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Equity Resear
17 October 20
Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companiescovered in its research reports. As a result, investors should be aware that the firm may have aconflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
This research report has been prepared in whole or in part by equity research analysts based outsidethe US who are not registered/qualified as research analysts with FINRA.
PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE
243.
India Consumer
Positioning for rising rural consumption;
Overweight on ITC and DaburWe initiate coverage on the Indian Consumer sector with ITC and Dabur as our top
OW picks. ITCs Cigarettes business is likely to sustain long term positive volume
growth, as we believe the peak inflection point for per capita consumption could be
~15 years away. Near-term, we view FY14 as a year of acclimatisation for ITC and
expect a rebound in cigarette volumes post two years of high-teens price hikes. In
the Indian FMCG market, we believe long-term positive consumption trends are
balanced by near-term concerns. However, pockets of strong growth exist in the
rural and exports market, with Dabur our preferred pick on this theme. In this
report we also initiate coverage on GCPL at EW and on HUL and Nestle India at UW.
ITC (OW; PT Rs409): Global consumption evolution points to positive volume outlook:
Contrary to studies (WHO) estimating cigarette PED as -0.4, we estimate ITC posted
volume CAGR of 3.3%, despite price CAGR of 9.7% over FY03-FY13. Analysis of global
trends points to an explanation, where cigarette consumption/capita peaks at ~US$20k
GDP (PPP)/capita, and assuming a 12% Nominal GDP CAGR then India could hit this
peak around 2027. Near-term, FY14 is likely to be a year of acclimatisation after two years
of consecutive high-teens price hikes and volumes could rebound. Improving profitability
in ITCs FMCG Others segment should further help OPM expansion (120bps by FY16E),
and we forecast revenue/EPS CAGR of 18%/20% over FY13-FY16E.
Dabur (OW; PT Rs199) best play on rural growth: Rural India spend is growing at 400-
500bps higher than urban spend, as urban consumers downtrade from premium
products. We believe Dabur, with 48% of its domestic FY13 revenues from the rural
market, offers the best exposure to this growth, while firms like HUL and Nestle India face
bleaker volume prospects in the near-term. Our longer term growth outlook for the India
consumer sector is still positive, and while staples deceleration is seen in most economies
at a per capita GDP of US$5,500, we believe this is still 10 years away for India (link).
Parent company a better way to play EM theme vs HUL (UW; PT Rs521)? For global
emerging market (EM) consumption exposure, Unilever (OW; PT GBp2,900) trading at
16.5x CY14E EPS may be a cheaper way to play the theme versus HUL on 35x FY15E.
De-rating possible for valuation leaders; prefer alpha over beta:Our India consumer
coverage trades at a 1-yr fwd P/E of 29.6x, a ~26% premium over the 15-yr average. The
expanded premium (95% vs Sensex) is a function of defensive shift, which may not be
sustained with the receding volume growth outlook. With HUL and Nestle India (UWs)
looking expensive at 35x and 36x P/E FY15E respectively, we see stock selection as key.
Risks: 1) OPM pressure due to adverse commodity price movements; 2) liquidity shift
from defensive sectors; 3) monsoon season/government support driving rural growth.
INDUSTRY UPDATE
Asia ex-Japan Cosmetics and HPCNEUTRAL
from N/A
Asia ex-Japan Staples
NEUTRAL
Unchanged
For a full list of our ratings, price target andearnings changes in this report, please seetable on page 2.
Asia ex-Japan Staples
Balaji Prasad, M.D.+91 22 6719 6295
BSIPL, Mumbai
Rohit Goel
+91 22 6719 6029
BSIPL, Mumbai
Vineet Sharma, CFA
+852 2903 4609
Barclays Bank, Hong Kong
European Staples
Simon Hales
+44 (0)20 3555 2107
Barclays, London
Liam Rowley
+44 (0)20 3134 3200
Barclays, London
Iain Simpson
+44 (0)20 3555 3598
Barclays, London
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Summary of our Ratings, Price Targets and Earnings Estimates in this Report
Company Rating Price Target EPS FY1 (E) EPS FY2 (E)
Old New Date Price Old New %Chg Old New %Chg Old New %Chg
Asia ex-Japan Cosmetics and HPC NR Neu
Dabur India Ltd. (DABUR IN / DABU.NS) N/A OW 14-Oct-2013 169.30 N/A 199.00 - N/A 5.16 - N/A 6.62 -
Godrej Consumer Products Ltd. (GCPL IN / GOCP.NS) N/A EW 14-Oct-2013 826.50 N/A 901.00 - N/A 25.00 - N/A 32.18 -
Hindustan Unilever Ltd. (HUVR IN / HLL.NS) N/A UW 14-Oct-2013 598.05 N/A 521.00 - N/A 16.35 - N/A 17.35 -
Asia ex-Japan Staples Neu Neu
ITC Ltd. (ITC IN / ITC.NS) N/A OW 14-Oct-2013 339.50 N/A 409.00 - N/A 10.81 - N/A 13.07 -
Nestle India Ltd. (NEST IN / NEST.NS) N/A UW 14-Oct-2013 5095.30 N/A 4224.00 - N/A 122.73 - N/A 140.79 -
Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.
FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research.
Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended
Industry View: Pos: Positive; Neu: Neutral; Neg: Negative
http://my.barcapint.com/BC/composite/GER_COMPANY?ticker=DABU.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=GOCP.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=HLL.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=ITC.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=NEST.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=NEST.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=ITC.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=HLL.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=GOCP.NShttp://my.barcapint.com/BC/composite/GER_COMPANY?ticker=DABU.NS8/11/2019 2013-10-17 - Initiation - Positioning for Rising Rural Consumption; OW I...
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KEY CHARTS HIGHLIGHTING OUR INDIA CONSUMER INVESTMENT THESISFIGURE 1Five phases of growth for Indian FMCG market, 1994-2016
FIGURE 2P/E vs EPS CAGR comparison with Global Consumer sectors
Source: Reserve Bank of India (RBI), Barclays Research estimates Note: CAGR over FY13-16E.
Source: Company data, Barclays Research estimates
FIGURE 3Staples deceleration tipping point at US$5.5k GDP; It takes
an average of 9-10 years to reach US$5.5k from US$1.5k
(Indias current GDP/capita)
FIGURE 4Global evolution of annual per capita cigarette consumption
Source: International Monetary Fund (IMF), Barclays Research Source: Euromonitor, Company data, Barclays Research
FIGURE 5Indian Consumer rural vs urban split of FY13 revenues
FIGURE 6Indian Consumer P/E rerating of 120% in last four years
Source: Company data, Barclays Research Source: Company data, Barclays Research estimates
0%
5%
10%
15%
20%
25%
0%
5%
10%
15%
20%
25%30%
35%
40%
45%
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014E
2016E
Coverage Revenue Growth Nominal GDP Growth (RHS)
Ph5 Declining
growth phase
as macro
slowsPh2 Revenuegrowth dipped
sharply with GDP
Ph3 '03 - '10: Growth pickup
inline with macro recovery
Ph4 Inorganicgrowth spike
Ph1 Spurt in consumptionpost liberalization
US Food US Cosmetics& HPCUS B&T
Japan food,B&T
JapanCosmetics &
HPC
European
food
European
HPC
EuropeanB&T
Asia ex Japan
Staples (exIndia)
DaburGCPL
HUL
ITC
Nestle
IndianConsumer
Coverage
10
15
20
25
30
35
40
0% 5% 10% 15% 20% 25%
PEx
EPS 3 yr CAGR
500
1,500
2,500
3,500
4,500
5,500
6,500
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
China Korea Taiwan India
India
Trajectory from ~$1,5k -
~$5,5k
China: 2002 - 2011
Korea: 1980 - 1990
Taiwan: 1978 - 1988China
Russia
USAIndonesia
JapanVietnam
India
Brazil
Germany
UK
0
500
1,000
1,500
2,000
2,500
3,000
0 10,000 20,000 30,000 40,000 50,000
Stickspercapita
GDP per capita ($)
Bubble size representstotal market volume(mn equivalent sticks)
30% 30% 35%40%
50%
70% 70% 65%60%
50%
0%
20%
40%
60%
80%
100%
Nestle GCPL ITC HUL Dabur
Rural Urban
0
10
20
30
40
50
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Coverage PE multiple Average
+1 SD -1 SD
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FIGURE 7Indian Consumer revenue & EPS CAGR snapshot
FIGURE 8ITC Cigarettes segment sustained EBIT margin expansion
and volume growth to result in strong revenue growth
Note: CAGR over FY13-16E.Source: Company data, Barclays Research estimates
Source: Company data, Barclays Research estimates
FIGURE 9HUL 72% of revenues are from highly penetrated segments
FIGURE 10Dabur strong revenue growth/OPM expansion
Note: Column bars denote penetration levels end-FY13.Source: Company data, Barclays Research estimates
Source: Company data, Barclays Research estimates
FIGURE 11Nestle India portfolio skewed towards urban consumption
FIGURE 12GCPL improvement in cash returns important for re-rating
