Retail in India 2012

1. Strictly Private and Confidential
Indian Consumer Goods: Resilience continues
Abneesh Roy Harsh Mehta
+91-22-6620 3141 +91-22-4063 5543
abneesh.roy@edelcap.com harsh.mehta@edelcap.com
February 2012

2. Key trends in Q3FY12
Volume spurs : Volume for 12 out of 13 companies in line or better than expectations; positive
surprises: Asian Paints, Marico and Dabur. This is in sharp contrast to many media and street
Q3FY12 forecasts of a sharp slowdown in rural demand and inventory pile up.
Ad spend remain soft, but some pick up: Six companies (out of 13) cut it in terms of % of
sales (v/s. 10 out of 13 in Q2FY12). Four trimmed ad spends on absolute basis.
Strain on gross margin persist: Gross margins of 12 companies (out of 21) dipped
significantly (
i ifi tl (except GCPL, Marico, N tl E
t GCPL M i Nestle, Emami, B it
i Britannia, Agro Tech and cigarette
i A T h d i tt
companies).
EBIDTA margin dips: EBITDA margin of 12 (out of 21) companies declined, though much lower
than gross margin (Dabur, USL, Zydus Wellness, Pidilite and Bajaj Corp saw a high decline)
(Dabur USL Wellness decline).
Pricing power rises: Majority took calibrated price hikes. Quality of sales growth was better
with balanced blend of price and volume growth.
N
New launches pick up pace: C
l h i k Companies are persisting with i
i i i i h innovations and product launches
i d d l h
across segments, and pace seen improving from the previous quarter.
International businesses continue to bloom: In most cases, businesses reported healthy
growth despite global economic pressures Emami disappointed in Africa Dabur in Turkey.
pressures. Africa, Turkey
Q3FY12 results | Hits: GCPL, Marico, Colgate, Asian Paints, Dabur. Flops: USL.
Top picks: Dabur, Marico, GCPL and ITC.
2

3. Outlook for coming quarters: Upbeat
Volume: To remain healthy as penetration levels and per capita usage will remain attractive for
years to come. Both rural and urban India to drive demand.
Ad spend: To see a slow revival.
Gross margin: Gross margin pressure likely peaked out. Coming quarters likely to see expansion
in gross margins, part of which will be ploughed back into ad spends.
India growing much faster than world average: In Dec quarter Indian volume growth
quarter,
continues to be much faster than the rest of the world, justifying premium multiples.
• Colgate India reported ~15% YoY volume growth v/s parent company’s 4.0%.
• HUL reported 9 % YoY volume growth against parent company’s 0.1%.
d 9.1% l h ’ 0 %
• Coca-Cola India reported a healthy 20% YoY volume growth v/s 3% for parent company.
Packaging law: The new packaging legislation could impact categories like biscuits, detergents,
tea, coffee and soaps, which in turn could affect affordability and thereby overall sales.
Budget: Tax-free slabs are expected to be raised, which will aid consumption.
3

4. Some unanswered questions……
Is it trend reversal of slowdown in ad spends:
Some consumer companies like Dabur, Marico,
GSK sharply stepped up ad spends in Dec
quarter.
Laggards in margins like soaps & detergents and
biscuits posted sharp recovery in margins. Is it
sustainable?
Marked increase in action in toothpaste segment.
Is P&G finally entering toothpaste in India?
Are margins in personal care set for a structural
downtrend?
Has India stepped up usage of hair oils as seen in
strong volume g
g growth by all hair oil companies?
y p
4

5. Risks
Currency: Further MTM impact will depend on how the INR moves from INR53 (Dec end).
Hike in excise tax, reduction in fiscal benefits.
Slowdown in rural growth due t low food i fl ti
Sl d i l th d to l f d inflation and cut back in govt. spends.
d tb ki t d
Slowdown in discretionary items in urban areas.
Increase in ad spends, entry of new players.
p , y p y
Difficulty in price hikes in lower SKUs, new packaging norms.
5

