Credit Suisse - India Packaged Foods Sector

1 May 2018
Asia Pacific/India
Equity Research
Food Products
India Packaged Foods Sector

Research Analysts
THEME
Arnab Mitra
91 22 6777 3806
arnab.mitra@credit-suisse.com Beginning of a long summer
Rohit Kadam, CFA
91 22 6777 3824
rohit.kadam@credit-suisse.com Figure 1: The foods opportunity—growth vs profitability
12
Growth potential versus profitability for different categories
(bubble size represents relative category size)
Profitability scores (low to High on scale: 1 to 10)

10
Chocolates
Coffee Baby Food
MFD
8 Spreads
Sauces/ Baked
Noodles
Dressings Goods
RTD
6 Juice beverages
Tea Soups
Soft Drinks Biscuits Breakfast
Cereals Savoury
4 Snacks
Dairy Ice
Creams
Processed
2 Meats
Edible Oils
0
5% 10% 15% 20% 25% 30%
-2
Growth potential of the category (estimated 10 year growth rate)
Source: Credit Suisse estimates
■ Catalysts now in place to drive a sustained inflection in packaged

foods. While the growth headroom in India packaged foods sector has
always been high, we now see catalysts in place to translate this potential
to sustainable long-term growth. Three critical impediments to foods growth
are now being addressed: (1) availability—sweeping changes in the front-
end supply chain, (2) affordability—lower GST rates, larger scale, less
wastages driving low price growth relative to unbranded products, and (3)
investments—incumbents are now strong and large to make investments
ahead of time, the way HUL has done in home and personal care segment.
■ The US$200 bn branded foods opportunity disaggregated. We expect
the branded packaged foods market to grow from US$40 bn to US$200 bn
over the next decade, as India rises up the steep foods S-curve. Growth will
be much faster in branded and non-commoditised categories. Looking at the
headroom for growth and profitability of various food categories, we see the
largest profitable opportunities over the next decade to be in baby food,
chocolates, biscuits, baked products, and juices/RTD beverages segment.
■ Nestlé and Britannia strong plays, smaller companies play in low
return categories. We see equally strong potential in Nestlé and Britannia,
Nestlé with a better category mix but Britannia with more potential in
market share gain and new categories. We increase our TP for Nestlé
(increase in multiple) to Rs10,500 (from Rs9,600), and Britannia (increase
in EPS) to Rs5,850 (fromRs5,550). Smaller companies like Prataap and
Manpasand play on high-growth categories in packaged foods. ITC’s foods
business is attractive but a small contributor to ITC’s earnings.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit
Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision.
1 May 2018
Focus charts
Figure 2: Power outages have dropped across India Figure 3: Packaged foods compare favourably with
which aids cold/ambient storage in retail stores unpackaged foods on calories per rupee spent
Average no supply hours per location Price for an average daily calorie requirement (Rs)
(Jan 2016 indexed to 100) 350
120
300
100 packaged foods
250
80
200
60 150
100
40
50
20
0
Cutting Chai
Poultry
Sandwich
Egg
Rice
Vada pav
Mango Sip
Pani Puri
Parle Glucose
Poha
Lays chips
Wheat flour
Good Day biscuits
Maggi Noodles
0
Delhi Hyderabad Bengaluru Maharshtra UP Maharashtra UP
Mega cities Other cities Rural areas
Jan 2016 Jan 2018
Source: Prayas (Energy Group) Electricity Supply Monitoring Initiative, Credit Suisse Source: Credit Suisse estimates
Figure 4: Categories such as biscuits and noodles Figure 5: India packaged food consumption levels
have seen price increases lower than food inflation low even compared to emerging markets
7.0% 50%
Six year price CAGR
India packaged foods per capita % EM average (2017)
6.0% 40%
5.0% 30%
4.0% 20%
3.0%
10%
2.0%
0%
Spreads
Tea
Soups
Coffee
Ready Meals
Biscuits
Savoury Snacks
Dairy
Juice
Sauces
Soft Drinks
Breakfast Cereals
Ice Creams
Chocolates
Bottled Water
Noodles
Processed Veg.
Baked Goods
Baby Food
Pasta
Processed Meats
1.0%
0.0%
Britannia Parle Maggi Tata Tea Amul Nescafe Food
Good Day Glucose Gold Taaza Inflation
Source: CMIE, Credit Suisse research Source: Euromonitor, Credit Suisse estimates
Figure 6: Non-commoditised categories in packaged Figure 7: Most branded food categories should
foods should grow much faster compound at more than 15% over the next decade
180 30%
18% CAGR
160
Next 10 yr CAGR forecast (2017-2027P)
25%
140
20%
120
10% CAGR
15%
100
80 10%
60 5%
40
0%
Soups
RTD beverages
Coffee
Tea
MFD
Savoury Snacks
Sauces
Biscuits
Baked Goods
Juice
Baby Food
Soft Drinks
Chocolates
Spreads
Noodles
Ice Creams
Breakfast Cereals
Pasta
20
Processed Meats
-
Commoditised (US$bn) Non-commoditised (US$bn)
2017A 2027P
Source: Euromonitor, Credit Suisse estimates Source: Euromonitor, Credit Suisse estimates
India Packaged Foods Sector 2