Milk
Products
Prep
dishesBeverages
Choc /
Confectio
nary
0
4
8
12
0 4 8 12
Category/segmen
tprospects
Company positioning in the segment
Strong
Weak
StrongWeak
Moderate
Moderate
42%
32% 31%
18%
29%
15%14% 15%
16%17% 18%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14E
FY15E
FY16E
Cash Returns (CROCI)
Sharp decline due to a spateof international acquisitions
Material Improvmentneeded
Note: Size of bubble indicates categorys proportional contribution to FY13 revs.Source: Company data, Barclays Research
Source: Thomson Reuters Datastream, Barclays Research estimates
18.4%
23.8%
21.2%
17.3%
12.2%
4.6%
18.3%19.7%
11.6%
14.0%
0%
5%
10%
15%
20%
25%
Rev Growth EPS Growth
Dabur GCPL HUL ITC Nestle
15.0%16.6%
13.4%
17.0%19.2%
15.5%
-2.8%
6.5%
1.0%
-0.1%
4.0% 4.0%
45%
50%
55%
60%
65%
70%
-5%
0%
5%
10%
15%
20%
2011
2012
2013
2014E
2015E
2016E
Revenue Growth Volume Growth OPM (RHS)
Acclimatisation to the price hikes
96%92%
87%
63% 63%
45%
26%
12%
0%
20%
40%
60%
80%
100%
120%
Soaps
Detergents Tea
HairCare
OralCare
SkinCare
Foods
Coffee
72% of revenues 28% ofrevenues
19% 21% 20% 30% 16% 17% 19% 19%
15.1%
16.9%
16.5%
14.8% 14.9%
15.9%
16.6%
16.9%
14%
15%
16%
17%
18%
10%
15%
20%
25%
30%
35%
FY09
FY10
FY11
FY12
FY13
FY14E
FY15E
FY16E
Revenue Growth EBIT Margin (RHS)
Acquisition driven
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INVESTMENT SUMMARY: SELECTED OPPORTUNITIES EXIST IN DECLININGGROWTH ENVIRONMENT
We initiate coverage of five Indian consumer stocks, highlighting ITC and Dabur India
(both rated OW) as our top sector picks. We rate Godrej Consumer Products (GCPL) as
EW and suggest investors avoid Hindustan Unilever (HUL) and Nestle India (both rated
UW). We think the long-term positive consumption trends are balanced by near-term
concerns, where the confluence of declining volume growth and peak multiples (95%
premium vs Sensex) limits returns to investors, and see stock selection as key. We
identify two strong pockets of growth: 1) rural India, where consumption spending has
overtaken urban Indian spend over past few years, and is further boosted by a strong
monsoon season and government spending support; and 2) export growth, which we
believe is looking increasingly attractive against the backdrop of a depreciated INR. Our
stock initiations bring additions to our Asia ex-Japan Staples coverage (where we add ITC
and Nestle; Neutral industry view) and to a new industry Asia ex-Japan Cosmetics and
HPC on which we initiate coverage with a Neutral view (adding Dabur, GCPL and HUL).
Framework to generate alpha when the beta play fades out
With 4-5 years of continuous outperformance of the consumer sector in general, andspecifically our coverage group, we believe that the beta play is fading in relevance. In such
a scenario, we lay out our framework to identify potential alpha generation opportunities
and highlight our preferred picks that screen well on these parameters.
Rural market exposure: Rural Indian income is still holding strong, despite broad
weakness in the consumer market, and consumption spend in rural regions is still on
average 400-500bps above its urban counterparts. This is also a view corroborated by
companies on a bottom-up basis, and hence our bias is towards companies with greater
percentage of revenues from this geographic section.
Leaders in niche segments: We believe companies that have a unique or niche portfolio
and are relatively resistant to economic dips (parts of the Dabur and Godrej portfolios), or
where consumption demand is inelastic (ITC), could be reliable havens to generate alpha.
Exports to newer emerging markets: Following a 12% average depreciation in the
rupee this year, companies with a significant export component (Dabur 32%; Godrej
44% of FY13 revenues) also appear favourably poised to deliver growth. Further, it also
de-risks the business model from being dependent on just the Indian growth narrative.
Further market penetration: In our view, companies with a greater component of
products in markets that are not yet fully saturated can continue to deliver growth.
Additionally, the ability to create new markets or shift market preferences are positives
like Godrejs paper-based Good Knight mosquito repellent, which we believe has the
potential to enhance further market penetration.
ITC Ltd; Overweight; 12-month PT Rs409 (20% potential upside)Cigarette consumption on a roll; improving cash generation to sustain valuations
Global consumption evolution points to positive volume outlook: Contrary to studies
pointing to the price elasticity of demand (PED) of cigarettes being around -0.4, we
estimate ITC posted volume CAGR of 3.3% and price CAGR of 9.7% over FY03-FY13.
Analysis of global trends points to an explanation, where ~US$20k GDP/capita (PPP basis)
has generally been an inflection point for per capita cigarette consumption to peak, with
volumes declining thereafter. Assuming 12% Nominal GDP CAGR then we estimate India
could hit this peak around 2027. A more direct explanation could be that as rural
disposable income rises steadily (i.e. rural spend accelerating faster than urban), a shift to
cigarettes from chewable tobacco is likely to be a longer-term structural driver of growth.
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Volume growth recovery in Cigarettes drives 3-year revenue/EPS CAGR of
18.3%/19.7%: ITC has hiked the prices of cigarettes by around 15%+ in the last three
years, explaining the muted volume CAGR of 1.5% over the same period. As these price
hikes are absorbed we forecast stronger volume CAGR of 2.5% over the next three years
(FY13-16E). Considering the material profit contribution from cigarettes (81% of EBIT in
FY13), we expect operating leverage to increase further and thus forecast revenue
CAGR of 18.3% over FY13-16E and stronger EPS CAGR of 19.7%.
ROIC to improve further by 600bps; 120bps OPM expansion over next three years:
The expected improvement in ROIC is not just driven from Cigarettes, but is also due to
the improving profitability from FMCG (Fast-Moving Consumer Goods) and Hotels.
Other metrics like ROE (stable despite significant growth in equity base) and CROCI
(cash return on cash invested, on the rise) point to further improving operating
fundamentals.
Valuation:We value ITC using sum-of-the-parts (SOTP) as our primary methodology.
We use P/E methodology to value all of ITCs segments, except FMCG Others where
we use P/S as it is in an investment phase and has yet to generate sustainable earnings.
Our 12-month price target of Rs409 implies potential upside of 20% and an implied P/E
of 31x, broadly in-line with the average FY15E P/E for the Indian Consumer sector.
Downside risks: 1) adverse tobacco industry regulations, as segment contributes 81%
of ITCs operating profits; 2) strong recovery in broader Indian equity market and
liquidity flows from defensives to cyclicals; and 3) any delay in FMCG & Hotel business
profitability due to macro slowdown or increased competition.
Dabur: Overweight; 12-month PT Rs199 (18% potential upside)
Best play on resilient rural growth; potential to rerate further
Our preferred play on resilient rural growth; 3-year revenue CAGR of 18%: Dabur
currently derives 48% of its domestic revenues (33% of group revenues as of FY13)
from the rural segments, where monthly per capita expenditure continues to see healthy
mid- to high-teens y/y growth, and we believe this should continue to rise
incrementally. This places it on a strong growth trajectory and we forecast 3-year
revenue CAGR (FY13-16E) of 18.4% (vs the peer average of 16.3%).
Niche portfolio, most insulated from declining macro growth: We expect volume
growth to pick up, especially for key categories like Hair Oil (Vatika should see increased
volume growth following price rationalisation of 1QFY14) and Foods (better
performance expected in 2HFY14 driven by increased traction in trade channels).
International segment business flux due to Namaste rebranding should end :
Following a challenging FY13 for Namaste (Daburs US subsidiary) owing to a
rebranding of the portfolio, we believe FY14 onwards should witness a recovery as
branding efforts gain ground. Further, a steeply depreciated rupee brings in significant
translation gains, helping boost profitability at the consolidated level by c50-75 bps.
Operating leverage coming into play could offset commodity price rise pressure: Our
OPM expansion forecasts are supported by: 1) increasing revenue contribution from
rural segments; 2) easing ad spends; 3) favourable move in Palm and Mustard Oil prices,
helping offset adverse price moves of commodity basket (LLP, Honey, Sugar); 4)
translation benefits due to INR depreciation; and 5) price increase of 2%-3% in Foods
segment.