6. Valuation snapshot and top picks
Div yield CAGR
Company Market Mcap Diluted EPS (INR) P/E( x) EV/EBITDA(x) ROE (%)
(%) (%)
Price (INR) (INR bn) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11E FY12E FY13E FY13E FY11‐13E
FMCG
Asian Paints
3,027 290 87.9 96.1 110.4 34.4 31.5 27.4 21.5 19.7 16.8 43.3 38.5 37.2 1.7 12.0
Colgate
1,004 137 29.6 32.2 37.8
33.9
31.2
26.6 25.1 22.7 18.8 113.4 113.9 111.7 2.7 13.0
Dabur
103 180 3.3 3.6 4.3
31.8
28.9
23.8 24.0 20.5 16.8 51.2 42.3 40.3 1.5 15.6
Emami
380 58 15.1 17.2 20.1 25.2 22.2 18.9 22.7 20.0 15.9 34.8 36.3 39.0 1.9 15.3
GlaxoSmithKline Co
2,616 110 71.3 84.5 106.9
36.7
31.0
24.5 23.0 19.4 15.0 32.8 34.6 36.2 1.6 22.5
Godrej Consumer
435 141 14.9 16.4 20.5
29.2
26.5
21.3 24.8 20.0 16.3 35.9 27.6 28.4 1.6 17.2
Hindustan Unilever
392 847 9.8 12.0 14.0
39.9
32.6
28.0 34.7 26.8 22.8 79.8 83.6 77.2 2.2 19.4
ITC
203 1580 6.6 7.9 9.0 30.6 25.6 22.4 19.8 17.3 15.1 33.2 35.9 37.2 2.7 16.8
Marico
163 100 4.7 5.2 6.5
34.9
31.3
25.1 25.5 21.2 16.9 30.3 30.5 29.6 0.6 17.9
Nestle*
4,412 425 88.7 106.2 129.9
49.7
41.5
34.0 33.7 27.1 21.7 119.1 101.5 92.6 1.8 21.0
United Spirits
p
676 88 35.1 30.6 38.6 19.2 22.1 17.5 12.2 11.7 10.3 11.6 9.0 10.6 1.7 4.8
United Breweries#
461 121
6.4
7.1
11.2
72.0
64.9
41.3
30.4
24.4
17.3
15.0
15.6
18.1
0.2 32.0
Pidilite#
145 77
6.4
7.3
9.7
22.7
19.8
15.0
16.7
15.3
12.5
31.2
28.4
28.1
1.8 23.1
Britannia#
519 63
10.4
16.0
20.4
49.8
32.4
25.4
30.6
20.1
16.0
40.5
43.9
52.6
2.0 40.1
FMCG ‐ Mean 36.4x 31.5x 25.1x 24.6x 20.6x 17.0x 53.2 50.3 49.1 1.8 19.3
FMCG ‐ Mean (market cap wtd average) 35.0x 29.8x 25.4x 25.2x 21.1x 17.8x 56.3 55.3 53.3 2.2 17.2
FMCG ‐ Mean (ex‐Nestle) 31.6x 28.3x 23.5x 23.3x 19.9x 16.5x 46.6 45.2 44.7 1.8 16.0
Prices on
Prices on 14 Feb 12
14‐Feb‐12 * CY numbers
CY numbers
# Bloomberg estimates
Based on our analysis, our top picks currently are Marico, ITC, Dabur and GCPL . Source: Company, Edelweiss research
6

7. A detailed analysis of trends

8. Trend 1: Volume spur on
Consumer pack continues to surprise positively in terms of volume growth despite several price hikes, with 12 out
hikes
of 13 companies posting volume growth in line/better than expectations.
Asian Paints surprised with ~10% volume growth (on high base) despite a slowdown in discretionary spend.
Colgate reported a healthy ~15% volume growth in the toothpaste category, better than Dabur’s 3%, while oral
care growth was muted for HUL
HUL.
Dabur’s domestic volume growth rebounded to ~8% YoY and shampoos posted a strong volume growth at 35%
YoY in Q3FY12 v/s 16% YoY in Q2FY12.
GSK’s Q4CY11 volumes grew 11% YoY led by 16% YoY volume growth in Horlicks.
ITC’s cigarette volume growth slowed down largely due to base effect.
Volume growth Y‐o‐Y Q3FY12 (%) vs. expectations
Colgate‐toothpaste
Colgate toothpaste 15 0
15.0
Colgate‐toothbrush ~13‐14
Asian Paints
10.0
Emami*
10.0
Godrej Consumer ‐ Soap*
19.0
Hindustan Unilever 9.1
ITC ‐ cigs
5.0
Marico
20.0
United Breweries
5.0
Dabur (domestic)
8.0
USL
1.0
Tata Global Beverages ~3‐4
GSK Consumer
11.0
Bajaj Corp
20.5
Coca‐Cola India
20.0
Unilever PLC (Parent)
0.1
Colgate‐Palmolive Co (Parent) 4.0
Source: Company, Edelweiss research * Domestic nos.
8

