Beat the Street Prerana 2010

Introduction
FMCG landscape in India is set for a major revamp. While the major conglomerates are
expected to post a healthy growth of over 15%, the bigger giants like HUL and Marico are
set to emerge as key laggards in terms of revenue growth, due to price cuts affected in their
core categories.

After the Union Budget, some companies have been forced to pass on the excise duty hikes
to the end customers; however, for most companies the focus continues to be on volume
growth. Better reach, strong support from higher Ad spends and support from rural markets
(higher MSPs, NREGS and rising food prices to drive rural incomes) will be the key drivers
aiding a modest volume growth for our FMCG universe.

Revenue growth in % YOY for Q42010E

60

50

40

30

20 % Change

10

0
CGPL Dabur ITC Nestle GSKCHL Asian Colgate Marico HUL
Paints

© Team $treet and Prerana 2010 Page 1

Beat the Street Prerana 2010

Budget Blues
The Union Budget 2010-11 continued its focus on Rural Development withthe Government
pressing ahead its efforts to increase the disposable income in the hands of the people, by
effecting a reduction in indirect taxes and by expanding public expenditure on programs like
the NREGS and Bharat Nirman, and on Rural Infrastructure.

FMCG companies in India are posting a steady revenue growth, largely led by consolidation
or new product launches or gains from stocking up of inventory ahead of price hikes. Better
reach (investments in distribution infrastructure), strong support from higher Ad spends are
the key drivers. However there have been some major laggards. Postponement of the GST
to 2011-12 and increase in the MAT rate to 18% (15%), along with a roll-back in excise duty
cut (hiked 2%) increased the trouble of the industry. Moreover, the hike in customs duty on
diesel and petrol, coupled with a 5% increase in the import duty on crude, had a negative
impact the transportation and packaging costs, thus affecting the entire FMCG sector. Crude
also saw a price increase. Performance of stocks of these companies relative to SENSEX is as
shown below.

20

16.5
15
13.8

10

5 4.9 5 5.4
2.5
1.3
0 0.3 -0.2
-0.9
Sensex BSE HUL GCPL Dabur Colgate ITC Nestle Marico Asian GSKCHL
-5 FMCG Paint

-10 -9.8

-15

Relative Outperformance to Sensex

© Team $treet and Prerana 2010 Page 2

Beat the Street Prerana 2010

Acquisitions and Innovations at the

forefront
FMCG majors are increasingly focusing on expanding their global footprint by acquiring
companies in niche segments to fill gaps in their product portfolio and diversifying in new
business segments to take advantage of new exciting opportunities emerging in various
sectors.

Among the most prominent deals completed this quarter was Godrej Consumer's
acquisition of Tura, an African personal care brand from Tura Group. Godrej Consumer is
expected to constitute a cross-functional team, with members from acquired companies
and its Indian management team to leverage synergies. Another important acquisition,
though on a small scale, was Marico acquiring the Malaysian hair styling brand, Code 10,
from Colgate-Palmolive.

Moreover, FMCG majors like ITC and Dabur are investing heavily on R&D to launch new
innovative products. Dabur is staging a comeback to the pharmaceutical discovery research
arena (Ayurvedic Research), with the setting up of Althea Life Sciences in the suburbs of
Gurgaon.

The table below summarises expected financials of these FMCG firms for relative inspection.

Company Net Sales Net Profit EPS(RS) EPS

4QFY10 4QFY10 %chang 4QFY10 %chang FY10 FY11 FY12
E %change E e E e E E E
Asian
Paints 1,617 13.5 156.3 54.6 16.3 54.6 77.0 84.3 95.9
Colgate
Palmolive 516 13.2 98.0 19.7 7.2 19.7 29.6 33.1 37.6
Dabur
India 897 22.6 121.5 16.5 1.4 16.5 5.7 6.8 7.8
GCPL 519 51.4 81.3 36.9 2.6 36.9 10.6 12.6 14.3
GSK
Consumer 615 14.0 102.7 22.4 24.4 22.4 55.3 67.2 80.0
HUL 4,280 7.3 483.3 -3.7 2.2 -3.7 9.9 10.2 11.7
ITC 4,708 21.0 1,077.5 33.2 2.8 33.2 10.9 12.1 13.4
Marico 622 10.8 64.1 7.8 1.1 7.8 4.0 4.8 5.3
Nestle 1,522 20.2 234.0 18.6 24.3 18.6 67.9 86.0 101.4

© Team $treet and Prerana 2010 Page 3

Beat the Street Prerana 2010

Case Description:
General Information about the company:

The company XYZ Limited is an Indian conglomerate having varied interests in foods and
beverages, non-carbonated drinks and various other FMCG products. With a very
successful operation, it has accumulated a huge cash balance. The board of XYZ Ltd. has in
principle agreed expanding the business by acquiring companies in exciting new/existing
sectors.