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Valuation: We value Dabur using one-year forward P/E as our primary methodology,
and applying a target multiple of 30x on FY15E which imputes a price target of Rs199.
The company currently trades on a one-year forward P/E of 26x (a 14% discount vs
peers), which is in-line with its historical trading range of 15-28x. We believe the stock is
likely to re-rate to higher end of its trading range, given its more resilient portfolio,
improving cash returns and ROE as operating leverage plays out.
Downside risks: 1) commodity pricing pressure on GM; 2) no margin expansion in theInternational segment; 3) rural growth decline and slowdown in Project Double traction;and 4) strong recovery in Indian equity market and liquidity shift from defensives.
Godrej Consumer: Equal Weight; 12-month PT Rs901 (9% potential upside)
Emerging market FMCG play; strong growth outlook priced in
Above peer growth (21.2% revenue CAGR vs 16.3% for coverage): We believe GCPL
will deliver one of the best revenue growth rates in our coverage over FY13-16E,
leveraging its unique hair care and household insecticides portfolio and also its
international market exposure. Hence, our forecast of 21.2% revenue CAGR over FY13-
16E (including organic CAGR of 17%) is ~490bps above our forecast for the industry of
16.3% CAGR.
Well positioned to cross sell its niche portfolio into newer markets: GCPLs household
insecticide and hair care portfolio in domestic markets are unique offerings vs other
FMCG peers. Hence, GCPL is a market leader in most categories, with dominant #1 or
#2 positions. With the spate of acquisitions over past few years, GCPL has also created
an international presence and distribution, where we believe these products can be
cross sold, driving organic growth over the near term. Hence, we forecast the
international business to grow at 25.3% CAGR (FY13-16E), even better than our
domestic revenue forecast of 17.8% CAGR.
Improved cash generation key for further re-rating: Rapid expansion of the companys
business through M&A has taken its toll on the returns profile, with most metrics
including ROE and ROIC showing a steep decline. In our view, GCPL needs to improve its
returns profile from these businesses to narrow the valuation discount vs peers at which
it trades, before we could get more constructive on the name.
Valuation: We value GCPL using one-year forward P/E as our primary methodology,
applying a target multiple of 28x (10% discount to peer average to reflect its weaker
cash returns profile) on FY15E which imputes a price target of Rs901. GCPL currently
trades at a P/E of 25.7x FY15E, which is a 24% premium to its 10-year historical trading
average of 21x, having re-rated materially in the past few years.
Risks:Downside risks: 1) heightened competition in the household insecticide segment;and 2) international market volatility, including currencies and socio-political changes.
Upside risks include: 1) better operating leverage than anticipated; and 2) better cross
selling of hair color products in international markets.
Hindustan Unilever: Underweight; 12-month PT Rs521 (13% potential
downside)
Receding volumes meet expensive multiples; better exposure through Unilever PLC
70% of sales are from high-penetration segments; needs premiumisation support:
HULs growth rates have decelerated over the past few quarters due to: 1) a broader
economic slowdown leading to a deceleration in consumption spend; and 2) stalling of
premiumisation, which has been the driver of growth for mature segments with high
penetration (Soaps, Detergents, Tea, and Oral Care). On a bottom-up basis, we forecast
a weak 3-year volume CAGR of 5%, down from the past 5-year volume CAGR of 8%.
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Intensifying competitive landscape coincides with senior management change: Rising
competitive activity in Personal Care, including Skin Care (with launches by Dabur and
Emami) and Oral Care (P&Gs Oral B entered India in July2013).This also coincides with
recently announced senior management changes and the new management will need
to tackle these growth issues in HULs core categories.
No downside protection in a weakening macro environment: Owing to a flight
towards defensives in the past few years (exaggerated in the past year), the Indianconsumer sector in general, and HUL in particular, are trading at P/E valuations much
higher than their historical range. HUL currently trades at a 25% premium vs the higher
end of its historical range and at a 127% premium vs BSE Sensex (vs an average
premium of 75% over the last 20 years).
Valuations: 10-year peak multiples not justified; HUL exposure through Unilever?We
value HUL using one-year forward P/E (target P/E multiple of 30x, in-line with peers).
The stock trades at a current P/E of 34.5x FY15E vs its10-year trading range of 20-30x.
As we discuss in more detail inside, for global EM consumption exposure, we believe
HULs parent company Unilever PLC (ULVR.L; OW; PT GBp2,900) trading at 16.5x P/E
for CY14E (ex-EM subsidiaries) may be a better way to play the theme vs HUL.
Upside risks: 1) a sharp recovery in staples and discretionary spending on the back of aneconomic recovery; 2) stronger-than-expected traction in rural areas (40% of FY13 HUL
revenues); 3) moderation of pricing pressures in the Soaps & Skin Care segments.
Nestle India: Underweight; 12-month PT Rs4,224 (17% potential downside)
Sub-optimally positioned; mean reversion to sector multiples
Portfolio skewed towards urban consumers: Nestle generates ~70% of its revenues
from urban areas, because a large component of its portfolio is discretionary and
aspirational (higher-end products). However, the urban segment is facing pressure on
spending capability due to the weak macro environment, high inflation, and continued
discretionary spending headwinds.
Strategy of focusing on margins in lieu of volume growth limits ability to rebound : Inour view, over the last two years Nestle has focused more on pricing-driven growth than
expanding in a large market like India. While Nestle has managed to post healthy growth
rates, the economic downturn does limit its ability to consistently raise prices and focus
on premium products. The larger drawback of this strategy is that when the economy
rebounds, Nestle could be left significantly lagging peers who have gained overall
market share and enhanced their presence with consumers in rural communities.
Limited catalysts to support expanded multiples: Looking ahead, we see limited
catalysts over the near-term, either in the form of new product launches, focused efforts
to increase brand recall, or a rebound in the economy. Hence, we believe multiples that
have expanded by 75% in last five years may not be supported at the current levels.
Valuation: We value Nestle using one-year forward P/E as the primary methodology
and set our target P/E at 30x, in-line with the sector average and on par with its 20-year
historical average (a 20% discount to the current CY14E P/E of 36.2x) in view of its
modest revenue/earnings CAGR over CY12-15E of 11.6%/14.0%. Our 12-month price
target of Rs4,224 offers potential downside of 17%.
Upside risks:1) a sharp spike in discretionary segment demand like Chocolates, Milk,and Milk Foods on the back of a solid economic recovery; 2) less competitive pressure
than anticipated in beverages; and 3) sharper-than-expected recovery in urban market
consumption.
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Sector risks
Changes to the macro outlook:Volume growth levels and valuation premium levels of
Indian Consumer stocks are highly correlated to the overall macro environment.
Discretionary spends & premiumisation trends:Changes could affect Indian consumer
stocks both in terms of volumes & margins (product mix changes and realisations).
Growth in emerging markets (EMs):Following a spate of EM acquisitions in the last fewyears (in particular by GCPL and Dabur), most companies are in consolidation mode but
may be affected if these geographies witness slower/faster recovery and worse/better
synergies than expected, along with any further volatility due to INR depreciation.
Rural consumption growth levels: Growth in rural areas and changes in disposable
incomes can be affected by multiple factors, including the monsoon season and also
government support for rural areas.
Liquidity shift: The Indian Consumer sector saw strong liquidity inflows following the
Global Financial Crisis in 2008, as the market rotated towards defensive sectors. Any
reversal of this could see liquidity flowing from defensives to cyclical.
Valuation comparison
FIGURE 13
Indian Consumer coverage summary valuation comparison
Stock
Stock Info Growth Metrics Valuation Metrics
Current
Price
12-mth
PT Pot. Up /
Mkt
Cap (FY13E - FY16E CAGR) FY2015E
Ticker Rating (in Rs) (in Rs) Downside (US$B) Sales EBIT EPS P/E EV/ EBITDA P/B ROE
2-yr
PEG
PT Implied
P/E
Dabur DABUR IN OW 169 199 18% 5.3 18.4% 23.6% 24.0% 25.6 18.4 8.1 32% 1.1 30.0
GCPL GCPL IN EW 827 901 9% 5.0 21.2% 23.1% 17.3% 25.7 18.3 5.7 22% 1.5 28.0
HUL HUVR IN UW 598 521 -13% 23.1 12.2% 11.4% 4.6% 34.5 25.9 25.9 73% 7.5 30.0
ITC ITC IN OW 340 409 20% 48.3 18.3% 19.7% 19.7% 26.0 18.0 8.2 32% 1.3 31.3
Nestle* NEST IN UW 5,095 4,224 -17% 8.8 11.6% 11.3% 14.0% 36.2 22.1 14.5 36% 2.6 30.0
Indian Consumers 90.5 16.3% 17.8% 15.9% 29.6 20.5 12.3 39% 2.8 29.9
US Food 5% 9% 9% 18.1 10.4 5.1 28% 1.8
US Cosmetics & HPC 4% 9% 11% 17.7 10.4 9.2 50% 1.9
US Beverages & Tobacco 3% 5% 9% 16.7 10.9 5.5 40% 2.1
Japan Food, Beverages & Tobacco 4% 7% 12% 21.5 7.2 1.8 9% 2.0
European Food 4% 6% 7% 15.7 9.3 2.2 16% 2.4
European HPC 3% 6% 7% 19.3 11.6 3.7 22% 5.1
European Beverages & Tobacco 6% 9% 11% 17.1 11.4 3.5 27% 1.8
Asia ex Japan Staples (ex India) 14% 15% 19% 23.1 22.9 5.0 24% 1.6
Notes: *Nestle is calendar year end, thus estimates are for CY14E.