9. Trend 1: Volume spur on (Contd…)
Revenues (INR mn) Q3FY12 Q3FY11 growth (%)
Hindustan Unilever 59,376 51,277
15.8
ITC 61,954 54,243
14.2
Asian Paints 25,605 20,996
22.0
Dabur 14,527
, 10,800
, 34.5
Colgate 6,898 5,766
19.6
Godrej Consumer 13,441 9,888
35.9
Marico 10,578 8,177
29.4
Emami 4,573 4,060
12.6
USL 19,539 19,601 (0.3)
Nestle 19,547 16,710 17.0
Agro Tech 1,816 1,956 (7.2)
GSK Consumer 6,248 5,242
19.2
Britannia Industries 12,491 10,834
15.3
Godfrey Phillips 4,821 4,247
13.5
VST Industries
VST Industries 1 701
1,701 1 387
1,387 22 7
22.7
Zydus Wellness
755
909 (16.9)
Berger Paints 7,823 6,201
26.2
Kansai Nerolac 6,655 5,601
18.8
Pidilite 7,680.5 6,593.2
16
Tata Global Beverages
Tata Global Beverages 18,018 16,060 12.2
Bajaj Corp 1,125
862
30.6
Source: Company, Edelweiss research
HUL reported a robust 9.1% volume growth (high base of 13% in Q3FY11); double-digit sales growth across
segments though most segments disappointed, except soaps and detergents.
USL’s 1% volume growth disappointed due to issues in Tamil Nadu (volume loss of 1.5mn cases) and West Bengal
(volume drop of 48% YoY for industry).
Emami’s 10% volume growth on back of market share gains in a few categories.
9

10. Trend 2: Ad spend under control; some revival
Four out of 13 companies have cut ad spending on an absolute basis to reduce pressure on margins (v/s three out
of 13 in Q2FY12).
Six have cut ad spending in terms of % of sales, indicating a revival in ad spending (v/s 10 out of 13 in Q2FY12).
In our view, some companies like Dabur have upped the ante in ad spend in order to regain market share and
view
achieve higher volume growth.
A&P YoY Growth (%) Change in bps YoY
Dabur 46.9 114
Godrej Consumer* 1.4 (284)
Marico 48.6 164
Emami
1.8
(187)
USL 11.7 119
Agro Tech (47.2)
(401)
GSK Consumer
GSK Consumer 27 1
27.1 113
Hindustan Unilever (7.1)
(287)
Colgate (10.9)
(533)
Zydus Wellness (4.3) 118
Tata Global Beverages 22.3 156
Britannia Industries
Britannia Industries 17.4 13
Godfrey Phillips (0.2)
(208)
Source: Company, Edelweiss research * Domestic nos.
Marico saw an increase in ad spends primarily largely due to new brand launches.
HUL’s reduction in ad spends helped the company expand its EBITDA margin.
GCPL’s A&P spends in Q3FY12 were almost stable on an absolute basis due to fewer launches.
GSK’s high A&P spends was due to heavy promotional spends for the launch of oats and relaunch of Boost which is
primarily a one off The company expects A&P spends to be ~15‐16% of sales
one‐off. ~15 16% sales.
10

11. Trend 3: Strain on gross margin; worst likely behind
Gross margins have declined for 12 out of 21 companies (dipped for 15 companies out of 21 in Q2FY12) due to
G i h d li d f t f i (di df i t f i d t
severe raw material inflation.
Cigarette companies saw margin expansion due to high pricing power and benign raw materials.
Calibrated price hikes and superior product mix helped GCPL, Marico, Emami, Nestle and Britannia expand gross
margin by 20bps, 114bps 203bps, 220bps and 300bps, respectively.
Agro Tech’s focus on improving margins helped the company improve gross margins by 589bps.
Most players are focused on growing volume rather than gross margin.
Gross margins Q3FY12 Q3FY11 Change in bps YoY
Hindustan Unilever 48.2 49.9 (169)
ITC ‐ cigs*
31.7
29.3 240
Asian Paints
39.4
40.3 (90)
Dabur 49 4
49.4 51 9
51.9 (248)
Colgate
61.6
62.5 (90)
Godrej Consumer
53.5
53.3
20
Marico
48.5
47.3 114
Emami
62.4
60.3 203
USL 39.1 41.0 ((190) )
Nestle
54.6
52.4 220
Agro Tech
30.0
24.2 589
GSK Consumer
65.7
66.0 (24)
Britannia Industries
36.7
33.7 300
Godfrey Phillips
63.7
61.5 219
VST Industries 54.8 53.5 138
Zydus Wellness
61.9
62.9 (97)
Berger Paints
35.6
36.5 (89)
Kansai Nerolac
33.0
33.7 (68)
Pidilite
42.9
45.9 (297)
Tata Global Beverages
Tata Global Beverages 58 0
58.0 58 9
58.9 (99)
Bajaj Corp
54.3
56.4 (210)
Source: Company, Edelweiss research * Cigarette business EBIT margins
11

