Motilal FMCG 04dec09

December 2009
Consumer Monopolies
Standing tall
Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com); Tel: +91 22 3982 5404
Nikhil Kumar (Nikhil.N@MotilalOswal.com); Tel:+91 22 3982 5120

Consumer Monopolies
Contents
Page No.
Monopolies rule .................................................................................................. 6
How monopolies are created ...........................................................................7-9
Benefits/implications of a consumer monopoly .......................................... 10-11
How consumer monopolies are placed on the BCG matrix ............................ 12
FMCG demand to accelerate ..................................................................... 13-15
Monopolies are best placed to capitalize emerging growth scenario ...... 16-17
Financial performance and valuations ............................................................. 18
Top picks ...................................................................................................... 19-20
Annexure I - Emerging income trends in urban and rural India .............. 21-23
Companies ................................................................................................. 24-104
ITC: The smoke king ...................................................................... 25
Hindustan Unilever: Soap opera .................................................... 33
Nestle India: Go for gold ................................................................ 41
Asian Paints: Colors of a leader ..................................................... 50
United Spirits: High on acquisitions ............................................... 58
Colgate: Smile all the way............................................................... 66
Marico: Well oiled ........................................................................... 73
Titan Industries: Leading in time ................................................... 79
GSK Consumer: Mastery through malt ........................................ 87
Gillette India: Cutting edge ............................................................ 94
Jyothy Laboratories: Competition white washed ........................ 100
4 December 2009 2
Thematic Report
SECTOR: FMCG
Consumer Monopolies
BSE Sensex: 17,102 S&P CNX: 5,109 4 December 2009
COMPANY NAME PG. India is on the threshold of a structural uplift in consumer demand. We are approaching
ITC 25
the inflexion point, at which the impact of rising per capita income, favorable demographics,
Hindustan Unilever 33 changing lifestyle and growing rural prosperity will combine to accelerate the FMCG
sector’s growth rate. While the FMCG sector has a steady profit growth trajectory, we
Nestle India 41
believe consumer monopolies can grow exponentially in the emerging scenario due to
Asian Paints 50 strong brands, captive consumers, high pricing power and better terms of trade. Consumer
United Spirits 58 monopolies could be one of the best themes to play the domestic consumption story.
Colgate 66
What are consumer monopolies?
Marico 73
Consumer monopolies are companies that occupy a dominant position in a product category
Titan Industries 79
or segment. We have identified companies in the consumer space that have emerged as
GSK Consumer 87 monopolies using criteria such as 1) market share at least 3x that of its nearest competitor
and 2) the brand or brand portfolio contributes at least 50% of sales or profits of the
Gillette India 94
company.
Jyothy Laboratories 100
A monopoly is established over years and is aided by factors such as regulations, first-
mover advantage, technology breakthroughs, distribution, brands and industry consolidation.
Monopolies enjoy 1) strong pricing power, 2) revenue growth visibility, 3) better terms of
trade with suppliers and distributors, 4) rising margins, 5) low capex, and 6) low to negative
working capital. All the companies covered in this report, except United Spirits and ITC,
have significantly increased their RoE over the past five years.
COMPETITIVE POSITION OF COMPANIES COVERED
COMPANY CATEGORY MKT. NEAREST COMPETITOR *MKT. % SALES VOLUME SALES FY10
SHARE SHARE CONTRI- GROWTH FY07-10 EBITDA
(%) NAME MKT SH. (%) X BUTION (%) CAGR (%) MARGIN (%)
Asian Paints Decorative Paints 45 Kansai Nerolac 14 3.2 93 12 19 18

Colgate Palmolive Oral Care 49 HUL 26 1.9 95 13 15 22
GSK Consumer Malted Drinks 70 Cadbury 15 4.7 90 9 20 17
Gillette India Male Grooming 40 House of Malhotra 14 2.9 74 10 12 30
Hindustan Unilever Toilet Soaps 45 Godrej Consumer 11 4.1 24 4 10 20
Detergents 35 P&G 14 2.6 25 8 18 12
Skin Care 50 Emami 5 10.0 11 20 N.A 30
ITC Cigarettes 82 Godfrey Phillips 10 8.2 42 5 13 53
Jyothy Labs Fabric Whitener 72 Reckitt Benckiser 5 14.4 60 5 12 30
Marico Pure Coconut Oil 55 Shalimar 8 7.0 32 10 21 18
Nestle Instant Noodles 80 Top Ramen 11 7.3 22 22 26 20
Baby Food 85 Heinz 15 5.7 34 10 15 25
United Spirits IMFL 59 Radico Khaitan 9 6.1 100 13 30 19
* Times nearest competitor Source: Company/MOSL
4 December 2009 3
Consumer Monopolies
Indian consumer market approaching inflexion point, sales growth to

accelerate
India’s FMCG market is on India’s US$25b FMCG market is on the threshold of major growth acceleration. We
the threshold of major estimate per capita nominal GDP will grow at 12.2% CAGR over FY10-14 to reach
growth acceleration US$1,666 in 2014. This will change the shape of India’s income pyramid, which could
have far reaching implications on consumer demand as per MGI (McKinsey’s Global
Institute). Rising income levels in urban and rural India and benefits from increasing
affordability, favorable demographics, low penetration, increased availability and distribution
expansion will increase the FMCG growth rate to over 20%. We expect a sharp increase
in demand for value for money products from the people moving out of poverty and for
premium products from a fast emerging upper middle and affluent class.
EXPECT FMCG GROWTH TO ACCELERATE (%)
21.4 20.3 20.0

20.5
16.9 17.5 16.5 17.0 17.5 17.0
16.0 16.5
18.4 18.8 18.0
10.7 12.5
7.0 8.0
3.7
3.0
-1.0
-2.5
FY93 FY96 FY99 FY02 FY05 FY08 FY11E FY14E
KEY GROWTH ENABLERS GROWTH DRAG GROWTH RESURGENCE SUSTAINED HIGH
(1993-1999) (2000-2006) (2007-2012) GROWTH (2013-15)
Reduction in excise duty Agri-degrowth/drought Agri GDP growth of 3% Decline in rural

from 70% to 30% poverty
Pent-up demand post liberalization 3-5% CAGR in agri prices 10-15% increase in crop prices Emergence of
urban middle class
Entry of P&G, Revlon, L'Oreal, Sara Lee, etc Shift in consumer wallet share 10x increase in NREGA allocation Improved
availability
New brands Fall in interest rates, Emergence of new categories (skin Rising awareness
(HUL - Organics & Le Sancy, Colgate-Protex, durable prices care, juices, noodles, paints, snacks)
Optima, Axion, Palmolive, etc)
HLL-P&G price war; Rising aspiration levels
End of P&G-Godrej JV
*Sales growth of HUL (adjusted for acquisitions), Nestle, GSK and Colgate taken as a proxy for FMCG growth prior to FY00 Source: MOSL
Monopolies best placed to capitalize on emerging growth scenario

Consumer monopolies are We believe consumer monopolies have some in-built advantages that will enable them to
best placed to capitalize on stay ahead of the pack in the emerging growth and competitive scenario. It includes 1) the
the emerging growth ability to invest in innovation and technology, 2) strong distribution clout with both organised
scenario retailers and the general trade, 3) huge economies of scale to manufacture and distribute
goods in the interiors, and 4) generic brands (Maggi, Surf, Vim, Chawyanprash,
Parachute, Cerelac and Nescafe), which act as key differentiating factors. The companies
in the consumer monopoly universe have posted sales CAGR of 16-20% over FY04-09.
The low to negative working capital operating cycle indicates their bargaining power with
suppliers and the trade.
4 December 2009 4
Consumer Monopolies
We expect our We expect our consumer monopoly universe to report sales growth of 16.5% and PAT
consumer monopoly universe growth of 22% over FY10-12. Sales growth will be mainly volume led indicating strong
to report PAT growth of 22% demand for various monopolies. Besides, we expect most of the companies in our universe
over FY10-12 to report 200-500bp increase in RoCE over FY10-12.
Top picks
ITC: ITC has a strong monopoly in cigarettes, which contribute 40% to its net sales and
87% to PBIT. Cigarette volumes have grown 6.5% in 1HFY10 and a benign tax environment
will aid faster conversion from other forms of tobacco to cigarettes. We estimate 15%
EBIT CAGR in cigarettes and 19.3% PAT CAGR over FY10-12. Maintain Buy with
SOTP-based target price of Rs292.
Nestle India: We expect Nestle India to gain most from the likely growth in the processed
foods segment. We believe a monopoly in noodles and baby food will enable it to beat
average growth for the sector. We estimate 22% PAT CAGR over CY09-11. The stock
trades at 28x CY10E EPS of Rs93.5 and 22.9x CY11E EPS of Rs114.2. Maintain Buy.
Buy ITC, Nestle and United Spirits: United Spirits is a play on gains from a monopoly situation in the world’s
United Spirits fastest growing IMFL (spirits) market. We expect 14% volume CAGR which can further
increase from favorable regulatory changes for rationalization in excise or a gradual ban
on country liquor. We expect a 43.7% PAT CAGR over FY10-12. The stock trades at
26.4x FY11E EPS of Rs51.1 and 21.8x FY12E EPS of Rs61.9. Maintain Buy.
VALUATION COMPARISON
COMPANY SALES GR. (%) PAT GR. (%) EPS (RS) P/E (X) ROCE (%)
RECO FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E
Asian Paints Neutral 16.4 16.7 12.0 21.5 80.0 97.1 20.9 17.2 57.4 57.3
Colgate Buy 16.4 17.0 14.3 17.8 31.0 36.5 22.1 18.8 145.1 143.2
Glaxo Smithkline* Buy 18.4 17.2 22.8 19.1 71.0 84.6 20.1 16.9 41.6 41.3
HUL Neutral 13.5 12.2 11.8 16.8 11.4 13.3 24.0 20.5 129.0 128.9
ITC Buy 16.6 12.8 21.6 17.0 12.3 14.4 20.8 17.8 35.1 35.5
Marico Buy 18.7 17.4 20.3 22.2 4.7 5.7 22.9 18.7 47.2 45.1
Nestle* Buy 20.3 19.7 22.2 22.2 93.5 114.2 28.0 22.9 164.0 158.5
Titan Industries Neutral 24.4 18.0 31.3 25.4 59.4 74.5 22.7 18.1 40.3 44.4
United Spirits Buy 14.6 14.7 66.3 21.1 51.1 61.9 26.4 21.8 14.4 15.6
*Year ending December; FY10 pertains to CY09 and FY11 to CY10 Source: MOSL
4 December 2009 5
Consumer Monopolies
Monopolies rule
Consumer monopolies India is on the threshold of a structural uplift in consumer demand. We are approaching
have strong brands that the inflexion point, at which the impact of rising per capita income, favorable demographics,
lead to high market shares changing lifestyle and growing rural prosperity will combine to increase the FMCG sector's
and a strong franchise of growth rate. Although the FMCG sector has a steady profit growth trajectory, we believe
captive customers consumer monopolies can grow exponentially in the emerging growth scenario. Consumer
monopolies have strong brands that lead to high market shares and a strong franchise of
captive customers. This ensures pricing power and better terms of trade. Consumer
monopolies could be one of the best themes to play the domestic consumption story.
What are consumer monopolies?

Consumer monopolies are companies that occupy a dominant position in a product category
or segment. A monopoly is seen as a company's position to dictate terms in its segment,
terms that others in the segment will follow. This monopoly position enables a company to
dictate terms in aspects like pricing, product (innovation, usability and packaging), place
(distribution) and promotion (advertising, publicity and sales promotion).
We have identified companies in the consumer space that have emerged as monopolies
using criteria such as market share, sales mix and contribution to profits from a particular
category. Besides, we looked at qualitative factors such as recent trends in market share
and the emerging competitive landscape in that product category. We focused on the
Consumer monopolies following financial parameters:
could be one of the best
themes to play the domestic a) Market leadership with a share that is at least 3x that of the nearest competitor.
consumption story b) The brand or brand portfolio in the monopoly segment should contribute at least half
the sales or profits of the company.
Colgate Palmolive has market share 1.9x the nearest competitor but the gap is increasing.
Moreover it is global leader in oral care and this segment contributes more than 95% to its
sales and profit. So we believe that Colgate is an emerging monopoly.
COMPETITIVE POSITION OF COMPANIES COVERED
COMPANY CATEGORY MKT. NEAREST COMPETITOR *MKT. % SALES VOLUME SALES FY10
SHARE SHARE CONTRI- GROWTH FY07-10 EBITDA
(%) NAME MKT SH. (%) X BUTION (%) CAGR (%) MARGIN (%)
Asian Paints Decorative Paints 45 Kansai Nerolac 14 3.2 93 12 19 18

Colgate Palmolive Oral Care 49 HUL 26 1.9 95 13 15 22
GSK Consumer Malted Drinks 70 Cadbury 15 4.7 90 9 20 17
Gillette India Male Grooming 40 House of Malhotra 14 2.9 74 10 12 30
Hindustan Unilever Toilet Soaps 45 Godrej Consumer 11 4.1 24 4 10 20
Detergents 35 P&G 14 2.6 25 8 18 12
Skin Care 50 Emami 5 10.0 11 20 N.A 30
ITC Cigarettes 82 Godfrey Phillips 10 8.2 42 5 13 53
Jyothy Labs Fabric Whitener 72 Reckitt Benckiser 5 14.4 60 5 12 30
Marico Pure Coconut Oil 55 Shalimar 8 7.0 32 10 21 18
Nestle Instant Noodles 80 Top Ramen 11 7.3 22 22 26 20
Baby Food 85 Heinz 15 5.7 34 10 15 25
United Spirits IMFL 59 Radico Khaitan 9 6.1 100 13 30 19
* Times nearest competitor Source: Company/MOSL
4 December 2009 6
Consumer Monopolies
How monopolies are created

We observe that factors A monopolistic situation provides companies/brands with pricing power and steady growth.
such as regulations, However a monopoly is established over years and reflects a management's relentless
first-mover advantage, effort to grow the business, increase competitiveness, innovate and increase brand strength.
technological breakthrough, We observe that factors such as regulations, first-mover advantage, technological
distribution, brands and breakthrough, distribution, brands and industry consolidation help to create a monopoly.
industry consolidation help We analyze some of the critical factors.
to create a monopoly
1. Regulations
Regulations can create monopolies. Government policies, for instance, that erect barriers
to new entrants to a market can help existing players to emerge as monopolies. Some of
the regulations that have helped to create monopolies are
1) Banning FDI in an industry
HIGH DUTIES ARE ENTRY BARRIERS 2) Restricting advertising of a product or category of products
EXCISE (% IMPORT
3) Imposing high duties and taxes on new/imported brands
OF SALES) DUTY (%)
IMFL ~50 ~65

Cigarettes ~50 ~60 Such conditions give companies that are already in the market a big advantage because
they prevent new players from entering it. In the Indian consumer space, regulations have
created monopolies in segments such as cigarettes, IMFL and baby food. Consequently,
companies such as ITC, United Spirits and Nestle have benefited.
MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION
ITC Cigarettes Ban on FDI in tobacco and on tobacco advertising have kept
companies like Japan Tobacco, Philip Morris and RJR out of India
United Spirits IMFL High import duty and a ban on liquor advertising have prevented
companies like Diageo and Pernod Ricard from establishing a
strong presence
Nestle Baby foods Ban on advertising and solicitation has restricted the entry of players
like Danone and Bristol-Meyers-Squibb
Source: Company/MOSL
2. First-mover advantage
First-mover advantage has helped to create monopolies in certain product categories.
Such players have created the category and nurtured it over time to maintain their position.
Nestle created the instant noodles category, while GSK Consumer did the same in the
malted food drinks category and we believe it will continue to reap the benefit from its
first-mover advantage.

LIFEBUOY SOAP: LAUNCHED IN 1895
Glaxo Smithkline Malted food GSK Consumer created the MFD category in 1961 and has 70%
Consumer drinks market share in this Rs24b category
Nestle Instant Nestle created the instant noodles category with the launch of Maggi
noodles 25 years ago. It has a 73% market share in the Rs13b category
Hindustan Unilever Toilet soaps HUL created the category by launch of Lifebouy in 1895
Titan Industries Jewelry First company to launch branded studded jewelry in India
4 December 2009 7
Consumer Monopolies
3. Product innovation/technological breakthrough

CUTTING EDGE INNOVATION Path-breaking product innovation enable companies to become consumer monopolies.
The innovation or technological breakthrough has resulted in transformation that altered
the product category and changed market leadership.
Jyothy Fabric A new formulation in Ujala fabric whitener replaced Robin Blue
Laboratories whitener as the market leader in the category
Gillette India Shaving The launch of shaving systems transformed the shaving products
systems market, putting Gillette on its way to monopoly status
4. Brands aid monopoly creation

Brands sometimes reach an iconic status, acting as a strong entry barrier. This involves a
high degree of consumer satisfaction; consequently some brands have emerged as generic
brands.
SURF: GENERIC DETERGENT BRAND MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION
Asian Paints Decorative Strong brand and mascot of Gattu (a boy with a paint-can and
paints brush) led the brand drive and positioned the brand strongly
Marico Industries Parachute Blue-colored bottles became synonymous with coconut oil
coconut oil
GSK Consumer Malted food Horlicks has emerged as an iconic brand among malted drinks; was
drinks positioned as a drink fulfilling a family's daily body requirements
Nestle Instant noodles Maggi has emerged as a generic brand; was positioned as an "easy
to cook and good to eat" snack
Hindustan Unilever Detergents Surf has emerged as generic brand for detergents
Toilet soaps Lux has emerged as a soap focusing on beauty
5. Distribution and reach

Superior distribution can propel a company to a leadership position. It provides the company
with a strong headstart and makes the products available to larger sections of a target
population. Strong distribution, however, must be backed by innovation to keep a brand
relevant over time.
DEALER NETWORK TWICE AS LARGE MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION
AS NEROLAC’S (NOS IN '000) Asian Paints Decorative Asian Paints started the concept of installing tinting machines with
22 paints distributors, which transformed the paint market and enabled the
company to gain a significant advantage over its competitors
11 United Spirits IMFL United Spirits belongs to the UB Group, which leads in the IMFL and
beer markets; this gives it an advantage in distribution, which in turn
gives it a sales push
Hindustan Unilever HUL has access to more than 8m retail outlets. The company has
Asian Paints Nerolac started project Shakti, which has provided deep rural reach.
4 December 2009 8
Consumer Monopolies
GLOBAL LEADERSHIP IN ORALCARE 6. Global leadership of parent

Global leadership of a parent company can be a competitive advantage leading to creation
of a monopoly. In-depth understanding of relevant categories, learning from other emerging
markets and R&D support, enabled companies like Colgate and Gillette to maintain their
leadership in their respective categories.
Colgate Oral care Colgate draws its strength from Colgate Palmolive USA, which
Gillette has a 70% share has global leadership in oral care
in the global shaving Gillette India Shaving Gillette has a 70% share in the global shaving systems market due to
systems its cutting edge products. The Indian company draws strength from
systems market
the parent
7. Acquisition of competitor
Acquisition of competitors can result in reduced competition and consolidation of market
share, creating a monopolistic structure. Marico and UNSP have been able to emerge as
UNITED SPIRITS: MARKET SHARE
monopolies due to the acquisition of competitors.
DOUBLED AFTER ACQUISITIONS (%)

55
31 Marico Coconut oil Acquisition of Nihar from HUL enabled Marico to increase its market
share in coconut oil to 55% and exercise strong pricing power
United Spirits IMFL United Spirits (erstwhile McDowell & Co) acquired Herbertsons, Shaw
2004-Pre 2009-Post Wallace and Triumph Dist to consolidate the industry and increase its
Acquisition Acquisition market share to 55% (earlier 25%) and emerge as a monopoly
Hindustan Unilever Toilet soap HUL acquired TOMCO, which provided brands like Hamam and Rexona
4 December 2009 9
Consumer Monopolies
Benefits/implications of a consumer monopoly

A monopolistic situation A monopolistic situation enables companies to reap quantitative and qualitative benefits,
enables companies to reap which are ultimately reflected in their returns ratios. The benefits might be related to 1)
quantitative and qualitative outpacing category volume growth, 2) pricing power, and/or 3) improved terms of trade.
benefits, which are ultimately
reflected in their Steady revenue growth visibility: Monopoly brands/portfolios position a company
return ratios to capture opportunities offered by a category. Monopoly companies are well placed
to grow ahead of the segment growth and consolidate their market position. Most
monopolies operate in medium to high growth categories. However, low growth in a
monopoly segment, which is accompanied by stiff competition and low entry barriers,
is a potential threat in the medium term.
Strong pricing power, high innovation: Often market leaders are price leaders in
PARACHUTE: PRICING POWER
their respective categories: Asian Paints in decorative paints, GSK Consumer in malted
PUSHES UP GROSS MARGINS (%) food drinks or HUL in toilet soaps. This enables them to maintain margins despite
47.4 47.3 input cost pressure as their price movement is likely to be followed by the industry.
46.5
The companies often introduce innovations, which enable them to stay ahead. Innovations
45.1
35.6
ensure improvement in the sales mix through the introduction of value-added products.
37.6
Better terms of trade: Monopolies enjoy better terms of trade with suppliers and
FY04
FY05
FY06
FY07
FY08
FY09
distributors. Economies of scale coupled with a strong position in the market boost
their bargaining power with input suppliers, such as Colgate in the case of laminate
tubes suppliers, Marico in the case of copra suppliers, Nestle with milk suppliers, ITC
in tobacco and United Spirits in glass bottles suppliers. This ensures competitive prices
(higher gross margins) despite existence of price warriors in their categories.
The benefits might be The trade plays an important role in promoting under-penetrated categories, and strong
related to outpacing players, such as United Spirits and HUL, have exclusive arrangements with dealers/
category volume growth, or distributors due to their strong bargaining power. These arrangements act as entry
pricing power or improved barriers for competitors. The monopolies bundle sales, which ensures minimum sales
terms of trade for their weak brands. Sales are mostly based on advance payment/PDC, which enable
companies to operate with minimal working capital (negative in some cases).
BETTER TERMS OF TRADE HAVE REDUCED THE OPERATING CYCLE (DAYS OF SALES)
ITC 18
Nestle -63
Colgate -125
HUL -184
4 December 2009 10
Consumer Monopolies
All the companies covered in High return ratios: Rising margins, low capex, high asset turns and low to negative
this report, except United working capital boost monopolies' returns ratios. All the companies covered in this
Spirits and ITC, have report, except United Spirits and ITC, have significantly increased their RoE over the
significantly increased their past five years. This enabled dividend payouts of more than 80% (Colgate, HUL
RoE over the past five years and Nestle).
ROE OF MOST COMPANIES HAVE BEEN ON A STEADY UPTREND (%)
FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Asian Paints 32.1 34.2 36.8 42.5 33.4 44.2 39.5

Colgate 37.6 52.8 58.0 104.6 153.3 156.0 146.6
GSK Consumer 13.7 22.4 23.4 25.1 24.8 26.8 27.6
HUL 56.6 56.8 56.5 121.1 121.3 93.5 92.5
ITC 24.6 26.2 25.7 25.9 23.8 25.1 25.3
Marico 31.8 33.3 51.4 50.4 44.9 37.0 33.2
Nestle 55.7 58.6 84.9 103.1 119.4 128.1 126.3
United Spirits 12.8 4.7 16.5 7.2 7.8 8.3 12.3
Titan 34.3 42.0 36.1 34.5 37.3 29.5 29.7
Cash flows and high payouts: Steady profit growth and no significant capex help
monopolies to pile free cash flows. We believe successful companies maintain a balance
between payouts and re-investment, enabling shareholder value creation. Most of the
companies we cover in this report have a payout of 40-70%.
TREND IN PAYOUT (%)
FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Asian Paints 52.2 56.3 43.6 39.0 41.8 42.0 42.0

Colgate 84.0 74.1 80.7 76.3 70.3 75.0 75.0
We believe successful
GSK Consumer 43.8 31.7 33.1 31.2 33.5 34.0 35.0
companies maintain HUL 92.9 84.0 86.0 113.4 65.4 73.9 74.9
a balance between payouts ITC 39.6 42.1 43.6 42.3 42.8 41.0 40.0
and re-investment, enabling Marico 44.2 34.5 40.8 25.2 19.6 16.7 13.9
Nestle 84.1 73.3 74.5 73.8 72.5 72.0 70.0
shareholder value creation
United Spirits 28.1 48.6 7.1 8.2 6.5 8.1 6.8
Titan 19.0 17.6 27.8 27.6 32.7 27.8 25.0
IMPLICATIONS OF BEING A MONOPOLY: A SNAPSHOT
ASPECT REASON
Steady revenue growth visibility A monopoly position ensures a company grows at least in line with
the industry and consolidates its position
Superior EBITDA margins A monopoly ensures strong pricing power and the ability to
increase margins and pass on a cost push to consumers
Low working capital requirement Strong bargaining power with the trade and suppliers
High RoE High profit margins and low working capital investment
provide higher RoE
High dividend payout ratio Monopoly companies have a payout ratio of 40-70% due to high
growth visibility and low capital requirement
4 December 2009 11
Consumer Monopolies
How consumer monopolies are placed on the BCG matrix
ITC’s cigarettes, HUL’s toilet Brands that are in a monopoly position enable their companies to achieve fast, sustained
soaps, Marico’s Parachute growth, healthy cash flows and good visibility. We have plotted various consumer monopolies
coconut oil, Nestlé’s infant on a BCG (Boston Consulting Group) matrix.
nutrition, and Titan’s watch
division are cash cows for We believe brands/brand portfolios like ITC's cigarette portfolio, HUL's toilet soaps,
their respective companies Marico's Parachute coconut oil, Nestlé's infant nutrition, Jyothy Labs' Ujala and Titan's
watch division are cash cows for their respective companies. The businesses are operating
in segments that have volume growth of 5-10%. Profit margins are high as the companies
have strong market shares, which ensure economies of scale. They generate free cash
flow, which is used to create new growth avenues, like functional foods in Marico, jewelry
and eyewear in Titan, New FMCG, hotels and paper in ITC, chilled dairy in Nestle, water
and foods in HUL and mosquito repellant and dish wash liquid in Jyothy Labs.
BCG MATRIX OF VARIOUS COMPANIES/ PRODUCT CATEGORIES
Question Marks Stars

Titan (Jew elry) Nestle (Noodles)
20
HUL-Skin Care
Volume growth (%)
15 UNSP
APNT
Gillette Colgate
10 Marico GSK Cons.

Nestle (Infant
HUL-Detergents Titan (Watches) Nutrition)
5 ITC (Cig)
HUL-Toilet Soaps Jyoti
Dogs Cash Cow s
0
0 20 40 60 80 100
Market Share (%)
Asian Paints’ On the other hand, brands/brand portfolios like Asian Paints' decorative range, Colgate's
decorative range, Colgate’s toothpaste range, United Spirits' IMFL, Nestlé's Maggi noodles and HUL's skin care
toothpaste, United Spirits’ products are rising stars for these companies. The businesses are poised for major growth
IMFL, Nestlé’s Maggi noodles in the coming years. As the companies consolidate their leadership position in the respective
and HUL’s skin care are categories over the coming years, they are likely to reap significant benefits in terms of
rising stars product mix (Asian Paints, United Spirits and Titan's jewelry), increased penetration (HUL's
skin care products, Colgate, Nestle's Maggi and United Spirits) and operating leverage in
advertising/distribution costs (Asian Paints, Colgate and Maggi).
We believe HUL's detergent division falls in the Dogs category. The business operates in
a category with mid to high single-digit volume growth but the pricing is constrained due to
stiff competition at the top end and in the mass market. This has reduced EBIT margins in
the business from 20-22% earlier to 12-13% currently. Besides, the company is gradually
losing market share in the segment.
4 December 2009 12
Consumer Monopolies
FMCG demand to accelerate
India's US$25b FMCG market is on the threshold of major growth acceleration. Rising
income levels in urban and rural India and benefits from increasing affordability, favorable
demographics, low penetration, increased availability and distribution expansion will increase
growth in the coming years.
Indian consumer market approaching inflexion point

We estimate per capita India has the world's twelfth largest consumer market (aggregate consumer spend of
nominal GDP will grow at US$370b in 2005), on par with Brazil, despite having a population that is six times larger.
12.2% CAGR over FY10-14 India's consumer market is relatively small because a large section of the population
to reach US$1,666 in 2014 (40-45%) is still in the deprived class. We estimate per capita nominal GDP will grow at
12.2% CAGR over FY10-14 to reach US$1,666 in 2014. The increase will help to enhance
the purchasing power of the consumer and reduce the number of people living below the
poverty line.
PER CAPITA NOMINAL GDP IS EXPECTED TO INCREASE BY 12.2% CAGR TO US$1,666 IN 2014
2,000 Per Capita GDP expected to

grow to US$1,666 in 2014
from US$1,031 in 2008
1,550 CAGR of 12.2%
Acceleration in Per
1,100 Capita GDP from 2003
CAGR of 11.8%
650 CAGR of 2.2%
200
2010E
2011E
2012E
2013E
2014E
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: MOSL
Households in the seekers This trend is expected to change the shape of India's income pyramid, which could have
and aspirers categories will far reaching implications on consumer demand as per MGI (McKinsey's Global Institute).
constitute two-thirds of The number of households in the deprived category is expected to fall to 74m in 2015 from
India’s households; this 101m in 2005. The number of households in this category has already declined by 24m in
section will fuel a major the past 10 years. Number of households in seekers category (income of Rs200,000-
increase in demand for Rs500,000/year) will increase five times over 2005-15 and seekers and aspirers will constitute
consumer goods two-thirds of India's households. We believe this section of the population will fuel a major
increase in demand for consumer goods.
CHANGING SHAPE OF INDIAN PYRAMID (MILLION HOUSEHOLDS)
1985 1995 2005 2015 2025
Global (>Rs1,000k) 0 0 1.2 3.3 9.5

Strivers (Rs500k-Rs1,000k) 0.25 0.5 2.4 5.5 33.1
Seekers (Rs200k-500k) 2 5 10.9 55.1 94.9
Aspirers (Rs90k-Rs200k) 10 30 91.3 106 93.1
Deprived (<Rs90k) 121 125 101.1 74.1 49.9
Total 133 161 207 244 281
Source: MGI's Bird of Gold
4 December 2009 13
Consumer Monopolies
Low penetration and per capita spends
PER CAPITA CONSUMPTION (%)
COUNTRY LAUNDRY SHAMPOO SKIN CARE TOOTHPASTE DEODORANTS
China 2.2 1.0 3.2 0.5 0.0

Indonesia 1.9 1.1 0.8 1.0 0.1
India 1.4 0.3 0.3 0.4 0.0
Malaysia 6.2 2.7 7.4 2.9 0.6
Thailand 3.9 2.4 7.7 2.0 0.8
Source: Industry/MOSL
We believe categories like deodorant, instant coffee, skin creams, oral care, shampoo and
processed food offer strong growth potential through increased penetration.
MARKET PENETRATION (%)
CATEGORY ALL INDIA URBAN RURAL
High Penetration Categories

Toilet Soap 91.0 96.0 89.0
Detergents Bar 88.0 91.0 86.0
Categories like, skin care, Washing Powder 90.0 93.0 89.0
Hair Oil 94.0 96.0 93.0
oral care, shampoo and
Medium Penetration Categories
processed food offer strong Toothpaste 56.0 79.0 45.0
growth potential through Shampoo 51.0 62.0 46.0
increased penetration Low Penetration Categories
Utensil Cleaner 29.0 59.0 16.0
Skin Cream 23.0 30.0 19.0
Packaged Fruit Juices 16.0 30.0 10.0
Favorable demographics
Decline in dependecy Consumption of goods and services in India will increase significantly in the coming years.
ratio and higher proporation Some of the key likely contributors are 1) expected decline in dependency ratio from 60%
of population in high currently to less than 54% by 2015 and to 48% by 2025, 2) 62% of the population being in
consumption age group will the high consumption age group of 14-59 years, 3) the impact of media exposure and
boost demand communication due to the rising number of televisions and cell phones, and 4) lower savings
focus due to increased security and visibility of the future income.
DEPENDENCY RATIO DECLINING (%) 64% OF POPULATION IN THE AGE GROUP OF 14-59 (%)
0-14 Years 14-59 Years Above 60