1 May 2018
Beginning of a long summer

Packaged foods Packaged foods consumption has very high growth headroom in India as the country
consumption has very stands at the starting point of a steep S-curve slope. However, to translate potential into
high growth headroom strong and consistent growth needs catalysts which we are now seeing fall in place. These
in India catalysts will solve the three main bottlenecks for foods growth: availability, affordability,
and investments. We expect the branded packaged foods market to grow ~5x over a
decade to US$200 bn, with the branded and non-commoditised segment growing much
faster than this pace. Nestlé is our top pick to play this long-term theme, followed by
Britannia.
Catalysts now in place to drive a sustained inflection

in packaged foods
We now see catalysts While the headroom to grow in foods has always been high, we now see catalysis in place to
in place to translate translate this potential into sustainable long-term growth. Three critical impediments to foods
this opportunity into growth are now being addressed. The first bottleneck was availability as lower shelf life,
long-term growth lack of controlled ambient temperature in retail, and inadequate supply chain constrain basic
distribution. There are, however, sweeping changes in the front-end supply chain that are
solving this problem. The second impediment is affordability: foods consumers compare
with unpackaged options. Over the last five years we have seen much lower inflation in
packaged foods as compared to unpackaged food driven by larger manufacturing
efficiencies, lower wastages in the supply chain and lowering of GST rates. The third factor
is that foods growth needs investments in setting up capacities and advertising. The large
incumbents in foods are now strong and large to make long-term investments ahead of time,
the way HUL has done in the home and personal care segment.
The US$200 bn branded foods opportunity

Branded packaged We expect the branded packaged foods market to grow from US$40 bn to US$200 bn over
foods should grow ~5x the next decade, as India rises up the steep foods consumption S-curve. This translates into
over the next ten years a 17% CAGR over ten years. We expect the overall packaged foods market to grow at ~13%
but branded should grow faster. The growth is likely to be even faster at ~18% for non-
commoditised branded packaged foods categories. Looking at headroom for growth and
overlaying current profitability of various foods categories, we see the largest profitable
opportunities over the next decade to be in baby food, chocolates, biscuits, baked products,
and juices/RTD beverages segments. Categories like salted snacks and dairy are also large
growth opportunities; however, they have low profit margins and lower return ratios.
Nestlé, Britannia equally strong plays; small

companies to play in lower margin categories
Nestlé and Britannia While many companies play on packaged foods in India, we look more closely at the pure
equally strong plays to play or predominantly foods companies within our coverage. We see equally strong
play the long-term potential in Nestlé and Britannia to deliver long-term growth. Nestlé has a better category
potential in foods mix for growth currently and also has a diversified product portfolio. Britannia, on the other
hand, is currently a single category company operating only in biscuits, but has more
potential to grow through market share gain and by entering new categories. We increase
our target multiple in Nestlé to build in the higher growth over the medium term, while for
Britannia we increase earnings for stronger near-term margins. The target price for Nestlé
moves to Rs10,500 (from Rs9,600) and in Britannia moves to Rs5,850 (fromRs5,550).
Outside our coverage there are companies like Prataap Snacks and Manpasand
Beverages which play on high growth but relatively low margin or return profile categories
in packaged foods. ITC’s foods business while being attractive is still a small contributor to
its earnings. HUL, Dabur and Marico also play on foods, though the proportion of business
is small.