12. Trend 4: EBITDA margin dips, but a few manage better
EBITDA margin of 12 out of 21 companies declined (declined for 14 out of 21 companies in Q2FY12). However, fall
Q2FY12) However
in EBITDA margin is much lower than fall in gross margin in most cases.
EBITDA margin of most companies declined primarily on account of raw material inflation.
However, a dip in EBITDA margin was cushioned by moderation in ad spending.
, p g y p g
HUL, ITC, Colgate, GCPL, Emami, Nestle, Agro Tech, Britannia and VST have managed margins well.
Low margin segments did well. HUL’s S&D margins expanded for three consecutive quarters (7.5% in Q4FY11 to
9.2% in Q1FY12 to 12.4% in Q2FY12 to 13.5% in Q3FY12). Britannia’s margins too expanded by 130bps YoY.
EBITDA margins Q3FY12 Q3FY11 Change in bps YoY
Hindustan Unilever
16.3
14.1 221
ITC
37.6
36.3 130
Asian Paints
15.5
16.4 (90)
Dabur 15.8 19.9 (407)
Colgate
21.6
16.1 550
Godrej Consumer
19.7
16.8 290
Marico
11.5
12.2 (68)
Emami
25.8
25.1
69
USL 9 6
9.6 14 1
14.1 (450)
Nestle
21.1
19.7 140
Agro Tech
8.5 (1.3) 977
GSK Consumer
13.5
14.3 (78)
Britannia Industries
6.7 5.4 130
Godfrey Phillips
Godfrey Phillips 14.5 14.7 (21)
VST Industries
32.6
29.8 281
Zydus Wellness
28.2
30.9 (272)
Berger Paints
10.1
11.0 (91)
Kansai Nerolac
12.1
12.3 (16)
Pidilite
14.9
17.3 (235)
Tata Global Beverages 10.0 11.5 (142)
Bajaj Corp
25.5
30.2 (473)
Source: Company, Edelweiss research
12

13. Trend 5: Pricing power continues
Quality of sales growth was better with balanced blend of price and volume growth.
Most companies have taken calibrated price hikes, but not completely to the extent of rise in commodity prices.
Hence, EBITDA margins have contracted.
However, empirically, it has been observed that with deflation in raw material, companies seldom roll back prices
completely, which could lead to margin expansion. Also, they roll back prices with a lag.
Price hike Product wise price hike
Company Price hike (%) Category Price hike (%)
Marico
9.3 Marico
Asian Paints
12.0 Consumer Products Business (India)
22.0
Colgate‐toothbrush ~3‐4 Parachute Coconut Oil (Rigid packs)
27.0
Dabur (domestic) 8.0 Coconut Oil
30.0
Hindustan Unilever
6.7 Value Added Hair Oils
20.0
ITC ‐ cig ~6 Saffola
14.0
USL
12.0 Dabur (domestic)
Tata Global Beverages ~3‐4 Shampoos
(31.0)
Bajaj Corp
Bajaj Corp 10 1
10.1 Toothpaste 4
11.4
11
GSK Consumer
8.0 GCPL
Source: Company, Edelweiss research Soaps
12.0
GSK Consumer
Biscuits
14.0
Colgate
Toothbrush ~3‐4
Source: Company, Edelweiss research
13

14. Trend 6: Pace of new launches picks up
Q3FY12 saw launches of several new products and categories by HUL, ITC, GCPL, Dabur, Marico and Colgate.
New products and innovations
Company New Product Launch
HUL Lux Handwash, AXE Shower gels, Dove body lotions range
Clinic Plus conditioners, Sunsilk Keratinology
Bru Gold – 100% coffee
Surf Excel Quickwash and Pepsodent G relaunched
Dabur Dabur Almond Hair Oil
New variants of Hajmola launched
GCPL HIT extra power electric mosquito repellant in Indonesia
Touch of Silver Intensive Conditioner and Cuticura Vitamin E Night and Day cream in UK
Marico Two new variants of Saffola Arise: long grain and basmati
Parachute Advansed Body Lotion, Saffola Masala Oats
Colgate Colgate 360° Sonic Power and Colgate ZigZag Anti‐Germ toothbrushes
Colgate Barbie and Colgate Spiderman (toothbrush and toothpaste in kids segment)
ITC Vivel Clear 3 in 1 soap
Di Wills range of hair care treatment in three variants
Fiama Di Wills Face and Body Talc in select markets
GSK Consumer
GSK C Launched Horlicks Oats and relaunched Boost
L h d H li k O t d l h dB t
Britannia NutriChoice Multigrain Thins, NutriChoice Multigrain Rosty, 50‐50 Snackuits
Source: Company, Edelweiss research
14