Pricing as of close on 14 October 2013.
Source: Company data, Barclays Research estimates
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CONTENTS
KEY CHARTS HIGHLIGHTING OUR INDIA CONSUMER INVESTMENTTHESIS .................................................................................................................. 3
INVESTMENT SUMMARY: SELECTED OPPORTUNITIES EXIST INDECLINING GROWTH ENVIRONMENT........................................................ 5
INDUSTRY OVERVIEW NEAR-TERM CHALLENGES ABOUND.......... 11
DIVERGENT PROSPECTS ACROSS PRODUCT SEGMENTS................... 15
LONG-TERM DRIVERS INTACT: 10+ YEARS TO US$5,500-6,000 GDPPER CAPITA....................................................................................................... 22
CONSUMER EVOLUTION: THE GLOBAL GROWTH COMPARISON.... 30
DEEP DIVE INTO OPERATING FUNDAMENTALS.................................... 33
VALUATIONS LOOK EXPENSIVE NEED TO BE SELECTIVE................. 45
KEY RISKS .......................................................................................................... 53
COMPANIES...................................................................................................... 54
ITC (OW; PT INR409; +20%): CIGARETTE CONSUMPTION ON AROLL; INITIATE AT OVERWEIGHT.............................................................. 55
DABUR (OW, PT INR199, +18%): BEST PLAY ON RESILIENT RURALGROWTH; INITIATE AT OVERWEIGHT...................................................... 93
GODREJ CONSUMER PRODUCTS (EW; PT INR901; +9%): EMERGINGMARKET FMCG PLAY; INITIATE AT EQUAL WEIGHT......................... 130
HUL (UW; PT INR521; -13%): RECEDING VOLUMES MEETEXPENSIVE MULTIPLES; INITIATE AT UNDERWEIGHT....................... 165
NESTLE INDIA (UW; PT INR4,224; -17%): SUB-OPTIMALLYPOSITIONED; INITIATE AT UNDERWEIGHT........................................... 199
APPENDIX....................................................................................................... 229
GLOBAL VALUATION SHEETS .................................................................. 230
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INDUSTRY OVERVIEW NEAR-TERM CHALLENGES ABOUND
Slowing GDP taking its toll revisiting 2000-2004?
FMCG market remains highly correlated to the macro environment
The Indian Consumer industry structurally remains highly correlated to the overall macro
environment with revenue levels broadly tracking nominal GDP growth. As shown in Figure
14, revenue growth levels dipped materially for the 2000-04 period, thus tracking the overall
moderation in nominal GDP growth.
Analysing the last twenty years of consumer revenue growth trends in India, we identify
four phases and discuss what we see as the fifth phase of growth for the FMCG market
(which includes all five companies being initiated on):
Phase 1 (1994-1999):There was a significant burst of growth post the 1991 economic
reforms and economic liberalisation. Following this, as consumer awareness grew and
nascent categories emerged in India, growth for the industry was strong and tracked at
least mid-teens even in the weak years.
Phase 2 (2000-2004):Following global recession in the 2000s, industry growth againmirrored the decline in GDP trends, with a prolonged period of mostly single-digit
growth from around 2000 till 2004.
Phase 3 (2005-2009):A steady growth phase driven mostly by the economic burst of
growth in India, growth in income levels (especially urban), and significant inflows &
investments into multiple sectors. Industry growth recovered from the troughs of the
early part of the decade to mid- to high-teen levels.
Phase 4 (2010-2013):Along with the continuing domestic consumption growth, the
post GFC 2008 phase also saw companies like Dabur and Godrej expanding into other
emerging markets, fuelling a burst of inorganic growth.
Phase 5 (2014-2016): We believe this phase is more likely to see muted growth asdeclining GDP and broader macroeconomic concerns affect consumption spend and
urban income growth, while keeping inflation at high levels. During this period, we
believe the broader FMCG market growth may be in low double-digits.
FIGURE 14
India Consumer revenue growth is highly correlated to the macro environment
Note: Coverage includes Dabur, GCPL, HUL, ITC and Nestle
Source: Thomson Reuters Datastream, Barclays Research estimates
26%
19%
13%
40%
14% 15%
6%8%
17%
4%
5%10%
20%20%
17%
20%22%
30%
24%
18%
14%17%
17%
0%
5%
10%
15%
20%
25%
0%
5%
10%
15%
20%25%
30%
35%
40%
45%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
Coverage Revenue Growth Nominal GDP Growth (RHS)
Phase 5 Muted growth
phase as macro slowsPhase 2 Revenue growth dippedsharply as GDP growth declined to7.8% from 15.7%
Phase 3 Revenue growth pickup inline with macro recovery
Phase 4 Acquisitionfuelled spike in growth
Phase 1 Spurt in consumptionpost liberatlization
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FMCG revenue growth of 12% in FY14E, lowest expectationin last eight years
We expect near-term challenges in the Indian FMCG market to persist, owing to a
prolonged slowdown in the economy over the past 4-6 quarters. CII in its FMCG Roadmap
to 2020 estimates discusses base and bull case growth rates of 12% and 17% respectively
over the remaining part of this decade, predicting that the Indian FMCG market could be
worth Rs3,380-6,250bn by 2020. While our medium to long-term domestic CAGR forecastof 14% for the FMCG market in India is higher than the base case forecast of CII, we are
cognizant of potential selection bias as our coverage universe consists of a select few
companies that are market leaders across multiple/niche categories.
As a result of the macro concerns discussed earlier, our expectations for the FMCG market
(current size is Rs2,020bn or US$37bn) are muted in the near-term, despite the intuitive
long-term attractiveness of an emerging markets consumption sector. Hence, despite the
last 10-year market CAGR of 15%, we expect domestic consumption growth for our
coverage to report 14% CAGR over FY13-16E, with most of the impact playing out in FY14E.
FIGURE 18
Indian Consumer industry is expected to grow ~12-17% pa over the next 5-6 yearsFor our coverage, we forecast
domestic CAGR of 14% over
the next three years (above the
base case forecast of CII)
Divergent performances we
forecast HUL and Nestle as
having the weakest revenue
outlook, while Dabur, GCPL and
ITC are expected to continue to
thrive
3380
1,300
2,300
620
550
2,250
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
FY10 FY15E FY20E
INRBn
17%
12%
12%
17%
Bull case
Base Case
Bear case
8%
Source: CII FMCG roadmap to 2020 estimates, Barclays Research estimates
FIGURE 19
with the rural segment contributing one-third to the sector
FIGURE 20
along with a relatively unorganised supply chain network
Rural
33.5%
Urban
66.5%
Grocers59%
GeneralStores13%
Chemists
8%
Paan plus6%
Food stores3%
Moderntrade6%
Others5%
Note: Data as per FY13
Source for both charts: India Brand Equity Foundation (IBEF), Barclays Research
The size of the Indian FMCG
market is currently around
Rs2trn (US$37bn)
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India Equity Strategy
Bhuvnesh Singh
+91 22 6719 6314
BSIPL, Mumbai
Views on economic recovery from Barclays India Strategy team
We have a defensive stance on Indian equities and prefer to avoid domestic cyclicals.
We expect the revenue growth environment for Indian corporates to remain weak in
the near term, pointing to macro-concerns from persistently high inflation, a fiscal
deficit, and currency vulnerability to external flows.
We expect Indias growth momentum to remain weak in the near term and forecast a
GDP growth rate of 4.7% in FY14E versus 6.2%/5.0% in FY12/FY13 (link). Owing tothe healthy monsoon rainfalls this year, we expect consumption to be supported,
although the weak fiscal health of the government could act as a drag on overall
spending in the economy. We expect inflation to moderate in 2HFY14 as food prices
should lower on the back of healthy monsoons. We forecast a WPI inflation rate of
5.7%/6.0% at end-FY14E/FY15E (versus 9.0/7.4% in FY12/FY13).