As an investment banker, you are supposed to find a target for a major FMCG company and
present the pitch to the company with all the due diligence.

© Team $treet and Prerana 2010 Page 4

Beat the Street Prerana 2010

Financial Statements of XYZ Limited:

Balance Sheet of XYZ Ltd. ------------------- in Rs. Cr. -------------------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Sources Of Funds
Total Share Capital 375.52 376.22 376.86 377.44 381.82
Equity Share Capital 375.52 376.22 376.86 377.44 381.82
Share Application Money 0 0 0 0 0
Preference Share Capital 0 0 0 0 0
Reserves 8,626.79 10,003.78 11,624.69 13,302.55 13,628.17
Revaluation Reserves 59.17 57.08 56.12 55.09 54.39
Net worth 9,061.48 10,437.08 12,057.67 13,735.08 14,064.38
Secured Loans 25.91 60.78 5.57 11.63 0
Unsecured Loans 93.82 140.1 208.86 165.92 107.71
Total Debt 119.73 200.88 214.43 177.55 107.71
Total Liabilities 9,181.21 10,637.96 12,272.10 13,912.63 14,172.09

Application Of Funds
Gross Block 6,227.17 7,134.31 8,959.70 10,558.65 11,967.86
Less: Accum. Depreciation 2,065.44 2,389.54 2,790.87 3,286.74 3,825.46
Net Block 4,161.73 4,744.77 6,168.83 7,271.91 8,142.40
Capital Work in Progress 399.97 1,130.20 1,126.82 1,214.06 1,008.99
Investments 3,517.01 3,067.77 2,934.55 2,837.75 5,726.87
Inventories 2,636.29 3,354.03 4,050.52 4,599.72 4,549.07
Sundry Debtors 547.96 636.69 736.93 668.67 858.8
Cash and Bank Balance 67.47 103.54 153.34 68.73 120.16
Total Current Assets 3,251.72 4,094.26 4,940.79 5,337.12 5,528.03
Loans and Advances 1,188.42 1,390.19 1,949.29 2,150.21 1,929.16
Fixed Deposits 788.35 796.62 416.91 963.66 1,006.12
Total CA, Loans & Advances 5,228.49 6,281.07 7,306.99 8,450.99 8,463.31
Deferred Credit 0 0 0 0 0
Current Liabilities 2,736.95 3,113.01 3,619.76 4,121.59 4,619.54
Provisions 1,389.04 1,472.84 1,645.33 1,740.49 4,549.94
Total CL & Provisions 4,125.99 4,585.85 5,265.09 5,862.08 9,169.48
Net Current Assets 1,102.50 1,695.22 2,041.90 2,588.91 -706.17
Miscellaneous Expenses 0 0 0 0 0
Total Assets 9,181.21 10,637.96 12,272.10 13,912.63 14,172.09
Contingent Liabilities 98.72 129.56 308.08 261.36 258.73
Book Value (Rs) 23.97 27.59 31.85 36.24 36.69

© Team $treet and Prerana 2010 Page 5

Beat the Street Prerana 2010

Profit & Loss account of XYZ Ltd. ------------------- in Rs. Cr. -------------------
Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Income
Sales Turnover 16236.4 19520.0 21467.4 23247.8 26399.6
Excise Duty 6438.1 7206.2 7435.2 8262.0 7832.2
Net Sales 9798.3 12313.8 14032.2 14985.8 18567.5
Other Income 203.2 276.2 516.5 426.2 545.1
Stock Adjustments 135.7 323.0 32.5 630.3 -447.5
Total Income 10137.2 12913.0 14581.2 16042.3 18665.0
Expenditure
Raw Materials 4265.7 5807.5 6307.8 6865.0 7140.7
Power & Fuel Cost 245.2 253.0 309.9 394.1 387.3
Employee Cost 541.4 630.2 745.0 903.4 1014.9
Other Manufacturing Expenses 50.1 65.3 73.5 402.9 413.8
Selling and Admin Expenses 1042.5 1299.2 1609.3 1684.4 2093.9
Miscellaneous Expenses 416.5 601.3 682.7 516.9 1008.9
Preoperative Expense Capitalised -15.8 -42.5 -112.8 -72.6 -71.9
Total Expenses 6545.6 8613.9 9615.5 10694.1 11987.6