72
68 63 64 64 64
60
60 58
52
48
35
32
29 27 25
23
12
9 11
7 8 8
1985 1995 2005 2015 2025 2001 2006 2011 2016 2021 2026
4 December 2009 14
Consumer Monopolies
McKinsey Global Likely trends in consumer demand

Institute expects that A large number of consumers are likely to use branded FMCG products for the
households with incomes first time, increasing demand for mass market FMCG products, mostly among the
exceeding Rs500,000 a year rural poor and urban lower class population.
will increase to 5.8m by 2015 Many consumers are likely to indulge in choice driven consumption, which will
(8.4% of households), increase demand for premium and super premium products in urban India; the middle
boosting demand for and upper middle class will be chief contributors to this.
premium FMCG products MGI (McKinsey's Global Institute) India consumer demand model estimates that, there
will be 111m fewer rural households in the deprived category by 2015. This is
expected to increase demand for basic food staples considerably, boosting demand for
poultry, dairy products, and packaged food.
Increased demand for value for money products in personal care and household
products will require product modifications to improve affordability.
According to MGI, urban households with incomes exceeding Rs500,000 a year
will increase to 5.8m by 2015 (8.4% of households) and to 36.5m by 2025
(28% of households) from 1.8m in 2005; this is expected to boost demand for
premium FMCG products.
EXPECT FMCG GROWTH TO ACCELERATE (%)
21.4 20.3 20.0

20.5
16.9 17.5 16.5 17.0 17.5 17.0
16.0 16.5
18.4 18.8 18.0
10.7 12.5
7.0 8.0
3.7
3.0
-1.0
-2.5
FY93 FY96 FY99 FY02 FY05 FY08 FY11E FY14E
KEY GROWTH ENABLERS GROWTH DRAG GROWTH RESURGENCE SUSTAINED HIGH
(1993-1999) (2000-2006) (2007-2012) GROWTH (2013-15)
Reduction in excise duty Agri-degrowth/drought Agri GDP growth of 3% Decline in rural

from 70% to 30% poverty
Pent-up demand post liberalization 3-5% CAGR in agri prices 10-15% increase in crop prices Emergence of
urban middle class
Entry of P&G, Revlon, L'Oreal, Sara Lee, etc Shift in consumer wallet share 10x increase in NREGA allocation Improved
availability
New brands Fall in interest rates, Emergence of new categories (skin Rising awareness
(HUL - Organics & Le Sancy, Colgate-Protex, durable prices care, juices, noodles, paints, snacks)
Optima, Axion, Palmolive, etc)
HLL-P&G price war; Rising aspiration levels
End of P&G-Godrej JV
*Sales growth of HUL (adjusted for acquisitions), Nestle, GSK and Colgate taken as a proxy for FMCG growth prior to FY00 Source: MOSL
4 December 2009 15
Consumer Monopolies
Monopolies best placed to capitalize on emerging growth
The emerging demand scenario will accelerate FMCG growth rate. But the terms of trade
and change in operating environment will require companies to innovate and evolve their
capability to cater to both, the mass and the class. Consumer monopolies we believe have
some in-built advantages that will enable them to stay ahead of the pack, despite increase
in competitive activity.
Technology will be a key Technology and innovation: We believe technology will be a key differentiator in growth
differentiator in growth rates rates. The emerging scenario will require companies to innovate on two fronts 1) launch
- the emerging scenario will premium products to cater to a fledging rich and upper income class and 2) initiate low
require companies to launch cost solutions to cater to a rising lower middle and middle class. Both the factors will play
premium products to cater to out differently and require significant investment in new product development, low cost
the rich and initiate low cost solutions and efficient production techniques. Monopolies can invest in technology and
solutions to cater to a rising development due to their strong cash flow, brands and pricing power.
lower middle and
middle class Distribution: Consumer companies will need to alter their distribution (8m outlets) to
cater to 1) organized retail in metros and tier-2 cities and 2) outlets in rural areas. Bargaining
power with organized retail (~15-20% of expected sales by 2020) will be a function of
category strength, market share and products relevant to their class of customers. Surging
rural demand will require significant investment to expand direct distribution to ensure
brand availability and visibility. We believe monopolies have sufficient clout with organized
retailers, on one hand, and an addressable market in rural areas, to expand distribution.
Monopolies have huge Economies of scale: The emerging demand scenario will require companies to cater to
economies of scale, which demand for value for money products in rural areas and small towns where the cost of
would enable them to distribution and logistics is higher than bigger cities. Monopolies have huge economies of
manufacture and distribute scale, which would enable them to manufacture and distribute goods in interiors at low
goods in the interiors at low costs and compete with the low price unorganized sector.
costs and compete with the
low price unorganized sector Brands: We expect brands to emerge as a key differentiating factor as many new players
will enter product segments to exploit the growth potential. Brand association will be key
to success in a scenario where there is increasing fragmentation in categories such as
household care, detergents, toilet soaps, noodles and skin creams. Monopolies usually
emerge as a generic name for a category, which enables them to maintain high recall and
triggers repeat purchases. Some brands that have achieved generic status are Maggi,
Surf, Vim, Chawyanprash, Parachute, Cerelac and Nescafe. Most of the owners of
such brands are consumer monopolies.
4 December 2009 16
Consumer Monopolies
Relative strength index of monopolies

We have assessed relative strength of consumer monopolies over their nearest competitor
on four criteria:
1. Brands: Presence across price points, potential new entrants (local/global), consumer
perception, etc.
2. Technology: Technology intensity/sensitivity of the product(s).
3. Scale: Market share, geographical presence, and scalability.
4. Sustainability: Threat of competitors, emergence of substitutes and financial strength.
RELATIVE STRENGTH INDEX OF VARIOUS MONOPOLIES (DESCENDING ORDER)
BRANDS TECHNO- SCALE SUSTAIN- TOTAL RELATIVE
LOGY ABILITY STRENGTH
Skin care from HUL is the Skin Care HUL 4 4 4 4 16 3.2

strongest monopoly due to Emami 2 1 1 1 5
Noodles Nestle 5 4 5 5 19 2.7
huge market share gap over
Top Ramen 2 3 1 1 7
competitors and presence IMFL United Spirits 4 4 5 5 18 2.0
across price points Radico Khaitan 2 3 2 2 9
Coconut Oil Marico 5 3 5 5 18 2.0
Shalimar 2 3 2 2 9
Cigarettes ITC 4 5 5 5 19 1.9
Godfrey Philips 3 3 1 3 10
Watches Titan Inds 4 3 5 5 17 1.9
Timex 2 4 2 1 9
Jewelry Tanishq 5 5 5 5 20 1.8
Gitanjali 3 4 2 2 11
Toothpaste Colgate 5 5 5 5 20 1.7
HUL 3 3 3 3 12
Malted Food Drink GSK Consumer 5 5 5 5 20 1.7
Cadbury's 3 4 2 3 12
Infant Food Nestle India 5 5 5 5 20 1.7
Heinz 3 4 2 3 12
Toilet Soaps HUL 5 4 5 3 17 1.7
GCPL 2 3 2 3 10
Fabric Whitener Jyothy Labs 5 3 5 5 18 1.6
Reckitt Benckiser 3 4 2 2 11
Male Grooming Gillette 5 5 3 5 18 1.6
HOM 3 2 3 3 11
Paints Asian Paints 5 4 5 5 19 1.5
Kansai Nerolac 3 5 2 3 13
Detergents HUL 4 5 4 3 16 1.3
P&G 3 5 2 2 12
*Ranked on a scale of 1-5, five being the highest Source: MOSL
Key takeaways
Detergents’ monopoly of HUL Skin care from HUL is the strongest monopoly due to huge market share gap over
is the weakest due to rising competitors and presence across price points.
competition across segments Detergents monopoly of HUL is weakest due to rising competition across segments
and declining market share and declining market share.
Nestlé’s Maggi noodles, United Spirits’ s IMFL, Marico's Parachute coconut oil and
ITC’s cigarettes are very strong monopolies.
4 December 2009 17
Consumer Monopolies
Financial performance and valuations

The companies in the The companies in the consumer monopoly universe have posted sales CAGR of 16% to
consumer monopoly universe 20% (excluding the impact of acquisitions) over the past three years. EBITDA margins
have posted sales CAGR of varied from 16% for HUL to 55% for ITC (cigarette business on net sales). The operating
16-20% (excluding the cycle for most of these companies indicates their bargaining power with suppliers and the
impact of acquisitions) over trade. Colgate has a negative operating cycle of 126 days due to credit it gets from suppliers.
the past three years ROCE for most of these companies has been very healthy. Nestle and Colgate have
exceptionally high ROCE due to low capital employed, which indicates efficient working
capital management and low capex requirements.
MONOPOLIES HAVE HIGHER MARGINS, ROCE; REQUIRE LOW WORKING CAPITAL
3 YEAR (%) FY10 (%)
COMPANY SALES PAT EBITDA OPERATING ROCE
CAGR CAGR MARGIN CYCLE (DAYS)
Asian Paints 19.1 33.3 17.5 30 59.9

Colgate 14.8 31.6 22.1 -126 152.1
GSK Consumer 19.8 23.9 17.2 22 41.4
HUL 13.5 12.7 16.3 -184 128.2
ITC 12.8 13.9 35.6 18 34.7
Marico 20.6 33.4 13.6 23 48.6
Nestle 21.4 30.3 21.5 -63 164.0
Titan Industries 28.3 19.1 7.5 110 36.3
United Spirits 30.0 12.3 18.7 59 15.6
We expect our consumer We expect our consumer monopoly universe to report sales growth of 16.5% and PAT
monopoly universe to report growth of 22.4% over FY10-12. Sales growth will be mainly volume-led, indicating strong
sales growth of 16.5% and demand for various monopolies. Margins will expand for most of the companies, as lower
PAT growth of 22.4% raw material costs boost profitability. We expect ITC, Asian paints, Colgate and Nestle to
over FY10-12 report maximum expansion in profit margins.
VALUATION COMPARISON
COMPANY SALES GR. (%) PAT GR. (%) EPS (RS) P/E (X) ROCE (%)
RECO FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E
Asian Paints Neutral 16.4 16.7 12.0 21.5 80.0 97.1 20.9 17.2 57.4 57.3
Colgate Buy 16.4 17.0 14.3 17.8 31.0 36.5 22.1 18.8 145.1 143.2
Glaxo Smithkline* Buy 18.4 17.2 22.8 19.1 71.0 84.6 20.1 16.9 41.6 41.3
HUL Neutral 13.5 12.2 11.8 16.8 11.4 13.3 24.0 20.5 129.0 128.9
ITC Buy 16.6 12.8 21.6 17.0 12.3 14.4 20.8 17.8 35.1 35.5
Marico Buy 18.7 17.4 20.3 22.2 4.7 5.7 22.9 18.7 47.2 45.1
Nestle* Buy 20.3 19.7 22.2 22.2 93.5 114.2 28.0 22.9 164.0 158.5
Titan Industries Neutral 24.4 18.0 31.3 25.4 59.4 74.5 22.7 18.1 40.3 44.4
United Spirits Buy 14.6 14.7 66.3 21.1 51.1 61.9 26.4 21.8 14.4 15.6
*Year Ending December; FY10 pertains to CY09 and FY11 to CY10 Source: MOSL
4 December 2009 18
Consumer Monopolies
Top picks
ITC - The smoke king

Faster conversion from ITC has a strong monopoly in cigarettes, which contribute 40% to its net sales and 87% to
other forms of tobacco to PBIT. Cigarette volumes have grown 6.5% in 1HFY10 despite an increase in VAT in a
cigarettes will enable few states and imposition of pictorial warnings on packaging. We expect other divisions
sustained 14% PBIT CAGR like paperboards and the agri-business to grow steadily while hotels will start improving
in cigarettes for ITC from 2HFY10. However its new FMCG business (losses Rs4.8b) is unlikely to turn around
in the next couple of years. We believe that faster conversion from other forms of tobacco
to cigarettes will enable sustained 14% PBIT CAGR in cigarettes. We estimate 19.3%
CAGR in earnings over FY10-12. Buy with SOTP-based target price of Rs292.
Nestle India - Go for gold

Nestle India will gain most We expect Nestle India to gain most from the likely growth in the processed foods segment.
from the likely growth in the We believe being a monopoly in noodles and baby food will enable it to beat average
processed foods segment - growth for the sector. We expect noodles, chilled dairy products and chocolates to be key
a monopoly in noodles and revenue growth drivers for Nestle India. We estimate 22.2% PAT CAGR over CY09-11.
baby food, it will beat The stock trades at 28xCY10E EPS of Rs93.5 and 22.9xCY11E EPS of Rs114.2. Buy.
average growth for the sector
United Spirits - High on acquisitions

United Spirit's ability to United Spirits is a play on gains from a monopoly situation in the world's fastest growing
straddle the portfolio across IMFL market. We expect the IMFL share in the spirits market to rise gradually as this
price points will enable it to segment is growing at 11-12% against 5-6% growth in the country-liquor segment. The
grow ahead of the market ability to straddle portfolio across price points will enable the company to grow ahead of
the market. Favorable regulatory changes for rationalization in excise or a gradual ban on
country liquor will increase growth rates significantly. We expect a 44% PAT CAGR over
FY10-12. The stock trades at 26.4xFY11E EPS of Rs51.1 and 21.8x FY12E EPS of
Rs61.9. Buy.
TARGET PRICES FOR STOCKS BASED ON STEADY GROWTH SCENARIO
COMPANY CMP FY10 P/E FY14 P/E BAND
(RS) EPS (RS) (X) EPS (RS) 20X 24X 28X
Asian Paints 1,673 71.4 23.4 139.7 2,794 3,352 3,911

Colgate 685 27.1 25.3 50.8 1,015 1,218 1,421
Glaxo Smithkline* 1,427 57.8 24.7 124.7 2,495 2,994 3,493
HUL 272 10.2 26.8 18.2 364 436 509
ITC 256 10.5 24.4 19.6 391 470 548
Marico 107 3.9 27.5 8.4 168 202 236
Nestle* 2,615 76.5 34.2 168.2 3,365 4,038 4,711
Titan Ind 1,351 45.3 29.8 123.5 2,470 2,965 3,459
United Spirits 1,350 30.7 43.9 94.8 1,895 2,274 2,654
Most Probable target price; * December year ending Source: MOSL
4 December 2009 19
ITC
0
100
200
300
400
0
40
80
120
160
1,000
2,000
3,000
4,000
1,200
1,800
2,400
0
600
Apr-98 Apr-98
Apr-02 Jan-98
Feb-99 Feb-99
NESTLE INDIA
Oct-98
UNITED SPIRITS
Dec-99 Feb-03 Aug-99 Dec-99
4 December 2009
MARICO INDUSTRIES
Sep-00 May-00 Sep-00
Dec-03
Jul-01 Mar-01 Jul-01
May-02 Oct-04 Dec-01 May-02
Mar-03 Sep-02 Mar-03
Aug-05 Jul-03
Jan-04 Jan-04
Apr-04
Nov-04 Jun-06 Nov-04
Feb-05
Sep-05 Sep-05
May-07 Nov-05
Jul-06 Jul-06
Consumer Monopolies: PE Bands
Sep-06
May-07 Mar-08 Jun-07 May-07
Mar-08 Apr-08 Mar-08
Jan-09
Jan-09 Jan-09 Jan-09
Nov-09 Nov-09 Nov-09 Nov-09
8x
25x
9x
20x
15x
12x
26x
15x
30x
40x
28x
42x
10x
30x
35x
20x
18x
34x
20x
25x
16x
24x
50
170
290
410
530
0
300
600
900
1,200
0
800
1,600
2,400
3,200
50
500
950
1,400
1,850
Jan-98
COLGATE
Jan-98 Apr-98 Apr-98
Oct-98
Oct-98 Feb-99 Feb-99
ASIAN PAINTS
Aug-99
GSK CONSUMER
Aug-99 Nov-99 Nov-99
May-00 May-00
Sep-00 Sep-00
HINDUSTAN UNILEVER
Mar-01 Mar-01
Jul-01 Jul-01
Dec-01 Dec-01
May-02 May-02
Sep-02 Sep-02
Mar-03 Mar-03
Jul-03 Jul-03
Jan-04 Jan-04
Apr-04 Apr-04
Nov-04 Nov-04
Feb-05 Feb-05
Sep-05 Sep-05
Nov-05 Nov-05
Jul-06 Jul-06
Sep-06 Sep-06
Jun-07 May-07 May-07
Jun-07
Apr-08 Mar-08 Mar-08
Apr-08
Jan-09 Jan-09 Jan-09
Jan-09
Nov-09 Nov-09 Nov-09 Nov-09
8x
10x
12x
14x
16x
10x
18x
15x
20x
10x
15x
20x
25x
30x
18x
22x
26x
30x
34x
38x
25x
30x
35x
20
Consumer Monopolies
Consumer Monopolies
Annexure I - Emerging income trends in urban and

rural India
The middle class will account for 70% of urban consumption

According to McKinsey’s Urban India accounts for 30% of its population and 52% of GDP. According to consultancy
estimates, urban India will firm McKinsey's estimates, urban India will account for two-thirds of incremental
account for two-thirds of consumption demand in the economy in the coming years. The increased expenditure on
incremental consumption urban consumption will be driven by (1) 60% increase in population led by normal growth
demand in the economy in and increase in urbanization to 37% from the current 30% (318m to 523m), and (2)
the coming years Development of a robust labor market and increasing employment opportunities.
URBAN HOUSEHOLD CONSUMPTION (RS) TO INCREASE 2.5X BY 2025 THE MIDDLE CLASS WILL CONSTITUTE 85% OF URBAN INDIA BY 2015
Global (>1000k) Strivers (500-1000k)

Seekers (200-500k) Aspirers (90-200k)
GR 378,170 Deprived (<90k)
CA
% 9 5
6.1 21
308,406 12
46 32
R 81 51
2.9% CAG
66
86,351 115,620
53
65,416 49
26
18 10
4 2 4 6
1
0 1
0 1 3
1985 1995 2005 2015 2025
1985 1995 2005 2015 2025
Source: Industry/Bloomberg/MOSL
The middle class will emerge as a big growth driver in urban India. They are expected to
account for 85% of urban households and 70% of consumption by 2015 and the rich class
will account for 7% of households and 28% of consumption.
Rural India will emerge as a new driver of consumption

Rural India accounts for 70% of the population but less than 48% of its GDP. The benefits
of liberalization and transformation of the economy have begun to percolate to rural India,
which augurs well for an increase in consumer demand and improved standard of living.
Rural employment mix changing; deprived class to decline to 29%

The benefits of liberalization The proportion of the rural population that is dependent on agriculture has declined from
and transformation of the 75% in 1994 to less than 67% and the share of agriculture in rural GDP has declined to
economy have begun to 48% from 60% in 1994. In rural areas, people have been shifting away from agriculture to
percolate to rural India areas such as trade, construction, transport and communication. Those employed in the
non-agricultural sector have ~2-2.5x earnings of those in the agricultural sector. As the
non-agricultural sector GDP has been growing at 12-15% CAGR (nominal) since 2004
and it will reduce share of agriculture in rural GDP.
4 December 2009 21
Consumer Monopolies
NON-AGRICULTURAL INCOME COMPRISES 52% OF RURAL INCOME
Agriculture & Allied Industry Services
14.9 19.2 26.2 28.6 28.4

11.3
14.7
15.8
20
29.6
73.8
66.2
58 51.4
42.1
Government’s rural focus has

1970-71 1980-81 1993-94 1999-00 2007-08
begun to impact the lives of
the common people and
SHARE OF RURAL POPULATION BY INCOME CLASS (%)
actual change might be
faster than anticipated Global (>1000k) Strivers (500-1000k) Seekers (200-500k)
Aspirers (90-200k) Deprived (<90k)
96 90 Inflexion
point
65
47
48
32 46
29
20
8 6
4 3
1
1985 1995 2005 2015 2025
Source: MGI Bird of Gold/Bloomberg/MOSL
Agricultural income The proportion of households in the deprived category (annual household income of
has increased 40-50% over <Rs90,000) is declining; MGI expects the proportion of deprived households in rural India
the past 2-3 years due to to fall to 46% by 2015. We believe the government's rural focus has begun to impact the
higher minimum support lives of the common people and actual change might be faster than anticipated due to:
prices of crops
1) NREGS (National Rural Employment Guarantee Scheme): The NREGS assures
100 days' work to the rural poor every year (wages are Rs100/day). Allocation under
NREGS has been increased from Rs42b in FY07 to Rs400b in FY10. This scheme will
thus cover 39% of rural households, which will include mainly marginal farmers and landless
laborers, thus increasing income and improving life of the bottom end of the rural population.
2) Bharat Nirman: This rural infrastructure development program had a spend of Rs1.76t
in FY09 in areas like infrastructure, sanitation, roads, electricity, irrigation and housing.
This will increase rural employment and ease infrastructure bottlenecks.
3) Changing face of agriculture: Agricultural income has increased 40-50% over the
past 2-3 years due to higher minimum support prices of crops. Besides agricultural income
will increase because of (1) rising income from segments like fruit, milk and livestock,
(2) food processing industries reducing wastage and provide employment, (3) contract
4 December 2009 22
Consumer Monopolies
farming reducing income uncertainties, (4) better price discovery through use of technology
under initiatives like E Choupal, and (5) productivity gains from improved irrigation and
farm practices.
Rising accessibility and viability

Some of the bottlenecks The increase in rural income is attracting marketers. We believe some of the bottlenecks
and drawbacks associated and drawbacks associated with rural selling, such as infrastructure, communication, demand
with rural selling, and volumes, are on the wane. This will increase the viability of marketing in rural India,
such as infrastructure, which is expected to increase per capita consumption to current urban consumption levels
communication, demand and by 2017.
volumes, are on the wane
RURAL INDIA SET FOR A MARKETING SPLASH
PROBLEM AREA REMEDY POTENTIAL IMPACT
Roads and power 50% rural population in connected Easy servicing, accessibility and consumer
districts; most others have basic roads, demand
power in all villages by 2012
Distribution Better connectivity to large centers More choice, better quality products at
nearby; organized sector setting up reasonable cost, easy availability
stores; innovations like Shakti and
E Choupal
Wide geography 78% of the rural population reside in Hub-and-spoke model with 20,000 non
200,000 villages out of a total of urban centers (population >5,000) acting
600,000 villages as hubs for small villages
Low cost Companies launching value for money Increase in volumes will lower overheads
unorganized products and expanding direct and distribution cost
competition distribution to reduce cost of
intermediation
Lack of Increased exposure to media Demand for high quality and branded
awareness (rising TV penetration), telecom (rural products, addition of new products to
mobile density), literacy (women consumption basket
and children)
Source: Industry/Bloomberg/MOSL
PER HOUSEHOLD CONSUMPTION IN RURAL INDIA (RS '000)
158
116
104
67
45 50
Urban India 1985 1995 2005 2015E 2025E

2005
Source: MGI/MOSL
4 December 2009 23
Thematic Report
SECTOR: FMCG
Companies
BSE Sensex: 17,102 S&P CNX: 5,109 4 December 2009
COMPANY NAME PG.
ITC 25
Hindustan Unilever 33
Nestle India 41
Asian Paints 50
United Spirits 58
Colgate 66
Marico 73
Titan Industries 79
GSK Consumer 87
Gillette India 94
Jyothy Laboratories 100
4 December 2009 24
Consumer Monopolies
SECTOR: FMCG
ITC – The smoke king

Buy CMP: Rs256 Target Price: Rs292 Bloomberg: ITC IN
Consumer Monopolies: Investment argument framework
1 Market share and position 2 Trends and opportunities

ITC has 82% value market share in India's Rs120b Huge growth opportunity in cigarettes as bidis outsell
cigarette market. cigarettes 10x.
ITC is present only in the filter segment, which Punitive taxation of cigarettes (v/s other tobacco) has
comprises 90% of the cigarette market. resulted in a decline in the share of cigarettes in total
Godfrey Phillips is the second largest player with tobacco consumption from 20% to 14%.
10% market share and VST has 5% of the market. Cigarette control regulations are at par with global
ITC dominates segments like Regular and standards after the implementation of pictorial
Kings.ITC's key brands are Wills Filter, Gold Flake warnings and a smoking ban in pubic places. Sales
Filter, Classic, India Kings, Scissors, Capstan and are expected to grow steadily henceforth.
Bristol. Stability in tax rates and removal of undue tax
The cigarette business contributes 57% of ITC's gross advantage to other forms of tobacco can significantly
sales and 87% of its EBIT. accelerate cigarettes' volume growth.
3 Company strategy to sustain its edge 4 Valuation and view

ITC has modernized plants with capex exceeding We estimate 19% PAT CAGR over FY10-12. It trades
Rs15b in the past three years, which will improve at 20.8x FY11E EPS of Rs12.3 and 17.8x FY12E
quality. EPS of Rs14.4. Buy with SOTP based target of Rs292.
Over the years ITC has innovated packaging for its STOCK PERFORMANCE (ONE YEAR)
cigarette brands.
ITC Sensex - Rebased
ITC has taken lower price increases in low end brands 400
like Capstan and Scissors, which are key growth
drivers after the phase out of non-filter cigarettes. 325
ITC bolstered distribution at the grassroots level with
sharper sales focus and accountability in cities. 250
ITC's Wills Lifestyle range of readymade garments,

175
Fiama Di Wills and Vivel Di Wills personal care
products enable surrogate advertising. 100
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
Stock info Financial & valuation summary

YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 3,774.4
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52-Week Range 271/156
03/09A 155,827 32,636 8.6 4.6 29.6 7.0 23.8 32.8 6.0 18.4
1,6,12 Rel. Perf. (%) -7/21/-38
03/10E 176,811 39,671 10.5 21.6 24.4 6.1 25.1 34.7 5.2 14.7
M.Cap. (Rs b) 966.2 03/11E 206,247 46,423 12.3 17.0 20.8 5.3 25.4 35.1 4.4 12.6
M.Cap. (US$ b) 20.7 03/12E 232,696 54,213 14.4 16.8 17.8 4.6 25.6 35.5 3.8 10.7
4 December 2009 25
ITC
ITC: CIGARETTE PORTFOLIO ITC commands 82% market share by value

STRADDLES ACROSS PRICE POINTS
ITC dominates India’s Rs120b cigarette market with 82% market share by value (and
71% share by volume), which is ~8x that of its nearest competitor, Godfrey Phillips, the
second largest player with 10% market share. VST has 5% value share. ITC is present
only in the filter cigarette segment, which comprises about 90% of the cigarette market.
CIGARETTE VOLUME SHARE CIGARETTE VALUE SHARE
GTC Others VST GTC Others

6% 2% 5% 2% 1%
GPI
GPI
13%
10%
Rs1.8/stick
VST ITC
ITC
8% 82%
71%
ITC dominates segments such as Regular and Kings. Its key brands are Wills Filter, Gold
Flake Filter, Classic, India Kings, Scissors, Capstan and Bristol.
COMPETITIVE MATRIX OF CIGARETTE BRANDS AND PRICE POINTS

Rs2.7/stick
SUB-CATEGORY PRICE POINT/STICK (RS) ITC'S BRANDS GODFREY PHILLIPS BRANDS
<70mm ~2 Capstan, Bristol, Scissors Red and White, Four Square

70-75mm ~3.5-4.5 Goldflake, NavyCut Four Square Kings
75-85mm ~4.5-5 Classic Marlboro
>85mm >5.5 India Kings, 555, B&H, Insignia Stellar, Jaisalmer
Cigarettes—a long-term growth opportunity

In the past decade cigarette volumes have grown in low to mid single digits. We believe
the long-term growth potential for cigarettes is huge given their low share in tobacco
consumption, low per capita consumption and huge scope to convert bidi users to cigarettes.
Rs4.9/stick
Bidis outsell cigarettes by 10 times.
CIGARETTES ARE 15% OF TOBACCO CONSUMPTION IN INDIA
23%
100% 21.0%
20.0%
85%
80% 17.0%
15.0%
60%
50%
15%
China USA Pakistan Nepal India Global

Av. 1971-72 1981-82 1991-92 2002-03 2008-
09E
4 December 2009 26
ITC
PER CAPITA CIGARETTE CONSUMPTION IS LOW (STICKS IN NOS)
1,886
1,771
India has one of the

lowest per capita cigarette
consumption... 844
618
488
303 243
85
USA China Pakistan Nepal Sri Lanka Bangladesh India World Av
BIDI MARKET PRESENTS HUGE GROWTH POTENTIAL (BILLION STICKS)
1,643
Sm oking tobacco m arket is
am ong the largest globally
...even as it is the second

700
largest smoking tobacco
market globaly
451
328 258
215
100
China USA Japan Russia Indonesia India
Tax-rate stability, favorable policies can unlock growth potential

Punitive taxation of cigarettes (v/s bidis and other tobacco products) has resulted in a
decline in the share of cigarettes in total tobacco consumption to about 15% currently
from 20% in 1991-92.
ITC – CIGARETTE EXCISE DUTY AND VOLUME GROWTH TRENDS (RS/'000 STICKS)
YEAR FY05 FY06 FY07 FY08 FY09 FY10E
Filter
>85mm 1,780 1,960 2,058 2,181 2,181 2,181
75-85mm 1,450 1,595 1,675 1,775 1,775 1,775
Favorable tax
70-75mm 1,090 1,200 1,260 1,336 1,336 1,336
environment boosts
<70mm 670 740 777 824 824 824
cigarette volume growth
Non Filter
60-70mm 450 495 520 551 1,322 1,322
<60mm 135 150 158 167 820 820
Excise Increase (%) 0 10 5 5 390 (<60mm) 0.0
140 (60-70mm)
ITC’s Volume Growth (%) 7.1 8.4 7.1 -0.7 -2.9 6.5
4 December 2009 27
ITC
Stable tax rates positively affect cigarette volume growth. Cigarette volumes have grown
by 6.5% in 1HFY10 (8% in 2QFY10) indicating positive volume impact due to stable
taxes this year. We believe rationalization of taxes on cigarettes versus other tobacco
products can help this market to grow rapidly.
ITC has been at the forefront of innovation in cigarettes

Over the past three years ITC has been at the forefront of modernisation in the cigarette industry. Over the past
ITC has spent Rs15b to three years ITC spent Rs15b to modernize its plants, which has helped to enhance product
modernize its plants, which quality. It has also introduced innovative packaging for its cigarette brands. ITC, which is
has helped to enhance present across segments, has been conscious in taking price increases in lower-end regular
product quality filters like Capstan and Scissors, which have become important brands after the phase-
out of cheaper non-filter cigarettes. ITC’s leadership is also ensured by the government’s
FDI regulations, which make entry of foreign players difficult. We believe ITC will continue
to dominate the Indian cigarette industry in the coming years.
CIGARETTE MODERNISATION CAPEX UP (RS B)
5.5
4.5 5.0
ITC is expected to
continue to dominate the
2.1
Indian cigarette industry in
the coming years 1.2
FY05 FY06 FY07 FY08 FY09
Lifestyle retailing, personal care provide surrogate advertising

ITC’s personal-care products ITC launched Wills Lifestyle brand of premium garments, which provide ad support to the
under the Fiama Di Wills Wills brand. Besides, the Wills Lifestyle brand has been extended to events like fashion
and Vivel Di Wills brands weeks to make it more popular. ITC’s personal-care products under the Fiama Di Wills
also aid brand recall and Vivel Di Wills brands also aid brand recall.
WILLS LIFESTYLE AND PERSONAL CARE BRANDS ENABLE SURROGATE ADS
4 December 2009 28
ITC
Cigarette monopoly ensures steady profit growth, margin expansion