1 May 2018
Valuation metrics
Figure 8: Valuation metrics for Indian FMCG and global packaged food companies
ROCE
Market cap ADTV FY19/CY18 FY20/CY19 FY19/CY18 (FY18/CY17) CMP TP
Company Bbrg ticker (US$bn) (US$ mn) P/E (x) P/E (x) EV/EBITDA (x) (%) Rating (LC) (LC) Upside
Indian FMCG
HUL HUVR IN 49.2 25.2 53 45 38 62% O 1,509 1,530 1%
ITC ITC IN 51.7 53.0 27 23 19 16% O 281 350 24%
Nestlé India NEST IN 13.7 9.8 58 47 34 35% O 9,406 10,500 12%
Colgate CLGT IN 4.6 5.7 41 36 24 40% N 1,124 1,120 0%
Dabur DABUR IN 9.8 9.9 42 37 35 19% N 370 365 -1%
Marico MRCO IN 6.5 6.1 44 38 31 31% N 333 330 -1%
GSK SKB IN 3.9 2.3 32 27 21 15% O 6,109 7,100 16%
Emami HMN IN 3.8 2.9 33 28 29 29% O 1,123 1,260 12%
GCPL GCPL IN 11.5 10.3 44 38 33 17% O 1,117 1,175 5%
Britannia BRIT IN 10.0 10.8 54 43 40 21% O 5,507 5,850 6%
Indian food plays
Nestlé India NEST IN 13.7 9.8 58 47 34 35% O 9,406 10,500 12%
Britannia BRIT IN 10.0 10.8 54 43 40 21% O 5,507 5,850 6%
GSK SKB IN 3.9 2.3 32 27 21 15% O 6,109 7,100 16%
Prataap Snacks DIAMOND IN 0.47 0.4 49 37 37 6% NC 1,378 NA NA
Manpasand Beverages MANB IN 0.7 1.1 35 24 24 11% NC 401 NA NA
Parag Milk Foods PARAG IN 0.4 2.5 27 22 15 10% NC 305 NA NA
Kwality Dairy KWALITY IN 0.2 6.0 5 3 5 29% NC 49 NA NA
Hatsun Agro HTSMF IN 1.7 0.4 60 39 29 32% NC 788 NA NA
Godrej Agrovet GOAGRO IN 2.0 4.2 42 35 25 14% N 705 630 -11%
Global food companies
Nestlé NESN SW 241.6 7.3 20 18 14 13% U 77 70 -9%
Danone BN FP 54.5 1.8 18 17 12 8% N 67 67 0%
Kraft Heinz KHC US 70.3 5.7 16 15 13 5% U 58 55 -5%
General Mills GIS US 27.1 4.6 15 14 11 14% N 45 44 -1%
Mondelez MDLZ US 60.9 6.4 16 15 14 7% O 40 48 20%
Kellogg Company K US 21.0 2.9 14 13 11 14% N 60 63 5%
The Hershey Company HSY US 25.4 1.9 18 17 16 33% N 93 90 -4%
Note: Updated with closing prices as of 27 April 2018. O=OUTPERFORM; N=NEUTRAL; U=UNDERPERFORM; NC= Not Covered.
Source: the BLOOMBERG PROFESSIONALTM service estimates for not covered companies, Credit Suisse estimates for coverage companies.