We expect revenues and earnings of domestic cyclicals to remain strained in the
context of the weak macro growth environment and note that RoEs have not yet
bottomed (seeIndia Equity Strategy: No fishing in troubled waters,29 August 2013, for
more details). We expect weak domestic investment cycle to continue to persist given
elevated interest rates and upcoming national elections.
https://live.barcap.com/go/publications/content?contentPubID=FC1972802https://live.barcap.com/go/publications/content?contentPubID=FC1972802https://live.barcap.com/go/publications/content?contentPubID=FC1972802https://live.barcap.com/go/publications/content?contentPubID=FC1961320https://live.barcap.com/go/publications/content?contentPubID=FC1961320https://live.barcap.com/go/publications/content?contentPubID=FC1961320https://live.barcap.com/go/publications/content?contentPubID=FC1961320https://live.barcap.com/go/publications/content?contentPubID=FC19728028/11/2019 2013-10-17 - Initiation - Positioning for Rising Rural Consumption; OW I...
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DIVERGENT PROSPECTS ACROSS PRODUCT SEGMENTS
In the charts below we discuss key categories of the FMCG market, the current trends, and
also the penetration of each segment, which helps us to identify the future growth potential
of each category.
FIGURE 21
Key growth drivers for the FMCG market
Source: Federation of Indian Chambers of Commerce and Industry, Barclays Research
FIGURE 22
Structure of the Indian FMCG market
Note: Milk Products are included in the Beverages segment. DW* = Dishwashing
Source: Company information, Barclays Research
Newer Product Categories
Favorable Govt Policies
Infrastructure Development
Consumer Industry Growth Drivers
Increasing Discretionary Income
Supply side Drivers
Growth of Modern Retail
Innovation & new product launches
Demand Side Drivers
Consistent GDP Growth
Increasing Consumer Income
High Private Consumption
Rising Urbanization Systemic Drivers
Low Labour Cost
FMCG(US$37bn)
Personal
Care24%
Beverages
30%
Food
35%Home Care
11%
Hair Care
24%
Oral Care
14%
Skin Care
12%
Soaps /
Bath29%
Rest
21%
Biscuits38%
Noodles
5%
Ice
Cream4%
Ready to
eat14%
Choco &
Confectiona
ry16%
Condiments
7%
Sweets
11%Rest
5%
Tea
14%
Coffee
4%
Juices
2%
Milk
Products80%
Insecticides
34%
Detergents
26%
DW*
15%
Rest
25%
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Key product segments in FMCG
Personal Care: Including skin care, hair care, and oral care, this category is ubiquitous
with a current market size of ~Rs481bn in India. It is the most mature segment across
the Staples landscape, with very high penetration levels. As a consequence, we believe
future growth of this category will not depend on volume growth, but instead
premiumisation (selling products with a higher price point, with incremental benefits or
ease of use, e.g. dispenser bottles instead of a bottle with a cap). In the currentenvironment of a slowdown in the discretionary segments, this category is likely to take
the deepest hit as consumers avoid buying at higher price points, hence we have muted
expectations for this category. Sub-segments within this category, like deodorants or
creams, could still grow at a much stronger rate than soaps or toothpaste, in our view.
Foods: This segment varies widely in terms of format and presence. Categories like
soups, packaged cereals, etc, are still in an emerging phase, while biscuits are widely
present in India. That said, we think there is healthy growth potential for this category.
Beverages: Apart from tea, which has a very high penetration in India, other categories
including coffee continue to be relatively underpenetrated. This explains the number of
launches in the last few years of premium coffee (from Nestle and HUL) and juice
variants (from Dabur). However, the beverages segment could come under pressure as
consumers shift from milk in tetra packs to lower priced milk sachets or from milk
sachets to even loose milk.
Home Care: This segment, which includes detergents and cleaners, has mixed
penetration levels in India, with detergents being almost fully penetrated. Cleaning
agents, like floor cleaners and toilet cleaners, are still in a growth phase.
FIGURE 23
Segment categorisation in India penetration levels vs historical volume growth CAGRs (over FY08-13)
Source: Company information, Barclays Research
Milk
TeaJuices
Coffee
Deodorants
Hair OilCream
Shampoos
SoapsToothpaste
Cleaning
Detergents
Soups
Atta
Edible Oils
NoodlesIce-cream
Biscuits
5
15
25
35
0 25 50 75 100
Last5yrvolumeCAGR(%)
Underpenetrated with
high potential: 0 - 25%
Underpenetrated
with moderate
potential: 25 - 50%
Moderate
penetration: 50 - 75%
Mature segments with
low volume growth
potential: 75 - 100%
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Penetration levels driving growth across segments
Volume growth levels broadly track the penetration levels, as can be seen from Figures 24
and 25. New smaller categories like deodorants, soups and packaged milk have emerged
over the past few years which, on account of the low penetration levels, have been
registering high growth levels.
FIGURE 24High growth categories have, as expected, been a result of low segment penetration levels
0
20
40
60
80
100
M
ilkTea
Juices
Coffee
Deodora
nts
HairOil
Cre
am
Shamp
oos
So
aps
Toothpaste
Clean
ing
Deterge
nts
Soups
A
tta
EdibleOils
Noodles
Ice-cre
am
Biscuits
%Penetration levels
Beverages Personal Care Home Care Food
Note: Data as FY13.
Source: Company information, Barclays Research
Significant growth divergence among categories
Of the 20+ categories our coverage companies operate in, we note a high divergence in
volume growth levels over the past five years (from 10%-25%). We believe product mix &
positioning have become all the more important in the current moderate demand
environment.
FIGURE 25
Growth levels (5-yr growth CAGR over FY08-13) vary sharply across different categories and segments
Source: Company information, Barclays Research
5
10
15
20
25
30
Milk
Tea
Juices
Coffee
Deodorants
HairOil
Cream
Shampoos
Soaps
Toothpaste
Cleaning
Detergents
Soups
Atta
EdibleOils
Noodles
Ice-cream
Biscuits
%
Beverages Personal Care Home Care Food
Lowest penetrated segments
have witnessed the highest
CAGR in the last five years
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Premiumisation a long-term driver; substantial near-termpressures
Driven by increasing disposable incomes, exposure to alternate lifestyles, and rising
urbanisation, many FMCG companies (examples for HUL given below) have focused
proactively on the premium segment of their portfolios in a bid to: 1) sub-segment the
existing categories, whichhelps increase the overall market and create new categories that
Indian consumers have erstwhile been relatively unexposed to; and 2) take advantage ofincreasing disposable incomesacross both the rural and urban categories.
FIGURE 26
Premiumisation trends across the different product categories of HUL
Category
Lifebuoy INR 20.5 Lux INR 60.0 Dove INR 132.0
Rexona INR 22.0 Breeze INR 30.0 Pears INR 150.0
Fair & Lovely INR 86-110
Ponds INR 54
INR 110.0 Dove INR 135.0
INR 140-220
INR 220.0
Surf Excel
INR 110.0 Lakme INR 140-200
Yellow Label INR 280.0Red labelTea
Hair Care
Active Wheel INR 45.0 Rin
Clinic Plus SunsilkINR 90-100
Skin Care Ponds
Taaza INR 150.0
Mass Market Middle Premium
Skin Cleansing
Laundry INR 76-115
Source: Company data, localbayana.com, Barclays Research
We believe that while these trends are positive over the long term, there are substantial
challenges in the near term that should put these advantages to the test. Based on our
discussions with the companies, along with our industry channel checks, there are signs of
a stalling of the premiumisation trends. This is primarily being driven by:
High inflationary levels (Figure 16)
Growth driven by rural segments instead of urban segments (Figures 31-33) and
Decline in volume growth levels across most of the FMCG companies, thus putting
pressure on price hikes (Figures 93-94).
One such example is HUL where growth in the Soaps segment, as per management, is now
being driven by the mass market product Lifebuoy rather than the premium offering of
Dove.
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Product portfolio: Competitive positioning vs sectorprospects
Following on from penetration and outlook discussions for the industry, we now look at
each of the companies we are initiating on and their associated positioning in key relevant
categories. We assess the positioning of the companies based on market dominance, brand
recalls and association, management outlook vs our views on sector penetration, and also
growth prospects as previously discussed. We conclude that:
Companies which are niche players with the ability to expand market size or create new
market categories are still enjoying growth (e.g. Dabur in Digestives, Godrej with
Household Care);
Competitive activity is intensifying across a few categories, especially in the HPC
(Household and Personal Care) segments, followed by the Foods segments. Beverages
(with the exclusion of Coffee) still seem to be dominated by individual companies for
specific categories (e.g. Nestle in Milk, Dabur in Juices, and HUL in Tea).