ITC is present in cigarettes, ITC has five business divisions with a strong presence in categories like cigarettes, hotels,
hotels, paperboard, paperboard, processed foods and agricultural exports. Cigarettes account for 57% of ITC’s
processed foods and gross sales and 42% of its net sales. Their contribution to profit is as high as 87%.
agricultural exports but
cigarettes contribute 87% of CIGARETTES DOMINATE SALES AND PROFIT MIX
ITC’s profit Paper

Agri Paper
and Pack Cigar- 5% 11%
aging ettes
15% 42% Hotels
Agri 7%
21%
New
FMCG
New -10%
Hotels Cigare
5% FMCG ttes
17% 87%
ITC’s strong monopolistic

ITC’s strong monopolistic position has ensured a steady rise in PBIT margins over the
position has ensured a
years despite low- to mid-single digit volume growth and periodic punitive taxes.
steady rise in PBIT margins
over the years
CIGARETTE PBIT GREW 16.3% CAGR OVER FY06-09; MARGINS UP 230BP
20 Sales Grow th (%) EBIT Grow th (%)

PBIT Margin (%)
15
10 54.8 55.0
55.4
54.0
5 53.1
53.8 53.7
0
FY10E
FY11E
FY12E
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY06
FY07
FY08
FY09
PAYOUT RATIO OF 45-50% FREE CASH FLOW IS MOVING UP
Dividend (Rs/share) Payout Ratio (%) EPS (Rs) FCF/ Share (Rs) 14.4
12.3
49.5 49.9
48.0 46.8 10.5
51.1 46.8
10.0
48.6 8.3 8.6
8.5
7.1 7.4
6.3
5.7 4.9
4.9
4.3 3.5
3.5 3.7
2.6 3.1
0.8 1.3
FY10E
FY11E
FY12E
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY06
FY07
FY08
FY09
4 December 2009 29
ITC
SEGMENTAL BREAK-UP
FY08 FY09 FY10E FY11E FY12E
Cigarettes
Volume Growth (%) -0.7 -2.9 6.5 6.0 5.9
Net Sales (Rs m) 66,350 75,568 89,586 104,194 116,606
Growth (%) 12.6 13.9 18.5 16.3 11.9
EBIT (Rs m) 36,340 41,838 49,272 55,952 62,967
EBIT margin (%) 54.8 55.4 55.0 53.7 54.0
New FMCG
Net Sales (Rs m) 25,096 30,056 36,881 42,060 48,527
Growth (%) 48.5 19.8 22.7 14.0 15.4
EBIT (Rs m) -2,635 -4,835 -3,965 -3,785 -2,426
Paperboards
Net Sales (Rs m) 21,579 26,471 30,785 33,815 36,193
Growth (%) 12.9 22.7 16.3 9.8 7.0
EBIT (Rs m) 4,531 5,086 6,095 6,763 7,239
EBIT margin (%) 21.0 19.2 19.8 20.0 20.0
Hotel
Net Sales (Rs m) 10,121 9,355 9,258 10,413 11,971
Growth (%) 11.7 -7.6 -1.0 12.5 15.0
EBIT (Rs m) 4,108 3,162 2,963 3,436 4,310
EBIT margin (%) 40.6 33.8 32.0 33.0 36.0
Agri business
Net Sales (Rs m) 38,684 38,460 39,405 47,254 53,831
Growth (%) 10.5 -0.6 2.5 19.9 13.9
EBIT (Rs m) 1,292 2,562 4,729 4,962 5,652
EBIT margin (%) 3.3 6.7 12.0 10.5 10.5
Valuation and view

Cigarette EBIT is expected We expect cigarette EBIT to grow at 13% CAGR over FY10-12. Our estimates factor in
to post 13% CAGR over 6% volume growth and 5% increase in excise duty. A benign tax environment and increase
FY10-12, benign tax in consumer upgradation from bidis to cigarettes will accelerate growth rates. ITC has
environment will promote invested Rs37b over the past three years in non-cigarette businesses like paper and
consumer upgrade from paperboard, hotels, agri and new FMCG. We estimate 23% CAGR in non cigarette EBIT
bidis to cigarettes and over FY10-12, however cigarettes still account for 82% of EBIT. We estimate 19% PAT
accelerate growth CAGR over FY10-12. The stock trades at 20.8x FY11E EPS of Rs12.3 and 17.8x FY12E
EPS of Rs14.4. Buy with SOTP based target of Rs292.
CIGARETTES ACCOUNT FOR 77% OF THE SOTP VALUE OF ITC (FY12E, RS B)
SALES EBITDA BASIS MULTIPLE (X) TOTAL EV RS/SHARE
Cigarettes 117 65 EV/EBITDA 13.0 849 225

Paper 34 10 EV/EBITDA 5.0 48 13
ITC invested Rs37b in the
Agri 54 6 EV/EBITDA 5.0 31 8
past three years in non- New FMCG 49 -2 EV/Sales 1.5 73 19
cigarette businesses, but Hotels 12 6 EV/EBITDA 10.0 56 15
cigarettes will still account Gross Value 1,057
Net Cash 47
for 82% of EBIT in FY12
Net Value 1,104
No of Shares 3.8
Per Share (Rs) 292
Source: MOSL
4 December 2009 30
ITC
ITC: Recent trends
Cigarette volume growth on uptrend (%) Cigarettes margin expansion spurs EBIT growth
7.5 EBIT (Rs m) - LHS EBIT Grow th (%) - RHS

14,000
5.5
24
10,500
24
2.0
17 18 17
7,000 17
16
-1.0
3,500 10
-2.0 -2.0
-3.0 -3.0
-4.0 -3.5 2
0
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
ITC - SEGMENTAL PERFORMANCE (QUARTERLY BASIS)
1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10
Sales (Rs m)
Cigarettes 36,361 36,282 39,015 39,493 41,606 41,831
FMCG - Others 6,936 7,593 7,223 8,388 7,594 8,633
Hotels 2,390 2,283 2,471 2,210 1,728 1,740
Agri business 18,345 8,641 6,215 5,259 9,406 10,283
Paper and packaging 6,059 7,005 6,271 7,136 7,026 7,904
EBIT (Rs m)
Cigarettes 9,614 10,069 11,341 10,814 11,254 12,517
FMCG - Others -1,226 -1,166 -1,270 -1,173 -998 -850
Hotels 853 687 911 711 306 316
Agri business 765 764 502 531 999 1,741
Paper and packaging 1,234 1,222 1,111 1,519 1,278 1,862
Sales growth YoY (%)
Cigarettes 5.7 10.9 10.5 10.2 14.4 15.3
FMCG - Others 27.9 29.4 11.7 13.6 9.5 14.0
Hotels 17.3 10.1 -13.7 -28.9 -28.4 -25.2
Agri business 32.3 16.7 -6.2 -51.2 -48.7 19.0
Paper and packaging 23.9 22.6 10.9 20.6 12.1 9.1
EBIT growth YoY (%)
Cigarettes 2.4 16.6 18.0 24.3 17.1 24.3
FMCG - Others NA NA NA NA NA NA
Hotels 32.7 4.2 -33.9 -50.2 -64.1 -54.1
Agri business 40.5 667.8 80.8 43.4 30.5 127.9
Paper and packaging 42.6 -2.6 -6.1 23.8 3.5 52.3
EBIT Margin (%)
Cigarettes 55.3 55.6 56.9 53.8 52.4 56.9
FMCG - Others -17.7 -15.4 -17.6 -14.0 -13.2 -9.8
Hotels 35.7 30.1 36.9 32.2 17.7 18.1
Agri business 4.2 8.8 8.1 10.1 10.6 16.9
Paper and packaging 20.4 17.5 17.7 21.3 18.2 23.6
4 December 2009 31
ITC
Financials and valuation
INCOME STATEMENT (RS MILLION) RATIOS
Y/E MARCH 2008 2009 2010E 2011E 2012E Y/E MARCH 2008 2009 2010E 2011E 2012E
Net Sales 139,475 153,881 175,021 204,361 230,706 Basic (Rs)
Operational Income 2,345 1,946 1,790 1,886 1,990 EPS 8.3 8.6 10.5 12.3 14.4
Total Revenue 141,820 155,827 176,811 206,247 232,696 Cash EPS 9.4 10.1 12.1 14.1 16.3
Change (%) 15.6 9.9 13.5 16.6 12.8 BV/Share 32.0 36.4 41.9 48.4 56.0
Total Expenditure -95,231 -105,296 -114,518 -135,125 -151,104 DPS 3.5 3.7 4.3 4.9 5.7
Payout % 42.3 42.8 41.0 40.0 40.0
EBITDA 46,589 50,532 62,293 71,123 81,592
Change (%) 14.8 8.5 23.3 14.2 14.7 Valuation (x)
Margin (%) 33.4 32.8 35.6 34.8 35.4 P/E 31.0 29.7 24.5 20.9 17.9
Depreciation -4,385 -5,494 -6,184 -6,856 -7,486 Cash P/E 27.2 25.4 21.2 18.2 15.7
Int. and Fin. Charges -251 -183 -300 -258 -258 EV/Sales 6.7 6.1 5.2 4.4 3.8
Other Income - Recurring 3,764 3,403 3,225 4,767 6,467 EV/EBITDA 20.1 18.5 14.7 12.6 10.7
Profit before Taxes 45,718 48,257 59,035 68,775 80,316 P/BV 8.0 7.1 6.1 5.3 4.6
Change (%) 17.3 5.6 22.3 16.5 16.8 Dividend Yield (%) 1.4 1.4 1.7 1.9 2.2
Margin (%) 32.8 31.4 33.7 33.7 34.8
Return Ratios (%)
Tax -13,690 -15,622 -16,530 -20,976 -24,496
RoE 25.9 23.8 25.1 25.4 25.6
Deferred Tax -827 -2,834 -1,376 -1,606
RoCE 35.9 32.8 34.7 35.1 35.5
Tax Rate (%) -31.8 -32.4 -32.8 -32.5 -32.5
Profit after Taxes 31,201 32,636 39,671 46,423 54,213
Working Capital Ratios
Change (%) 16.8 4.6 21.6 17.0 16.8
Debtor (Days) 19 16 18 18 18
Margin (%) 22.4 21.2 22.7 22.7 23.5
Asset Turnover (x) 1.1 1.0 1.0 1.0 1.0
Reported PAT 31,201 32,636 39,671 46,423 54,213
Leverage Ratio
BALANCE SHEET (RS MILLION)
Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0
Y/E MARCH 2008 2009 2010E 2011E 2012E
Share Capital 3,769 3,774 3,774 3,774 3,774 CASH FLOW STATEMENT (RS MILLION)
Reserves 116,808 133,576 154,217 178,915 207,756
Y/E MARCH 2008 2009 2010E 2011E 2012E
Net Worth 120,577 137,351 157,992 182,689 211,530
OP/(loss) before Tax 42,204 45,038 56,110 64,267 74,106
Loans 2,144 1,776 1,659 1,659 1,659
Int./Div. Received 3,764 3,403 3,225 4,767 6,467
Deferred Liability 5,451 8,672 11,300 12,456 13,826
Depreciation and Amort. 4,385 5,494 6,184 6,856 7,486
Capital Employed 128,172 147,798 170,952 196,804 227,015
Interest Paid -251 -183 -300 -258 -258
Direct Taxes Paid -14,517 -15,622 -19,363 -22,352 -26,103
Gross Block 89,597 105,587 115,587 130,587 142,587
(Incr)/Decr in WC -4,848 -4,070 -1,627 -3,973 -1,962
Less: Accum. Depn. -27,909 -32,867 -39,051 -45,907 -53,393
Deff Tax 722 3,221 2,629 1,155 1,370
Net Fixed Assets 61,688 72,719 76,535 84,679 89,194
CF from Operations 31,460 37,281 46,857 50,461 61,106
Capital WIP 11,268 12,141 15,000 10,000 10,000
Investments 29,346 28,378 44,810 62,081 84,491
Extraordinary Items 0 0 0 0 1
(Incr)/Decr in FA -21,232 -17,397 -12,859 -10,000 -12,000
Curr. Assets, L&A 70,193 81,611 87,429 102,028 113,909
(Pur)/Sale of Investments 1,332 968 -16,433 -17,271 -22,410
Inventory 40,505 45,997 49,853 59,281 66,470
CF from Invest. -19,900 -16,429 -29,292 -27,271 -34,409
Account Receivables 7,369 6,687 8,631 10,078 11,377
Cash and Bank Balance 5,703 10,324 8,742 10,206 11,530
Change in Networth 437 437 0 0 0
Others 16,616 18,603 20,203 22,463 24,532
(Incr)/Decr in Debt 136 -369 -116 0 0
Curr. Liab. and Prov. 44,323 47,050 52,823 61,984 70,579
Dividend Paid -15,432 -16,299 -19,030 -21,726 -25,372
Account Payables 27,397 29,141 32,064 38,353 43,111
CF from Fin. Activity -14,860 -16,231 -19,147 -21,726 -25,372
Other Liabilities 3,736 3,943 4,493 5,061 5,782
Provisions 13,190 13,966 16,266 18,570 21,686 Incr/Decr of Cash -3,300 4,621 -1,582 1,464 1,325
Net Current Assets 25,870 34,561 34,606 40,044 43,330 Add: Opening Balance 9,002 5,703 10,324 8,742 10,206
Application of Funds 128,172 147,798 170,952 196,804 227,015 Closing Balance 5,702 10,324 8,742 10,206 11,531
E: MOSL Estimates
4 December 2009 32
Consumer Monopolies
SECTOR: FMCG
Hindustan Unilever – Soap opera

Neutral CMP: Rs272 Target Price: Rs293 Bloomberg: HUVR IN

Hindustan Unilever has 45% market share in the toilet Although soap and detergent have product penetration
soaps category, 35% in detergents and 50% in skin of 85-90%, per capita spends in comparison to peers
creams. HUL has a strong lead over the competition like China and Indonesia are 30-35% lower. Soap
with GCPL (soaps 10.9%), P&G (detergents 13.5%) volumes are expected to grow at 4% CAGR while
and Emami (skin care 5%). detergents volume should expand at 8% CAGR.
HUL's key brands are Lux, Lifebuoy, Dove and Pears The mass market segment in soap and detergent is
(toilet soap); Wheel, Rin and Surf Excel (detergent); 70-75% of volumes with a huge opportunity to upgrade
Fair and Lovely and Ponds in (skin creams). consumers to mid priced and premium products.
HUL lost market share in these segments in the Skin creams have 22% penetration and rural
past 18 months (980bp in toilet soap, 600bp in skin penetration is 17%. Per capita spend is only 10% of
creams and 280bp in detergents). China's and 35% of Indonesia's.
GCPL (toilet soap), Ghari (detergents) and Emami Rising awareness of skin care and a need to look
(skin cream) have increased market share. good will drive demand for skin creams by 20% CAGR.

HUL's portfolio in soap, detergent and skin creams We estimate 14% PAT CAGR over FY10-12. The stock
straddles price points. This will enable the company trades at 24xFY11E EPS of Rs11.4 and 20.5xFY12E
to retain consumers as they upgrade. EPS of Rs13.3. Neutral.
HUL has limited competition in the premium segment STOCK PERFORMANCE (ONE YEAR)
(Dove, Pears and Surf Excel). Competition from

Hind. Unilever Sensex - Rebased
home-grown brands is weak in the premium segment. 480
HUL has cut prices and revamped products in its
mass-market brand range including Wheel, Rin, Lux 405
and Lifebuoy to improve the price value equation.
330
HUL has increased focus on Dove, Surf Excel and
Ponds to cater to the premium segment. Distribution 255
in premium outlets has been increased.
180

Equity Shares (m) 2,177.5
03/09A* 167,617 20,636 9.5 18.4 28.7 28.8 121.3 138.6 2.8 18.9
1,6,12 Rel. Perf. (%) -10/-5/-70
03/10E 179,457 22,136 10.2 7.1 26.8 25.0 93.5 128.2 3.2 19.6
M.Cap. (Rs b) 592.3 03/11E 203,623 24,750 11.4 11.8 24.0 22.2 92.5 129.0 2.8 17.2
M.Cap. (US$ b) 12.8 03/12E 228,398 28,908 13.3 16.8 20.5 18.9 92.0 128.9 2.5 14.7
* EPS for 12 months (April 08-March 09)
4 December 2009 33
Hindustan Unilever
A strong monopoly in toilet soaps, detergents, skin creams

Hindustan Unilever, which Hindustan Unilever (HUL) has 45% market share in the toilet soap segment, 35% in
has 45% market share in the detergents and 50% in skin creams. The company has a big lead over its nearest rivals:
toilet soap segment, 35% in GCPL has 10.9% market share in the toilet soaps market, P&G has 13.5% of the detergents
detergents and 50% in skin market and Emami has 5% of the skin care market. HUL’s key brands are Lux, Lifebuoy,
creams, is present across Dove and Pears (toilet soap); Wheel, Rin and Surf Excel (detergents); Fair and Lovely
various price points in all and Ponds (skin creams). However over the past 18 months HUL lost market share of
these segments while its 980bp in the toilet soaps segment, 600bp in the skin care segment and 280bp in the detergents
competitors are not segment, while GCPL (toilet soap), Ghari (detergents) and Emami (skin care) increased
their market shares in the mass segment.
MARKET SHARE: TOILET SOAP MARKET SHARE: DETERGENT MARKET SHARE: SKIN CARE
Others HUL HUL Others HUL

Others
23% 44% 35.0% 32.6%
25.0% 49.4%
ITC
3% Fena
6.0%
Cavin
Reckitt P&G
Wipro GCPL Nirma Ghari care
4% Nirma 13.5% Amw ay L Oreal Emami
6% 9% 11% 8.5% 12.0% 3.5% 5.5%
4.0% 5.0%
HUL’s market share in toilet soaps is 4x that of its nearest competitor, and its detergent
market share is 2.6x. Skin creams offer significant advantage to HUL as the second
competitor is just 10% of its size. HUL is present across price points in all these segments
while its competitors are not.
PRODUCT PORTFOLIO SPANNING ACROSS INCOME LADDER
Per capita spends, potential for penetration to drive steady volume growth
Soaps and detergents have product penetration of 85-90%, which is among the highest in
FMCG categories. But the definition of penetration includes infrequent users, which is
reflected in lower per capita spends. India’s per capita spends are 30-35% lower than
those of its peers, like China and Indonesia. However, the spends are expected to converge
in the coming few years. Soap volumes are expected to grow 4% CAGR and detergent
4 December 2009 34
Hindustan Unilever
In the soaps and detergents volumes are expected to expand at 8% CAGR over coming 3-5 years. In the soaps and
categories, the mass market detergents categories, the mass market segment comprises 70-75% of volume, indicating
segment comprises 70-75% of a big opportunity to upgrade consumers to mid priced and premium products.
volume, indicating an
opportunity to upgrade COMPARISON OF PER-CAPITA SPENDS ACROSS CATEGORIES (US$)
COUNTRY LAUNDRY SKIN CARE

consumers to mid priced and
China 2.2 3.2
premium products
Indonesia 1.9 0.8
India 1.4 0.3
Malaysia 6.2 7.4
Thailand 3.9 7.7
Skin creams have a 22% penetration and rural penetration is only 17%. The per capita
spend is only 10% of China’s and 35% of Indonesia’s. Rising awareness of skin care and
aspirations to look good will drive demand for skin creams, which will grow by over 20%
CAGR in 3-5 years. Emami led the race, launching fairness creams for men, followed by
HUL and Nivea. This has resulted in 30-40% growth of this segment. Similarly, Oil of
Olay, Ponds and L’Oreal entered the premium anti-ageing and beauty creams segment,
which will increase demand at the premium end.
Product portfolio HUL’s key strength

HUL’s brands straddle HUL has a monopoly in the toilet soaps, skin creams and detergents markets. The company’s
segments and price points, strength lies in its portfolio approach, with its brands straddling segments and price points.
which gives the company a None of its competitors has such a comprehensive product portfolio. This gives HUL the
unique advantage to unique advantage to upgrade consumers as their incomes increase.
upgrade consumers as their
incomes increase DETERGENTS – THREE-PLAYER MARKET BEYOND RS60/KG SEGMENT
DETERGENT HUL BRANDS PRICE (RS/KG) KEY COMPETITOR PRICE (RS/KG)
Super Premium Surf Excel 145 Ariel, Henko 145

Premium Surf Excel Blue 119 Henko Stain Champion 107
Popular Rin 67 Tide 67
Mid-priced Sunlight/Wheelgold 50 Ujala, Tide Natural, Super Nirma 50
Sub-Popular Wheel 30 Ghari, Nirma, Fena, Mr White 30
Market Share 35% P&G 12.5%, Ghari 12%
TOILET SOAPS - HUL OFFERS MORE THAN 30 VARIANTS ACROSS PRICE POINTS
PRICE/ HUL ITC GCPL NIRMA RECKITT WIPRo
10 GM
Super Premium 4.0 Dove, Pears Fiama Di Wills

Premium 2.5 Liril, Lux Int. Vivel Di Wills Cinthol Dettol
Popular 1.3 Lux, Lifebuoy Vivel Fairglow Nima Jeeva
Sub Popular 0.7 Breeze Superia No1 Nirma Santoor
Market Share (%) 44.6 2.5 10.9 7.5 8.0 8.5
SKIN CREAMS – PREMIUM SEGMENT TO EMERGE AS MOST COMPETITIVE
SKIN CARE HUL BRANDS PRICE (RS) KEY COMPETITOR
Super Premium Ponds 450-600 Oil of Olay, L’Oreal, Nivea

Premium Lakme, Vaseline 150-300 Garnier
Popular Fair & Lovely 35-100 Emami
4 December 2009 35
Hindustan Unilever
BRANDS LOSING MARKET SHARE HUL losing market share due to competition in the mass segment
HUL has been losing market share in the toilet soaps, detergents and skin care segments
in the recent past. Market share declined by 980bp in the toilet soaps category, 280bp in
the detergents market and 600bp in the skin creams segment in the past 18 months. The
loss has been in the mass end of the market because national and regional players have
been aggressively expanding their distribution and product ranges. HUL increased prices
during the commodities boom and easier availability of competitive products dented HUL’s
market share. HUL initiated corrective action such as cutting prices across categories,
increasing adspends and revamping distribution, from which it will benefit after a lag.
However, since competitors’ direct distribution expansion is a key reason for HUL’s loss
of market share, recovering it would be a function of its own initiatives as well as competitive
intensity in the market. We believe HUL might not be able to regain market share without
denting margins.
HUL HAS LOST 980BP IN TOILET SOAPS HUL HAS LOST 280BP IN DETERGENTS HULHAS LOST 600BP IN SKIN CARE
39.1
54.3 38.2
37.9 54.0 54.6
52.1
37.4 52.7 53.1
50.3 37.8
49.6 51.4
48.2 36.2 50.2
46.3 49.4
35.0
44.5
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-08
Sep-09
Sep-08
Sep-09
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-08
Sep-09
HUL is driving consumer upgradation

We believe HUL will be one of the big beneficiaries of an expected consumer upgrade to
LEADING PREMIUM BRANDS
premium products as disposable incomes increase. In the toilet soaps market, HUL and
ITC have products that cater to all market segments. But HUL’s brands are better
established since ITC is a relatively new player. In the detergents market, Henkel and
P&G are in the mid and premium segments whereas HUL is in the economy segment as
well. In the skin care market, some niche domestic players cater to the economy segment
whereas MNCs are in the premium segment.
We believe growth in the mass market will be a key driver in the medium term. New
MNCs and Indian companies will enter the skin care market because of the growth
opportunities it offers. Even if HUL’s market share in some of these segments declines, it
would be able to retain its monopoly status in these categories because:
There is a huge gap between its own market share and that of its nearest competitor;
HUL’s share is 4x that of its nearest competitor in the toilet soaps market, its share is
2.6x that of its nearest rival in the detergents market and as much as 10x that of its
rival in the skin creams market.
Despite near term pressure, HUL will benefit, after a lag, from growth in the premium
segment.
HUL’s portfolio strategy enables it to cater to consumers at all price points.
4 December 2009 36
Hindustan Unilever
PREMIUM LAUNCHES HAVE BEEN WELL RECEIVED
Monopoly status ensures higher margins, superior return ratios

HUL has higher margins HUL has higher margins than its competitors in various product segments. We estimate
than its competitors in HUL’s toilet soap margins are more than 20% and its margins in skin creams are over
various segments 30%. Margins in the detergents market have declined over the past few years to 10-12%
from 20% due to price wars. We estimate these three product segments contribute 60%
to HUL’s topline, but more than 70% to its profitability.
Strong bargaining power Strong bargaining power with dealers and the trade has ensured HUL gets payment through
with dealers and the trade post-dated checks (PDCs). It also gets considerable credit from its suppliers. The net
has ensured HUL gets working capital has been a negative Rs19b-20b. This has ensured 110% ROCE, low capital
payment through post-dated requirement and a high payout ratio of 80-85%.
checks and considerable
credit from its suppliers
Valuation and view
HUL is losing market share in soaps, detergents and skin creams, however its monopoly in
these segments is not under threat. We expect heightened competition in core categories
of soaps, detergents and skin creams due to new launches and distribution expansion by
HUL is losing market the competition. We expect HUL to increase investment in advertising and trade push
share in soaps, detergents which can impact profit margins. We estimate HUL has 20% EBIT margins in toilet soap
and skin care, but its and detergent margins declined to 10-12% after the price war with P&G.. We estimate
monopoly in these segments 12.8% sales CAGR and 14.3% PAT CAGR over FY10-12. The stock trades at 24xFY11E
is not under threat EPS of Rs11.4 and 20.5xFY12E EPS of Rs13.3. Although HUL is trading at lowest P/E
premium to peers on a historical basis, loss of market share and increase in competitive
activity will continue to drag down stock performance. Maintain Neutral.
4 December 2009 37
Hindustan Unilever
SALES GROWTH REMAINS SLUGGISH (%) LOW INPUT COSTS BOOSTS MARGIN (%)
13.0 13.0 16.7

12.2 16.3
11.4 16.2
9.5
7.9 14.9
7.1 14.8 14.8
14.2
FY10E
FY11E
FY12E
FY10E
FY11E
FY12E
FY09*
FY09*
CY05
CY06
CY07
CY05
CY06
CY07
FOUR YEAR PAT CAGR AT 11.3% (CY06-FY10) MONOPOLY ENSURING NEGATIVE WORKING CAPITAL (RS B)
17.5 16.8
13.2 11.8
10.6
7.3 -14 -14

7.3
-18 -18 -18

-19 -20
FY10E
FY11E
FY12E
FY09*
CY05
CY06
CY07
FY10E
FY11E
FY12E
FY09*
CY05
CY06
CY07
SHARE BUYBACK BOOSTS ROE (%) HEALTHY PAYOUT RATIO SUSTAINS (%)
113
121.1 121.3
92.0 84 86
93.5 92.5
74 75 72
65
56.8 56.5
FY10E
FY11E
FY12E
FY09*
CY05
CY06
CY07
FY10E
FY11E
FY12E
FY09*
CY05
CY06
CY07
*15 month period Source: Company/MOSL
4 December 2009 38
Hindustan Unilever
Hindustan Unilever: Recent trends
Volume growth (%) declines QoQ Lower volume growth impacts FMCG sales growth (%)
21.6 21.2
8.3
19.4
10.4 18.8
8.4 6.8 18.0
3.0 2.3 2.0 1.0 12.8

11.8
10.8
-4.2
7.0
Jun-08
Jun-09
Mar-08
Mar-09
Sep-07
Dec-07
Sep-08
Dec-08
Sep-09
Jun-08
Jun-09
Mar-08
Mar-09
Sep-07
Dec-07
Sep-08
Dec-08
Sep-09
Palm oil prices: Up 50% from the bottom LAB prices (Rs/kg): Up 28% from the bottom
5,000 128
122.1
Malaysian Ringgit\Metric Tonnes
4,000 111
3,600
94.1
3,000 94
90.0
2,185
2,000 77
2,109
1,935 67.8 71.1
63.5
1,000 60
Jun-09
Jan-09
Mar-08
Dec-06
Nov-09
May-07
Oct-07
Jun-06
Jun-07
Jun-08
Jun-09
Feb-07
Feb-08
Feb-09
Aug-08
Oct-06
Oct-07
Oct-08
Oct-09
Gross margins: Boosted by low input cost Investment in A&P: At a new high (% of sales)
Gross Margins (%) - LHS
2006 2007 2008 2009
EBITDA Margins (%) - RHS
51 18
49.6 11.0 11.4 11.2 11.0
10.5 10.1
9.0
49 16 8.5
48.3
15.3
13.4
14.8 12.5
47 14 11.2 11.2
9.6 10.4 9.9
45 12
Jun-08
Jun-09
Mar-08
Mar-09
Sep-07
Dec-07
Sep-08
Dec-08
Sep-09
Mar Jun Sep Dec
4 December 2009 39
Hindustan Unilever
Y/E MARCH CY07 FY09 FY10E FY11E FY12E Y/E MARCH CY07 FY09 FY10E FY11E FY12E

Other operating income 1,937 3,622 1,876 3,038 3,425 EPS 8.0 11.5 10.2 11.4 13.3
Change (%) 13.0 48.5 -12.9 13.5 12.2 BV/Share 6.6 9.5 10.9 12.3 14.4
COGS 72,685 108,379 91,512 105,058 117,127 DPS 9.1 7.5 7.5 8.5 9.5
Gross Profit 66,006 97,636 87,945 98,565 111,271 Payout % 113.4 65.4 73.9 74.9 71.6
Operating Exp 45,281 67,235 58,699 65,619 73,117
EBIDTA 20,724 30,402 29,245 32,946 38,154 Valuation (x)
Change (%) 13.7 46.7 -3.8 12.7 15.8 P/E 34.0 23.7 26.8 24.0 20.5
Margin (%) 14.9 14.8 16.3 16.2 16.7 Cash P/E 31.5 22.0 24.8 22.2 19.1
Depreciation 1,384 1,953 1,814 2,006 2,132 EV/Sales 4.2 2.8 3.2 2.8 2.5
Int. and Fin. Charges 255 253 217 183 150 EV/EBITDA 27.8 18.9 19.6 17.2 14.7
Other Income - Recurring 2,379 2,056 1,721 1,597 1,916 P/BV 41.2 28.8 25.0 22.2 18.9
Profit before Taxes 21,464 30,251 28,936 32,353 37,788 Dividend Yield (%) 3.3 2.8 2.8 3.1 3.5
Change (%) 15.3 40.9 -4.3 11.8 16.8
Margin (%) 15.7 14.9 16.3 16.1 16.8 Return Ratios (%)
Tax 3,643 5,244 6,279 7,021 8,200 RoE 121.1 121.3 93.5 92.5 92.0
Deferred Tax 389 0 521 582 680 RoCE 160.3 138.6 128.2 129.0 128.9
Tax Rate (%) 18.8 17.3 23.5 23.5 23.5
Profit after Taxes 17,432 25,007 22,136 24,750 28,908 Working Capital Ratios
Change (%) 13.2 43.5 -11.5 11.8 16.8 Debtor (Days) 12 10 12 12 12
Margin (%) 12.7 12.4 12.5 12.3 12.8 Asset Turnover (x) 9.0 8.1 6.9 7.1 6.9
Non-rec. (Exp)/Income 1,824 -43 65 0 0
Reported PAT 19,256 24,965 22,201 24,750 28,908 Leverage Ratio
Debt/Equity (x) 0.1 0.2 0.1 0.1 0.0
Y/E MARCH CY07 FY09 FY10E FY11E FY12E

CASH FLOW STATEMENT (RS MILLION)
Share Capital 2,177 2,180 2,180 2,180 2,180
Reserves 12,215 18,435 21,497 24,568 29,247 Y/E MARCH CY07 FY09 FY10E FY11E FY12E
Net Worth 14,392 20,615 23,677 26,748 31,427 OP/(loss) before Tax 20,724 30,402 29,245 32,946 38,154
Loans 885 4,219 1,883 1,594 1,305 Int./Div. Received 2,379 2,056 1,721 1,597 1,916
Capital Employed 15,278 24,835 25,560 28,342 32,731 Interest Paid -255 -253 -217 -183 -150
Gross Block 26,691 28,817 34,817 36,817 39,317 (Incr)/Decr in WC -2,641 742 -2,012 -1,677 -2,133
Less: Accum. Depn. -11,466 -12,750 -14,563 -16,569 -18,701 Change in Deff 122 -424 -172 -184 -196
Net Fixed Assets 15,225 16,068 20,254 20,248 20,617 CF from Operations 16,686 27,278 22,286 25,478 29,390
Capital WIP 1,856 4,721 1,500 1,500 1,500
Investments 14,408 19,194 19,480 22,764 27,473 Extraordinary Items 1,824 -43 65 0 0
Deferred Charges 2,124 2,548 2,720 2,904 3,100 (Incr)/Decr in FA 2,818 4,991 2,779 2,000 2,500
(Pur)/Sale of Investments 9,731 -4,786 -286 -3,285 -4,709
Curr. Assets, L&A 32,774 40,142 44,363 50,075 56,323 CF from Invest. 14,372 163 2,558 -1,285 -2,209
Inventory 19,536 25,289 27,320 30,859 34,611
Account Receivables 4,434 5,369 5,838 6,595 7,396 Change in Networth -8,782 381 -11 0 0
Cash and Bank Balance 2,009 1,906 3,220 4,217 5,466 (Incr)/Decr in Debt 159 3,334 -2,336 -289 -289
Others 6,796 7,579 7,984 8,405 8,849 Dividend Paid -23,316 -19,123 -19,128 -21,679 -24,229
Curr. Liab. and Prov. 51,110 57,838 62,757 69,150 76,282 Others -1,280 -12,136 -2,054 -1,228 -1,413
Account Payables 28,785 33,050 37,231 40,679 44,690 CF from Fin. Activity -33,219 -27,544 -23,530 -23,196 -25,932
Provisions 6,716 8,720 8,991 10,177 11,420 Incr/Decr of Cash -2,161 -103 1,314 997 1,250
Net Current Assets -18,336 -17,696 -18,395 -19,075 -19,958 Add: Opening Balance 4,169 2,009 1,906 3,220 4,217
E: MOSL Estimates; FY09 Fifteen month ending E: MOSL Estimates; FY09 Fifteen month ending
4 December 2009 40
Consumer Monopolies
SECTOR: FMCG
Nestle India – Go for gold

Buy CMP: Rs2,615 Target Price: Rs3,083 Bloomberg: NEST IN

Nestle has a monopolistic (~85%) market share in Infant food and nutrition will grow in low double digits
the Rs15b infant foods and nutrition category. (10-12%), due to its limited use since it is used by
Nestle has brands like Cerelac and Nestum (infant infants aged three months to two years. Besides, there
food) and Lactogen and NIDO (infant and children are restrictions on advertising.
milk). Farex from Heinz is the only significant Product launches that cater to this segment and
competitor in infant foods. extend its usage can expand the category.
Nestlé's Maggi has 80% market share in the Rs13b Instant noodles grew 30% in CY08 and are tipped to
instant noodles category. Top Ramen from Indo grow by 18-20% CAGR over the next few years. Entry
Nissin is theclosest rival with 11% market share. of new players and private labels will accelerate growth
Nestle is credited with nurturing and evolving the Instant noodles consumption is 0.08% of total food
instant noodles category since last 25 years with grain consumption in India which indicates the
numerous innovations. inherent potential in this category.