1 May 2018
Table of contents
Focus charts 2
Beginning of a long summer 3

Catalysts now in place to drive a sustained inflection in packaged foods ................ 3
The US$200 bn branded foods opportunity .............................................................. 3
Nestlé, Britannia equally strong plays; small companies to play in lower margin
categories .................................................................................................................. 3
Valuation metrics 4
Catalysts now in place to drive a sustained inflection in packaged foods 6

Availability: Sweeping changes in the front-end supply chain is widening
distribution ................................................................................................................. 7
Affordability of packaged foods has significantly improved vis-à-vis unpackaged
food ......................................................................................................................... 10
Investments: Large incumbents now putting in effort to grow the category, a
change from the past .............................................................................................. 11
Structural drivers in place as long arch trends ....................................................... 14
The US$200 bn branded foods opportunity 15

Where is the headroom for growth the highest? ..................................................... 15
We expect branded packaged foods to grow 5x in ten years, non-commoditised to
lead the growth........................................................................................................ 16
Most attractive categories with strong growth and high profitability ....................... 19
Nestlé, Britannia equally strong plays, small companies to play in lower margin
categories 22
Could ITC or Patanjali be a disruptor?.................................................................... 23
Nestlé India (NEST.BO / NEST IN) 25
Britannia Industries Limited (BRIT.BO) 27
GlaxoSmithkline Consumer Healthcare (GLSM.BO / SKB IN) 29
Prataap Snacks (DIAMOND IN) 31
Manpasand Beverages (MANB IN) 32

1 May 2018
Catalysts now in place to drive a sustained

inflection in packaged foods
Catalysts now in place The headroom for packaged foods in India has always been very high. The consumption
to drive a sustained gaps with other emerging markets in packaged foods are much higher than in the home
inflection in packaged and personal care (HPC) segment. However, there are catalysts needed to translate this
foods Packaged foods potential to sustainable high growth, as there are bottlenecks which are much higher in
marketing and packaged foods compared to the HPC segment. These issues are over and above the
distribution has been basic marketing challenges which exist even in HPC categories. These are specific to
more challenging than packaged foods due to the nature of the products with lower shelf life, need for controlled
home & personal care ambient temperature in the supply chain, greater price sensitivity of consumers and taste
being a local factor in all foods categories. What is changing now is that there are major
changes taking place which are now reducing these bottlenecks. This, in our view, will
drive an inflection point which will lead to a sustained multi-year high growth phase.
Figure 9: Catalysts in place to remove bottlenecks to packaged foods growth

Three key catalysts in place now to drive growth
But three catalysts in

place now helping Sweeping changes in the front-end supply chain widening
change that reach—better electricity supply and refrigeration in retail,
Availability expansion of modern retail, use of sales front-end
technology to reduce wastages
Affordability of packaged foods has significantly improved

vis-a-vis unpackaged foods making it calorie efficient—
Affordability manufacturing efficiency, lower wastage, lower GST rates
Large incumbents now putting in efforts to grow their

categories, a change from the past. Food companies like
Investments Nestlé and Britannia have now reached scale and are
investing, like HUL did for home and personal care
Source: Credit Suisse research
Figure 10: Foods face many more challenges than that in home and personal
care segment
Factor Foods Home and personal care
 Below six months (sometimes even three days)  Mostly >12 months
Shelf life  Consumers more sensitive—will not buy products  Consumers less sensitive to expiry date
within the last month of expiry date
 Many categories need controlled ambient  No need for ambient temperate in most cases
Storage
temperature
 Local tastes very important, plug and play of global  Global products with minor modifications have worked
Localisation
products may not necessarily work very well
Price  High sensitivity as consumers have unbranded  Price is important in terms of which brand consumer
sensitivity options for most categories to compare uses, not as much for category consumption