Operating Profit 3388.4 4022.9 4449.2 4922.0 6132.3

PBDIT 3591.6 4299.1 4965.7 5348.2 6677.4
Interest 21.1 16.0 24.6 47.7 90.3
PBDT 3570.5 4283.1 4941.0 5300.6 6587.1
Depreciation 332.3 362.9 438.5 549.4 608.7
Other Written Off 0.0 0.0 0.0 0.0 0.0
Profit Before Tax 3238.1 3920.2 4502.6 4751.2 5978.4
Extra-ordinary items 46.1 61.9 117.4 81.5 48.7
PBT (Post Extra-ordinary Items) 3284.3 3982.1 4620.0 4832.7 6027.0
Tax 1027.6 1263.1 1481.0 1565.1 1965.4
Reported Net Profit 2235.4 2700.0 3120.1 3263.6 4061.0
Total Value Addition 2279.9 2806.4 3307.7 3829.1 4846.9
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Equity Dividend 995.1 1166.3 1319.0 1396.5 3818.2
Corporate Dividend Tax 139.6 198.2 224.2 237.3 634.2
Per share data (annualised)
Shares in issue (lakhs) 37551.8 37622.2 37686.1 37744.0 38181.8
Earnings Per Share (Rs) 6.0 7.2 8.3 8.7 10.6
Equity Dividend (%) 265.0 310.0 350.0 370.0 1000.0
Book Value (Rs) 24.0 27.6 31.9 36.2 36.7

© Team $treet and Prerana 2010 Page 6

Beat the Street Prerana 2010

Problem Statement
1. You are senior banker in one of the leading investment banks in the country. You
plan to approach XYZ Ltd for advising them on inorganic growth opportunities
through future acquisitions. You have an option of selecting a target company in any
one of the following sectors:

 Financial Services
 Telecom
 FMCG
 Real Estate

2. Prepare a proposal for the same. You have to come up with:

a. The Objective of the proposal

b. Basis for selection of Sector
c. Potential growth opportunities in the Sector
d. Valuation of the selected target company
e. Projected consolidated Financial Statements of the merged entity
f. Sources of Funding
g. Breakeven on Equity
h. Fair Acquisition price
i. Fund raising plan for the company
j. Chosen capital raising decisions and financial ratios employed to arrive at the
decision
k. Risk management and mitigation strategies if any

3. The Financials of the target company must be available in public domain

4. You need to provide comprehensive justification to your M&A proposal

© Team $treet and Prerana 2010 Page 7

Beat the Street Prerana 2010

THE PROCESS
Phase I: Report Submission and Selection

1. Participation will be in teams of 2 members from the same institute. A comprehensive

report not exceeding 3000 words (exclusive of cover page, references, annexure and
executive summary) should be prepared in pdf format with font Times New Roman and
font size 12, and 1.5 line spacing. The report should also include an executive summary
not exceeding 300 words. The report should be named
<BTS_TeamName_CollegeName>

2. The participants are required to send only a soft copy of their entry to the following mail
id: beatthestreet@prerana2010.com, with the subject line as
<BTS_TeamName_CollegeName> by 23:59 Hrs on 16th October 2010.

3. For the data that has been provided in the case, please stick to the same and do not
make any assumptions. However, for data not provided, suitable and reasonable
assumptions may be made and need to be stated explicitly in the solution.

4. All assumptions made along with suitable reasoning should be listed down as an
annexure (2 pages max) at the end of the case solution. The same would not be
included in the word limit count however will be taken into account while evaluation.

Phase II: Final Presentation

• Five teams will be short listed and invited to the NITIE campus to give their presentation
during Prerana 2010 (Exact dates would be communicated to shortlisted teams).

• They qualifying teams need to prepare presentations (25 slides max) that would last for
a maximum of 15 minutes each.

• The presentation would be given 25% weightage while the case solution will be given
75% weightage.

The reports would be broadly judged on the following parameters:

 Analysis of case
 Money raising decision and capital structure (would be given major weightage)
 Risk identification and mitigation strategies
 Marketing strategies
 Assumptions and reasoning of the same

© Team $treet and Prerana 2010 Page 8

Beat the Street Prerana 2010

RULES AND REGULATIONS

1. This competition is open to all students pursuing a post graduate MBA program, or
equivalent, across different management institutes in India and abroad.

2. Each team can comprise of two members and should be from the same institute.

3. The analysis should represent original research work. Plagiarized work would lead to
immediate disqualification.

4. The teams that come down to NITIE for the final presentation would be reimbursed,
sleeper class fares. The fare reimbursed will be for the shortest route between the team’s
institute and Mumbai.

5. The body of the mail and the first page of the entry must contain the team name, team
members, registration ids, contact details and institute name

6. All subsequent pages should contain only the registration IDs of all the team members in
the header section.

7. The names of the team members or the name/logo of their institute should not appear
anywhere in the body of the document

8. The decisions of the organizers of the contest and the panel of judges will be final and
will be binding on all the participants.

9. The entries received will become the property of the organizers of Prerana 2010.

PRIZES
The teams would be awarded cash prizes as follows:

1st Prize – ` 20,000

2nd Prize – ` 10,000

Important Dates

Last date for submission of reports: 16th October 2010 at 23:59 HRS

For any further details contact

Vaibhav Gupta – 09833728369

Gaurav Malhotra – 09212729322

© Team $treet and Prerana 2010 Page 9