Nestle is in the forefront of infant food technology. The stock trades at 28xCY10 EPS of Rs93.5 and
The company has introduced innovations like Nan2 22.9xCY11 EPS of Rs114.2. We expect premium
Milk Formula and innovations in Cerelac. valuations to sustain given strong visibility of growth
Nestle has launched Nido to cater to children over and high payout ratio of 72%. Buy.
two years old. The parent company has brands like
Gerber, Mucilon and Naturnes, which can be STOCK PERFORMANCE (ONE YEAR)
launched in India.
Nestle Sensex - Rebased
Nestle has repositioned Maggi Noodles with its 3,000
campaign Taste Bhi, Health Bhi. Maggi claims to
provide 20% of children's daily calcium and protein 2,500
needs.
Maggi noodles are available in 15 variants and two 2,000
cup packs. The product has undergone significant
change with variants like Vegetable Atta Noodles, 1,500
and Chinese variants.
Nestle has launched Maggi noodles in Rs5 packs to 1,000
increase the product penetration in small towns and Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
rural areas.

Equity Shares (m) 96.4
52-Week Range (Rs) 2,739/1,335
12/08A 43,242 5,649 58.6 31.0 44.6 53.3 119.4 169.9 5.8 28.9
1,6,12 Rel. Perf. (%) -6/33/-1
12/09E 50,907 7,374 76.5 30.5 34.2 42.8 125.1 172.8 4.9 22.9
M.Cap. (Rs b) 252.1 12/10E 61,219 9,011 93.5 22.2 28.0 33.5 119.7 164.0 4.1 18.8
M.Cap. (US$ b) 5.4 12/11E 73,255 11,010 114.2 22.2 22.9 26.5 115.7 158.5 3.4 15.4
4 December 2009 41
Nestle India
Milk Products and Nutrition

Nestle dominates the infant nutrition market
Nestle commands 85% of the Rs15b infant foods and nutrition market with brands such as
Cerelac and Nestum (infant foods) and Lactogen, Nestogen and Nan (infant milk). Farex
from Heinz is its key competitor in infant foods.
INFANT NUTRITION MARKET: MILK PRODUCTS, NUTRITION SALES MIX

NESTLE HAS ~85% SHARE
Exports
Heinz Milkmaid 5%
Yoghurt
15% 4%
10%
Baby Foods
Ghee 32%
5%
Nestle
85%
Milk
10%
Milk Pow ders
34%
MULTIPLE BRANDS/VARIANTS IN
INFANT NUTRITION Source: Company/MOSL
Baby food, nutrition account for 66% of category sales

Nestlé’s baby food and nutrition comprise 66% of the company's category sales. We
believe Nestle India has strong pricing power and superior profit margins in baby foods,
which boosts profitability of the segment relative to Nestle's average gross margins.
MILK PRODUCTS, NUTRITION: VOLUMES INCH UP
Volume Grow th (%) Realization Grow th (%)
16.3
11.7
10.2 10.8
7.4 6.1 6.3 10.1 7.5
1.3 5.4
1.6 2.7 2.9
CY03 CY04 CY05 CY06 CY07 CY08 9MCY09
India a tough market for infant food

The government's restrictions and regulations make India a tough market to operate in for
infant foods and nutrition. India’s guidelines regarding the formula for infant foods are
stricter than those of some of its neighbors and advertising in the category is banned.
Nestle India follows the following guidelines:
4 December 2009 42
Nestle India
1 Complies with the IMS Act and WHO code of marketing of breast-milk substitutes.
2 Encourages continued breast feeding for up to two years.
3 Does not advertise or promote infant milk and substitutes and infant foods to public.
4 Warns users of consequences of incorrect use of infant-milk substitutes.
5 Does not use pictures of babies and women on its infant-milk substitute packaging.
6 Does not supply free samples and food packs to patients.
7 Does not distribute educational material for these products in hospitals.
8 Follows the Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of
Production, Supply and Distribution) Act, 1992 (IMS Act).
Nestle poised for 10-12% sales growth in Infant Food and Nutrition
Infant food and nutrition Infant Food and Nutrition as a category will grow 10-12% as the use of these products is
as a category will grow by limited to children aged between three months and two years. Nestle is well placed to
10-12% and Nestle is well capture growth in this category because:
placed to capitalize
1 Nestle is at the forefront of infant-foods technology. It has introduced innovations like
on the growth
Nan2, 3 and variants of Lactogen and Nestogen.
2 Nestle has launched Nido, aimed at nutritional needs of children aged over two years.
3 Nestle has strong technological support from its parent company, which has brands
like Gerber, Mucilon and Naturnes that can be launched in India
TECHNOLOGICAL SUPPORT OF PARENT IS A COMPETITIVE ADVANTAGE FOR NESTLE INDIA
Nestle has 80% of the Instant Noodles market

Nestle India, which Nestle has 80% in the Rs13b Instant Noodles market. Top Ramen is the second largest
is credited with starting player with 11% share. Nestle India is credited with creating and nurturing the Instant
and nurturing the instant Noodles category in India 25 years ago. Instant Noodles comprise nearly 70% of India’s
noodles category in India 25 noodles market.
years ago, commands 80% of
INSTANT NOODLES: MAGGI HOLDS 80% MARKET SHARE
the market
Chings Wai Wai Private
3% 4% Labels
Top Raman 2%
11%
Maggi
80%
4 December 2009 43
Nestle India
MULTIPLE VARIANTS HELP EXPAND THE CATEGORY
Noodles are 80% of category sales for Nestle India

Noodles have enabled 25% Maggi noodles account for 80% of the prepared dishes category for Nestle India, which
category growth in the has other products like ketchup and soups in this category. Noodles have been the category
past three years growth driver in the recent past. The category has given Nestle India volume growth of
25% in the past three years and noodles have grown at more than 30%.
PREPARED DISHES SALES MIX
Soups Others
Ketchup 5% 2%
13%
Instant
Noodles
80%
PREPARED DISHES: HIGH DOUBLE DIGIT VOLUME GROWTH
Volume Grow th (%) Realization Grow th (%)

30.1
24.8
16.3 20.0
19.6
9.9
3.8
8.5 5.1
4.6 4.6
0.5 -1.0 -0.7
CY03 CY04 CY05 CY06 CY07 CY08 9MCY09
18-20% CAGR likely for instant noodles over CY08-13

Instant noodles grew 30% in Instant noodles grew 30% in CY08 and are tipped to post a CAGR of 18-20% over the
CY08 and are tipped to post next few years. Instant noodles have emerged as a viable snacking and food option in
a CAGR of 18-20% over the India. We believe the category will continue to drive high double-digit growth in the coming
next few years years because:
1 Instant noodles have higher acceptance among children today than they did 10-15
years ago. Children, who today consume the product from the age of two to three, are
likely to consume it more often than adults do.
4 December 2009 44
Nestle India
2 Noodles, as a category, evolved due to availability of options ranging from regular

flavors to Chinese, Thai and those made from wheat flour and pulses. These are
increasing the product appeal across sections of the population.
3 Manufacturers have launched five-rupee packs, which is helping to expand the category
in small towns. Besides, price increases have been minimal to keep it affordable.
4 Leading organized retailers have launched private-label instant noodles, priced at a
10-20% discount to branded products, which is likely to expand the market.
5 Instant noodles consumption is 0.08% of India’s food grain consumption, underscores
the potential in the category.
Nestle to maintain above industry average growth in instant noodles

Nestle is expected to grow We estimate Nestlé’s instant noodles volumes have been growing by more than 25% a
Maggi noodles sales above year over the past three years. Noodles are not technology intensive and brand, taste and
category growth rates flavor are key factors in this product category. We believe Nestle will grow Maggi noodles
sales above category growth rates because:
1. Nestle has strong brand equity in this market. Nestle has strong association of the
brand with children and adults
2. Nestle has repositioned Maggi noodles on the nutrition platform with the slogan Taste
Bhi Health Bhi. Maggi claims it provides children with 20% of their daily requirement
of calcium and protein
3. Maggi noodles are available in 15 variants and two cup-packs. The product has
undergone significant change with variants like vegetable atta noodles, dal atta noodles
and Chinese variants
4. Nestle launched Maggi noodles in five-rupee packs to increase product penetration
5. Nestle has been drawing on support of its parent to launch innovations. Rice Mania
was developed by the Singapore-based R&D centre of the parent company.
Monopolistic situation powers growth

Nestlé’s monopolistic Nestlé’s monopolistic position in baby foods and noodles has given it stronger volume
position in baby foods and growth and higher margins than its peers over the past five years. However over the past
noodles has given it stronger five years Nestlé’s gross margins declined by 400bp due to 1) rising input costs, 2) lower
volume growth and higher price increases, and 3) promotion of small packs. EBIDTA margins have been sustained
margins than its peers over at 20-21% due to lower adspends and strong operating leverage.
the past five years
IMPROVED PRICING POWER RESTRICTS MARGIN CONTRACTION
Gross Margins (%) EBIDTA Margin (%)
21.1 21.0 21.1

56.8
20.3 20.1 20.2
55.0
55.0 55.4 19.3
19.1
53.1
17.6 53.6 52.2 52.0
51.5
2001 2002 2003 2004 2005 2006 2007 2008 2009E
4 December 2009 45
Nestle India
MAJOR INPUT PRICES HAVE BEEN ON AN UPTREND
260 Green Coffee Milk

Wheat Flour Sugar Green Coffee, 238
Oils
210
Sugar and Green Coffee
prices are up sharply, Sugar, 158
160
vegetable oil prices
are benign Milk, 116
110 Wheat Flour, 103
Oils, 88
60
CY07 3QCY09
Nestlé’s PAT grew 20% over CY04-08, 30% in the past two years. Robust PAT growth
and increased asset turns enabled ROE to increase from 55% in CY04 increased to 120%
in CY08. FCF rose to Rs4.5b in CY08 from Rs2.5b in CY04 and DPS rose to Rs42.5/
share from Rs24.5 in CY04.
SUSTAINED PAT GROWTH (%) HIGH CASHFLOW GENERATION
PAT Grow th ROE (%) 12,500 FCFO - (Rs m - LHS) 100

44 160 DPS - RHS
30.7 31.0 119 125 120 9,500 75
32 120
103 116
30.5
We estimate 22% 17.1 6,500 50
20 80
PAT CAGR over CY09-11 59 22.2 22.2
8 61 40 3,500 25
-0.6
-4 0 500 0
2009E
2010E
2011E
2005
2006
2007
2008
CY09E
CY10E
CY11E
CY05
CY06
CY07
CY08
BETTER TERMS OF TRADE
Inventory Days Debtors Days Creditors Days

120
104 102 99 95 95 95
87
90
74
68 65 66 67 65
Nestle has negative 63
working capital due to 60
better terms of trade
30
4.2 6.9 5.4 3.7 4.5 4.5 4.5
0
CY05 CY06 CY07 CY08 CY09E CY10E CY11E
4 December 2009 46
Nestle India
Valuation and view

Nestle is the best play on the emerging growth opportunity in the processed foods segment.
We expect Maggi noodles to be a major growth driver with 20% volume CAGR for
coming few years. We expect Nestle to launch products from its parent’s nutrition portfolio,
particularly in the wellness and therapeutic segment. We estimate 16.2% volume CAGR
over CY09-11 while margin expansion would be a muted 40bp. We expect 20% sales
CAGR and 21.5% PAT CAGR over CY09-11. The stock trades at 28xCY10E EPS of
Rs93.5 and 22.9xCY11E EPS of Rs114.2. We expect premium valuations to sustain given
strong visibility of growth and high payout ratio of 72%. Buy.
SMALL-SIZED SKUS ARE KEY GROWTH DRIVERS
RS5 SKU IS 53% OF SMALL PACK SALES PREPARED DISHES ACCOUNT FOR 66% OF SMALL PACK SALES
Milk
50 Paise - Products & Beverages -
Rs 10 - 4%
16% Choclate & 10%
Nutrition -
Confec-
7%
tionery -
Re 1 - 10%
17%
Prepared
Rs 2 - 17% Dishes &
Rs 5 - 53% Cooking
Aids - 66%
4 December 2009 47
Nestle India
Nestle India: Recent trends
9MCY09 sales mix Operating leverage boosts EBITDA margins
Choclate & Gross Margins (%) (LHS) EBIDTA Margin (%) (RHS)
Confec- Milk
Products & 54 25
tionery
53.3 52.8
14.1% Nutrition 52.4
46.3%
52 22
21.1
21.6
50 19
19.5
Prepared
Dishes & 48 16
3QCY07
4QCY07
1QCY08
2QCY08
3QCY08
4QCY08
1QCY09
2QCY09
3QCY09
cooking Aids Beverages
25.5% 14.1%
Milk products and nutrition: Volumes up 10.8% Prepared dishes and cooking aids: Volumes up 19.6%
Sales Volume ('000 tons) Sales (Rs b) Sales Volume ('000 tons) Sales (Rs b)
9.6
17.5
14.8
7.7
101.3 112.9
91.5 94.4
9MCY08 9MCY09 9MCY08 9MCY09
Chocolates and confectionery: Volumes up 5.2% Beverages: Volumes decline 9%
Sales Volume ('000 tons) Sales (Rs b) Sales Volume ('000 tons) Sales (Rs b)
5.3
5.3 5.3
4.6 32.8
18.1
31.2
16.4
9MCY08 9MCY09
9MCY08 9MCY09
4 December 2009 48
Nestle India
Y/E DECEMBER 2008 2009 2010E 2011E 2012E Y/E DECEMBER 2008 2009 2010E 2011E 2012E
Domestic Sales 41,326 49,638 59,388 71,228 85,710 Basic (Rs)

Export Sales 3,384 3,056 3,791 4,305 4,988 EPS 58.6 76.5 93.5 114.2 136.0
Net Sales 43,242 50,907 61,219 73,255 88,042 Cash EPS 68.2 88.0 107.0 130.2 155.0
Excise 1,468 1,787 1,960 2,279 2,657 BV/Share 49.1 61.1 78.1 98.7 123.3
Change (%) 23.4 17.7 20.3 19.7 20.2 DPS 42.5 55.1 65.4 79.9 95.2
Total Expenditure -34,605 -39,981 -47,986 -57,177 -68,430 Payout % 72.5 72.0 70.0 70.0 70.0
EBITDA 8,637 10,926 13,234 16,078 19,611

Valuation (x)
Change (%) 24.0 26.5 21.1 21.5 22.0
P/E 44.6 34.2 28.0 22.9 19.2
Margin (%) 20.0 21.5 21.6 21.9 22.3
Cash P/E 38.4 29.7 24.4 20.1 16.9
Depreciation -924 -1,109 -1,302 -1,546 -1,835
EV/Sales 5.8 4.9 4.1 3.4 2.8
Int. and Fin. Ch. -17 -16 -16 -16 -16
EV/EBITDA 28.9 22.9 18.8 15.4 12.6
Other Inc.- Rec. 341 384 428 567 708
P/BV 53.3 42.8 33.5 26.5 21.2
PBT 8,037 10,185 12,343 15,083 18,468
Dividend Yield (%) 1.6 2.1 2.5 3.1 3.6
Change (%) 24.4 26.7 21.2 22.2 22.4
Margin (%) 18.6 20.0 20.2 20.6 21.0
Tax -2,423 -2,586 -3,066 -3,746 -4,927 Return Ratios (%)
Deferred Tax 36 -225 -267 -326 -428 RoE 119.4 125.1 119.7 115.7 110.3
Tax Rate (%) -29.7 -27.6 -27.0 -27.0 -29.0 RoCE 169.9 172.8 164.0 158.5 155.3
Adjusted PAT 5,649 7,374 9,011 11,010 13,112
Change (%) 31.0 30.5 22.2 22.2 19.1 Working Capital Ratios
Margin (%) 13.1 14.5 14.7 15.0 14.9 Debtor (Days) 4 5 5 5 5
Non-rec. (Exp)/Inc. -308 -339 -373 -410 -451 Asset Turnover (x) 9.1 8.6 8.1 7.7 7.4
Reported PAT 5,341 7,035 8,638 10,600 12,662
Leverage Ratio
Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0
Y/E DECEMBER 2008 2009 2010E 2011E 2012E
Share Capital 964 964 964 964 964

Reserves 3,769 4,931 6,562 8,555 10,929
Net Worth 4,733 5,896 7,527 9,519 11,893 CASH FLOW STATEMENT (RS MILLION)
Loans 8 8 8 8 8 Y/E DECEMBER 2008 2009 2010E 2011E 2012E

Capital Employed 4,742 5,904 7,535 9,528 11,901 OP/(loss) before Tax 7,713 9,817 11,932 14,531 17,776
Int./Div. Received 341 384 428 567 708
Gross Block 14,048 16,744 19,937 23,626 28,063
Depreciation and Amort. 924 1,109 1,302 1,546 1,835
Less: Accum. Depn. -6,519 -7,627 -8,929 -10,476 -12,311
Interest Paid -17 -16 -16 -16 -16
Net Fixed Assets 7,530 9,117 11,007 13,151 15,753
Capital WIP 1,092 1,146 1,204 1,264 1,327
(Incr)/Decr in WC 2,220 -4 872 1,386 1,379
Investments 349 1,792 2,600 3,940 5,450
Curr. Assets, L&A 7,979 7,807 9,333 11,155 13,228

Inventory 4,349 5,077 6,100 7,239 8,622 (Incr)/Decr in FA -2,605 -2,750 -3,250 -3,750 -4,500
Account Receivables 456 650 779 931 1,118 (Pur)/Sale of Investments 595 -1,443 -808 -1,340 -1,510
Cash and Bank Balance 1,937 236 249 411 417 CF from Invest. -2,010 -4,193 -4,058 -5,090 -6,010
Others 1,238 1,844 2,206 2,575 3,071

Curr. Liab. and Prov. 11,840 13,364 15,749 18,796 22,242 Dividend Paid -4,794 -6,212 -7,380 -9,017 -10,739
Account Payables 5,018 6,377 7,656 9,067 10,785 Others -415
Other Liabilities 49 63 76 91 109 CF from Fin. Activity -5,189 -6,212 -7,380 -9,017 -10,739
Provisions 6,773 6,924 8,017 9,639 11,348
Net Curr. Assets -3,860 -5,557 -6,416 -7,641 -9,014 Incr/Decr of Cash 1,559 -1,701 13 162 6
Def. Tax Liability -369 -594 -860 -1,186 -1,615 Add: Opening Balance 378 1,937 236 249 411
Appl. of Funds 4,742 5,904 7,535 9,528 11,901 Closing Balance 1,936 236 249 411 417
E: MOSL Estimates
4 December 2009 49
Consumer Monopolies
SECTOR: FMCG
Asian Paints – Colors of a leader

Neutral CMP: Rs1,673 Target Price: Rs1,942 Bloomberg: APNT IN

Asian Paints leads in Rs120b decorative paints Per capita consumption of paints in India is ~1kg (~3-
market with 45% share among organized players. 6kg in emerging economies). Besides there is growth
Kansai Nerolac, Berger Paints and ICI India are other potential from conversion of lime wash users to paints.
key players with market share of 14%, 12% and 9% Favorable demographics, changing lifestyle and rising
respectively. aspirations have increased use of branded paints.
The decorative paints segment has MNCs like Akzo Increasing affordability of homes (rising incomes, low
Nobel (ICI), Kansai (Kansai Nerolac) and Nikon. interest rates and tax incentives) is likely to give a
However, Asian Paints' strong brands and distribution significant push to new housing stock, which will boost
have enabled it to retain its position. demand for paints.
Decorative paint volumes are growing at 1.5-2x GDP Premium end market fast evolving from growing trend
growth; branded players are growing faster on of premium finishes and designer paints. This will
account of up-trading from the non-branded segment. increase realizations and accelerate growth for
branded players.

Asian Paints' products straddle segments with an We estimate 17% PAT CAGR over FY10-12. The stock
economy range offering Utsav to Royale at the top trades at 20.9xFY11E EPS of Rs80 and 17.2xFY12E
end. EPS of Rs97.1. Neutral.
The company keeps competitive pricing (4.5% STOCK PERFORMANCE (ONE YEAR)
realization CAGR over FY05-09 including mix

Asian Paints Sensex - Rebased
changes). Focus on volumes enabled it to maintain
1,800
its lead over competition.
The company has led product innovations (Royale 1,500
Play and Apex Ultima ) and technological innovations
1,200
(tinting machines, Color World and Home Solutions)
in the paints category. 900
Asian Paints has a distribution reach of 22,000
dealers and more than 12,400 tinting machines (2x 600
the nearest competitor).

YEAR NET SALES ADJ.PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
52-Week Range 1,734/681
3/09A 54,632 4,014 41.8 -3.9 40.0 13.3 33.4 48.5 2.9 24.0
1,6,12 Rel. Perf. (%) -8/36/4
3/10E 62,3 60 6,849 71.4 70.7 23.4 10.4 44.2 59.9 2.6 14.7
M.Cap. (Rs b) 160.5 3/11E 72,604 7,670 80.0 12.0 20.9 8.3 39.5 57.4 2.2 12.8
M.Cap. (US$ b) 3.5 3/12E 84,720 9,317 97.1 21.5 17.2 6.7 38.7 57.3 1.8 10.6
4 December 2009 50
Asian Paints
BRANDS ACROSS PRICE POINTS Asian Paints holds 45% of the decorative paints market
Asian Paints has about 45% market share in the Rs120b decorative paints industry and
the second biggest player, Kansai Nerolac, has about 15% share. Berger and ICI have
12% and 9% market share respectively.
45% MARKET SHARE IN THE ORGANIZED DECORATIVE PAINTS SEGMENT
Others
20%
Rs9/sqft
Asian
Paints
ICI 45%
9%
Beger Nerolac
12% 14%
Rs11/sqft Source: Company/MOSL
Asian Paints’ brand-building initiatives have boosted its growth and expanded the category.
It has played a significant role in de-commoditizing the product segment and consumer
involvement in making the buying decision has increased over the past decade. Thus a
market, which was painter/contractor-led has now become a virtual B-I-Y (Buy It Yourself)
segment. Asian Paints has led innovations in the category by launching Royale Play and
Apex Ultima, in sync with consumers’ changing aspirations. Consequently growth at the
premium end (emulsion/enamel) has outpaced that of the low-end category, signaling a
rising trend in consumer up-trading.
Rs15/sqft
RANGE OF DECORATIVE PAINTS PORTFOLIO
BRANDS POSITIONING *PRICE/SQFT
Exteriors ACE, ACE Superior Economy 8

Apex Mid-Range 9
Apex Ultima,Apex Duracast Premium 11
Interior Emulsion Royale Play Designer Premium 35-55
Royale Premium 16
Asian Paints Interior Wall Finish Mid-Range 13
Enamel Utsav Enamel Economy 9
Apcolite, Premium 14
Premium Semi Gloss enamel Premium 15
Rs16/sqft onwards Distemper Utsav Economy 9
Tractor Mid-Range 10
*Including labor and other consumables Source: Company/MOSL
4 December 2009 51
Asian Paints
Decorative paints: Set to ride the consumerism wave

Rising per capita income, We believe the decorative paints category (Rs120b) in India holds immense potential in
aspirations and lifestyle terms of increasing penetration of branded paints and up-trading consumers from economy
changes are expected to to premium segments. Per-capita consumption of paints in India is about 1.2kg against 3-
result in consumers in 6kg in emerging economies and the potential to convert non-users/limestone users to paint
moving from unbranded to users is huge. We believe rising per-capita income, especially at the bottom of the pyramid,
branded paints aspirations and lifestyle changes will result in more consumers in the lower middle class
moving from unbranded to branded paints.
OPPORTUNITY TO UPGRADE: COST OF ASIAN PAINTS UTSAV V/S UNORGANIZED (LIMESTONE)
Rs3/sqft Rs10/sqft Rs15/sqft
The paints segment can benefit from a growing trend of construction of affordable homes.
Improving affordability can spur property demand and paints are likely to be a natural
beneficiary.
EASIER AVAILABILITY OF FINANCE STRENGTHENS DEMAND FOR HOMES (RS B)
3,200
~20% CAGR in Hom e Loans
2,400
1,600
800
0
2005 2006 2007 2008 2009
Over the past decade, paint Despite being a relatively price-elastic category major players have raised average prices
demand has averaged 1.5-2x without affecting volume growth. Over the past decade paint demand has averaged
GDP growth and the trend is 1.5-2x GDP growth and we expect the trend to strengthen in the next five years. Besides
expected to strengthen in the increasing demand at the bottom of the pyramid (distemper), we expect the paint category
next five years to also benefit from higher growth in the premium segment.
4 December 2009 52
Asian Paints
PAINT DEMAND GROWTH VOLUME HAS AVERAGED 1.5-2X GDP GROWTH
Real GDP Grow th Paint Industry Grow th
15.0 16.0
14.0 14.0 15.0
13.0 11.7
10.0
9.0 9.5 9.1
8.0 8.5 8.1
7.8 7.0 7.5 8.7
6.6 6.4 5.2 5.8
3.8
5.0
FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
Asian Paints’ ability to Asian Paints well-placed to maintain competitive edge

straddle price points enables Straddles price points: Asian Paints’ products range from Utsav at the bottom end to
it to fulfill diverse consumer Royale Play and designer finishes at the top end. The ability to straddle price points (Rs5/
needs and retain consumers sq ft to Rs125/sq ft) enables the company to fulfill diverse consumer needs and retain
as they upgrade to emulsions consumers as they upgrade to emulsions.
Asian Paints’ distribution Wide distribution with tinting machine: Asian Paints’ distribution network is more
network is more than twice than twice as large as its nearest competitor’s. It has more than 22,000 dealers and more
as large as its nearest than 12,400 Color World outlets with tinting machines.
competitor’s
DISTRIBUTION REACH/TECHNOLOGICAL INNOVATIONS DEALER NETWORK TWICE AS LARGE AS NEROLAC’S
Dealership (nos) Color World (nos) Dealership (nos)

(%) Of Outlets 22,000
22,000
56
17,000
56% of Asian Paints
14,500
dealers have Color World 12,400 11,000
32
(tinting machines)
14 5,500
2,000
2001 2005 2009 Asian Paints Nerolac
In the face of competition Product innovations built brand loyalty: Asian Paints has been at the forefront of new
from MNCs like Kansai and concepts and innovations in the decorative paints market. In the face of competition from
ICI, Asian Paints introduced MNCs like Kansai and ICI, Asian Paints introduced innovations such as:
path-breaking innovations Tinting machines offering consumers wide color options.
Asian Paints Home Solutions introduced the service concept with a complete solution
for painting.
Exterior paint (Apex) in a market dominated by cement paints for external use.
Concepts like Wall Fashion and Royale Play, which make painting a new experience
Samplers, which let consumers to feel a product before committing money for painting.
4 December 2009 53
Asian Paints
ASIAN PAINTS DESIGNER COLLECTION HAS KEPT PACE WITH CHANGING ASPIRATIONS OF CONSUMERS
Monopoly ensures steady growth, healthy returns ratio

The monopolistic situation The monopolistic situation has helped Asian Paints to grow ahead of the market and gain
has helped Asian Paints to from gradual up-trading by middle-class consumers. Domestic sales reported a 19% CAGR
grow ahead of the market over FY04-09, backed by volume CAGR of 15%, beating the industry average of 11-12%.
and gain from gradual Realizations increased by a mere 4% including gains from an improved product mix.
upgrades by middle-class
PRICE INCREASES HAVE BEEN MINIMAL (%) …GROSS MARGINS MAINTAINED AT 40-42%
consumers
Volume grow th Realisation grow th
44.1
42.8 43.9
3.2 4.0 43.7
3.3 9.8
4.8 3 41.7
17.8 17.5
13.8 13.4 14.0 13.0 14 41.1
-4.0 38.9
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Capacity ramp-up plans over Asian Paints’ stable gross-margin band of 40-42% enables it to offer competitive prices
the next few years indicate and keeps at bay competitors and new entrants. This strategy has enabled steady consumer
Asian Paints’ management’s upgrading and long-term production planning. Asian Paints is setting up a facility in Rohtak
confidence in sustaining and contemplating another plant in Maharashtra. Capacity ramp-up plans over the next
volume growth few years indicates the management’s confidence in sustaining volume growth.
HEALTHY ROE OF 35-40% (%)... ...BACKED BY ROBUST PAT GROWTH (%)
44.2 90
42.5 70.7
39.5 65
45.7
36.8 38.7 40 29.5