1 May 2018
Availability: Sweeping changes in the front-end

supply chain is widening distribution
One of the biggest impediments to growth in packaged foods is availability of the product
for consumers, which means that the product should be available at retail stores for all
relevant consumers. In most HPC categories, this is largely a question of scale; a larger
company has more scale to justify the cost of going deeper into small population centres.
If a company is willing to bear the cost of distributor salesmen, it will be able to rapidly
expand distribution. However, in packaged foods the challenges are far beyond basic
scale. Supply chain costs in food companies can be as high as 20% compared to 5-7% for
HPC, and product returns could be another 5-10% of costs, making the business model
unviable without charging very high prices to consumers which, in turn, hinders adoption
and penetration. The main reasons for the complexity are:
■ Shorter product shelf life and higher consumer sensitivity to expiry dates: Many
food products have a shelf life of six months or lower, which is printed on the pack as
Shorter shelf life and an expiry date. Some products like dairy have less than 15 days of shelf life. Compared
lack of requisite to this, the shelf life for products in HPC is normally 12 months. The supply chain takes
ambient temperature nearly a month or more to reach the end retail store from the date of packaging. Also,
controlled facilities consumers are more sensitive to expiry dates in foods. Even when the product has not
have been a challenge expired but is within a month from expiry, consumers tend not to buy the product. Thus,
there is a far greater risk of a product expiring on the retail shelf in ‘foods’ than in
‘HPC’, as the window to generate offtake is often less than three months. This makes
both companies and retailers cautious in stocking large quantities or stocking new
products or variants of existing products. This is not the case with HPC.
■ Needed for ambient/frozen temperature for many food products: Many food
categories like dairy, ice cream, and chocolates need ambient or frozen temperatures
to be stocked in retail stores. India has ~10 mn retail stores, a large majority of which
are in rural areas and small towns. These stores need consistent electricity supply
before investing in some form of refrigeration equipment to stock these food
categories. Even after electricity has reached these areas, there is a lot of education
needed on the various kinds of food products and the level of temperature that is
needed for the products to be preserved in the best form. For example, a large metro
city like Bengaluru has only 30% of its retail stores with some kind of ambient storage
facility, and only ~10% have consistent ambient temperature 24 hours a day.
Major changes in front-end supply chain to overcome these bottlenecks
There are, however, big changes which are taking place in the ecosystem which are
helping ease these bottlenecks. Some of the important changes are
(1) Electricity supply within urban areas leading to greater ambient/cold
storage in retail: There has been a significant improvement in electricity supply
Urban and rural consistency in urban areas over the past few years. This will, over a period of
areas seeing a time, lead to lot more retail stores investing in some cooling/refrigeration
substantial equipment which will be a big driver for distribution of products like dairy, ice
improvement in creams, and chocolates. Products like chocolates need temperatures below the
the consistency of melting point of the product, dairy needs refrigeration for many categories, ice
electricity supply creams and meat products need freezing. Over a period of time there has also
been a reduction in the cost of cooling equipment like visi-coolers, freezers and
tabletop coolers in the front end. In most cases, the brand owners pay for the
refrigeration equipment which is put in the stores, and the economies of scale are
helping lower capital costs while technological advancements on electricity
efficiency are reducing running costs and maintenance costs.

1 May 2018
Figure 12: Power outages have dropped across the

Figure 11: India’s power deficit has dropped sharply cities (larger and Tier 2) as well as in rural areas
12.0 Average no supply hours per location
(Jan 2016 indexed to 100)
120
10.0
100
8.0
80
6.0 60
4.0 40
20
2.0
0
- Delhi Hyderabad Bengaluru Maharshtra UP Maharashtra UP
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Mega cities Other cities Rural areas
Power deficit (%)
Jan 2016 Jan 2018
Source: Ministry of Power, Credit Suisse research Source: Prayas (Energy Group) Electricity Supply Monitoring Initiative, Credit Suisse
research
Figure 13: A table top chiller for chocolates in India Figure 14: A hard top chest freezer
Source: Tata Group website Source: Blue Star India
(2) Smartphone apps usage in front-end sales giving better control on

what/where/how much to sell: For many food categories the need for real time
Smartphones at the
data on the front end is important, not just to maximise sales but also to minimise
front end of
distribution aiding damages which can be a very high cost. Most large companies have now moved
efficiency gains to having salesmen carry smartphones with front-end sales applications. Here
they, on a real-time basis, are able to feed in data on the stock levels of various
SKUs at the retail level, thus making it much easier to avoid excess stocks of
items which are not selling, or run liquidations ahead of the expiry dates. This was
done in the past as well; however, the lack of real-time centralised data meant this
was left to the salesman to decide, and with the high levels of attrition in front-end
sales, this was not done in a systematic manner.

