034 Others 374 (29) 491 565 496 Gross cash flow 3,291 3,544 4,387 5,374 6,268 Less: Changes in WC 867 1,201 (216) 841 759 Operating cash flow 2,424 2,342 4,603 4,533 5,509 Less: Capex 723 2,323 1,033 2,198 1,975 Free cash flow 1,701 19 3,571 2,334 3,534

Cash flow metrics Year to March FY10 FY11 FY12 FY13E FY14EOperating cash flow 2,061 2,285 ‐ 4,533 5,509Investing cash flow (2,114) (4,045) ‐ (2,198) (1,975) Financing cash flow 281 2,757 ‐ (2,194) (2,249) Net cash flow 229 997 ‐ 141 1,286 Capex (723) (2,323) (1,033) (2,198) (1,975) Dividends paid (470) (472) (500) (690) (826) Share issuance/(buyback) ‐ 5 1 ‐ ‐


Consumer Goods

Profitability & efficiency ratios Year to March FY10 FY11 FY12 FY13E FY14EROAE (%) 43.6 30.3 31.0 30.2 28.5ROACE (%) 36.6 27.1 25.5 30.6 31.8 Inventory day 54 61 60 60 60 Debtors days 18 19 16 16 16 Payable days 49 50 49 49 49 Cash conversion cycle (days) 23 31 28 27 27 Current ratio 2.2 2.4 2.1 2.2 2.3 Debt/EBITDA 1.2 1.9 1.6 1.1 0.8 Debt/Equity 0.7 0.8 0.7 0.5 0.3 Adjusted debt/equity 0.7 0.8 0.7 0.5 0.3 Interest coverage 12.3 8.5 9.7 10.6 15.1

Operating ratios Year to March FY10 FY11 FY12 FY13E FY14ETotal asset turnover 2.9 2.3 2.2 2.3 2.4Fixed asset turnover 9.9 8.8 9.0 9.2 9.0 Equity turnover 4.8 4.0 3.9 3.7 3.4

Valuation parameters Year to March FY10 FY11 FY12 FY13E FY14EDiluted EPS (INR) 3.8 4.7 5.2 6.4 7.7Y‐o‐Y growth (%) 22.7 22.4 10.8 24.5 19.9 CEPS (INR) 5.0 5.1 6.4 7.9 9.5 Diluted PE (x) 53.7 43.9 39.6 31.8 26.5 Price/BV (x) 19.0 13.7 11.0 8.6 6.8 EV/Sales (x) 4.8 4.2 3.2 2.7 2.2 EV/EBITDA (x) 33.9 31.2 26.6 20.6 16.9 Dividend yield (%) 0.3 0.3 0.3 0.5 0.6

Peer comparison valuationCompany Market Mcap

Price (INR) (INR bn) FY13E FY14E FY13E FY14E FY13E FY14EConsumer GoodsAsian Paints 3,903 374 32.6 26.9 20.8 17.2 38.2 38.9Colgate 1,271 173 31.5 27.3 23.5 19.8 117.1 116.7Dabur 125 218 28.8 24.2 20.3 17.0 40.7 38.4Emami 576 87 29.0 23.6 24.0 19.8 40.3 43.7GSK Consumer* 3,092 130 29.4 24.7 19.5 16.5 35.5 35.0Godrej Consumer 725 247 32.3 26.8 23.3 19.2 22.9 23.6Hindustan Unilever 533 1152 34.6 30.1 26.5 22.5 78.5 70.9ITC 283 2227 29.3 24.9 18.9 16.0 37.5 39.6Marico 204 132 31.8 26.5 20.6 16.9 30.2 28.5Nestle* 4,780 461 40.9 33.7 25.9 21.1 74.7 67.4United Spirits 1,184 155 47.3 34.1 17.9 15.5 6.6 8.6Consumer Goods ‐ Mean 33.4 27.5 21.9 18.3 47.5 46.5 Consumer Goods ‐ Mean (market cap wtd average) 32.4 27.3 21.8 18.3 50.5 49.1 Consumer Goods ‐ Mean (ex‐Nestle) 32.7x 26.9x 21.5x 18.0x 44.8 44.4

* CY numbers Source: Edelweiss research

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


Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Asian Paints BUY SP M Colgate HOLD SP M

Dabur BUY SO M Emami BUY SP H

GlaxoSmithKline Consumer Healthcare BUY SP M Godrej Consumer BUY SO H

Hindustan Unilever HOLD SP L ITC BUY SO L

Marico BUY SO M Nestle Ltd HOLD SP L

United Spirits HOLD SU H

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return


Consumer Goods

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Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Co‐Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Consumer Goods Asian Paints, Colgate, Dabur, Godrej Consumer , Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, GlaxoSmithKline Consumer Healthcare, United Spirits

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 113 53 19 186* 1 stocks under review

Market Cap (INR) 114 58 14

Date Company Title Price (INR) Recos

Recent Research

02‐Nov‐12 GSK Consumer

Margin BOOST; Result Update

3,020 Buy

30‐Oct‐12 Colgate Palmolive

Bites more into the toothpaste market; Result Update

1,237 Hold

29‐Oct‐12 Asian Paints Volumes recover; margins to follow; Result Update

3,923 Buy

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12‐month period

Hold appreciate up to 15% over a 12‐month period

Reduce depreciate more than 5% over a 12‐month period

Rating Expected to


Marico

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