21.5 21.5
15
34.2 -3.9 12.0
33.4
-10
FY10E
FY11E
FY12E
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY06
FY07
FY08
FY09
4 December 2009 54
Asian Paints
PAYOUT RATIO OF ~40% A DIVIDEND YIELD OF ~2%
56.3
2.9
2.3
2.1
43.6 42.7
41.8 42.0 1.2 1.2

42.0
39.0 0.7 0.8
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
Monopolistic business Tight control over overheads, high utilization of manufacturing facilities and steady growth
status, strong financials, ensured an increase in ROCE to 52% from 41% over the past five years. ROE increased
steady growth and investor to 41% from 31% and the dividend payout ratio has been steady at 40%. Monopolistic
friendly policies have business status, strong financials, steady growth and investor friendly policies have ensured
ensured premium valuations premium valuations for the stock relative to benchmark indices.
for Asian Paints relative to
benchmark indices
Valuation and view
Asian Paints continues to be a strong play on rising consumerism and housing demand in
India. We estimate 14% volume CAGR over FY10-12. Historically, paint sales volumes
increased by 1.6-1.8x GDP growth. Although EBIDTA margins seem to have structurally
moved up from 15-16% to 17-18%, we estimate 12.5% PAT growth in FY11 due to 70bp
margin decline (higher input costs and overheads on the Rohtak facility). Long term prospects
look encouraging; low PAT growth (estimates of 12%) in FY11 can result in near term
underperformance. We estimate 17% PAT CAGR over FY10-12. The stock trades at
20.9xFY11E EPS of Rs80 and 17.2xFY12E EPS of Rs97.1. Neutral.
4 December 2009 55
Asian Paints
Asian Paints: Recent trends
Sales growth primarily volume led (%) ~12% price cut impacts sales growth
Volume Grow th Realization Grow th Sales (Rs m) - LHS Grow th (%) - RHS
20,000
14.5
12.1 29.3 30.2
13.2 15,000 25.9
23.4 25.4
1.1
20.0 19.0 5.5
10,000 17.5
13.0 18.2 16.8
11.5 17.5
9.8
5,000
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-08
Sep-09
Jun-08
Dec-08
Mar-09
Jun-09
Sep-08
Sep-09
Low input costs boost margins All time high EBITDA and EBITDA margin
Raw Material Cost (%) EBITDA Margin (%) EBITDA (Rs m) - LHS EBITDA Margins (%) - RHS
3,700
63.9 18.7
18.9 18.7
18.9
16.0 15.8 61.3 2,900 16.0
61.1 14.4
14.1 60.5 14.2
13.7 12.6 13.9
12.6
2,100
13.9 14.2 12.6 8.3
58.5 58.7 58.7 58.2 56.8
1,300
56.1
8.3
500
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-07
Sep-08
Sep-09
Turpentine oil prices rule easy (Rs/KL) Titanium dioxide prices sluggish (Index)
58,000 120
53,700
46,000 111
110
34,000
25,200 100
22,000 101
25,100 98
10,000 90
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Jan-06
Jul-06
Oct-06
Jan-07
Jul-07
Oct-07
Jan-08
Jul-08
Oct-08
Jan-09
Jul-09
Oct-09
Apr-06
Apr-07
Apr-08
Apr-09
4 December 2009 56
Asian Paints
Y/E MARCH FY08 FY09 FY10E FY11E FY12E Y/E MARCH FY08 FY09 FY10E FY11E FY12E

Change (%) 20.1 24.0 14.1 16.4 16.7 EPS 43.5 41.8 71.4 80.0 97.1
Raw Materials 25776 33706 35766 41852 48732 Cash EPS 49.7 49.6 80.8 90.8 108.7
Gross Profit 18296 20926 26594 30752 35987 BV/Share 102.4 125.4 161.6 202.3 250.9
Margin (%) 41.5 38.3 42.6 42.4 42.5 DPS 19.9 20.5 35.1 39.3 48.5
Operating Expenses 11690 14232 15694 18530 21356 Payout % 39.0 41.8 42.0 42.0 42.7
EBITDA 6,606 6,694 10,900 12,222 14,631 Valuation (x)

Change (%) 38.2 1.3 62.8 12.1 19.7 P/E 38.4 40.0 23.4 20.9 17.2
Margin (%) 15.0 12.3 17.5 16.8 17.3 Cash P/E 33.7 33.7 20.7 18.4 15.4
Depreciation 592 744 897 1,040 1,106 EV/Sales 3.6 2.9 2.6 2.2 1.8
Other Income 596 517 654 768 939 P/BV 16.3 13.3 10.4 8.3 6.7
Tax 1,928 1,811 2,995 3,511 4,284
Tax Rate (%) 31.8 31.8 31.2 31.7 32.0 Return Ratios (%)
RoE 42.5 33.4 44.2 39.5 38.7
PBT Before Minority 4365 4230 7105 7993 9710
RoCE 57.6 48.5 59.9 57.4 57.3
Minority Interest 189 216 256 323 393
Adjusted PAT 4,176 4,014 6,849 7,670 9,317
Working Capital Ratios
Change (%) 45.7 -3.9 70.7 12.0 21.5
Debtor (Days) 10 10 11 11 11
Margin (%) 9.5 7.3 11.0 10.6 11.0
Asset Turnover (x) 4.8 3.8 4.0 3.7 4.1
Exceptional/Prior Period inc -84 -35 626 0 0
Reported PAT 4,092 3,978 7,475 7,670 9,317
Leverage Ratio
Debt/Equity (x) 0.3 0.3 0.2 0.1 0.1
Y/E MARCH FY08 FY09 FY10E FY11E FY12E
Share Capital 959 959 959 959 959

Reserves 8,865 11,073 14,543 18,444 23,106
Net Worth 9,824 12,032 15,502 19,403 24,066
Loans 2,752 3,086 3,500 2,750 2,050 Y/E MARCH FY08 FY09 FY10E FY11E FY12E
Deferred Liability 391 533 760 959 1,245 OP/(loss) before Tax 6,606 6,694 10,900 12,222 14,631
Minority Interest 574 756 1,012 1,334 1,728 Int./Div. Received 596 517 654 768 939
Gross Block 12,112 14,614 16,614 19,614 20,864
(Incr)/Decr in WC 1,021 -1,656 -1,195 -862 -1,017
Less: Accum. Depn. 6,337 6,484 7,381 8,421 9,526
Net Fixed Assets 5,776 8,130 9,233 11,194 11,338
Capital WIP 1,142 921 2,500 500 2,250
Incr in FA -2,285 -2,281 -3,579 -1,000 -3,000
Investments 2,767 784 2,029 3,903 5,737
Pur of Investments -839 1,983 -1,245 -1,875 -1,834
Curr. Assets, L&A 14,936 17,987 21,299 25,341 29,022 CF from Invest. -3,124 -299 -4,824 -2,875 -4,834
Inventory 7,140 7,690 10,251 11,736 13,694
Account Receivables 4,603 5,719 6,834 7,957 9,284 Issue of Shares 0 0 0 0 0
Cash and Bank Balance 1,107 2,104 1,350 2,326 2,222 Incr in Debt 310 -334 -414 750 700
Curr. Liab. and Prov. 11,523 11,921 14,793 16,997 19,764 Min Int/ Dt 96 324 483 522 679
Account Payables 5,720 5,542 6,859 8,026 9,346 Others -1,403 -208 332 -2,022 -2,079
Other Liabilities 4,140 4,570 5,124 5,799 6,568 CF from Fin. Activity -2,905 -2,185 -2,964 -4,519 -5,355
Provisions 1,664 1,810 2,810 3,171 3,851
Net Current Assets 3,413 6,066 6,507 8,345 9,258 Incr/Decr of Cash 53 997 -753 976 -104
Godwill on Cons. 444 506 506 506 506 Add: Opening Balance 1,054 1,107 2,104 1,350 2,326
E: MOSL Estimates
4 December 2009 57
Consumer Monopolies
SECTOR: FMCG
United Spirits – High on acquisitions

Buy CMP: Rs1,350 Target Price: Rs1,548 Bloomberg: UNSP IN

United Spirits has 55% market share in the 159m Country liquor accounts for 60% of spirit sales; we
case IMFL market in India. Seagram and Radico expect this ratio to decline as consumers upgrade.
have 9% and 8% market share respectively. Per capita consumption is 0.9lts; the number of
United Spirits has 19 brands that sell more than a persons in the legal drinking age will increase by 150m
million cases each year. The company has leadership in current decade (2001-2011).
in all the segments (whisky, vodka, brandy and gin) Social taboo attached to drinking is fading, leading to
except rum (Mohan Maekin). higher consumption among the educated. This is
United Spirits has brands like Royal Challenge, pushing up sales of segments like vodka and premium
Signature, Antiquity, Director's Special, Bagpiper, Scotches and whisky.
McDowell No 1 and Romanov. It also launched Liquor advertising in not allowed in India, which makes
Scotch brands like Whyte and Mackay, Isle of Jura it extremely difficult to establish brands.
and Dalmore. IMFL industry volumes are expected to increase at
11-12% excluding the upside from regulatory changes.

United Spirits acquired Shaw Wallace, Herbertsons We estimate 44% consolidated PAT CAGR over
and Triumph Distilleries to assume market FY10-12. The stock trades at 26.4xFY11E EPS of
leadership. It is merging Balaji Distilleries, which will Rs51.1 and 21.8xFY12E EPS of Rs61.9. Buy.
consolidate its position in South India. STOCK PERFORMANCE (ONE YEAR)
United Spirits is part of the UB Group, India's largest United Spirits Sensex - Rebased
alcoholic beverages group.This provides bargaining 2,000
power with distributors and bottlers.
United Spirits has launched tertapacks and blister 1,600
packs of whisky. Innovative products include Pinky
Vodka, Antiquity Blue and low-calorie vodka. 1,200
United Spirits gains from surrogate advertising
through its IPL team Royal Challengers and football 800
club (East Bengal).
United Spirits owns Whyte and Mackay, which 400
ensures Scotch for IMFL blending. Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

YEAR NET SALES ADJ.PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
52-Week Range 1,415/426
03/09A 54,681 1,875 23.0 24.9 58.7 5.7 7.8 9.9 3.2 20.2
1,6,12 Rel. Perf. (%) 21/32/-38
03/10E 63,869 3,603 30.7 33.7 43.9 3.9 8.3 11.9 3.0 18.2
M.Cap. (Rs b) 159.0 03/11E 73,203 5,990 51.1 66.3 26.4 3.5 12.3 14.4 2.6 14.8
M.Cap. (US$ b) 3.4 03/12E 83,933 7,257 61.9 21.1 21.8 3.1 13.1 15.6 2.3 13.0
4 December 2009 58
United Spirits
LEADING WHISKY BRANDS United Spirits leads the IMFL segment

United Spirits commands 55% of India’s IMFL market, which consists of 159m cases.
Seagram has 9% market share and Radico Khaitan has 8% in this market. United Spirits
has 19 brands, which sell more than a million cases every year. The company leads in
virtually all the segments— whisky, vodka, brandy and gin— though Mohan Maekins leads
in the rum segment. United Spirits’ brands comprise Royal Challenge, Signature,
Antiquity, Director’s Special, Bagpiper, McDowell No1 and Romanov. The McDowell
No1 umbrella brand sold 31.5m cases of whisky, rum and brandy in FY09. Bagpiper is
India’s largest whisky, which sold over 16m cases in FY09. USL's top four brands have
retail sales value exceeding US$2.5b.
USL HAS ~55% MARKET SHARE; ~6X NEXT BIGGEST PLAYER
Others, 12
Diageo, 1
Mohan Meakin, 5
Jagatjit, 5
BDA, 5
USL, 55
Radico, 9
Seagrams, 8
UNITED SPIRITS HAS BRANDS ACROSS IMFL SEGMENTS

PRODUCT SEGMENT BRANDS
Whisky
Scotch/Super Premium Whisky Antiquity Blue and Rare, Whyte and Mackay
Premium Royal Challenge and Signature, DSP Black Label
Regular/Low End McDowell No1, Bagpiper, Green label, Director’s special
Rum McDowell No1 Celebration, Old Cask
Brandy McDowell No1, John Exshaw, Golconda, Honey Bee
Gin Blue Riband, Carew
Vodka White Mischeif, Alcazar, Romanov
Note: Brands in blue are millionaire brands Source: Company/MOSL
LEADING BRANDS IN VODKA IMFL market a huge growth opportunity

Country liquor accounts for 60% of spirit sales. We expect a gradual ban on country liquor
across states. Liquor advertising is not allowed in India. Even if 25% of the country liquor
market is added to the IMFL market, the size of IMFL will increase by 40%. IMFL
volumes are growing at 11-12% v/s 5-6% volume growth for country liquor. We believe
that increase in affordability will further boost IMFL demand.
Besides, there are restrictions on distribution, inter-state movement of spirits and high
taxes. Strong entry barriers make the market more lucrative for existing players. Although
we do not expect big changes in distribution, we expect an increase in distribution outlets
and rationalization of taxes in the coming years. This would increase liquor demand.
4 December 2009 59
United Spirits
IMFL- STEADY LONG TERM GROWTH POTENTIAL
Spirits Industry
USL: PREMIUM WHISKY BRANDS 384m cases
IMFL 159m cases Country liquor 225m cases

Expected growth – 11-12% Expected growth – 5-6%
Whisky Rum Brandy Vodka Gin

IMFL share 58% IMFL share 20% IMFL share 17% IMFL share 3.5% IMFL share 2%
Exp growth -15% Exp growth 6% Exp growth 15% Exp growth 20% Exp growth 4%
Major Brands Major Brands Major Brands Major Brands Major Brands
McDowell No 1 Bacardi McDowell No 1 Smirnoff Blue Riband
Royal Stag Old Monk Honey Bee Romanov Carew
8PM McDowell John Exshaw White Mischief Hayward’s
Bagpiper Celebration Old Admiral Magic Moments Aristocrat
Director’s Special Old Admiral Golconda Alcazar Contessa
Per capita consumption is only 0.9 liter and the number of people in the legally permissible
age range will increase by 150m in current decade. The social stigma attached to drinking
is fading, leading to higher consumption among the educated. This is enhancing sales of
segments such as vodka, premium Scotches and whisky. IMFL volumes are expected to
grow 11-12% excluding the upside from favorable regulatory changes. State taxes account
for 70% of the MRP of liquor and a rationalization will increase demand significantly.
LOW PER CAPITA CONSUMPTION, YOUNG POPULATION POSITIVE FOR IMFL
>60 years 20-59 years 0-19 years

(LITERS) 9.5
8.5 (POPULATION IN M)
2011 94.2 636 447

4.6 4.7 4.5 5.0
0.9
2001 70.8 485 455
UK
India
Thailand
Russia
Brazil
USA
World
0% 20% 40% 60% 80% 100%
4 December 2009 60
United Spirits
UNSP: RECENT INNOVATIONS United Spirits' strategy to maintain monopolistic position

United Spirits has emerged a monopoly due to industry consolidation and acquisitions. The
company is undertaking the following initiatives to maintain its competitive edge:
1 United Spirits acquired Shaw Wallace, Herbertsons and Triumph Distillers to assume
market leadership. It is merging with Balaji Dist will consolidate its position in south
India. United Spirits is part of the UB Group, which is the largest alcoholic beverage
group. This provides bargaining power with distributors and bottlers.
CONSOLIDATION OF SPIRITS BUSINESS OF UB GROUP
McDowell & Co
Demerger of Investments
into McDowell Holdings
Merged Companies
Shaw Wallace and Company

Phipson Distillery Ltd
Herbertsons Ltd
Triumph Distillers and Vintners
Baramati Grape Inds
United Distillers
McDowell International Brands
United Spirits
United Spirits Ltd
Source: Company/Motilal Oswal Securities
2 United Spirits launched packaging innovations like small tetra-packs and blister packs
for whisky. The company’s innovative products include Pinky Vodka, Antiquity Blue
and low-calorie vodka. The company has launched Blue Riband Gin in flavors and a
diet version of McDowell No1.
3 United Spirits does surrogate advertising through its IPL team Royal Challengers and
football club, East Bengal. While the IPL team is named after one of its key brands,
the football team retains its original name.
4 United Spirits acquired Whyte and Mackay, which is among the top five Scotch whisky
companies in the world. This provides the company with a Scotch inventory of 108m
liters and brands like Isle of Jura, Dalmore and Whyte and Mackay.
ROYAL CHALLENGE BANGLORE IPL TEAM ENABLES SURROGATE ADVERTISING
4 December 2009 61
United Spirits
Monopoly has enabled margin expansion

United Spirits has United Spirits has emerged as one of the strongest monopolies in the Indian consumer
emerged as one of the space. The monopolistic situation has been achieved by consolidation in the Indian IMFL
strongest consumer industry. Besides, state regulations that impose 1) high duties on imports 2)restrictions and
monopolies, achieved by duties on movement of liquor, and 3) distribution controls have helped United Spirits to
consolidation in the Indian emerge as a monopoly. This situation has enabled the company to save costs and improve
IMFL industry profitability on the following fronts:
UNITED SPIRITS: MARKET SHARE 1. Unwarranted promotional campaigns and undercutting has given way to more rational
DOUBLES AFTER ACQUISITION (%) pricing and a competitive environment.
55 2. A strong market position enables United Spirits to cut overhead costs like freight and
31
achieve economies of scale in production and distribution.
3. The monopolistic situation has increased EBIDTA margins to 18.8% in FY08 from
2004-Pre 2009-Post 5.5% in FY05.
Acquisition Acquisition 4. United Spirits has emerged as India’s largest consumer of glass bottles, cartons and
ENA, providing savings in procurement costs.
VOLUMES SET TO INCREASE MARGINS TO MOVE UP
Sales Volume (m Cases) Gross Margin % LHS

150 Volume Grow th EBITDA Margin (%) - RHS
19.6
18.8 16.7
125 15.7 15.3 18.4 18.7
14.6 15.0 15.0
Sales volumes are
48.7 50.1
expected to increase 11.1
100 47.6
by 15% CAGR 45.4
10.2 45.6
43.5 43.8
75
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
50
FY 08 FY 09 FY 10E FY11E FY 12E
ADVERTISING COST GOING DOWN (%) HIGH BARGAINING POWER IN PACKAGING
Advertising Cost Staff Costs Packaging Cost (per case)

10.9 % of Sales
10.7
9.5 25.2 25.3
8.1 8.5
Lower input cost 7.9 23.1
7.8 7.7 22.8 22.8
and advertising will 7.2 22.5 22.4
6.6 179.1
increase EBITDA margins 6.3 6.0 173.7
169.5 169.5
by 180bp over FY10-12
6.1 6.2
157.9 161.0 163.0
FY10E
FY11E
FY12E
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY06
FY07
FY08
FY09
4 December 2009 62
United Spirits
USL CONSOLIDATED FINANCIALS CALCULATIONS (RS M)
FY10E FY11E FY12E
USL Standalone
Sales 47,982 56,423 66,400
USL Standalone profits EBITDA 8,034 10,396 12,394
will increase by 32% CAGR EBITDA Margin (%) 16.7 18.4 18.7
over FY10-12 Interest 2,774 2,972 2,973
PAT 3,485 4,871 6,066
Adj Share Capital 1,172 1,172 1,173
EPS (Rs) 29.7 41.6 51.7
Whyte & Mackay (inc USL Holdings)
Sales 13,772 13,870 13,955
EBITDA 4,312 4,247 4,246
EBITDA Margin (%) 31.3 30.6 30.4
Interest 2,432 2,355 2,278
Depreciation 367 355 344
Tax 530 538 601
Tax Rate (%) 35.0 35.0 37.0
PAT 984 999 1,023
Whyte & Mackay Int in USL Holding 532 0 0
will contribute Rs8.5 to Adj PAT 585 999 1,023
consolidated EPS by FY11 Adj Share Capital 1,172 1,172 1,173
EPS (Rs) 5.0 8.5 8.7
GBP/Re 76.0 73.6 71.2
USL - Consolidated
Sales 63,869 73,203 83,933
EBITDA 11,974 14,670 16,699
EBITDA Margin (%) 18.7 20.0 19.9
PAT 3,603 5,990 7,257
Adj Share Capital 1,172 1,172 1,173
EPS (Rs) 30.7 51.1 61.9
USL HOLDINGS DEBT REDUCTION (USD)
Debt (April 2009) 620

Debt Repayment 530
Treasury Stock Sale 190
QIP 240
Internal Accruals 20
Consolidated debt Domestic Debt 80
has decline to Rs52b Balance Debt 90
due to treasury stock
sale and QIP CONSOLIDATED DEBT
RS B INTEREST RATE (%)
Whyte & Mackay 30.0 7-8

Standalone 21.9 11-11.5
Total 51.9
Valuation and view

United Spirits is the best bet on demand for spirits in India. Huge scale (volumes to cross
100m cases in FY10), 19 millionaire brands across price points, distribution advantages
and assured Scotch supply from Whyte and Mackay make it a sustainable monopoly. The
worst seems to be over given capital infusion of Rs25b; sale of 8.4m treasury shares will
enable further debt reduction. We estimate 120bp margin expansion over FY10-12, which
would translate into 44% PAT CAGR on a consolidated basis. Standalone volumes and
PAT will grow at 15% and 32% respectively over FY10-12. The stock trades at 26.4xFY11E
EPS of Rs51.1 and 21.8xFY12E EPS of Rs61.9. Buy.
4 December 2009 63
United Spirits
United Spirits: Recent trends
Quarterly trend in domestic IMFL sales (m cases) High input costs impact margins
FY08 FY09 FY10 Gross Margin (%) EBITDA Margin (%)
25.2 54 25
24.0 52.0
22.9 51.0
21.5 22.1 21.2
20.6 20.0 48.5 19.6
18.1 49 20
17.9 17.8 21.3 17.9 16.9
19.2 48.6 46
17.8 46.7 45.4
44 42.2 15
16.0
38.9
39 10
10.3
34 5
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
1Q 2Q 3Q 4Q
ENA prices have stabilised at Rs150/case Adspend is falling (% of sales)
FY08 FY09 FY10E FY08 FY09 FY10

11.4
10.7
150 150 156 10.0
148 9.2 8.9 9.2
8.8
147
7.7
138 7.1
133
5.4
111
110 104
101 103
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Whyte and Mckay Scotch inventory value rising Geographical sales mix (%)
Inventory (m litre) Value (m GBP) CSD, Others, North,

600 Value/liter (GBP) 6
4.9 5.0 Andhra 5.3 1.8 18.5
4.4 4.6 Pradesh,
450 3.9 5
3.3 18.9
300 3
East, 13.2
150 2
0 0
Mar-08
Dec-08
Mar-09
Sep-08
Sep-09
Acquisition
Rest of
On
South, 28.6 West, 13.7
4 December 2009 64
United Spirits
INCOME STATEMENT (CONSOLIDATED) (RS MILLION) RATIOS (CONSOLIDATED)

Other Operating Inc 3,559 4,139 3,917 4,503 5,180 EPS (Ex. Treasury stock) 18.4 23.0 30.7 51.1 61.9
Change (%) 56.2 18.2 16.8 14.6 14.7 BV/Share 257.0 238.8 344.7 388.3 440.3
Total Expenditure -36,552 -44,827 -51,896 -58,533 -67,234 DPS 1.5 1.5 2.5 3.5 5.0
Payout % 8.2 6.5 8.1 6.8 8.1
EBITDA 9,723 9,853 11,974 14,670 16,699
Change (%) 123.1 1.3 21.5 22.5 13.8 Valuation (x)
Margin (%) 21.0 18.0 18.7 20.0 19.9 P/E 73.4 58.7 43.9 26.4 21.8
Depreciation -741 -926 -893 -904 -926 Cash P/E 50.1 48.3 37.7 24.6 20.7
Int. and Fin. Charges -5,448 -7,176 -5,738 -5,327 -5,418 EV/Sales 3.3 3.2 3.0 2.6 2.3
Other Income - Recurring 1,063 1,038 756 798 853 EV/EBITDA 15.9 20.2 18.2 14.8 13.0
Profit before Taxes 4,598 2,790 6,099 9,238 11,208 P/BV 5.3 5.7 3.9 3.5 3.1
Tax 2,661 916 2,496 3,247 3,951 Dividend Yield (%) 0.1 0.1 0.2 0.3 0.4
Tax Rate (%) 57.9 32.8 40.9 35.2 35.3
Adjusted PAT 1,645 1,875 3,603 5,990 7,257 Return Ratios (%)
Change (%) -35.1 14.0 92.1 66.3 21.1 RoE 7.2 7.8 8.3 12.3 13.1
Margin (%) 3.6 3.4 5.6 8.2 8.6 RoCE 11.3 9.9 11.9 14.4 15.6
Non-rec. (Exp)/Income 1,076 -5,959 700 0 0
Reported PAT 2,721 -4,084 4,303 5,990 7,257 Working Capital Ratios
Debtor (Days) 66 59 65 65 65
BALANCE SHEET (CONSOLIDATED) (RS MILLION) Asset Turnover (x) 0.5 0.5 0.6 0.7 0.8
Y/E MARCH 2008 2009 2010E 2011E 2012E

Leverage Ratio
Share Capital 886 1,002 1,256 1,256 1,256
Debt/Equity (x) 2.9 3.3 1.3 1.1 0.9
Reserves 19,887 22,854 42,039 47,515 54,037
Minority Interest 1,992 63 0 0 0
CASH FLOW STATEMENT (CONSOLIDATED) (RS MILLION)
Net Worth 22,765 23,919 43,295 48,771 55,293
Y/E MARCH 2008 2009 2010E 2011E 2012E
Loans 66,041 78,036 55,939 52,153 51,455
Capital Employed 88,825 101,037 99,253 100,943 106,748 OP/(loss) before Tax 8,982 8,927 11,081 13,766 15,773
Int./Div. Received 1,063 1,038 756 798 853
Gross Block 16,985 22,919 23,919 24,919 25,919 Depreciation and Amort. 741 926 893 904 926
Less: Accum. Depn. -6,357 -6,650 -7,543 -8,446 -9,372 Interest Paid -5,448 -7,176 -5,738 -5,327 -5,418
Net Fixed Assets 10,628 16,269 16,377 16,473 16,547 Direct Taxes Paid -2,661 -916 -2,496 -3,247 -3,951
Capital WIP 534 288 500 500 500 Incr/Decr in WC -10,788 -3,677 -4,244 -4,143 -6,371
Goodwill 53,260 44,738 44,738 44,738 44,738 CF from Operations -8,110 -876 251 2,751 1,812
Investments 2,119 9,501 1,362 1,362 1,362
Foregin Monetary term 0 5,598 5,598 5,598 5,598 Extraordinary Items 1,076 -5,959 700 0 0
(Incr)/Decr in FA -48,649 2,200 -1,212 -1,000 -1,000
Curr. Assets, L&A 34,478 40,372 46,877 50,261 58,050 (Pur)/Sale of Investments -75 -12,980 8,140 0 0
Inventory 14,850 17,458 20,648 23,666 28,744 Msc Exp -967 -234 2 0 0
Account Receivables 8,370 8,880 11,374 13,036 14,947 CF from Invest. -48,616 -16,973 7,630 -1,000 -1,000
Cash and Bank Balance 5,438 4,490 6,280 3,731 3,091
Bank Deposit 4,370 4,234 4,234 4,234 4,234 Issue of Shares 4,466 5,062 14,706 -1,029 -1,469
Others 5,820 9,544 8,574 9,827 11,268 (Incr)/Decr in Debt 51,240 11,995 -22,097 -3,786 -699
Curr. Liab. and Prov. 13,161 16,463 16,933 18,723 20,782 Dividend Paid 174 176 367 514 735
Account Payables 8,502 9,791 12,249 14,039 16,097 Others 506 -4,702 -3,301 -4,234 -4,253
Other Liabilities 3,431 4,088 2,100 2,100 2,101 CF from Fin. Activity 56,385 12,531 -10,325 -8,534 -5,687
Provisions 1,228 2,584 2,584 2,584 2,584
Net Current Assets 21,316 23,909 29,943 31,537 37,268 Incr/Decr of Cash -340 -5,319 -2,444 -6,783 -4,875
Msc Expenses 967 733 735 735 735 Add: Opening Balance 5,778 9,808 8,724 10,514 7,965
E: MOSL Estimates
4 December 2009 65
Consumer Monopolies
SECTOR: FMCG
Colgate – Smile all the way

Buy CMP: Rs685 Target Price: Rs803 Bloomberg: CLGT IN

Colgate is the leader in the Rs40b oral care category The oral care market offers exciting long term growth
with a 49% market share. HUL (26% market share) opportunities from first time users (Datun) and
and Dabur (11% market share) are key competitors. consumer uptrading (toothpowder to toothpaste).
Colgate leads in all three oral care segments. It has Toothpaste presents an exciting opportunity as the
52% share in the Rs30b toothpaste market, 44% penetration is rising (13% increase in 2001 to 67%)
share in the Rs5b toothpowder market and 37% from new users and consumer upgrades from
share in the Rs4b toothbrush market. toothpowder to toothpaste.
Colgate has been ranked as the most trusted brand Only 7% of Indians brush their teeth twice daily (~61%
in the Indian Brand Equity survey making it the most in China, 86% in Malaysia).
valuable brand in Indian consumer market. Rising hygiene awareness, education and affordability
Colgate offers oral care products across formats and (attractive entry points of Rs5/10) will provide steady
price points and is the most preferred and double digit growth to oral care.
recommended brand by doctors.