1 May 2018
Increasing share of (3) Expansion of modern retail into smaller towns and within larger cities:
modern retail a Modern trade expansion in India is picking up strongly, especially in smaller cities
major driver for and in the suburbs of bigger cities. The expansion is also now being driven not
packaged food just by large hyper marts but also by smaller supermarkets and convenience
growth stores. The advantage of modern retail is that it (1) cuts down the supply chain
time from factory to retail shelf significantly, (2) it is possible to liquidate products
which are nearing expiry dates through local promotions, (3) total stock levels are
relatively lower as companies have much higher frequency of servicing. All these
significantly reduce the risk of products expiring on the shelf. Modern trade also
means presence of coolers and freezers which make it possible to stock many
products which require various temperature ranges.
Figure 15: India’s organised retail share is expected to double over 2016-25
India organised retail penetration evolution
350 22%
20%
300
17% 18%
250
16%
200 14%
12%
150 12%
286
9% 10%
100
7% 8%
50 115
6%
55
27
- 4%
2012 2016 2020 2025
India Organised retail (US$ bn) % share of overall retail (RHS) China organised retail share
Source: 2012 to 2020 data is from DMart RHP for which the source is Technopak Data. 2025 are Credit Suisse forecasts
Figure 16: Leading organised retailers have been Figure 17: DMart (second largest) has been growing
growing at 25% for the past few years the fastest
Growth for key organised retail players 45%
25% 40%
35%
20%
30%
25%
15%
20%
24%
10% 15%
12% 10%
5%
5%
0% 0%
No. of stores Revenues Stores Area Sales
FY12-16 CAGR DMart 5 year CAGR (FY12-17)
Note: Players included are Future Group, Reliance, AB Retail, Trent/ Tata, Spencer's, Source: Company data, Credit Suisse research
Hypercity and DMart.
Source: DMart RHP for which the source is Technopak Data, Credit Suisse research

1 May 2018
Affordability of packaged foods has significantly

improved vis-à-vis unpackaged food
Packaged foods Affordability of products is important for growth in most categories in India due to the low
more affordable per capita income levels. However, this is even more important in packaged foods as
than ever consumers compare the expense with unpacked foods options which are being replaced
by packaged consumption. This is very different from HPC where consumer habits have
firmly moved towards consumption of shampoo vs soap to wash hair, and toothpaste vs
‘neem’ sticks to brush teeth.
Over time, several packaged food categories have become more affordable as the price
increases have been benign compared to the inflation levels in the country (Figure 18).
This is possible on the back of companies growing in scale, extracting efficiencies and
savings from automated manufacturing, improved logistics and lower wastages over time.
The tax rate cuts under GST would provide a significant boost as there has been 8-12%
price reduction for the consumers at one go.
Figure 19: Several packaged food products now
Figure 18: Categories such as biscuits and noodles compare closely with unpackaged foods on
have seen price increases much lower than food cost/calorie, even without accounting for cooking
inflation cost and time
7.0% Price for an average daily calorie requirement (Rs)
Six year price CAGR 350
6.0% 300
packaged foods
5.0% 250
200
4.0%
150
3.0% 100
50
2.0%
0
Cutting Chai
Poultry
Egg
Rice
Vada pav
Sandwich
Mango Sip
Pani Puri
Parle Glucose
Poha
Lays chips
Wheat flour
Good Day biscuits
Maggi Noodles
1.0%
0.0%
Britannia Parle Maggi Tata Tea Amul Nescafe Food
Good Day Glucose Gold Taaza Inflation
Source: CMIE, Credit Suisse estimates Source: Credit Suisse estimates
We reckon consumers in the economy segment have a broad sense of ‘the bang for the
buck’ or how much it costs them to get enough calories from different food options. In
Figure 19, we attempt to estimate the amount of spend on a food type to meet an entire
day's calorie requirement. Figure 19 suggests that, over time, improving affordability has
meant that several packaged foods now are ‘calorie competitive’ with hitherto incumbent
unpackaged/unorganised meal options. This analysis in fact ignores the time and the
convenience factor of packaged foods over say cooking a bowl of rice or making bread at
home. If one was to add the cost of fuel to cook these, packaged foods would be an even
more affordable option.
Figure 20: Few examples where packaged food options bring in intangible
benefits such as convenience and time saving
Packaged food Convenience/ time saving factor
Packaged rice/ flour No need to clean, or take to mill for grinding
UHT milk No need for repeat visits to the local dairy, no need to boil, value-added options like low fat and fortified
Packaged meat Pre-cut and clean. Buying conditions much better than the local meat shop