ITCs Cigarettes segment is in a unique positioning of its own, with penetration at 15%
and strong volume growth prospects.
ITCs entry into the FMCG segment has been disruptive for market leaders like HUL in
the past five years, and we expect ITC will continue to gain greater share in this segment
given its strong distribution reach.
FIGURE 27
Indian Consumer company positioning
Note: Size of the bubble indicates the categorys proportional contribution to FY13 revenues.
Source: Company data, Barclays Research
Dabur
GCPLHUL
ITC
Nestle
-
4.00
8.00
12.00
4.50 8.50
Categorypositioning
Company positioning
Strong
Weak
StrongWeak
Moderate
Moderate
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Deep dive into the Indian consumer coverage companies
FIGURE 28
ITC strong market position; relatively insulated from any discretionary slowdown
Cigarettes no promotions or
ads, but this is still a strong
category of growth for ITC
FMCG ITCs disruptive entry
and market share gain
continues, and we expect new
launches to intensify
Hotels increased capacity
and slowing macro
environment make this the
weakest segment, despite ITCs
well known hotel brands
CigarettesFMCG
Hotels
Agri Business
Paperboard
0
4
8
12
0 4 8 12
Category/segmentprospects
Company positioning in the segment
S
trong
Weak
StrongWeak
Moderate
Moderate
Note: Size of the bubble indicates the categorys proportional contribution to FY13 revenues.
Source: Company data, Barclays Research
FIGURE 29
Dabur significant presence in the niche segments is a strong positive
Digestives Dabur is uniquely
associated with most products
in this category, especially
Hajmola, its flagship brand
Hair Care strong positioning
in Perfumed Hair Care Oilthrough the Amla brands, and
volume recovery is expected
Foods Dabur has the best
known brand of honey, with
increasing use by households
Note: Size of the bubble indicates the categorys proportional contribution to FY13 revenues.
Source: Company data, Barclays Research
Hair Care
Digestives
OTC & EthicalsHealth Sup
Home Care
Oral Care
Skin Care
Foods
0
4
8
12
0 4 8 12
Category/
segmentprospects
Company positioning in the segment
Strong
Weak
StrongWeak
Moderate
Moderate
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FIGURE 30
Nestle high exposure to urban/discretionary segments which are facing downward
pressure
Prepared Dishes strong
brand recall for Nestle with
moderate growth prospects
Milk Products volume
growth likely to stall as
consumers may downtrend
Chocolates similar to other
discretionary segments,
Chocolates also face a dip in
growth
FIGURE 31
HUL highly competed segments constitute the bulk of its portfolio
Personal Care intensifying
competition and slowing urban
income growth are affecting
HULs Personal Care segments
Detergents strong
positioning, but likely muted
growth prospects
Coffee intensifying
competition in a growth
segment
Soaps
Detergent
Tea
Coffee
FoodsSkin Care
Hair Care
Oral Care
0
4
8
12
0 4 8 12
C
ategory/segmentprospects
Company positioning in the segment
Strong
Weak
StrongWeak
Moderate
Moderate
FIGURE 32
GCPL leadership presence across the key segments
Hair Color GCPL is aleader in
this space, with strong growth
potential
Household Insecticides dominant positioning with
innovative launches provide an
edge
Soaps weak positioning with
moderate growth outlook
Note for all charts: Size of the bubble indicates the categorys proportional contribution to FY13 revenues.
Source for all charts: Company data, Barclays Research
BeveragesPrep dishes
Choc /
Confectionary Milk Products
0
4
8
12
0 4 8 12Category/segmentprospects
Company positioning in the segment
Strong
Weak
StrongWeak
Moderate
Moderate
Soaps
Hair Color
HouseholdInsecticides
0
4
8
12
0 4 8 12
Category/segm
entprospects
Company positioning in the segment
Strong
Weak
StrongWeak
Moderate
Moderate
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LONG-TERM DRIVERS INTACT: 10+ YEARS TO US$5,500-6,000 GDP PER CAPITA
While we have discussed near-term concerns (macro slowdown, stalling of premiumisation
trends, etc.) in the previous sections, we believe the longer term outlook also needs to be
analysed, as it could have a significant bearing on the Indian Consumer sectors 95%
premium vs BSE Sensex. Assessing the drivers of growth for the next 5-10 years, we believe
the industry can still see healthy growth, as multiple drivers exist. We also include analysis
from the Barclays Research regional team on GDP per capita evolution and how a level of
US$5,500 acts as a threshold for staples deceleration, which we think is likely another 10
years away for India.
Structural deceleration comes in at US$5,500 GDP per capita
GDP per capita in India is currently around US$1,450 (2012) according to World Bank
estimates, one of the lowest in the world and ranking the country at #79. We believe that a
multi-year multi-decade phase of development is still likely for the Indian economy. Analysis
by our Barclays Research regional counterparts covering the Asia ex-Japan Staples sector
(see Life slows at 55(00), 9 July 2012), points to an interesting evolution of the
consumption trend in an economy. After comparing the evolution of Japan, Korea, Taiwan
and China over a period of 40 years, the key conclusions were:
Consumption spending decelerates structurally once an economy reaches US$5,500-
6,000 GDP per capita.
Further, this is also the phase at which growth of the consumer industry starts to lag
growth in nominal GDP.
This deceleration is more evident in the staples sector (especially in Food, Beverages,
etc), while the discretionary segment typically continues to grow at a faster rate.
From an Indian Consumer perspective, the key takeaway for us is that India is likely still
around 10+ years away from reaching this threshold GDP per capita. Indian GDP per capita
has grown at 11.9% CAGR in the last ten years. Assuming it continues at this pace, weexpect the Indian economy could hit this threshold level of US$5,500 GDP per capita
somewhere around 2023-2024.
FIGURE 33
Evolution of per capita GDP ($US) among different economies
Source: IMF, Barclays Research
500
1,500
2,500
3,500
4,500
5,500
6,500
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
China Korea Taiwan India
India
Trajectory from ~$1,500 - ~$5,500
China: 2002 - 2011 (15.8% CAGR)
Korea: 1980 - 1990 (14.8% CAGR)
Taiwan: 1978 - 1988 (14.4% CAGR)
We believe a decade-long
period of growth in the AeJ
Staples sector is still likely and
that the consumer industry by
then would have transformed
itself and evolved into
substantially differentiatedsegments, with higher-end
discretionary segments
continuing to drive growth
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Favourable dependency ratio
As shown in Figure 34, India has one of the lowest dependency ratios compared to other
geographies, indicating a high percentage of people in the income-generating class and a
lesser proportion of dependants. Industry forecasts suggest that even by 2050, Indias
dependency ratio could be in the mid-teens, pointing to at least three or four decades of
young/adult population in the working class, who could fuel consumption growth.
FIGURE 34
Dependency ratio in India remains favourable vs other
geographies
FIGURE 35
Number of households in the higher income category
expected to increase sharply
7% 7%5% 5%
15%12%13%
17%
11%
8%
22%
19%
23%
27%
21%
15%
29%
21%
0%
5%
10%
15%
20%
25%
30%
35%
China Korea Thailand India Europe NorthAmerica
2005 2025P 2050P
91%
74%
41%
8%
22%
50%
2% 4% 9%
0%
20%
40%
60%
80%
100%
2004 2009 2015E
LSM 1-4 LSM 5-7 LSM 8+
Source: K S Oils, Barclays Research Notes: LSM = Living Standard Measures; Higher LSM points to higher standards
of living.
Source: HUL estimates, Barclays Research
Rural economy is a key driver for the FMCG industry
The rural segment currently constitutes c33% of the overall FMCG market in India, and hasbeen fast outpacing the urban segment in terms of growth. This has been driven by:
Low penetration levels: despite stronger growth levels in the last three years,
penetration levels in rural areas still remain much lower than in urban areas;
Rural income growth: increasing income levels driving the overall improvement in living
standards along with a higher disposable income; and
Expansion of rural distribution networksthrough efforts like Daburs Project Double
and HULs Shakti Project.