Presence of brands across segments (premium: Total We estimate 16% PAT CAGR (FY10-12) due to 600bp
and Sensitive; popular: CDC, Maxfresh and Active rise in tax rate in FY11 as the Baddi unit moves to
Salt; economy: Cibaca and Colgate Toothpowder) 30% tax exemption. The stock trades at 22.1xFY11E
will enable it to target consumers across income EPS of Rs31 and 18.8xFY12E EPS of Rs36.5. Buy.
groups. STOCK PERFORMANCE (ONE YEAR)
Wide distribution (81% retail outlets) and focus on

Colgate Sensex - Rebased
oral care is unmatched. Consumer activation
800
programs like Disha, sampling in schools, dentist
endorsements and Oral Health Month have enabled 675
Colgate get closer to consumers.
Colgate derives technology support from its parent 550
Colgate Palmolive US, which has enabled the launch

425
of innovative products like Active Salt, Herbal and
Maxfresh toothpastes and Colgate 360, Colgate 300
Sensitive and Zigzag toothbrushes. Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Equity Shares (m) 136.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
52-Week Range (Rs) 735/380
03/09A 16,948 2,902 21.3 25.2 32.1 43.1 153.3 150.2 5.3 26.9
1,6,12 Rel. Perf. (%) -9/16/-15
03/10E 19,700 3,683 27.1 26.9 25.3 35.6 154.1 152.1 4.6 20.3
M.Cap. (Rs b) 93.2
03/11E 22,925 4,209 31.0 14.3 22.1 29.8 146.5 145.1 3.9 16.4
M.Cap. (US$ B) 2.0
03/12E 26,830 4,958 36.5 17.8 18.8 24.9 144.4 143.2 3.3 13.8
4 December 2009 66
Colgate
Colgate leads in the oral care market

Colgate has 52% share in Colgate, a pure play in the Rs40b oral care market, commands 49% market share of the
the toothpaste market, 44% oral care category. Colgate has 52% share in the toothpaste market, 44% share in the
share in the toothpowder toothpowder category and 37% in the toothbrushes segment. Colgate is present in the
category and 37% in the premium toothpaste market with its Total and Sensitive brands, with Colgate Dental
toothbrushes segment Cream, Active Salt and Maxfresh brands in the popular market, and Cibaca in the value-
for-money category. This presence has helped it to reach out to a broad consumer base
across income levels. This compares favorably with HUL’s positioning in the premium
and popular segments (Pepsodent and Close-Up respectively) and the herbal positioning
of Dabur with its Dabur Lal Dant Manjan, Babool, Meswak and Dabur Red toothpaste
across segments.
COLGATE’S PRODUCT PORTFOLIO
STRADDLES ACROSS PRICE POINTS

COLGATE: LEADING ALL THE WAY
CATEGORY MKT SIZE MAJOR BRANDS MKT POSITIONING COMPETITORS
(RSB) SH (%)
Toothpastes Rs30b Total, Sensitive 52 Premium Meswak

CDC, Maxfresh, Active Salt Popular Pepsodent , Dabur
Value for money - Rs27/200gm Red, Close-Up
Colgate Cibaca Value for Money Anchor, Babool
Toothpowders Rs4b Colgate Toothpowder, 44 Value for Money Dabur Lal Dant Manjan
Lal Dant Manjan
Toothbrushes Rs5b Colgate 360, Sensitive 37 Premium Pepsodent, Oral-B
Value for Money Binaca
Popular - Rs56/200gm Source: Company/MOSL
TOOTHPASTE VOLUMES: IN A NEW GROWTH ORBIT (%) …REFLECTED IN MARKET-SHARE GAINS (%)
18 50.2
49.6
15
Premium - Rs65/150gm 49.2 49.1 49.2 49.6
13 11 14
14 49.2
10 9 11 48.4
10 10 10 48.2
8
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
2QFY09
3QFY09
4QFY09
2QFY07
4QFY07
2QFY08
4QFY08
2QFY09
4QFY09
2QFY10
Colgate has gained

market share across various
MARKET SHARE IN TOOTHBRUSH (%) 3 YEAR GROWTH: COLGATE V/S CATEGORY (%)
segments in oral care
Category Colgate
38.0 38.2
37.7 37.6 16.6
15.2
37.2 13.9
35.1 35.2
5.9
2QFY08
3QFY08
4QFY08
2QFY09
3QFY09
4QFY09
1QFY10
Toothpaste Toothbrush
4 December 2009 67
Colgate
Oral care: Rural growth story here to stay

The oral care category has We believe the oral-care category has entered a new growth phase led by rising awareness
entered a new growth phase, for oral hygiene, especially in rural India, where per capita consumption is rising, led by
led by rising awareness for higher penetration and frequency of brushing. Toothpaste per capita consumption has
oral hygiene, especially increased to 108gm currently from 80gm in 2005. However it holds immense potential for
in rural India growth considering the consumption in China (219gm) and Malaysia (285gm). Besides,
only 7% of Indians brush their teeth twice daily against 61% in China and 86% in Malaysia.
Higher reach of media, rising awareness and increasing affordability (Rs.5/10 SKUs)
among rural Indians have pushed the younger generation to move directly towards
toothpaste. But the pace of upgrade of Datun and toothpowder users will be gradual.
TOOTHPASTE: PER CAPITA CONSUMPTION GROWS 10.5% CAGR
India’s per capita toothpaste

consumption has increased 120
to 108gm. But it lags the
90
consumption in
108
China (219gm) and 60 80
in Malaysia (285gm) 30
0
2005 2008
Source: MOSL
UPTRADING FROM TOOTHPOWDER TO TOOTHPASTE IS ACCELERATING
Toothpaste Toothpow der

Sharp increase in penetration of
toothpaste led by uptrading from 57
54
toothpow der
51
44 44 50
44 46
45
36 35 36 35 35 35 35
34
31
2000 2001 2002 2003 2004 2005 2006 2007 2008
ALL INDIA TOOTHPASTE PENETRATION RISING (%)
2005 2008
Urban 74.9 79.0

Rural 37.6 45.0
All India 48.6 57.0
4 December 2009 68
Colgate
Colgate well placed to maintain competitive edge

Brand-building initiatives Portfolio across price points: Colgate's product portfolio straddles several price points.
have helped Colgate to Colgate’s presence in the toothpowder category is a significant positive as Colgate
acquire the highest brand toothpowder consumers migrate to Colgate toothpaste. This enables the company to capture
recall: It is the most trusted consumers at all income levels. Colgate’s brand-building initiatives have helped it to acquire
Indian brand the highest brand recall: it is the most trusted Indian brand.
CONSUMER MIGRATION FROM DATUN TO TOOTHPOWDER AND TOOTHPASTE
Rs0.25 per use ~Rs0.30 per use ~Rs0.4/0.6 per use
Oral care focus and consumer activation: Colgate is an oral-care focused company,
with a wide reach (81% outlets in FY09 up from 49% in FY06). Consumer-activation
programs like Disha, partnerships with the IDA/dentist community, Oral Health Month
and awareness campaigns in schools will enable Colgate to maintain its lead in the market.
Colgate’s parental support Parent's technology: The company draws its strength from R&D and technology of its
will ensure steady gains parent, Colgate Palmolive USA, the world leader in oral care. This has enabled the launch
particularly as HUL’s parent, of innovative products such as Colgate Total, Active Salt, Herbal and Sensitive. Colgate
Unilever, quit the oral care also launched Colgate 360, Colgate Sensitive and ZigZag toothbrushes.
segment in some large,
developed markets We believe parental support will ensure steady gains for Colgate particularly as HUL’s
parent Unilever got out of the oral care segment in some large, developed markets. Dabur,
though an emerging player, has niche positioning. We believe Colgate has entered a phase
of high-volume growth on strong brand equity, consumer upgrades and a rational pricing
environment, which makes it a candidate for an emerging monopoly.
Emerging monopoly ensures increased margins

Colgate’s emerging monopolistic position has enabled it to report a steady 15% CAGR in
sales and 27% in PAT over FY05-09. We estimate 16% sales CAGR over FY09-11.
SUSTAINED SALES TRACTION OVER FY09-11E
Colgate has entered a phase 32,000 Net Sales (Rs m) Grow th (%)
16.6 17.0
of high-volume growth on 15.5 13.9
24,000 15.2 15.0
strong brand equity, 13.8
consumer upgrades and a
16,000
rational pricing
environment, which makes it 8,000
a candidate for an emerging
monopoly 0
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
4 December 2009 69
Colgate
Colgate spends 15.5-17% Colgate spends 15.5-17% of sales on advertising and promotion (higher than the industry
of sales on advertising and average of 10-12%), which we expect will tend lower given Colgate’s strengthening position.
promotion (higher than We see the decline in adspend to be structural as Colgate has gained significant traction in
the industry average of sales due to attractive pricing and a wide distribution network. Besides, as a brand evolves
10-12%), which will tend and gains scale, the adspend required to maintain the equity would decline. This is expected
lower given Colgate’s to boost EBITDA margins. We have assumed 15.5% adspend in FY10 to be on the
strengthening position conservative side, but we don’t rule out upside on this front.
ADSPEND DECLINE COULD BE STRUCTURAL (%) TAX RATE TO RISE
Ad-spend EBITDA Margins Tax Rate (%)

40
23.2 23.4 37
22.1
34
19.0 19.1
18.1 17.3
16.5 28
14.4 28
17.6 17.4 25 25
15.7 16.0
16.0 15.0 14.6 14.6 22 21 21
14.2
16 19
16
FY10E
FY11E
FY12E
FY04
FY05
FY06
FY07
FY08
FY09
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Colgate has ROE of
153% and dividend payout Colgate has ROE of 153% and dividend payout ratio of 80% (dividend yield of 2.5%).
ratio of 80%
REDUCTION OF SHARE CAPITAL HAS BOOSTED ROE (%) HIGH PAYOUT RATIO ENSURES HEALTHY YIELD
40 EPS Dividend Yield %
153 156 6.2

147 146 5.2
30
4.2
105 3.6
3.1
20 2.9
53 58
1.7
10
0
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
Margin expansion Valuation and view

over FY10-12 is expected Colgate is pure play in India's oral care market. We expect 14% volume CAGR over
to be 130bp driven mainly FY10-12. We estimate 130bp margin expansion in FY10-12 mainly driven by operating
by operating leverage leverage and lower adspends due to Colgate moving towards a monopoly situation in oral
and lower adspends due care. We estimate 16% PAT CAGR mainly due to a 600bp increase in the tax rate in
to Colgate moving towards FY11 as its Baddi unit moves from 100% to 30% tax exemption. Colgate has average
a monopoly situation P/E multiple of 22x due to 150% RoCE and more than 80% dividend payout ratio. The
in oral care stock trades at 22.1xFY11E EPS of Rs31 and 18.8xFY12E EPS of Rs36.5. Buy.
4 December 2009 70
Colgate
Colgate: Recent trends
Toothpaste: Volume growth in new orbit Colgate gains share at the expense of HUL (%)
18.0
Colgate (LHS) HUL (RHS)
15.2
32.1 49.5
13.0 14.0
14.0
48.4
10.0 10.9 11.2 30.4 48.5
10.0
9.0
10.0 9.5 29.6
47.8 29.8
8.0
28.0
46.7
2QFY07
4QFY07
2QFY08
4QFY08
2QFY09
4QFY09
2QFY10
2005 2006 2007 2008 1QFY10
Gross margin rising Lower adspend boosts margin expansion

59.7 Ad spend (% of sales) EBIDTA Margin
25.3
21.8
57.4 57.0 57.4
56.5 20.6 20.9
56.2 19.7 22.0
56.5 19.0 18.6 18.2 18.8
17.5 19.7
16.9
55.9 56.0 56.2
55.5 15.4
15.6 16.6 17.0 16.9
54.8 15.0 15.5 16.0
14.0
54.2 13.0 12.9 12.5
11.3
2QFY07
4QFY07
2QFY08
4QFY08
2QFY09
4QFY09
2QFY10
2QFY07
4QFY07
2QFY08
4QFY08
2QFY09
4QFY09
2QFY10
Mentha oil price trend (US$/ton) Calcium carbonate price trend (US$/ton)
850 160
748
144
750 140
650 120
567
550 100
96
482 89
450 80
Mar-07
Jun-07
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-07
Sep-08
Sep-09
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
4 December 2009 71
Colgate

Change (%) 13.8 15.0 16.2 16.4 17.0 EPS 17.0 21.3 27.1 31.0 36.5
COGS 6,328 7,413 8,508 9,874 11,503 Cash EPS 18.5 23.0 28.8 32.8 38.4
Gross Profit 8,406 9,535 11,192 13,051 15,327 BV/Share 11.9 15.9 19.2 23.0 27.5
Gross Margin (%) 57.1 56.3 56.8 56.9 57.1 DPS 13.0 15.0 20.3 23.2 27.3
Operating expenses 6,120 6,919 7,323 8,249 9,587 Payout % 76.3 70.3 75.0 75.0 75.0
Other Operating Income 633 760 613 670 701
EBITDA 2,919 3,376 4,482 5,472 6,441 Valuation (x)
Change (%) 51.6 15.6 32.8 22.1 17.7 P/E 40.2 32.1 25.3 22.1 18.8
Margin (%) 19.0 19.1 22.1 23.2 23.4 Cash P/E 37.0 29.7 23.7 20.9 17.8
Depreciation 198 229 241 253 264 EV/Sales 6.2 5.3 4.6 3.9 3.3
Financial Other Income 214 318 303 376 454 P/BV 57.4 43.1 35.6 29.8 24.9
Change (%) 51.2 18.2 31.0 23.2 18.6
Margin (%) 19.8 20.4 23.0 24.3 24.6 Return Ratios (%)
Tax 625 448 884 1,434 1,735 RoE 104.6 153.3 154.1 146.5 144.4
Deferred Tax -22 103 -42 -68 -83 RoCE 103.2 150.2 152.1 145.1 143.2
Tax Rate (%) 20.7 16.0 18.6 24.5 25.0
Adjusted PAT 2,317 2,902 3,683 4,209 4,958 Working Capital Ratios
Change (%) 44.7 25.2 26.9 14.3 17.8 Debtor (Days) 2 2 2 2 2
Margin (%) 15.7 17.1 18.7 18.4 18.5 Asset Turnover (x) 25.0 10.6 14.5 12.4 12.3
Reported PAT 2,317 2,902 3,683 4,209 4,958
Leverage Ratio
BALANCE SHEET (RS MILLION) Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0
Y/E MARCH 2008 2009 2010E 2011E 2012E
Share Capital 136 136 136 136 136

Reserves 1,486 2,027 2,478 2,994 3,601 CASH FLOW STATEMENT (RS MILLION)
Net Worth 1,622 2,163 2,614 3,130 3,737 Y/E MARCH 2008 2009 2010E 2011E 2012E
Loans 47 47 44 44 45 OP/(loss) before Tax 2,919 3,376 4,482 5,472 6,441
Deferred Liability -278 -177 -219 -287 -370 Int./Div. Received 214 318 303 376 454
Direct Taxes Paid -625 -448 -884 -1,434 -1,735
Gross Block 4,496 4,253 4,503 4,703 4,903
(Incr)/Decr in WC 988 -120 160 537 682
Less: Accum. Depn. -2,582 -2,513 -2,754 -3,007 -3,271
Net Fixed Assets 1,914 1,739 1,749 1,695 1,631
Capital WIP 76 47 104 149 185
(Incr)/Decr in FA -214 273 -307 -245 -236
Investments 726 383 980 882 1,050
(Pur)/Sale of Investments 607 343 -597 98 -168
Curr. Assets, L&A 4,017 5,421 5,543 6,857 8,183 CF from Invest. 394 615 -904 -147 -404
Inventory 756 824 1,007 1,183 1,388

Account Receivables 92 111 124 144 169 Change in Equity -1,224 20 0 0 0
Cash and Bank Balance 1,443 2,511 2,413 3,504 4,572 (Incr)/Decr in Debt 4 0 -3 0 1
Curr. Liab. and Prov. 5,342 5,557 5,937 6,698 7,638 Others -54 -300 0 0 0
Account Payables 3,047 3,417 3,901 4,434 5,102 CF from Fin. Activity -3,551 -2,661 -3,235 -3,693 -4,350
Other Liabilities 422 528 562 613 670

Provisions 1,873 1,612 1,474 1,650 1,866 Incr/Decr of Cash 326 1,069 -98 1,091 1,068
Net Current Assets -1,325 -136 -394 160 545 Add: Opening Balance 1,117 1,443 2,511 2,413 3,504
E: MOSL Estimates
4 December 2009 72
Consumer Monopolies
SECTOR: FMCG
Marico – Well oiled

Buy CMP: Rs107 Target Price: Rs114 Bloomberg: MRCO IN

Marico is leads in the Rs15b branded pure coconut Rising income and aspiration levels have resulted in
oil market with a share of 55%. higher penetration for the category. (Size has doubled
Marico's flagship brand, Parachute, holds 48% from Rs6.5b in 2004 to Rs15b in 2009).
market share and Nihar and Oil Of Malabar accounts We estimate ~Rs2b-3b is added to the coconut oil
for 7%. category every year (~10% growth) due to new user
Other prominent players in the category include additions.
Shalimar (~8%) and Dabur (5%). Regional brands Growth of the branded coconut oil market is expected
like Panchratna and Kera account for the rest of the accelerate (12-14%) led by category expansion and
market. upgrades from loose oil (40% of the category).
We estimate that branded pure coconut oil accounts Price-led competition among national brands has been
for 32% of Marico's sales but contribute more than minimal after the exit of HUL in FY06 (Marico acquired
50% of its profits. Nihar). Regional players' prices are at 8-10% discount
to Marico's.

Marico's focus has been to expand the category size We estimate PAT CAGR of 21% over FY10-12. The
of coconut oil rather than to aggressively capture stock trades at 22.9xFY11E EPS of Rs4.7 and
market share as its share is 7x more than its nearest 18.7xFY12E EPS of Rs5.7. Buy.
rival. STOCK PERFORMANCE (ONE YEAR)
Marico has led innovation in the category through Marico Sensex - Rebased
packaging like blister packs and wide-neck packs. 120
Investment in brand building have enabled Marico to
de-commoditize the category. Resulting brand loyalty 100
meant significant pricing power for Marico, reducing

80
sensitivity to copra prices.
· Partnerships with the Coconut Development Board
60
and copra farming community have enabled Marico
to secure quality inputs at reasonable prices.
40

03/09A 23,884 2,037 3.3 28.5 32.0 14.4 44.9 42.5 2.8 22.3
1,6,12 Rel. Perf. (%) -1/27/23
03/10E 27,463 2,368 3.9 16.2 27.5 10.2 37.0 48.6 2.4 17.8
M.Cap. (Rs b) 65.2 03/11E 32,608 2,849 4.7 20.3 22.9 7.4 32.4 47.2 2.0 14.9
M.Cap. (US$ b) 1.4 03/12E 38,273 3,483 5.7 22.2 18.7 5.5 29.6 45.1 1.6 12.3
4 December 2009 73
Marico
Marico: Beyond market share

Marico has a 55% share Marico has a 55% share in the Rs15b branded pure coconut oil market. Shalimar and
in the Rs15b branded pure Dabur are the other key players with a market share of 8% and 5% respectively. Regional
coconut oil market and brands like Panchratna, Kera and others compete largely on a price proposition.
its key competitors are
Shalimar, with 8% share Marico acquired Nihar and Oil of Malabar to consolidate the branded coconut oil market.
and Dabur with 5% share Over the past five years Marico has maintained its market share and has been a key
beneficiary of the 15% CAGR of branded coconut oil sales. We estimate Parachute
brand to have grown from Rs2.6b in FY04 to Rs8b in FY09 (CAGR of ~25%).
Marico acquired Nihar and MARICO: 55% MARKET SHARE IN COCONUT HAIR OIL
Oil of Malabar to consolidate BRAND MARKET SHARE (%)
the branded coconut oil Parachute 48

market and has been a key Nihar 6
Oil of Malabar 1
beneficiary of the growing
coconut oil market
BRANDED COCONUT OIL: MARICO LEADS PARACHUTE: DOUBLE DIGIT VOLUME GROWTH
12.0
Others 11.0 11.0 11.0
32.0% 10.0
8.5 9.0
Dabur Marico
Shalimar
FY10E
FY11E
FY12E
5.0%
FY06
FY07
FY08
FY09
8.0% 55.0%
Opportunity to uptrade
Increased use of coconut oil The branded coconut oil market presents high visibility of growth and profitability. The
and upgrades from loose oils coconut oil segment (both branded and loose) posted sales of 9% CAGR over FY04-09
to branded consumption and branded coconut oil posted sales of 15% CAGR. We believe increased use of coconut
helped branded coconut oil oil (penetration and frequency of use) and upgrades from loose oils to branded consumption
sales to grow 15% CAGR helped this growth. Unorganized/loose oils constitute about 40% of the coconut oil market
over FY04-09 (down from 53% in FY04) and we expect their share to fall to 25% in the next five years.
SHARE OF LOOSE OILS DECLINED FROM 53% IN FY04 TO 40% IN FY09: A RS25B OPPORTUNITY
Branded Unbranded/Loose
60
53
47
40
2004 2009
4 December 2009 74
Marico
The branded coconut oil Rising incomes and aspiration levels have resulted in higher penetration. Branded coconut
market doubled to Rs15b in oil market doubled to Rs15b in 2009 from Rs7b in 2004. We expect the trend to continue
2009 from Rs7b in 2004 and in the medium term. Besides, new users enter the coconut oil market (about 10% growth)
this trend is expected to every year, adding Rs2b to the category. Growth of the branded coconut oil market is
continue in the medium term expected to accelerate (12-14%) led by category expansion and upgrades from loose oils.
PARACHUTE: PACKING INNOVATION Strategy to maintain leadership

Marico led consolidation in the industry with the acquisition of Nihar and Oil of Malabar.
Besides, it focused on expanding the coconut oil market instead of pursuing market share.
We believe Marico is well placed to maintain its leadership in the product category because:
Marico led the innovation in the category through packaging like blister packs (Re1
SKUs), wide-neck, and flip packs. These have helped to increase the relevance of the
brand to existing and new consumers, resulting in category expansion.
Rs1 Blister pack Marico’s investments over the years on brand building have enabled it to de-commoditize
the category. The resultant brand loyalty gave Marico significant pricing power, which
reduced its sensitivity to copra prices. In 2005 when copra prices slipped Marico did
not reduce the price of Parachute resulting in a 1,000bp margin expansion. It is going
through a similar phase in the current cycle as well.
Being the biggest consumer of copra in India, Marico has initiated partnerships with
the Coconut Development Board and the copra farming community, enabling Marico
to secure quality inputs at reasonable prices.
Rs5 SKU
We like the management’s strategy of not pursuing market share from regional brands in
price-led competition. The segment yields high margins for Marico and we see visibility of
growth and profitability from pure coconut oil for several years to come. We believe pure
coconut oil (Parachute) is a cash cow for Marico and the high returns thus generated are
invested in new growth engines like Saffola, Kaya and other recent prototypes.
Wide neck pack
Monopoly in Parachute has enabled 900bp gross margin expansion

The coconut High pricing power has enabled Marico to retain benefits of copra price declines thereby
oil segment yields high enabling gross margin expansion (FY06 is a case in point). We expect Marico’s coconut
margins for Marico and we oil franchise to post 10-12% volume growth over the next five years and 3-4% realization
see visibility of growth and growth. Parachute is estimated to contribute about 32% of Marico’s sales and 50% of
profitability from pure gross profit.
coconut oil going forward
MARGIN PUSH LED BY PRICING POWER IN PARACHUTE (%)
Gross Margin EBITDA Margin

14 13
13 13 13 13
13
50
47 45 49 48
Margins have 47 47
increased significantly,
due to pricing power 38
in Parachute 36
9 9
FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E
4 December 2009 75
Marico
Steady cashflow from the The company is still in a growth phase in other categories wherein investment in brands
Parachute stable is expected could help Marico to be a major player in hair oil and processed food. We believe the
to help Marico to develop existence of a steady cashflow from the Parachute stable will help to develop other
other segments segments.
HEALTHY ROE (%) LOWER YIELD DUE TO INVESTMENT IN NEW BRANDS
Pricing pow er Dividend Yield (%)

in Parachute Im pact of new
51 50 businesses 0.7
0.6 0.6 0.6 0.6 0.6
45 0.6
37
33 32
30
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
Valuation and view

We expect Marico to maintain a strong monopoly in coconut oil and in the wellness segment,
through its niche positioning of Saffola. We estimate sales CAGR of 18.1% over FY10-
12, PAT is expected to increase 21.3%. While benign prices of copra will be a key growth
driver in the near term, increased profitability in Kaya, Haircode and Fiancée will be key
drivers, going forward. The stock currently trades at 22.9xFY11E EPS of Rs4.7 and
18.7xFY12E EPS of Rs5.7. Buy.
MARICO'S GEOGRAPHICAL SALES MIX MARICO'S DOMESTIC SALES MIX
South Others Kaya

Bangladesh Egypt Parachute
Africa Sw eekar 13% 6%
8% 3% 38%
3% 7%
Middle East
6%
India
80%
Saffola Hair Oils

20% 16%
4 December 2009 76
Marico
Marico Industries: Recent trends
Sales growth impacted by price cuts/discounts Lower input costs boost gross margins (%)
Sales (Rsm) - LHS Sales Grow th (%) Gross Margins EBITDA Margins
7,800
50.7 52.9
48.4 47.2 49.2 49.7
30 47.9 46.3 45.7 45.0
6,300 28
23
4,800 24 23
20 14.1 14.0 12.7

3,300 18 16 13.7
14.7
12.6 12.2 12.7 13.1 13.8
9.7
1,800
Jun-07
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-07
Sep-08
Sep-09
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-07
Sep-08
Sep-09
Parachute: Double digit volume growth in 1HFY10 (%) Copra price (Rs/Qtl): Hits a low
14 5,000
11 11 4,450
10 10 3,995
9 9
8
3,900
3,350
2,900
2,800
Dec-07
Feb-08
Jun-08
Oct-08
Dec-08
Feb-09
Jun-09
Oct-09
Apr-08
Aug-08
Apr-09
Aug-09
Dec-07
Jun-08
Dec-08
Jun-09
FY08
Sep-08
FY09
Sep-09
Saffola: Sales promotions/price cuts boost volumes (%) Safflower prices (Rs/ton): Benign
28 100,000
22 22 90,000
19
80,000
13
11 63,500
9 70,000
68,000
60,000
3
50,000
Feb-08
May-08
Nov-08
Feb-09
May-09
Nov-09
Aug-08
Aug-09
Dec-07
Jun-08
Dec-08
Jun-09
FY08
Sep-08
FY09
Sep-09
4 December 2009 77
Marico

Change (%) 22.4 25.4 15.0 18.7 17.4 EPS 2.6 3.3 3.9 4.7 5.7
COGS 10,043 13,105 13,762 16,638 19,721 Cash EPS 3.3 3.7 4.7 5.5 6.6
Gross Profit 9007 10780 13701 15969 18552 BV/Share 5.2 7.4 10.5 14.4 19.3
Margin (%) 47.3 45.1 49.9 49.0 48.5 DPS 0.7 0.7 0.7 0.7 0.7
Operating Expenses 6,544 7,740 9,977 11,667 13,526 Payout % 25.2 19.6 16.7 13.9 12.2
EBITDA 2,463 3,040 3,724 4,303 5,027

Valuation (x)
Change (%) 24.0 23.4 22.5 15.5 16.8
P/E 41.1 32.0 27.5 22.9 18.7
Margin (%) 12.9 12.7 13.6 13.2 13.1
Cash P/E 32.6 29.0 22.9 19.6 16.1
Depreciation 309 358 515 481 552
EV/Sales 3.6 2.8 2.4 2.0 1.6
Int. and Fin. Charges 305 357 326 261 210
EV/EBITDA 27.6 22.3 17.8 14.9 12.3
Other Income - Recurring 96 122 152 189 318
P/BV 20.7 14.4 10.2 7.4 5.5
Profit before Taxes 1,945 2,447 3,036 3,749 4,583
Dividend Yield (%) 0.6 0.6 0.6 0.6 0.7
Change (%) 43.0 25.8 24.1 23.5 22.2
Margin (%) 10.2 10.2 11.1 11.5 12.0
Current Tax (excl MAT Ent) 157 70 395 525 642 Return Ratios (%)
Deferred Tax 202 339 273 375 458 RoE 50.4 44.9 37.0 32.4 29.6
Tax Rate (%) 18.5 16.7 22.0 24.0 24.0 RoCE 42.6 42.5 48.6 47.2 45.1
Change (%) 60.4 28.5 16.2 20.3 22.2 Working Capital Ratios
Margin (%) 8.3 8.5 8.6 8.7 9.1 Debtor (Days) 17 17 16 17 17
Extraordinary items 105 -150 -41 0 0 Asset Turnover (x) 2.8 2.9 3.0 3.1 2.9
Reported PAT 1,691 1,887 2,327 2,849 3,483
Leverage Ratio
Debt/Equity (x) 1.1 0.8 0.4 0.2 0.1
Y/E MARCH 2008 2009 2010E 2011E 2012E
Share Capital 609 609 609 609 609

Reserves 2,537 3,926 5,790 8,176 11,160
Net Worth 3,146 4,535 6,399 8,785 11,769 Y/E MARCH 2008 2009 2010E 2011E 2012E
Loans 3,579 3,750 2,638 1,750 1,300 OP/(loss) before Tax 2,463 3,040 3,724 4,303 5,027
Capital Employed 6,727 8,285 9,037 10,535 13,069 Int./Div. Received 96 122 152 189 318
Interest Paid -305 -357 -326 -261 -210
Gross Fixed Assets 2,934 3,885 4,385 4,885 5,885 Direct Taxes Paid -157 -70 -395 -525 -642
Intangibles 627 684 627 627 627 (Incr)/Decr in WC -827 -1,062 -478 -707 -526
Less: Accum. Depn. -1,635 -2,035 -2,549 -3,031 -3,583 CF from Operations 1,269 1,672 2,678 2,999 3,967
Net Fixed Assets 1,926 2,534 2,462 2,481 2,929
Capital WIP 647 577 250 200 200
Extraordinary Items 0 0 0 0 0
Goodwill 842 850 842 842 842
(Incr)/Decr in FA -1,159 -938 -116 -450 -1,000
Investments 0 121 800 1,600 3,800
(Pur)/Sale of Investments 0 -121 -679 -800 -2,200
Curr. Assets, L&A 5,281 6,719 7,254 8,787 9,749 CF from Invest. -1,159 -1,059 -795 -1,250 -3,200
Inventory 2,605 3,390 3,913 4,728 5,550

Account Receivables 863 1,108 1,236 1,500 1,761 Issue of Shares 0 0 0 0 0
Cash and Bank Balance 753 922 712 1,066 842 (Incr)/Decr in Debt 1,070 170 -1,112 -888 -450
Others 1,061 1,299 1,393 1,493 1,597 Dividend Paid -467 -467 -463 -463 -499
Curr. Liab. and Prov. 2,951 3,158 3,425 3,897 4,557 Others -388 -148 -518 -43 -43
Current Libilities 2,560 2,803 2,954 3,400 3,981 CF from Fin. Activity 215 -444 -2,093 -1,394 -992
Provisions 392 355 471 497 575
Net Current Assets 2,330 3,561 3,829 4,890 5,192 Incr/Decr of Cash 325 169 -210 355 -225
Deferred Tax Liability 982 641 854 521 106 Add: Opening Balance 427 753 922 712 1,066
Application of Funds 6,727 8,285 9,037 10,535 13,071 Closing Balance 752 922 712 1,066 842
E: MOSL Estimates
4 December 2009 78
Consumer Monopolies
SECTOR: FMCG
Titan Industries – Leading in time

Neutral CMP: Rs1,351 Target Price: Rs1,499 Bloomberg: TTAN IN

Titan has 60% of India's organised watch market Only 27% of Indians own a watch and 82% of the
with annual sales exceeding 9m units. volumes are priced below Rs1,000.
It has brands positioned at various price points:Titan Watches are fast emerging as fashion accessories
(premium), Sonata (mass), Fastrack (youth), Xylus with an increasing trend of multiple watches.
(Swiss) and Licensed (Tommy Hilfiger and Hugo The Indian jewelry market is worth Rs800b a year and
Boss). is growing at 15% CAGR as gold and jewelry are
Titan has more than 40% share in India's Rs70b considered family treasures.
branded jewelry market.. Branded jewelry is less than 10% of the jewelry
Titan has a strong presence in the domestic branded market, offering huge scope for branded players.
jewelry market with exclusive store brands like Diamond-studded jewelry comprises 10-12% of the
Tanishq and Gold Plus. Indian jewelry market; this high margin segment
Tanishq has 126 stores in more than 70 Indian towns (30%+ gross margins) is growing at 20-25% a year.
and is the only jeweler with a pan-India presence.