1 May 2018
Figure 21: Several packaged food categories have seen a drop in taxes under
the GST regime
Category Pre-GST rate GST rate
Chocolates ~25-26% 18%
Instant coffee ~25-26% 18%
Condensed milk ~25-26% 12%
Malted food drinks ~25-26% 18%
Noodles ~18-20% 12%
Source: gstcouncil.gov.in, Credit Suisse research
Investments: Large incumbents now putting in effort

to grow the category, a change from the past
Food companies For any category to grow consistently, it is necessary for incumbents in that category to
have been making invest in driving that growth. This means spending on innovations, advertising, and
large investments distribution to grow categories, especially the ones with low penetration. It also means
investing in capex to create capacities ahead of demand. In foods, this was lacking from
the large incumbents till a few years back, which has started changing in the last 3-5
years. This, in our view, will be the key factor driving acceleration in growth in the sector.
Figure 22: There has been significant pick-up in Figure 23: Diary sector capex over FY16-21 could be
capex by Nestlé and Britannia in the last few years ~US$4 bn, as per CRISIL estimates
Capex (Rs bn) 160
35
140
30
120
25
100
2.2x
20
80
15 60
10 40
2.7x
5 20
- 0
Nestle Britannia FY13-15 FY16-18E FY19-21P
FY06-11 FY11-17 Diary sector capex in India (Rs bn)
Source: Company data, Credit Suisse research Source: CRISIL ratings, CRISIL estimates
Foods did not have a dominant player like HUL, overall large companies also lesser
The home and personal care segment has always had a very large player like HUL.
Besides HUL there are five other relatively sizeable companies—Godrej Consumer,
Dabur, Colgate, Marico, and P&G. As most of these companies have been growth
oriented in the past, there have been continuous investments in growing HPC categories
in terms of both penetration and premiumisation. However, the foods segment did not
have large growth-oriented incumbents. Now we have a few sizeable food companies in
India like Nestlé, Britannia, Mondelez, and ITC, which are making investments into growth.
The space has attracted lot of private equity funding for small companies which are also
investing for growth.

1 May 2018
Figure 24: Food companies now have a reasonable scale versus ten years back
Sales comparison - HUL versus food businesses

120
100 100
100
80
80
60
49
40
20
0
FY07 FY17
HUL (indexed to 100) ITC Foods + NEST + BRIT
Source: Company data, Credit Suisse research
Nestlé, Britannia, ITC now investing in growing their core categories

Companies Britannia has made a strong push for growth in its core category of biscuits in the past 5-
launching premium 10 years, focusing on new product launches, driving access packs and expanding
and innovative distribution aggressively. It has also significantly increased its investment in capex to set
products in their up its own manufacturing capacity. Nestlé went through a phase between 2010 and 2015
core categories where there were practically no new product launches despite the fact that it is a leader in
low penetration categories. However, after the Maggi food safety issue in 2015, there was
a management change in Nestlé India after which the company aggressively launched
new products to drive its core category consumption. ITC now also has a very sizeable
foods business, and the company has invested strongly in growing branded packaged
wheat flour, cream biscuits, and salted snacks.
Figure 25: Examples of recent new launches across product types by Britannia
Product Type Brand Description Picture
Biscuit Filled Pure Magic Deuce Biscuits with a chocolate layer on top
Good Day
Biscuit Filled Premium range of cookies
Wonderfulls
Biscuit Cookie Good Day Chunkies Premium chocolate chip cookies
Oats based cookies for the health