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FIGURE 36
% increase in monthly per capita expenditure in India; rural
has overtaken urban for first time in the last three years
FIGURE 37
along with a sharp increase in absolute incremental
consumption expenditure as well
7.3% 7.5%
13.2%
19.2%
14.0%
11.8%
13.9%
17.2%
0%
5%
10%
15%
20%
25%
1987-94 1993-05 2004-10 2009-12
Rural Urban
2,994
3,750
2,000
2,500
3,000
3,500
4,000
Urban Rural
INRMn
+25%
Source: NSSO, Accenture, Barclays Research Source: NSSO, Accenture, Barclays Research
FIGURE 38Lower penetration levels offer significant growth
opportunities
FIGURE 39FMCG rural consumption growth has outpaced that of urban
in the last three years
42%37%
67%
18% 18%
3% 2%
77%
57%
80%
32%
59%
19%
5%
0%
20%
40%
60%
80%
100%
Toothp
aste
Sham
poo
Ha
iroil
SkinCream
Mos-Repellants
InstantNoo
dles
HairDyes
Rural Urban
3%
10%
13%11%
16%
-8%
1%
14%
18%
14%
-10%
-5%
0%
5%
10%
15%
20%
CY03 CY05 CY07 CY09 CY11
Urban Rural
Source: Dabur, Barclays Research Source: Dabur, Barclays Research
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Rural economy being driven by concerted government efforts
High spending on rural development, through measures such as NREGA (National Rural
Employee Guarantee Scheme) and Minimum Support Prices (MSPs), has witnessed robust
growth over the years. However, we see a relative softening in FY14, partly because of
already high inflation levels.
FIGURE 40
Strong growth levels in Minimum Support Prices
Strong increment levels across
minimum support prices in key
agricultural crops have helped
raise overall income levels for
the rural segment
but we see some tapering of
growth levels in FY14; one-third
of the crop categories have
seen no increase in MSPs.
Note: 3-year CAGR is from FY11-14
Source: Commission for Agricultural Costs and Prices, Barclays Research
FIGURE 41
Government spending on rural development in India remains high
213 243 288 569 566 721 642
0.20.5
0.7
1.3
1.9
2.6
3.2
0
0.5
1
1.5
2
2.5
3
3.5
0
100
200
300
400
500
600
700
800
FY06 FY07 FY08 FY09 FY10 FY11 FY12
INRTn
INRbn
Government spend (LHS) Cummulative spend (RHS)
Source: Dabur, Barclays Research
Crop FY11 FY12 FY13 FY14 3 yr CAGR FY14 y/y
Paddy 1,000 1,080 1,250 1,310 9% 5%
Wheat 1,100 1,120 1,285 1,350 7% 5%
Jowar 880 980 1,500 1,500 19% 0%
Bajra 880 980 1,175 1,250 12% 6%
Maize 880 980 1,175 1,310 14% 11%
Soybean 1,400 1,650 2,200 2,500 21% 14%
Cotton 2,500 2,800 3,600 3,700 14% 3%
Groundnut 2,300 2,700 3,700 4,000 20% 8%
Sunflower 2,350 2,800 3,700 3,700 16% 0%
Urad 2,900 3,300 4,300 4,300 14% 0%
Sesaum 2,900 3,400 4,200 4,500 16% 7%
Niger Seed 2,450 2,900 3,500 3,500 13% 0%
Ragi 965 1,050 1,500 1,500 16% 0%
Minimum Support Prices (INR / quintal)
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along with an increased focus by the FMCG companies
Sharp expansion of distribution networks and overall reach: Rural reach has been
more than doubled by most of the major companies, in a bid to tap the unexplored
market and take advantage of increasing income levels.
An increasing number of product innovations to cater to the rural segment: Many
companies have altered their product portfolio for new offerings especially aimed at
rural areas.
Management comments across different consumption categories highlight the increasing
prominence of rural areas in the overall strategy of big consumer players. Higher purchasing
power trends along with positive macro trends (better monsoons, Government support,
etc.) should help drive near-term revenues.
FIGURE 42
Dabur sharp increase in direct village coverage
FIGURE 43
HUL rural reach has increased by 4x in the last three years
14,865
17,882
30,091
10,000
15,000
20,000
25,000
30,000
35,000
FY11 FY12 FY13
Direct village coverage
+20%
+68%
0.3
0.8
1.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
2009 2010 2011
Direct rural coverage
4x
Source: Company data, Barclays Research Source: Company data, Barclays Research
FIGURE 44
Promising annual income levels (rural household income
distribution)
FIGURE 45
could result in further improvement in the social indicators
for rural India
61%41%
26%
35%
50%
48%
3% 7%22%
1% 2% 4%
0%
20%
40%
60%
80%
100%
2005 2015 2025
< INR 90k INR 90 - 200k INR 0.2 - 0.5mn INR > 0.5mn
22%
46%
36%
59%
27%
59%
0%
10%
20%
30%
40%
50%
60%
70%
#Pucca houses Below poverty line Rural literacy
1981 2007
Source: CII - FMCG roadmap to 2020, Barclays Research # Pucca houses are concrete establishments
Source: CII - FMCG roadmap to 2020, Barclays Research
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Distribution expansion is reaching out to untapped villages
With the rural segment contributing just one-third of overall FMCG revenues, along with
low segment penetration levels across segments, distribution networks play a key
differentiating role among the FMCG players. HULs Project Shakti covers over 135k villages
and c3.3mn households in the rural segment.
We note that an extensive distribution network not only helps companies expand their
markets, gain consumer insights, and enhance earnings potential of the channel partners,but it is also a sustainable advantage which can be leveraged for cross-segment revenues.
For instance, HUL through a network of over 700 rural distributors as part of its Project
Express distributes telecom products for Tata Teleservices in 95,000 telecom outlets.
We note that while the players have erstwhile been focusing extensively on enhancing the
number of touchpoints, there have been efforts to increase the quality of the reach in terms
of more revenues per store through innovative schemes, customised product launches, etc.
We expect these schemes to gain more traction in future, especially in a moderate demand
environment, and help improve average realisations.
Case Study: Quality of the expansion in distribution
According to a study by Nielsen (November 2011), the top 5 FMCG companies in India
(in terms of growth) have focused not only on increasing the overall number of
touchpoints but also on quality of the increased touchpoints in terms of offtake per
store.
Sharp divergence in the top 5 players and bottom 5 players (from the top 20) can be
seen in Figure 46, with the top players having witnessed a sharp uptick in revenue
growth/store (average of 16% vs 6% average for the bottom 5 for FY11).
FIGURE 46
Success of the top players is driven by well rounded growth across both distribution
reach and quality of the reach
There is a clear distinction
between the top 5 and bottom
5 companies, with the former
falling towards the top-right
side
which indicates that for the
same amount of distribution
growth, a top 5 company tends
to see much higher growth in
revenue per dealer
0%
5%
10%
15%
20%
25%
30%
0% 5% 10% 15% 20% 25%Growthinperdealerofftake
Distribution growth %
Bottom - 5 growth co Top - 5 growth co
Increasing offtakeper store
Note: Analysis based on rural stores only.
Source: Nielsen, Barclays Research
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Indias organised retail growth momentum
India lags significantly compared to its Asian peers in terms of retail penetration levels, as
illustrated by Figure 47. Estimated to be valued at US$26bn in 2011, as per industry sources
(Ernst & Young), the organised retail market is expected to grow at a CAGR of 26% over the
next five years, thus increasing overall penetration levels to c20% by FY21. In our view, this
should be driven by: 1) inroads made by key players in rural areas, both in terms of the
penetration levels (volumes sold) as well as the improving product mix; and 2) increasingincome levels to expose more population to branded products versus unbranded products
sold earlier. The launch of low volume shampoo sachet packets costing Rs1/Rs2 was a
pioneering example of this. In our view, these should both drive supply chain efficiencies,
and in the long term help reduce SG&A expenditure for firms.
FIGURE 47
Indias retail penetration levels are low compared to Asian peers
Organized retail relates to
corporate retail channels, while
unorganized retail is related to
local grocery shops etc.
Indias organised retail
penetration is at the lower end
of the spectrum compared to
global peers 15%19%
45%
60%70%
80%94%
85% 81%
55%
40%30%
20%6%
0%
20%
40%
60%
80%
100%
US Taiwan Malaysia Thailand Indonesia China India
Unorganised retail penetration Organised retail penetration
Source: E&Y (2011), Barclays Research
FIGURE 48and are expected to grow sharply as per industry estimates
and is expected to rise
sharply to c20% (from 6% in
2011), thus offering significant
opportunities wrt growth and
supply chain efficiencies to the
FMCG players
94% 91%80%
6% 9%20%
0%
20%
40%
60%
80%
100%
2011 2016E 2021E
Unorganised retail penetration Organised retail penetration
Source: Deloitte (2011), Barclays Research
Strong momentum in
organised retail should help
increase overall penetration
levels and drive supply chain
efficiencies for FMCG
companies; HUL expects
modern retail to contribute
c25% of its revenues in five
years (from 12-15% currently)
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Emergence of alternative distribution channels
Pharmacies seeing a big push; increasing share of private labels a challenge
We are beginning to see worrying signs of consumer down-trending in the form of an
increasing share of private label products in modern trade (private labels are generally
considered cheaper). As shown in Figure 49, private labels are growing faster than modern
retail trade and are gaining market share, as consumers increasingly prefer lower-priced
products to national brands.