Titan straddles the price value spectrum in watches We estimate 28% PAT CAGR over FY10-12. The stock
from the low priced Sonata to the Swiss-made Xylus trades at 22.7xFY11E EPS of Rs59.4 and 18.1xFY12E
and licensed brands like Hugo Boss. EPS of Rs74.5. Neutral.
Titan captures the value chain from manufacturing
STOCK PERFORMANCE (ONE YEAR)
to branding and retailing through its own outlets,
which gives it a competitive advantage. Titan Industries Sensex - Rebased
1,850
Tanishq has a huge first mover advantage in branded
jewelry with 126 stores and quality assurance in gold. 1,550
Tanishq has been associated with some of the best
designs and offers an extensive range of jewelry in 1,250
India. It has also extended its presence to mid-sized
950
cities with a no frills Gold Plus model.
650

52-Week Range 1,509/667
03/09A 38,034 2,055 46.3 36.8 29.2 10.9 37.3 38.8 1.6 18.8
1,6,12 Rel. Perf. (%) -2/1/-31
03/10E 44,531 2,009 45.3 -2.2 29.8 8.8 29.5 36.3 1.4 18.1
M.Cap. (Rs b) 60.0 03/11E 55,385 2,638 59.4 31.3 22.7 7.0 30.6 40.3 1.1 13.5
M.Cap. (US$ b) 1.3 03/12E 65,340 3,307 74.5 25.4 18.1 5.6 30.8 44.4 0.9 10.6
4 December 2009 79
Titan Industries
Titan has, over the years, Titan has, over the years, identified and nurtured niche categories, offering branded products
identified and nurtured niche in an erstwhile unorganized segment. From a modest venture into quartz watches in 1984,
categories, offering branded to its entry into the organized jewelry segment (in 1996) and its latest foray into branded
products in an erstwhile eyewear, Titan has benefited from the first mover advantage in every segment of its
unorganized segment presence, thereby enjoying a near monopoly.
Titan has 60% share of the organized watch market

Titan, which spearheaded the quartz revolution in India, has come a long way to reach its
monopoly status (60% share in the Rs30b organized watch segment). Timex is a distant
second with ~9% share. Other players include HMT, Maxima and several global brands in
the premium segment. Titan’s brands are positioned across various segments: Sonata
(economy), Titan (premium), Fastrack (youth), Xylus (Swiss), Tommy Hilfiger and Hugo
Boss (licensed). This puts Titan in a unique position to gain from expected demand growth
for a basic, functional watch to premium, designer watches.
UNORGANIZED SEGMENT IS ~55% OF WATCH MARKET TITAN HAS ~60% SHARE IN ORGANIZED SEGMENT
Organized
Market, 45
Others, 31
Titan, 60
Timex, 9
Unorganized
Market, 55
INDIA’S WATCH MARKET (VALUE) INDIA’S WATCH MARKET (VOLUME)
Luxury
Mid-Upper
Luxury Mass (> Rs5,000), 1%
(Rs1,000- Mass
(> Rs5000), 13% (< Rs400), 11% Rs5,000), 13% (< Rs400), 38%
Mid-Upper Low End

(Rs1,000-Rs5,000), 33% Low End
(Rs400-Rs1,000), 43%
(Rs400-Rs1,000), 48%
About 55% of the watch About 55% of the watch market is still unorganized and most of this is at the bottom end
market is still unorganized of the segment. About 38% of watch volumes are priced under Rs400 each and 86% are
and most of this is at the priced lower than Rs1,000 each. Premium watches (>Rs1,000) account for 13% of industry
bottom end of the segment volumes and luxury watches (>Rs5,000) account for 1% of the volumes.
4 December 2009 80
Titan Industries
TITAN'S WATCH PORTFOLIO Watch industry volumes to grow in high single digits
SONATA: VALUE FOR MONEY
Watch volumes are likely to grow in high single digits. Volume growth will be driven by low
penetration as only 27% of Indians own a watch, and the proportion is less than 15% in
rural India. However, subsequent growth would be more a function of rising aspirations
than functional use (time keeping) consequent to increasing penetration of mobile phones.
We believe watches have evolved from time keeping devices to fashion accessories. This
is resulting in dual ownership of watches (~5%) and those based on occasions, such as
formal, casual and sports watches. This trend is emerging among the upper middle class,
triggering 25-35% volume growth in the premium/luxury segment.
We expect consumer upgrades to premium watches to sustain due to rising aspirations,

availability of international brands and the emergence of high income, indulgent consumers.
Rs295 onwards
FASTRACK: YOUTH BRAND WATCHES: PREMIUM SEGMENT IS GROWING AT 25-35%
SEGMENT VOLUME GR. (%)
Luxury (> Rs5,000) 25-35

Mid-upper (Rs1,000-5,000) 4-7
Low-end (Rs400-1,000) 8-11
Mass (< Rs400) 8-11
Titan well placed to maintain leadership in watches

Rs700 onwards
Titan continues to maintain a strong lead in the watch market, into which several global
TITAN: PREMIUM BRAND brands in the premium segment have entered. The watch market is fast evolving as most
global brands are available in India through franchisee arrangements or tie-ups with
organized retailers. Titan is in a strong position to maintain its lead because:
Titan’s brands straddle price points from the Rs400 Sonata to Xylus and Nebula at
the luxury end. This enables Titan to garner consumers at all levels.
Titan’s Fastrack brands, which sell more than a million watches, target the youth
segment. Titan has also launched watches aimed at women, with sub-brands like Raga
and Diva, which are re-inventing the category. Other key launches include Aqura,
Insignia, Regalia, Gold & Steel, Octane, Zoop and Edge.
Rs1,000 onwards
Titan has increased its thrust on distribution and retail. It has 275 “World Of Titan”
RAGA: LUXURY BRAND stores, keeping in mind discerning consumer and changing preferences. It has also
opened seven Fastrack and 10 Sonata stores and one Helios store, which will be a
multi-brand outlet for leading global brands. World Of Titan stores account for 40% of
the sales of the company with a superior sales mix. Besides, the company has over
700 service centers, which provide it with a distinct edge.
BRANDS ACROSS PRICE POINTS
PRICE POINT TITAN BRANDS COMPETING BRANDS
Rs399-1,000 Sonata HMT, Maxima

Rs1,000-5,000 Titan, Fast Track Citizen, Timex, Fossil, Swatch
Rs10,000-Rs30,000 Xylus, Nebula Omega, Rado, Tag Heur, Tissot, Hugo Boss
Rs4,000 onwards
4 December 2009 81
Titan Industries
LICENSED AND OUTSOURCED WATCHES GROWING FASTER EBITDA MARGIN IMPACTED BY RETAIL EXPANSION
Titan & Fastrack Vol (m) Sonata Volume (m) Licensed Brands Sales Grow th (%) - LHS EBITDA Grow th % - LHS
5.4 EBITDA Margin (%) - RHS

5.1 40 24
4.7 4.8 4.9
4.5 4.7 20.0
4.6 4.2 4.3 4.4
3.7 3.9 4.1 30 19.0 18.5 18.5 20
17.5 17.9 18.0
2.9
2.4 20 16
1.9
1.4
0.9 10 12
0.1 0.3
0 8
FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Jewelry: Tanishq’s first mover advantage

ORGANIZED JEWELRY: THE TIP OF Titan pioneered the branded jewelry segment in 1996 with the launch of Tanishq 18 carat
THE ICEBERG jewelry in an industry dominated by mom-and-pop shops. The company has redefined its
Unorganized , ~90
model to focus on 22 carat gold jewelry and gold jewelry. Tanishq has 40% share of the
organized jewelry market. Organized jewelry accounts for less than 10% of the Rs700b
jewelry market. Titan has store brands like Tanishq (up market gold and studded jewelry),
GoldPlus (mass market gold jewelry) and Zoya (high end studded jewelry).
Branded, ~10 Competitors like Rajesh Exports, Gitanjali Gems, Reliance Retail and other mid sized players
have entered the branded jewelry segment. The entry of new players and their adspends
has increased awareness of branded jewelry and helped to boost its growth.
Branded jewelry demand to grow in high teens

The branded jewelry The Indian jewelry market has grown steadily by mid single digits. Gold is considered one
market in India is expected of the best assets to own due to 1) its proven worth and investment value over centuries,
to grow in high teens 2) as an adornment accessory, and 3) it being an essential part of marriages.Gold prices
have nearly tripled over the past five years, adding to its attraction as a long term investment.
The branded jewelry market is expected to grow in high teens because

Branded jewelry players have launched several contemporary designs to suit a
generation that prefers lighter jewelry.
Increasingly people are moving away from their homes for professional reasons, taking
them away from their families and traditional jewelers. This works to the advantage of
branded players, which are able to get an increasing set of customers based on
hallmarking and brand building.
Branded players have launched no frills, low cost models, like GoldPlus, which focus
on plain gold jewelry and target mid sized towns. We believe this segment comprises
a very big part of sales and will boost the branded business sales.
4 December 2009 82
Titan Industries
Titan to maintain lead in the branded jewelry market

Titan is expected to grow Tanishq has established itself as a prominent store brand in the branded jewelry segment.
ahead of the market growth Sales and EBIDTA of the jewelry segment have grown 46% and 47% respectively over
rate and maintain its share the past five years and the number of jewelry pieces sold has grown 45% CAGR. We
in the jewelry segment expect Titan to grow ahead of the market growth rate and maintain its share in the jewelry
segment because:
? Titan has a huge first mover advantage and is the only national jeweler. Although it is
the largest jeweler in India it does not lead in the big cities. In most of the big cities it
is among the top 5-7 players. So, existing locations offer significant scope to increase
sales.
? Tanishq (123 stores as at FY09) has a geographical presence in 70 towns. It is present
in prime high street locations and is increasing its store sizes to capitalize on demand.
? Tanishq offers the guarantee of purity and reliability, which come from its parentage,
one of India’s most trusted business groups. This trust plays a big role in ensuring the
jeweler’s success.
? Titan launched GoldPlus, a low cost, plain, gold jewelry brand aimed at value conscious
consumers in semi urban and rural India, which accounts for 40% of the jewelry
market. The company has 30 stores under this format and sales of Rs3.9b. A scale-up
of this model will enable Titan to increase market share and growth in the interiors.
Margins at the jewelry division are a function of (1) sales proportion of GoldPlus (estimated
gross margin of 8%), studded jewelry (gross margin: 32%) and gold coins (gross margin:
3%) (2) stock turns, which should ideally be four, to enable lower holding costs 3) spends
on overheads and advertising. The jewelry business has increased EBIDTA margins by
40bp in the past few years due to operating leverage from existing stores.
OPERATIONAL LEVERAGE TO INCREASE MARGINS STUDDED JEWELRY AND GOLD COIN MIX KEY FACTOR (%)
Sales Grow th (%) - LHS 11

100 EBITDA Grow th % - LHS 10.0 Gold Coins 18 FY 11
EBITDA Margin (%) - RHS 20
FY 09
75 8.5 13 FY 07
Gold Plus 14
7.2 7
6.9
50 6.5 6.4 6.5 7.0
5.9 6.0 Diamond 24
22
Studded 24
25 5.5
Tanishq Plain 52
0 4.0 45
Gold 49
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
0.0 10.0 20.0 30.0 40.0 50.0 60.0
Monopoly has ensured a rising asset turn and RoCE

Titan is the most profitable specialty retailer and perhaps among the few with free cash
flows. The company’s financials have been bolstered by its strong competitive position in
key products and segments:
? Titan reported sales and adjusted PAT of 32.4% and 42.5% respectively, CAGR, over
FY04-09. Pricing power at the premium end in watches and better margins in studded
jewelry neutralized the impact of GoldPlus sales and falling entry level pricing of
Sonata.
4 December 2009 83
Titan Industries
Although Titan’s margins eroded due to increasing contribution from jewelry, RoCE
increased from 12.6% in FY04 to 38.8% in FY09 due to higher asset turns.
Over FY04-09 Titan’s sales and adjusted PAT grew 4.3x and 5.6x respectively, and
increased capital employed was negligible at 23%.
TITAN INDUSTRIES: RETAIL FOOTPRINT (NOS)
WORLD OF TITAN SONATA TANISHQ GOLD PLUS TITAN EYE+
FY07 205 12 88 10 N.A

FY08 226 14 101 20 10
FY09 265 10 115 30 70
INCREASING CONTRIBUTION OF JEWELRY AND LOSS MAKING BUSINESS DEPRESSES MARGINS (%)
2,400 Eye Wear (Rs m) Precision Engineering (Rs m)
12.3 11.7 1,800

11.2
10.0
8.5 8.5 1,200
8.6
7.6 8.0
600
FY10E
FY11E
FY12E
FY04
FY05
FY06
FY07
FY08
FY09
0
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
RISING ASSSET TURNS IN THE JEWELRY BUSINESS(X)... ...BOOST ROCE (%)
5.1 5.1 4.9 5.0 45.0
4.2 39.6
38.8
3.5
36.1
2.8
31.0
29.7
25.6
FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Valuation and view

Titan is expected to maintain a strong monopoly in watches and branded jewelry. We
expect watch volumes to increase by 11.9% CAGR over FY10-12. Jewelry volumes are
expected to grow at 15% CAGR. We estimate 170bp margin expansion driven by 1)
improved sales mix in favor of studded jewelry, 2) operating leverage in the jewelry business,
3) peak out of losses in eyewear business. We believe the jewelry business will drive 28%
PAT CAGR over FY10-12. Long term prospects look encouraging though there are short
term concerns on volume growth in jewelry and losses in both eyewear and precision
engineering. The stock trades at 22.7xFY11E EPS of Rs59.4 and 18.1xFY12E EPS of
Rs74.5. Neutral.
4 December 2009 84
Titan Industries
Titan Industries: Recent trends
Watch margins rising Jewelry: Inventory valuations impact margins

Sales Growth (%) PBIT Growth (%) PBIT Margin (%) Sales Growth (%) PBIT Growth (%) PBIT Margin (%)
135
22
20 67 100
55 20 71
56 51 49
38 16 7
29 12 21 32 44 7
12 19 33
14 5 6 14 6 3 9
2 4 15
10 -10 -3 -3 3 -15
-41
-30
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
Jewelry: Volume continues to shrink Gold prices hit new high

19,000
32
17,405
16,500
16
INR/10g
14,000
14,055
-3 11,500
-7.2 -7
-15
9,000
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Nov-09
Sep-09
FY09 sales mix: Jewelry is 72% of sales FY09 EBITDA mix: Watches are 50% of EBITDA
Precision PE &
Engg Eyew ear Eyew ear Watches
2% 2% Watches -6% 50%
24%
Jewelry
Jewelry
56%
72%
4 December 2009 85
Titan Industries

Change (%) 43.2 27.0 17.1 24.4 18.0 EPS 33.9 46.3 45.3 59.4 74.5
Total Expenditure -27,391 -34,779 -41,180 -50,949 -59,807 Cash EPS 40.9 54.3 52.2 66.9 82.6
EBITDA 2,546 3,255 3,351 4,436 5,534 BV/Share 98.2 124.2 153.5 194.3 241.5
Change (%) 22.1 27.8 2.9 32.4 24.7 DPS 9.4 15.1 12.6 14.9 22.4
Margin (%) 8.5 8.6 7.5 8.0 8.5 Payout % 27.6 32.7 27.8 25.0 30.0
Depreciation -297 -418 -371 -395 -425
Int. and Fin. Charges -201 -228 -361 -396 -406 Valuation (x)
Other Income - Recurring 18 53 60 19 22 P/E 39.9 29.2 29.8 22.7 18.1
Cash P/E 33.0 24.9 25.9 20.2 16.4
Profit before Taxes 2,023 2,662 2,679 3,663 4,725 EV/Sales 2.1 1.6 1.4 1.1 0.9
Change (%) 30.0 31.6 0.7 36.7 29.0 EV/EBITDA 24.4 18.8 18.1 13.5 10.6
Margin (%) 6.8 7.0 6.0 6.6 7.2 P/BV 13.8 10.9 8.8 7.0 5.6
Tax -448 -672 -723 -1,108 -1,531 Dividend Yield (%) 0.7 1.1 0.9 1.1 1.7
Tax Rate (%) -25.7 -22.8 -25.0 -28.0 -30.0
Return Ratios (%)
Profit after Taxes 1,503 2,055 2,009 2,638 3,307 RoE 34.5 37.3 29.5 30.6 30.8
Change (%) 27.2 36.8 -2.2 31.3 25.4 RoCE 31.0 38.8 36.3 40.3 44.4
Margin (%) 5.0 5.4 4.5 4.8 5.1
Extraordinary Items -80 -466 0 0 0 Working Capital Ratios
Reported PAT 1,423 1,589 2,009 2,638 3,307 Debtor (Days) 12 10 10 10 10
Asset Turnover (x) 4.2 5.1 5.3 5.5 5.7
Y/E MARCH 2008 2009 2010E 2011E 2012E

Leverage Ratio
Share Capital 444 444 444 444 444 Debt/Equity (x) 0.6 0.3 0.2 0.1 0.0
Preference Share Capital 0 0 0 0 0

Reserves 3,918 5,068 6,371 8,185 10,278
Net Worth 4,362 5,512 6,815 8,629 10,722
Loans 2,575 1,754 1,328 1,128 400 Y/E MARCH 2008 2009 2010E 2011E 2012E
Deferred Tax 247 182 235 317 431 OP/(loss) before Tax 2,249 2,838 2,980 4,041 5,109
Capital Employed 7,184 7,448 8,379 10,075 11,553 Int./Div. Received 18 53 60 19 22
Depreciation and Amort. 297 418 371 395 425
Gross Block 5,581 5,930 6,379 6,900 7,539 Interest Paid -201 -228 -361 -396 -406
Less: Accum. Depn. -2,856 -3,186 -3,493 -3,825 -4,186 Direct Taxes Paid -448 -672 -723 -1,108 -1,531
Net Fixed Assets 2,725 2,745 2,886 3,075 3,352 (Incr)/Decr in WC -938 -519 -365 -1,049 -851
Intangibles 525 461 398 335 271 CF from Operations 977 1,889 1,962 1,902 2,768
Capital WIP 100 195 100 100 100
Investments 474 77 77 77 77 Extraordinary Items -80 -466 0 0 0
(Incr)/Decr in FA -366 -445 -354 -521 -639
Curr. Assets, L&A 12,686 14,777 16,692 20,515 24,162 (Pur)/Sale of Investments -204 397 0 0 0
Inventory 10,211 12,027 13,494 16,290 18,939 CF from Invest. -650 -513 -354 -521 -639
Account Receivables 965 1,062 1,235 1,536 1,812
Cash and Bank Balance 519 547 669 1,190 1,604 Incr/(Decr) in Debt 105 -821 -426 -200 -728
Others 992 1,141 1,293 1,499 1,806 Dividend Paid -416 -672 -559 -660 -992
Curr. Liab. and Prov. 8,801 10,346 11,773 14,027 16,409 Others -4 145 -502 -1 6
Account Payables 6,538 6,967 8,029 9,985 11,779 CF from Fin. Activity -315 -1,347 -1,486 -861 -1,714
Provisions 702 857 1,203 1,479 2,050 Incr/Decr of Cash 12 28 122 521 416
Net Current Assets 3,885 4,432 4,918 6,488 7,753 Add: Opening Balance 507 519 547 669 1,190
Application of Funds 7,184 7,448 8,379 10,075 11,553 Closing Balance 519 547 669 1,190 1,604
E: MOSL Estimates
4 December 2009 86
Consumer Monopolies
SECTOR: FMCG
GSK Consumer – Mastery through malt

Buy CMP: Rs1,427 Taget Price: Rs1,692 Bloomberg: SKB IN

GSK Consumer has 70% market share in the Rs24b Rising affordability and awareness will increase
malted food drinks (MFD) category. penetration as less than 20% of the population
Cadbury is the second largest player with 15% consumes MFD; frequency of purchase is 4x a year.
market share. Dabur's Chawyan Junior is the latest We believe a huge bottom of pyramid (BOP)
entrant in the category. opportunity exists to expand the category among the
Horlicks dominates the white drinks segment, which lower middle class, through the launch of lower priced
accounts for 70% of the MFD category. Brown drinks variants.
account for 30%. Rising product visibility and consumer indulgence in
GSK's Horlicks has ~55% market share and brands organized retail will drive growth rates.
like Boost, Maltova and Viva account for 15% of the ~80% of the market is in South and East India. In the
market. North and West, the market has not developed
GSK has launched niche products like Mother's significantly, which offers a huge growth opportunity.
Horlicks, Women Horlicks and Horlicks Lite to
expand the market.

GSK has a first mover advantage and a strong brand We estimate 21% PAT CAGR over CY09-11. The stock
in the MFD category. Milo (globally No1 brand in trades at 20.1x CY10E EPS of Rs71 and 16.9x CY11E
malted drinks) has been withdrawn, which augurs EPS of Rs84.6. Buy.
well for GSK.
STOCK PERFORMANCE (ONE YEAR)
GSK has adopted a strategy of targeting consumers
at different stages of life (women, mothers and GSK Consumer Sensex - Rebased
1,600
children) that could expand the category.
GSK is test marketing a value-for-money variant
1,300
(Rs80/500gm) Horlicks Asha in Andhra Pradesh.
LUP (low unit packs) of Rs20/90gm SKU have been 1,000
launched to stimulate trials by non-users.
700
400

Equity Shares (m) 42.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
52-Week Range (Rs) 1,465/483
12/08A 15,431 1,883 44.8 16.3 31.9 7.9 24.8 38.4 3.6 23.3
1,6,12 Rel. Perf. (%) 6/48/94
12/09E 19,177 2,432 57.8 29.1 24.7 6.6 26.8 41.4 2.9 16.6
M.Cap. (Rs b) 60.1
12/10E 22,697 2,987 71.0 22.8 20.1 5.5 27.6 41.6 2.4 13.8
M.Cap. (US$ b) 1.3
12/11E 26,598 3,557 84.6 19.1 16.9 4.7 27.6 41.3 2.0 11.2
4 December 2009 87
GSK Consumer
KEY BRANDS IN MALTED FOOD GSK Consumer an undisputed leader in the Rs24b MFD category
GSK Consumer has a 70% share in the Rs24b malted food drinks (MFD) category. Cadbury
(Bournvita) and Complan from Heinz are the other prominent players with ~15% and
~13% market share respectively. Dabur recently entered this category with its Chawyan
Junior brand and HUL’s Kissan Amaze Brainfood is yet to be launched nationally. Milo,
the world’s leading brand from Nestle in this segment, quit the Indian market, which augurs
well for GSK.
GSK CONSUMER LEADS THE MFD CATEGORY... ...WITH FLAGSHIP BRAND HORLICKS
Others
Complan 2%
Others
13%
Cadbury Boost 3%
White Malted Food
15% 20%
Horlicks
77%
GSK
Consumer 70%
The malted food drinks category can be sub-divided into white and brown segments based
on their flavor. In India the white segment comprises 70% of the MFD market and the
brown segment has a 30% share. GSK has 35% share in the brown segment and Bournvita
Brown Malted Food
leads this category with 45% market share. The market is skewed geographically too: the
South and East account for nearly 80% of the MFD market and in the North and the West,
where use is driven mainly by taste, the brown segment is popular.
MFD: Low growth rates due to affordability, low awareness

Malted food drinks have been used in India as a milk substitute and their consumption is
higher in states where milk is scarce. The MFD market has been growing at a modest 6-
8% because the products are highly priced (Rs138/500gm) and therefore lack mass appeal.
Besides, the products have been facing generic competition from new products launched
on the health platform.
GENERIC COMPETITION FOR MALTED FOOD DRINKS
GSK Consumer has 70%

share in the Rs24b malted
food drinks category with
Cadbury and Heinz being the
other prominent players
4 December 2009 88
GSK Consumer
GSK has played a key role in We estimate the proportion of the Indian population consuming malted food drinks at less
consolidating the malted than 20%. South and East India are predominantly white malted drinks markets, as the
food drinks category and product has been traditionally used as a milk substitute. North and West India, on the other
Horlicks has been a key hand, are brown energy drinks markets as the product is used as a nutrient additive and
driver for GSK flavoring agent. We expect penetration to increase due to (1) launch of niche products
such as Women’s Horlicks and Mother Horlicks, (2) increased awareness and brand
building, (3) launch of Rs20 SKU, and (4) value-for-money variants aimed at the mass
market. We believe the category has evolved over years and is not price-led at the top
end. Each brand is focused on specific needs and priced accordingly (Complan is priced
about 32% higher than Horlicks). New entrant, Chyawan Junior has maintained pricing
at Rs138/500gm, at par with Horlicks.
MALTED FOOD DRINKS: COMPETITIVE MATRIX
BRAND VARIANT PRICE/GM COMPETITORS' BRAND PRICE/GM
Horlicks Basic 138/500gm Complan 178/500gm

Women 110/200gm
Mother 230/500gm
Boost Basic 135/500gm Bournvita 138/500gm
Chocoblast 135/500gm Chawyan Junior 138/500gm
GSK: Focus on category expansion, not market share

GSK gained predominance MFD as a category has evolved over the years and GSK has played a key role in
in the malted food drinks consolidating the category. Horlicks has been the key driver for GSK, even as it acquired
sector due to its first-mover brands such as Boost, Maltova (Jagatjit Industries) and Viva over the years. GSK gained
advantage and exclusive predominance in the sector due to its first-mover advantage and exclusive focus on this
focus on this product product segment.
segment
MALTED FOOD DRINKS DOUBLE DIGIT VOLUME GROWTH TO SUSTAIN
15.8%
12.0%
CY08 volume growth 11.0%
10.3%
was boosted by 98%
9.1% 9.1%
increase in exports
7.1%
CY05 CY06 CY07 CY08 CY09E CY10E CY11E
We believe GSK is well placed to maintain its dominance in this product category because:
GSK’s flagship brand, Horlicks, is positioned on the nutrition platform in the white
drinks segment and Boost is positioned on the energy platform in the brown drinks
segment.
Horlicks has launched flavors such as vanilla, toffee, elaichi and chocolate, which has
created excitement in the white category and increased the brand’s relevance to young
consumers.
4 December 2009 89
GSK Consumer
GSK is targeting various GSK is targeting various consumers such as women, mothers and children aged between
consumers such as women, two and 10 years with products like Women’s Horlicks, Mother Horlicks, Acti Base
mothers and children aged and Acti Grow.
between two and 10 years
through variants of Horlicks NEW LAUNCHES HAVE CATERED TO A VARIED CONSUMER BASE
GSK is test marketing a value for money variant, Horlicks Asha (Rs80/500gm) in
Andhra Pradesh to tap opportunity at the bottom of the pyramid.
The company has tested the waters with LUP (low unit packs) of Rs20/90gm SKUs
to stimulate trials by non-users, and the response has been encouraging.
GSK ensures steady margins

GSK maintained GSK reported sales CAGR of 17% (volume growth of 10.5%) and PAT CAGR of 21%
EBITDA margins at over CY05-08. Despite a steady increase in prices of key inputs such as milk and malt (9-
16-17% due to operating 16% CAGR), GSK’s monopolistic position has enabled it to maintain gross margins of 62-
leverage in employee cost, 67% over CY05-08, led by improved sales mix (contribution from value added brands and
manufacturing cost and judicious price increase). Sustained volume growth in malted foods has enabled GSK to
selling and distribution costs get benefits of economies of scale and efficiency. Despite a marginal contraction in gross
margins, GSK maintained EBITDA margins at 16-17% due to operating leverage in
employee cost, manufacturing cost and selling and distribution costs.
GSK MARGINS STEADY INPUT COST INDEX RISING GRADUALLY
Gross Margin (%) Milk Pow er

EBITDA Margins (%) Milk Fluid
19.0 Malt and Malt Extracts
280
16.7 17.5 17.2 17.6 253
15.4
67 17.8
230
209
65 199 216
65
180
63 63 137 181 172
62 62
130
130
110
80
CY09E
CY10E
CY11E
CY05
CY06
CY07
CY08
CY09E
CY10E
CY11E
CY05
CY06
CY07
CY08
4 December 2009 90
GSK Consumer
The company posted ROE of ~25%, even as more than 50% of its capital employed is in
cash/cash equivalent. Historically, the company has retained profits (payout ~30%) despite
a low capex requirement.
ROE IS IMPACTED BY RS4.5B CASH (%) GSK HAS LOWEST PAYOUT RATIO AMONG MNCS (%)
Payout Ratio % (LHS)

27.6 27.6 Dividend Yield % (RHS)
26.8 2.6
2.2
25.1
1.8 1.8
1.6 1.4
23.4 1.4 36
24.8 35
22.4
34
33 33
32 31
CY09E
CY10E
CY11E
CY05
CY06
CY07
CY08
CY09E
CY10E
CY11E
CY05
CY06
CY07
CY08
Valuation and view

GSK has GSK has had an unassailable monopoly in the malted food drinks category after the
had an unassailable withdrawal of Milo by Nestle. GSK launched Women's Horlicks, Nutribar, Chill Dhood,
monopoly in the malted food Actibase and Acti Grow in the past two years. The company is test marketing a value-for-
drinks category after the money brand, Horlicks Asha, (Rs80/500gm). We estimate 10.6% volume growth in malted
withdrawal of Milo by Nestle food drinks. and a 60bp margin expansion over CY09-11 despite by higher adspends on
new launches. We expect PAT CAGR of 21% over CY09-11. The stock trades at 20.1x
CY10E EPS of Rs71 and 16.9x CY11E EPS of Rs84.6. Sustained growth in profits and
increase in dividend payout (33.5%) can further re-rate the stock. Buy.
4 December 2009 91
GSK Consumer
GSK Consumer: Recent trends
Decline in exports impact 3QCY09 sales 3QCY09 volume growth at a 10-quarter low (%)
Net Sales (Rs m) - LHS Grow th (% YoY) - RHS 20
6,000 17
31.4
16
25.8 16
4,500 24.5 13.5
13 13
19.3 20.2 12
12
3,000 16.6 17.3
17.2
8
1,500 8 7
6
7.3
0 4
Mar-08
Mar-09
Dec-07
Jun-08
Dec-08
Jun-09
Sep-07
Sep-08
Sep-09
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-07
Sep-08
Sep-09
Increased adspend impact margins Low volume growth, adspend impact profit growth
Gross Margin (%) - LHS EBITDA Margin (%) - RHS PAT (Rs m) - LHS PAT Grow th (% YoY) - RHS
1,000
66 22.0 48.3
19.3 19.4 65
800 39.4
65 15.9 33.8
14.5 15.9
14.9 63
600
62 62
18.5 19.6
61 400 9.1
12.6 12.1 60 9.1 13.2
60 5.0
200
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-07
Sep-08
Sep-09
Sep-07
Sep-08
Sep-09
Milk price index rising steadily Barley prices firm (Rs/qtl)
270 1,120
1,069
249.4
245 1,040
1,007
220 960
216.1
195 880
881
182.3
170 800
Jan-06
May-06
Jan-07
May-07
Jan-08
May-08
Jan-09
May-09
Sep-06
Sep-07
Sep-08
Sep-09
Jul-09
Jul-09
Jul-09
Jun-09
Oct-09
Oct-09
Nov-09
Sep-09
Sep-09
Aug-09
Aug-09
4 December 2009 92
GSK Consumer
Y/E DECEMBER 2008 2009E 2010E 2011E 2012E Y/E DECEMBER 2008 2009E 2010E 2011E 2012E

Change (%) 20.8 24.3 18.4 17.2 17.2 EPS 44.8 57.8 71.0 84.6 103.3
Total Expenditure -13,043 -15,877 -18,707 -21,853 -25,485 Cash EPS 54.8 68.1 82.3 97.9 117.2
BV/Share 180.9 215.7 257.7 306.6 364.6
EBITDA 2,388 3,301 3,990 4,745 5,699 DPS 15.0 19.7 24.9 30.4 38.7
Change (%) 6.8 38.2 20.9 18.9 20.1 Payout % 33.5 34.0 35.0 36.0 37.5
Margin (%) 15.5 17.2 17.6 17.8 18.3
Depreciation -419 -431 -473 -560 -588 Valuation (x)
Int. and Fin. Charges -82 -65 -65 -60 -60 P/E 31.9 24.7 20.1 16.9 13.8
Other Income - Recurring 955 890 995 1,135 1,371 Cash P/E 26.1 21.0 17.3 14.6 12.2
Profit before Taxes 2,841 3,694 4,447 5,260 6,422 EV/Sales 3.6 2.9 2.4 2.0 1.6
Change (%) 16.2 30.1 20.4 18.3 22.1 EV/EBITDA 23.3 16.6 13.8 11.2 8.9
Margin (%) 18.4 19.3 19.6 19.8 20.6 P/BV 7.9 6.6 5.5 4.7 3.9
Tax -1,064 -1,404 -1,623 -1,894 -2,312 Dividend Yield (%) 1.1 1.4 1.7 2.1 2.7
Deferred Tax 107 141 163 190 232

Return Ratios (%)
Tax Rate (%) -33.7 -34.2 -32.8 -32.4 -32.4
RoE 24.8 26.8 27.6 27.6 28.3
RoCE 38.4 41.4 41.6 41.3 42.3
Change (%) 16.3 29.1 22.8 19.1 22.1
Margin (%) 12.2 12.7 13.2 13.4 13.9 Working Capital Ratios
Reported PAT 1,883 2,432 2,987 3,557 4,342 Debtor (Days) 10 9 9 9 9
Asset Turnover (x) 2.0 2.1 2.1 2.1 2.0
Leverage Ratio
Y/E DECEMBER 2008 2009E 2010E 2011E 2012E
Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0
Share Capital 421 421 421 421 421
Reserves 7,188 8,653 10,416 12,475 14,912
Net Worth 7,609 9,073 10,837 12,896 15,333
Capital Employed 7,609 9,073 10,837 12,896 15,333 Y/E DECEMBER 2008 2009E 2010E 2011E 2012E
OP/(loss) before Tax 1,968 2,870 3,517 4,186 5,111

Gross Block 5,395 6,259 8,459 8,859 9,259 Int./Div. Received 955 890 995 1,135 1,371
Less: Accum. Depn. -3,292 -3,723 -4,196 -4,755 -5,343 Depreciation and Amort. 419 431 473 560 588
Net Fixed Assets 2,102 2,536 4,263 4,104 3,916 Interest Paid -82 -65 -65 -60 -60
Capital WIP 163 163 163 163 163 Direct Taxes Paid -1,064 -1,404 -1,623 -1,894 -2,312
Investments 4,505 4,730 4,500 6,000 8,000 (Incr)/Decr in WC -412 -758 -487 -487 -580
Curr. Assets, L&A 4,029 5,281 6,219 7,700 9,232
Inventory 2,772 3,678 4,477 5,320 6,322 (Incr)/Decr in FA -148 -864 -2,200 -400 -400
Account Receivables 433 479 567 665 780 (Pur)/Sale of Investments -1,527 -225 230 -1,500 -2,000
Cash and Bank Balance 205 394 336 758 1,035 CF from Invest. -1,675 -1,089 -1,970 -1,900 -2,400
Others 620 730 838 958 1,096
Issue of Shares 0 0 0 0 0
Curr. Liab. and Prov. 3,125 3,430 3,939 4,511 5,186 (Incr)/Decr in Debt 0 0 0 0 0
Account Payables 2,167 2,397 2,755 3,162 3,627 Dividend Paid -631 -827 -1,045 -1,280 -1,628
Other Liabilities 626 666 722 784 843 Others -211 142 148 163 188
Provisions 332 366 462 565 717 CF from Fin. Activity -842 -685 -897 -1,117 -1,440
Net Current Assets 904 1,851 2,281 3,189 4,046
Incr/Decr of Cash -732 189 -58 421 277
Deferred Tax Liability -66 -207 -370 -560 -793 Add: Opening Balance 937 205 394 336 758
Application of Funds 7,609 9,074 10,837 12,896 15,333 Closing Balance 204 394 336 758 1,035
E: MOSL Estimates
4 December 2009 93
Consumer Monopolies
SECTOR: FMCG
Gillette India – Cutting edge

Not Rated CMP: Rs1,336 Bloomberg: GILL IN

Gillette India has a 30% share in the ~Rs17b male The Indian male grooming market is growing at ~10%
grooming products segment. CAGR and this growth rate can accelerate to 12-15%
Shaving blades and systems comprise 75% of the in coming years led by increasing proportion of white
male grooming market and deodorants, hair care and collar jobs and rising aspirations.
skin care account for the rest of the market. Despite being highly skewed towards double edged
Malhotra Shaving (Topaz, Laser), Vidyut Metallic blades, twin edged disposables and shaving systems
(SuperMax) and HUL (Axe) are key competitors with (twin blade and triple blade) are increasingly
market shares of 14%, 10% and 10% respectively. penetrating the wet shaving market.
Gillette has firm control on the systems market with The proportion of barber service users is declining in
brands like Sensor Excel and Mach3 Turbo in the India, reflecting an increasing base for disposables
premium end and Vector Plus and Presto in the and advanced shaving systems.
economy segment.
The shaving blade brands consist of Gillette, 7'O
Clock and Wilkinson.