15. Trend 7: International sales growth robust for most players
Companies reported robust growth in international business despite global economic pressure.
Marico’s international business was~23% of the Group’s turnover in FY11 and grew 16% YoY
(organic) in Q3FY12.
Dabur’s organic growth in international business was a robust 37.8% despite political
disturbances in Middle East.
GCPL’s international margins expanded on back of strong performance in Indonesia and Africa.
Emami’s international business declined primarily due to slowdown in Africa; however, growth
in other regions remained intact (Middle East: 50% YoY and GCC: 40% YoY growth).
Companies are also planning introduction of a few international products in India.
International business
Company Growth (%) Company International sales as % of total revenue
Asian Paints Flat HUL 1.0
Dabur*
37.8 Emami
14.0
Godrej Consumer* 30.0 Dabur 20.0
Marico*
16.0 GCPL
33.0
Emami (7.0) Marico
24.0
Source: Company, Edelweiss research * Organic growth Note: FY11 data
15

16. Annexure

17. Rural focus bolsters volume
Rural India remains a major focus area for all companies.
Rural consumption market stood at ~USD190bn in 2010 and is expected to triple to USD600bn in next 10 years.
Companies are increasingly focusing on rural expansion with specific products and direct distribution
distribution.
Most companies have rural growth outstripping urban growth.
Emami’s rural sales contribution has been consistently increasing and is 50% of total sales as of Q3FY12.
Dabur does not see a slowdown in rural areas which contributes a little more than 50% to sales. The company has
a massive extension plan to increase its direct reach in rural India.
For Marico, rural growth outpaced urban (rural sales contribute 40% to total Parachute sales).
% of sales Rural Urban
Dabur
50.0
50.0
Emami
50.0
50.0
Bajaj Corp
36.0
64.0
Source: Company, Edelweiss research
17

18. Key raw material: Price trend
Palm Oil
Palm Oil
4,800
4,000
3,200
(INR)
2,400
1,600
,
800
Feb‐02
Feb‐03
Feb‐04
Feb‐05
Feb‐06
Feb‐07
Feb‐08
Feb‐09
Feb‐10
Feb‐11
Feb‐12
Copra
7,500
6,500
5,500
(INR/Qtl)
4,500
3,500
2,500
‐06
‐07
‐08
‐09
‐10
‐11
‐12
Feb‐
Feb‐
Feb‐
Feb‐
Feb‐
Feb‐
Feb‐
Source: Company, Edelweiss research
18

19. Key raw material: Price trend and Edelweiss commodity index
LLP Packaging
70 90
LLP price have increased further HDPE prices have not increased
62 84
(Liquid Paraffin INR/lt)
g)
(HDPE INR/kg
54 78
46 72
38 66
30 60
Dec‐10
Dec‐11
Aug‐10
Aug‐11
Oct‐10
Oct‐11
Apr‐10
Apr‐11
Feb‐10
Feb‐11
Jun‐10
Jun‐11
Dec‐10
Dec‐11
Aug‐10
Oct‐10
Aug‐11
Oct‐11
Apr‐10
Apr‐11
Feb‐10
Feb‐11
Jun‐10
Jun‐11
Commodity Index
155 60.0
139 40.0
123 20.0
107 0.0
RM pressure
91 softeneing (20.0)
(20 0)
75 (40.0)
Oct‐07
Oct‐08
Oct‐09
Oct‐10
Oct‐11
Apr‐07
Apr‐08
Apr‐09
Apr‐10
Apr‐11
Jan‐07
Jan‐08
Jan‐09
Jan‐10
Jan‐11
Jan‐12
Jul‐07
Jul‐08
Jul‐09
Jul‐10
Jul‐11
Y‐o‐Y Inflation (RHS) Edelweiss RMP weighted price Index
Source: Company, Edelweiss research
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