We believe this poses an additional challenge for FMCG firms as most companies rely on a
modern retail format to drive future growth, especially those in the premium segment. A
sharp increase in the share of private labels could help expand the markets size by offering
cheaper alternatives, but it could also signal a shift in consumer loyalties from the known
brands to these cheaper products.
FIGURE 49
Private labels growing faster than modern trade; gaining market share
Private labels are gaining
market share from established
brands, which points to: 1) an
expanded market size by
offering cheaper alternatives,
and b) a shift in customer
loyalties
45%
34%
55%49%
12%
46%
64%
32% 31%26%
36%
25%
9%
22%26%
0%
10%
20%
30%
40%
50%
60%
70%
Tissue
Paper
Floor
Cleaners
Washing
Powder
Glass
Cleaners
Refined Oil Spices Packaged
Tea
Biscuits
Modern Trade growth Private label growth
420%
Note: Bars represent category revenue growth y/y in FY12Source: Nielsen, Barclays Research
FIGURE 50
still, we see significant headroom for growth, as private label share in overall organised
retail sales remains low in India vs developed countries
India is under-branded and
under-penetrated in many
categories. It makes immense
sense to build own brands to
do market and category
development, leading toaccelerating consumption
Devendra Chawla, President of
Food Bazaar at Future Group
46%
40% 35%29% 27%
21% 20%11%
20%
0%
10%
20%
30%
40%
50%
Switzerland
UK
Germany
Spain
France
Australia
USA
India
WorldAverage
Source: CII - FMCG roadmap to 2020, Barclays Research
Private label spend is
estimated to grow 5x from
current levels to US$500mn by
2015, as per Nielsen
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CONSUMER EVOLUTION: THE GLOBAL GROWTH COMPARISON
Consumer industry follows an S-shaped consumption curve
The Consumer sector tends to follow an S-shaped consumption curve relating to the per
capita expenditure along with per capita GDP. The framework is widely accepted as having
three broad stages:
1. Warm up zone: The industry is still in the nascent stages and products are stillexpensive for most potential customers. As a result, market penetration (as captured
by consumption expenditure per capita) grows much slower than GDP per capita.
2. Hot zone:As GDP per capita grows further, the product categories eventually reaches
takeoff point wherein penetration levels increase sharply as more customers adopt
the product.
3. Cool down zone:At a still higher level of GDP per capita, categories tend to reach a
saturation point post which penetration generally remains flat despite potential GDP
growth as consumers start to direct their incremental expenditure to other product
categories.
While growth patterns, along with the occurrence of take-off/saturation points, would varywith products, services and countries, the broad trend remains consistent across the board.
FIGURE 51
S-shaped consumption curve for the Consumer industry
Source: McKinsey (November 2011), Barclays Research
PerCapitaConsumptio
nExpenditure
GDP er ca ita
Warm up Zone Cool down zoneHot Zone
- Products stillexpensive for mostconsumers
- Market growth ratebelow income growth
- Product reacheshigh penetrationlevels
- Market growthslows down
- Products becomeaffordable
- Sharp increase in the
market growth levels
Takeoff point
Saturationpoint
India is at the lower end of the
S- shaped consumption curve
vs global peers
and while different segments
are likely to follow different
trajectories, we believe there is
still significant headroom for
growth in India over the long
run.
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We use examples of the Footwear and the Healthcare Insurance industries in the US to
show the different stages of evolution for these sectors and where they are on this
consumption curve.
FIGURE 52
The footwear industry in the US is currently in the high penetration/cool down mode
Per capita expenditure trends
in the US footwear industry,
show that after a sharp
increase in growth penetration
from 1995-2004, the industry is
now in a cool-down zone
60
70
80
90
100
110
120
130
25 30 35 40 45
Expenditure/capita(USD)
GDP / capita ('000s USD) Source: United States Consensus Bureau, Barclays Research
FIGURE 53
The health insurance industry in the US is still in the incremental penetration/hot zone
mode
Per capita expenditure trends
in the US health insurance
industry show that the industryis still in hot zone mode
0
100
200
300
400
500
600
700
25 30 35 40 45
Expenditure/capita(USD)
GDP / capita ('000s USD) Source: United States Consensus Bureau, Barclays Research
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While India is growing ahead of global peers, there is still a long way to go
FIGURE 54Revenue growth for top 50 FMCG players (India vs global)
FIGURE 55GDP per capita remains at the lower end of spectrum
Source: OC&C Strategy, Barclays Research Note: Data as per FY12
Source: IMF, Barclays Research
FIGURE 56 coupled with the low contribution of FMCG to GDP
FIGURE 57resulting in a low per capita FMCG consumption
7.5%
4.6% 4.6%
2.9%2.4% 2.2%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Philippines
Thailand
Nigeria
China
Indonesia
India
FM
CGconsumptionasa%ofGDP
214
161
128
7259
31
0
50
100
150
200
250
Thailand
Philippines
China
Indonesia
Nigeria
India
PercapitaFMCGconsumption(USD)
Source: KS Oils, Barclays Research Source: KS Oils, Barclays Research
FIGURE 58India has low penetration levels in the key FMCG categories (examples of Skin Care and Shampoo shown below)
Note: Data as per FY13
Source: HUL, Barclays Research.
8% 8% 7%
1% 0%
-1%
17% 16%
26%
17%
11%
18%
-5%
0%
5%
10%
15%
20%
25%
30%
HPC
Food
Spirits
Tobacco
Diversified
Pharma
Global 50 (CAGR 10 yrs) India 50 (CAGR 10 yrs)
36.7
20.3
12.110.3
8.96.1 5.7
3.9 3.0 2.9 2.6 1.5 1.5 1.3 0.9 0.9 0.6 0.6
0
5
10
15
20
25
30
35
40
HongKong
Taiwan
Brazil
Malaysia
Mauritius
China
Thailand
Indonesia
Bhutan
SriLanka
Philippines
Vietnam
India
Pakistan
Burma
Bangladesh
Nepal
Afghanistan
Thousand USD
3.2
0.80.3
7.47.7
0
1
2
3
4
5
6
7
8
9
China Indonesia India Malaysia Thailand
Percapitaconsumption(USD)
Skin Care
1.01.1
0.3
2.7
2.4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
China Indonesia India Malaysia Thailand
Percapitaconsumption(USD)
Shampoo
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DEEP DIVE INTO OPERATING FUNDAMENTALS
While EBIT margins in the Indian Consumer sector have remained fairly robust and relatively
resilient in the last 15 years, we also analyse other variants driving the ROE of FMCG
companies:
International acquisitions: Both Dabur & GCPL have opted for a sharp expansion mode
through ventures in emerging markets like Africa. While both expect these to be highgrowth areas, we believe this strategy has had a dampening effect on returns (because
of a sharp increase in the asset base) in the recent past
Corporate actions:The last 4-5 years have witnessed a significant amount of corporate
actions involving share buybacks (HUL) and share splits (GCPL) among others, all of
which have added to volatility in the return metrics.
FIGURE 59
Indian Consumer coverage EBIT margins have displayed strong resilience and are
showing an uptrend
EBIT Margins = EBIT/Sales
EBIT margins have remained
healthy for the FMCG
companies, showing strong
resilience levels even in the
demand slowdown
environment
Source: Thomson Reuters Datastream, Barclays Research
FIGURE 60
along with a stable interest burden ratio (declined in the last four years)
Interest Burden = PBT/EBIT
The interest burden ratio has
remained broadly stable over
the last 10-15 years as debt
levels remained at manageable
levels for most companies
under our coverage
Source: Thomson Reuters Datastream, Barclays Research
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
10%
12%
14%
16%
18%
20%
22%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
EBIT Margin ROE (RHS)
'96-'01: Sharp OPM expansionunderlines the recovery in ROE
'09-'13: Decilne in ROEsdespite strong margins
0%
10%
20%30%
40%
50%
60%
70%
80%
90%
60%
70%
80%
90%
100%
110%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Interest Burden ROE (RHS)
Improvement in interest burden
across all players
'09-'13: High interest costs for Dabur,
GCPL & Nestle - c300bps decline inInterest burden ratio
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FIGURE 61
although a slightly increasing tax burden in 2013
Tax Burden = PAT/PBT
We note that the tax burden
has gradually come down toc75% from 80-81% (in 2005-
06); increasing tax rates has
been an industry wide
phenomenon
FIGURE 62
and a sharp drop in
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