Gillette's strength lies in the technology of its parent. Steady sales growth of 10% CAGR over FY03-09 and
It launched global brands like Mach III Turbo at the high margins (~27%) enabled Gillette to report high
premium end and developed Vector Plus in the RoE of 23%. The stock trades at 37x CY08 EPS.
economy segment for the Indian market. STOCK PERFORMANCE (ONE YEAR)
Brands like Vector Plus and Presto improved

Gillette India Sensex - Rebased
affordability and increased investment in brand 1,600
building raised awareness.
Gillette is targeting the upper and middle classes in 1,300
India and has constantly pursued strategies to
1,000
upgrade consumers.
Gillette adopted a price skimming strategy in shaving 700
gels, foams, brushes and deodorants.
400

Equity Shares (m) 96.4 YEAR NET SALES PAT* EPS EPS P/E P/BV ROE ROCE EV/ EV/
52-Week Range 1,408/601
12/06 4,724 687 21.1 - 63.3 12.5 19.7 35.4 8.7 33.0
1,6,12 Rel. Perf. (%) 5/39/-5
M.Cap. (Rs b) 94.5 12/07 8,022 1,424 43.7 107.1 30.6 12.1 39.6 58.9 5.2 17.5
M.Cap. (US$ b) 2.2 12/08 6,247 1,174 36.0 -17.5 37.1 10.2 27.6 42.4 6.8 21.8
* Excluding extraordinary items and provisions
4 December 2009 94
Gillette India
Gillette leads the male grooming segment

Gillette, which Gillette is synonymous with advanced shaving systems in India (twin blade and triple
is synonymous with blade). It holds a 30% share in Rs17b Indian male grooming segment. Other significant
advanced shaving systems in players are Malhotra Shaving (Laser), Vidyut Metallic (SuperMax) and HUL (Axe) whose
India, holds a 30% share in market share is 14%, 10% and 10% respectively.
the Rs17b Indian male
grooming segment GILLETTE HAS 30% SHARE OF THE MALE GROOMING MARKET
Others Gillette
36% 30%
HUL Malhotra
10% Vidyut Mettalics Shaving
10% 14%
In the male grooming market, shaving blades and systems comprise 75% (Rs13b) and
deodorant, hair care, skin care and others account for about 6% each. Gillette has 40%
share in the shaving blades and systems market while House of Malhotra has 14% share.
INDIAN MALE GROOMING MARKET BLADES AND RAZORS: A RS13B OPPORTUNITY
Pre
Razor
Shave
and
14%
Skin Blades Others
60% Gillette
Care 37%
40%
5%
Hair
Care
7%
Vidyut Malhotra
Deo 8% Men's Razor and Mettalics Shaving
Show er Blades 60% 9% 14%
6%
GILLETTE HAS THE MOST COMPREHENSIVE OFFERING IN MALE GROOMING PRODUCTS SEGMENT
4 December 2009 95
Gillette India
Gillette is present in major categories in the male grooming market: shaving blades and
systems, deodorants, shaving gels and foams. HUL is present in the shaving creams, face
creams and deodorants segments and Emami and Nivea are fast emerging as key players
in the male skin care segment.
Male grooming market to grow at 12-15% CAGR

The Indian male grooming is The Indian male grooming market posted CAGR of 10% over FY04-09 and we expect
expected to grow by 12-15% this to increase to 12-15% over the next three years, led by a rising proportion of white-
over the next three years, led collar jobs and rising aspirations. Skin whitening creams and deodorants are the fastest
by a rising proportion of growing segments of the market. Although small (Rs2b) these segments are likely to grow
white-collar jobs and rising by over 20% CAGR. The launch of male dedicated products by HUL, Emami and Nivea
aspirations has helped to expand this niche market.
The shaving blades market is dominated by double edged blades, which account for about
two-thirds of it. The market for shaving blades and systems is undergoing significant
evolution. We believe male grooming products will maintain double digit growth as:
A rising proportion of white collared working people will increase the incidence of
daily shaving in India.
A significant part of the population in rural India and small towns have poor frequency
of shaving, which will increase with availability of free flow of water and rising
Skin whitening creams awareness.
and deodorants are the There are opportunities in increasing penetration of advanced shaving systems as
fastest growing segments of rising manpower costs will reduce the proportion of barber-service users. This will
the Indian male grooming result in increasing the number of consumers using advanced shaving systems.
market and are likely to A rising need to look and feel good will increase the growth rates for men’s grooming
grow by over 20% CAGR products like deodorants, after shave lotions and skin creams.
Gillette well placed to capitalize on emerging growth opportunity

Gillette is expected to be one We believe Gillette will be one of the biggest beneficiaries of change in skin care habits by
of the biggest beneficiaries the Indian male population. Even though Gillette is not present in the high growth skin
of change in the skin care creams market and has limited presence in the deodorant market in India, it is well placed
habits by the Indian male to capture the expected surge in demand for male grooming products as:
population Gillette is backed by Gillette Co USA, the global leader in men’s shaving products.
The company is credited with the launch of top of the line shaving systems like Gillette
Sensor, Sensor Excel, Mach3 and Mach3 Turbo.
Gillette has developed Vector Plus for developing markets like India. The product has
a push blade system, designed for markets where free flowing water is not available.
The company has been educating consumers regarding the benefits of using its systems.
Although Gillette's long term focus remains the high end systems market; the company
launched Gillette, Wilkinson and 7 O'Clock blades, targeting double-edged blade
users. This helps to establish higher consumer connect and gradually upgrade them to
systems.
Gillette has the most comprehensive range of male grooming products, including shaving
systems, shaving gels, after shave lotions and deodorants, which enable the company
to offer a complete solution.
4 December 2009 96
Gillette India
Ensuring high margins

For Gillette India, male For Gillette India, male grooming products account for 74% of sales, portable power accounts
grooming products account for 6% and oral care for 20%. The company has EBIT and PAT margins of 27% and 16%
for 74% of sales, portable respectively. Male grooming is the most profitable segment for the company with sales
power accounts for 6% and and EBIT contribution of 74% and 83% respectively. High margins and bargaining power
oral care for 20% in this segment have enabled the company to maintain ROCE of over 40% and strong free
cash flows.
Steady sales CAGR of 10% Steady sales CAGR of 10% over FY03-09 and robust margins (27%) have enabled the
over FY03-09 and robust company to report high ROE of 23%. With a payout of 36%, the stock offers yield
EBIT margins of 27% have of ~1%.
enabled the company to
SALES MIX (CATEGORY WISE) FY09 VOLUMES IMPACTED BY DISTRIBUTION HICCUPS
report high ROE of 23%
Others 27.6 Shaving Systems
Toiletries Shaving Systems
2% Volume grow th
9% and Catridges, 36%
Batteries
5%
13.3
Tooth
2.8
brush
20% Safety Razor
Blades FY07 FY08 FY09
28%
SEGMENTAL REVENUE BREAK-UP SEGMENTAL PBIT MIX
Oral Portable Oral

Portable Care Pow er Care
Pow er 21% 3% 14%
5%
Grooming Grooming
74% 83%
FY09 SEGMENTAL RESULTS (RS M) TREND IN MARGINS (%)

REVENUES PBIT PBIT
Gross Margin EBIT Margin
MARGIN (%)
Grooming 4,877 1,310 26.9 31.4

Portable Power 354 47 13.3 29.7
64.4
Oral Care 1,383 218 15.8
62.2
Total 6,615 1,576 23.8 62.8
27.1
50.6
26.4
FY06 FY07 FY08 FY09
4 December 2009 97
Gillette India
TREND IN ROE AND ROCE PAYOUT OF ~35%
RoE RoCE EPS DPS Payout (%)

75.0 43.7
59
36.0 34.7
42 40.1
40 34.7
21.1
17.5 36.0
35 36 15.8
28 12.5 12.5
23
20
FY06 FY07 FY08 FY09 FY06 FY07 FY08 FY09
Valuation and view

Gillette is expected to Gillette has a strong monopoly in male shaving systems where it is the global leader. Male
maintain growth in the low grooming contributes 74% to sales and 83% to profits of the company. It has 27% EBIT
to mid teens in the Indian margins in this business. We expect Gillette to maintain growth of low to mid teens in the
male grooming segment in male grooming segment in the coming years. The company could gain significantly from
the coming years the expected increase in disposable income and improved consumer lifestyles. In the past
couple of years Gillette's PAT fell 10% but we expect the company to gain after the
integration with P&G.. The stock trades at 37x CY08 EPS. Not rated.
4 December 2009 98
Gillette India
Y/E DECEMBER 2006 2007 2008 2009E Y/E DECEMBER 2006 2007 2008 2009E
Net Sales 4,724 8,022 6,247 6,945 Basic (Rs)

Change (%) 69.8 -22.1 11.2 EPS 21.1 43.7 36.0 34.7
Total Expenditure 3,475 5,640 4,285 5,061 Cash EPS 25.9 42.1 37.6 38.2
BV/Share 106.9 110.4 130.6 150.6
EBITDA 1,249 2,383 1,962 1,884 DPS 15.8 17.5 12.5 12.5
Change (%) 90.7 -17.7 -4.0 Payout % 75.0 40.1 34.7 36.0
Margin (%) 26.4 29.7 31.4 27.1
Depreciation 156 223 140 114 Valuation (x)
Int. and Fin. Ch. 0 0 0 0 P/E 63.3 30.6 37.1 38.5
PBT 1,093 2,160 1,822 1,770 Cash P/E 51.7 31.7 35.6 34.9
Change (%) 11.7 97.5 -15.6 -2.8 EV/Sales 8.7 5.2 6.8 6.1
Margin (%) 23.1 26.9 29.2 25.5 EV/EBITDA 33.0 17.5 21.8 22.6
Tax 430 781 673 628 P/BV 12.5 12.1 10.2 8.9
Deferred Tax -24 -45 -25 11 Dividend Yield (%) 1.2 1.3 0.9 0.9
Tax Rate (%) 37.1 34.1 35.6 36.1
Adjusted PAT 687 1,424 1,174 1,131 Return Ratios (%)
Change (%) 107.1 -17.5 -3.6 RoE 19.7 39.6 27.6 23.0
Margin (%) 14.5 17.7 18.8 16.3 RoCE 35.4 58.9 42.4 35.7
Non-rec. (Exp)/Inc. 0 -274 -89 1
Reported PAT 687 1,149 1,084 1,132 Working Capital Ratios
Debtor (Days) 27 29 38 32
BALANCE SHEET (RS MILLION) Asset Turnover (x) 1.3 2.2 1.5 1.4
Y/E DECEMBER 2006 2007 2008 2009E
Share Capital 326 326 326 326 Leverage Ratio
Reserves 3,156 3,270 3,928 4,583 Debt/Equity (x) 0.0 0.0 0.0 0.0
Net Worth 3,482 3,596 4,254 4,909

Loans 0 0 0 0
Deffered Tax 117 72 47 49 Y/E DECEMBER 2006 2007 2008 2009E
Capital Employed 3,599 3,668 4,301 4,957 OP/(loss) before Tax 1,094 2,160 1,822 1,770
Int./Div. Received 179 0 0 0
Gross Block 2,726 2,580 2,538 2,468 Depreciation and Amort. 156 223 140 114
Less: Accum. Depn. -1,399 -1,515 -1,621 -1,577 Interest Paid 0 0 0 0
Net Fixed Assets 1,327 1,065 918 891 Direct Taxes Paid 430 781 673 628
Capital WIP 37 6 30 24 (Incr)/Decr in WC -71 -301 -381 -172
Investments 0 0 0 0 CF from Operations 1,788 2,863 2,254 2,341
Curr. Assets, L&A 4,443 5,933 5,152 5,548 (Incr)/Decr in FA -71 372 -1,089 -830
Inventory 499 827 1,032 1,010 CF from Invest. -71 372 -1,089 -830
Account Receivables 344 640 644 606
Cash and Bank Balance 2,297 1,728 764 926 Dividend Paid -3259 -5703 -4073 -4073
Loans & Adv. 1,304 2,739 2,712 3,007 Others 1,899 1,900 1,945 2,724
Curr. Liab. and Prov. 2,208 3,336 1,798 1,506 CF from Fin. Activity -1,360 -3,803 -2,128 -1,349
Account Payables 671 1,043 1,260 980
Provisions 1,537 2,294 539 527 Incr/Decr of Cash 357 -568 -963 162
Net Current Assets 2,235 2,597 3,354 4,042 Add: Opening Balance 1,939 2,297 1,728 764
Application of Funds 3,599 3,668 4,301 4,958 Closing Balance 2,297 1,728 765 926
E: MOSL Estimates
4 December 2009 99
Consumer Monopolies
SECTOR: FMCG
Jyothy Laboratories – Competition white washed

Not Rated CMP: Rs184 Bloomberg: JYL IN

Jyothy Laboratories (JLL) is the market leader in the Fabric whitener has 35% penetration in homes that
~Rs4b fabric whitener market with 75% market share use detergent. The category faces competition from
with its Ujala brand. The only competitor in the high quality detergents and other stain removers. The
category is Reckitt Benckiser's Robin Blue (~5% inherent volume growth in this category is just 5%.
market share). Rising aspirations, declining use of whites and
Ujala has been ranked 45th among the 100 most increased use of washing machines limit a major
trusted brands in India. The category has evolved increase in volume growth.
around Ujala in the past 20 years. Earlier Robin Blue Fabric whitener as a category has evolved from the
had emerged as a generic brand in this segment in powder (Neel) to the current liquid whitener. Break
the powder (Neel) segment. through technology and better formulation has led to
Fabric whitener is a low involvement category with liquids occupying 80-85% share among fabric
spend of only Rs12 in 6-12 months. whiteners.

Superior formulation and continued spends on 38% payout ratio ensures 43% ROE and 1.5% dividend
consumer awareness have made Ujala a generic yield. The stock trades at 33.3x FY09 EPS of Rs5.5.
name in the category. Not Rated.
Jyothy Labs offers a price value equation (Rs12/75ml) STOCK PERFORMANCE (ONE YEAR)
that enables it to reach consumers across income

Jyothy Labs Sensex - Rebased
slabs. 200
Distribution is crucial in the marketing of fabric
whiteners and Jyothy Labs has a reach of 2.9m 160
outlets and a dedicated sales force to cater to the
unique requirements of the category. 120
80
40

3/06A 3,794 468 6.5 - 28.3 5.2 18.3 18.3 3.2 19.8
1,6,12 Rel. Perf. (%) 17/81/144
3/07A 4,471 516 6.8 4.3 27.2 4.5 17.6 17.6 2.8 19.3
M.Cap. (Rs b) 13.4 3/08A 4,085 524 6.5 -3.6 28.2 4.1 15.9 15.9 3.0 16.1
M.Cap. (US$ b) 0.3 3/09A* 3,799 401 5.5 -15.3 33.3 3.8 11.4 11.4 3.3 21.4
*FY09 results are for 9 months ending March
4 December 2009 100

Jyothy Laboratories
Ujala has 75% market share in fabric whiteners

Jyothy Laboratories, The niche Rs4b fabric whitener category is dominated by Jyothy Laboratories’ Ujala,
which commands 75% of the which commands 75% market share, followed by Reckitt Benckiser’s Robin Blue with
fabric whitener market, led about 5% share. The category has evolved as the use of the whitener in powdered form
shift in the consumption (mostly by unorganized players) has fallen to an estimated 20%.
trend from powdered fabric
whitener to liquids Jyothy has led shift in the consumption trend from powdered fabric whitener to liquids due
to superior product experience (no stains), attractive pricing and a dedicated sales force.
Ujala pushed Robin Blue to a small market share despite Reckitt Benckiser launching
Robin Blue in liquid form and a similar color (violet) formulation to Ujala.
UJALA HAS 75% SHARE IN THE FABRIC WHITENER MARKET (%)
Others, 20
Ujala pushed Robin Blue to a
small market share despite
Reckitt Benckiser launching
Robin Blue in liquid form Reckitt Benckiser, 5
and in a similar color

(violet) formulation to Ujala
Jyothy Labs, 75
Fabric whitener to remain a low volume growth category

The fabric whitener segment Fabric whiteners have 35% product penetration, which is very low in comparison to more
is one of the few product than 90% for detergents. The fabric whitener segment is one of the few product segments
segments in which rural sales in which rural sales exceed urban sales.
exceed urban sales
FABRIC WHITENERS (VOLUME IN '000 LITERS) FABRIC WHITENERS (VALUE, IN MILLION)
FY07 FY08 FY09 FY07 FY08 FY09

40,000 4,800
30,000 3,600
20,000 2,400
10,000 1,200
0 0
Total Urban Rural Total Urban Rural
4 December 2009 101

Jyothy Laboratories
It is a low involvement It is a low involvement category that is growing volumes in low to mid single digits (5-6%).
category but increasing The low category growth despite 35% penetration is due to:
spends on consumer Lack of awareness rather than lack of affordability.
awareness are likely to Rising use of washing machines and high end detergents impacting.
result in steady volume Rising incomes leading to lower use of white clothes except as uniforms.
growth for Ujala
We believe increasing spends on consumer awareness are likely to result in steady volume
growth for Ujala. The use of the product does not change with rising affordability, which
will keep the category as a slow but steady growth segment.
Jyothy to retain leadership in niche segment

Jyothy Laboratories has created the liquid fabric whitener category virtually from scratch.
Ujala is backed by a scalable price-value equation and price points that cater to all sections
GENERIC FABRIC WHITENER BRAND of the population. Jyothy Laboratories offers a price-value proposition (Rs12/75ml) that
makes the brand relevant to urban and rural consumers. Ujala Supreme is available in
9ml, 30ml, 75ml, 125ml and 250ml packs.
We believe Ujala has become a generic brand for fabric whitener and is best placed to
ride the increasing penetration in the segment as:
The company has proprietary technology and product which is only manufactured in-
house. There is no outsourcing of the product.
Jyothy Laboratories has a reach of 2.9m outlets (direct reach of 1m outlets) and a
dedicated sales force that caters to the unique requirements of the category with small
sized and low value SKUs. The company has developed the distribution with a
partnership approach with its distributors, which has enabled the company to enter
new categories.
Fabric whitener has not Jyothy's sales force is on its rolls and not on contract or on the rolls of dealers. This
attracted large players as the has enabled improved production planning, high level of commitment and better results.
small size of the category Fabric whitener has not attracted large players as the small size of the category (Rs4b),
(Rs4b), low consumer low consumer involvement and small unit price make it unattractive for them. Besides,
involvement and low unit the company is evolving the category; it has extended the product to include Ujala
price make it unattractive Stiff and Shine, which offers consumers dual benefits.
Ujala a cash cow, funding expansion in new categories

We estimate Ujala contributes 40% of Jyothy Laboratories' turnover and 60% of PBIT.
Ujala has gross margins of 60% with high pricing power. The company raised prices by
one rupee whenever input cost pressures pushed gross margins below the targeted 60%.
Ujala is a cash cow for Jyothy Laboratories and has enabled it to invest cash flows in
new growth drivers like Maxo (mosquito repellant), Exo (utensil cleaner) and Fabric
Spa. The company plans to take Exo utensil cleaner national and has extended its Ujala
detergent powder brand to South India.
4 December 2009 102

Jyothy Laboratories
India. Strong performance from Ujala fabric whitener has enabled Jyothy to report 43%
ROE and dividend payout of 38%.
FY09: SALES MIX* (%) FY09: PBIT MIX* (%)
Soaps &
Home
Detergents, 94
Care, 44
Home
Care, 6
Soaps &
Detergents, 56
ROE TREND* (%) …WITH AN INCREASING PAYOUT* (%)
18.3
17.6 36.2
15.9 30.6
19.3
18.5
11.4
FY06 FY07 FY08 FY09 FY06 FY07 FY08 FY09
*FY09 financials are for 9 months Source: Company/MOSL
Valuation and view

Jyothy Labs continues to grow Ujala fabric whitener at mid single volume growth with
60% gross margins. Jyothy has been investing cash flows from Ujala in incubating new
businesses like mosquito repellents (Maxo), dish washing bar (Exo), and detergent and
laundry care services. The company is taking the Exo dish washing soap national and
Ujala washing powder has been extended to south India. It has also started its modern
Fabric Spa in Bangalore recently. Exo, Maxo and Ujala detergents are likely to be major
growth drivers in the near term. The stock trades at 33.3x FY09 EPS of Rs5.5.
Not Rated.
4 December 2009 103

Jyothy Laboratories
Y/E MARCH 2006 2007 2008 2009 Y/E MARCH 2006 2007 2008 2009
Net Sales 3,794 4,471 4,085 3799 Basic (Rs)

Change (%) 17.9 -8.6 -7.0 EPS 6.5 6.8 6.5 5.5
Total Expenditure 3,184 3,818 3,314 3,221 BV/Share 35.1 40.5 45.3 48.5
DPS 1.3 1.3 2.0 2.0
EBITDA 610 653 771 578 Payout (%) 19 19 31 36
Change (%) 7.1 18.1 -25.1
Margin (%) 16.1 14.6 18.9 15.2 Valuation (x)
Depreciation -52 -62 -74 -68 P/E 28.3 27.2 28.2 33.3
Interest -1 -2 -7 -4 EV/Sales 3.2 2.8 3.0 3.3
PBT 557.0 589.3 690.3 505.8 EV/EBITDA 19.8 19.3 16.1 21.4
Change (%) 5.8 17.1 -26.7 P/BV 5.2 4.5 4.1 3.8
Margin (%) 14.7 13.2 16.9 13.3 Dividend Yield (%) 0.7 0.7 1.1 1.1
Tax 59 76 144 86
Deferred Tax 30 -3 22 19 Return Ratios (%)
Tax Rate (%) 16 12 24 21 RoE 18.3 17.6 15.9 11.4
Adjusted PAT 468 516 524 401 RoCE 18.3 17.6 15.9 11.4
Change (%) 10.4 1.6 -23.4
Margin (%) 12.3 11.5 12.8 10.6 Working Capital Ratios
Non-rec. (Exp)/Inc. 3.9 -24.4 -50.1 0 Debtor (Days) 31.0 33.2 22.6 40.7
Reported PAT 471 492 474 401 Asset Turnover (x) 1.5 1.5 1.2 1.1
BALANCE SHEET (RS MILLION) Leverage Ratio
Y/E MARCH 2006 2007 2008 2009

Debt/Equity (x) 0.0 0.0 0.0 0.0
Share Capital 73 73 73 73
Reserves 2,475 2,865 3,219 3,451
Net Worth 2,548 2,938 3,292 3,523
Loans 1 2 2 2 Y/E MARCH 2006 2007 2008 2009
Capital Employed 2,549 2,939 3,294 3,525 PBT before EO items 468 516 524 401
Add : Depreciation 52 62 74 68
Gross Block 1,074 1,353 2,179 2,283 Interest 1 2 7 4
Less: Accum. Depn. 240 297 365 432 Less : Direct taxes paid 90 73 166 105
Net Fixed Assets 834 1,056 1,814 1,851 (Inc)/Dec in WC -394 -324 106 93
Capital WIP 84 573 91 61 CF from Operations 216 329 878 671
Investments 17 17 23 173
Curr. Assets, L&A 1,970 1,767 2,016 2,186 (Incr)/Decr in FA -122 -398 -968 -238
Inventory 236 397 425 429 (Pur)/Sale of Investments -17 0 -6 -150
Account Receivables 322 407 253 424 CF from Invest. -139 -398 -974 -388
Cash and Bank Balance 1,277 768 955 1,002
Loans and Advances 134 195 383 331 Inc/(Dec) in networth 1,924 -217 -315 -315
Inc/(Dec) in debt 1 1 0 0
Curr. Liab. and Prov. 298 419 562 638 Less : Interest paid -1 -2 -7 -4
Account Payables 226 369 341 388 Dividend paid 91 91 145 145
Other Liabilities 0 0 0 0 Others -1,706 -313 460 -62
Provisions 72 50 221 250 CF from fin. activity 309 -441 283 -236
Net Curr. Assets 1,672 1,348 1,454 1,547 Incr/Decr of Cash 386 -510 187 48
Def. Tax Liability -57 -55 -88 -107 Add: Opening Balance 892 1,277 768 955
Appl. of Funds 2,549 2,939 3,294 3,525 Closing Balance 1,277 768 955 1,002
Source: Company
4 December 2009 104

N O T E S
4 December 2009 105

N O T E S
4 December 2009 106

N O T E S
4 December 2009 107

For more copies or other information, contact
Institutional: Navin Agarwal. Retail: Manish Shah
Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com
Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021
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Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely
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Disclosure of Interest Statement ITC HUL Nestle Asian Paints United Spirits GSK Cons. Titan Ind Colgate Marico
1. Analyst ownership of the stock No No No No Yes No No No No
2. Group/Directors ownership of the stock Yes Yes No No No No No No Yes
3. Broking relationship with company covered No No No No No No No No No
4. Investment Banking relationship with company covered No No No No No No No No No
This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required
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December 2009

Nikhil Kumar (Nikhil.N@MotilalOswal.com); Tel:+91 22 3982 5120

Monopolies rule .................................................................................................. 6

How monopolies are created ...........................................................................7-9

Benefits/implications of a consumer monopoly .......................................... 10-11

How consumer monopolies are placed on the BCG matrix ............................ 12

FMCG demand to accelerate ..................................................................... 13-15

Financial performance and valuations ............................................................. 18

Top picks ...................................................................................................... 19-20

Companies ................................................................................................. 24-104

ITC: The smoke king ...................................................................... 25

Hindustan Unilever: Soap opera .................................................... 33

Nestle India: Go for gold ................................................................ 41

Asian Paints: Colors of a leader ..................................................... 50

United Spirits: High on acquisitions ............................................... 58

Colgate: Smile all the way............................................................... 66

Marico: Well oiled ........................................................................... 73

Titan Industries: Leading in time ................................................... 79

GSK Consumer: Mastery through malt ........................................ 87

Gillette India: Cutting edge ............................................................ 94

Jyothy Laboratories: Competition white washed ........................ 100

COMPETITIVE POSITION OF COMPANIES COVERED

SHARE SHARE CONTRI- GROWTH FY07-10 EBITDA

Asian Paints Decorative Paints 45 Kansai Nerolac 14 3.2 93 12 19 18

Indian consumer market approaching inflexion point, sales growth to

EXPECT FMCG GROWTH TO ACCELERATE (%)

21.4 20.3 20.0

KEY GROWTH ENABLERS GROWTH DRAG GROWTH RESURGENCE SUSTAINED HIGH

(1993-1999) (2000-2006) (2007-2012) GROWTH (2013-15)

Reduction in excise duty Agri-degrowth/drought Agri GDP growth of 3% Decline in rural

Monopolies best placed to capitalize on emerging growth scenario

What are consumer monopolies?

COMPETITIVE POSITION OF COMPANIES COVERED

SHARE SHARE CONTRI- GROWTH FY07-10 EBITDA

Asian Paints Decorative Paints 45 Kansai Nerolac 14 3.2 93 12 19 18

How monopolies are created

IMFL ~50 ~65

MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION

MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION

3. Product innovation/technological breakthrough

MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION

4. Brands aid monopoly creation

5. Distribution and reach

GLOBAL LEADERSHIP IN ORALCARE 6. Global leadership of parent

MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION

MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION

Benefits/implications of a consumer monopoly

ROE OF MOST COMPANIES HAVE BEEN ON A STEADY UPTREND (%)

FY05 FY06 FY07 FY08 FY09 FY10E FY11E

Asian Paints 32.1 34.2 36.8 42.5 33.4 44.2 39.5

TREND IN PAYOUT (%)

FY05 FY06 FY07 FY08 FY09 FY10E FY11E

Asian Paints 52.2 56.3 43.6 39.0 41.8 42.0 42.0

IMPLICATIONS OF BEING A MONOPOLY: A SNAPSHOT

How consumer monopolies are placed on the BCG matrix

BCG MATRIX OF VARIOUS COMPANIES/ PRODUCT CATEGORIES

Question Marks Stars

10 Marico GSK Cons.

FMCG demand to accelerate

Indian consumer market approaching inflexion point

2,000 Per Capita GDP expected to

650 CAGR of 2.2%

ITC's Wills Lifestyle range of readymade garments,