Biscuit Cookie Nutrichoice Oats
conscious
Nutrichoice Digestive
Biscuit Cookie No refined flour; no added sugar
Zero
Source: Britannia Industries Company website (with company approval)

1 May 2018
Figure 26: Direct distribution reach has gone up

2.5x over four years for Britannia …… Figure 27: ….driving growth in hitherto weak states
2.0 35%
Britannia direct distribution (mn) Growth trajectory in weak states
1.8 30%
1.6 25%
1.4 20%
15%
1.2
10%
1.0
5%
0.8
0%
0.6
-5%
0.4
-10%
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
FY14
FY15
FY16
Gujarat MP Rajasthan UP
FY13 FY14 FY15 FY16 FY17 1HFY18 3QFY18
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse
Figure 28: Series of new and innovative launches/extensions by Nestlé in its core categories
Segment Brand Product Proposition Picture
A thicker version of Kit Kat with two flavours: Hazelnut and Choko. Each
Kit Kat Kit Kat Chunky KITKAT CHUNKY is breakable into three portions of 64 calories each to
Chocolates enable portion control.
Priced at Rs2 (or 30 cents), this is being used to drive penetration and
Kit Kat Kit Kat Mini
introduce the Kit Kat brand to a large section of the population.
Traditional wafer chocolate with peanut crème and roasted peanut bits,
Munch Munch nuts
Chocolates priced ~50% lower than Snickers.
Munch Munch crunch-o-nuts Munch nuts infused with small cocoa balls.
The new range of MAGGI noodles consists of four new flavours: Amritsari
Maggi Four Indian flavours
Achari, Mumbaiya Chatak, Super Chennai and Bengali Jhaal
Noodles
Four new flavours: Green Chilli, Peri Peri, Chilli Chicken and Barbeque
Maggi Hot Heads
Pepper.
Super premium positioning for infant nutrition, helped stem market share
Nan Nan Pro
Infant nutrition loss to Mead Johnson and Abbott.
Baby food
Ceregrow Ceregrow Cereal for kids aged 2-5 years.
Source: Company data, Credit Suisse estimates
In foods greater efforts are needed for innovation to crack the taste barrier—
globally successful products may not work in India as easily as in HPC
Companies also are In home and personal care categories there have been many instances of products from
entering relevant developed markets which have been successfully launched in India with only minor
adjacencies modifications. There are many examples of successes like Matic detergents, Dove soaps
and shampoo, and Head & Shoulders. However, in foods, the same logic does not work in
most cases, as products which are successful in developed markets may have no
resonance in India, given the different taste palette and dietary restrictions. The very wide
divergence of the taste palette within India makes it even more complicated. A few
successes in the past in foods have been Maggi noodles which had an inflection point

1 May 2018
once it cracked the ‘masala’ flavour which appealed to a large section of Indian
consumers. Similarly, Marico has had initial success in oats, as it changed the taste and
occasion to consume oats from breakfast (as in the West) to mid-meal, and from sweet to
savoury. With much larger scale now, the larger Indian food companies have larger
product development centres in India, which are able to better address the market. Also,
younger consumers who are much more comfortable with western cuisine are also
growing, which will create a bigger market for the existing globally successful products.
Figure 29: Examples of new innovative product launches by companies outside their core categories
Company Product Picture Description
Britannia Filled Croissant Single serve croissants with various cream or jam fillings.
Britannia Cake Muffins filed with chocolate/ strawberry cream
Nestlé RTD Coffee / Nutritional Cold Coffees and Milo in convenient ready to drink formats at Rs30
Fruits based carbonated Carbonated fruit drink with ~17% fruit content; seen as a healthy substitute for
Manpasand Beverages
drink carbonated soda drinks
Raw Pressery Cold pressed juices A variety of cold pressed juices; also subscription-based home delivery
Id Fresh food Idli batter pre mix All-natural, preservative-free batter to make traditional Idlis (Indian savoury cakes)
Contains 33% protein with a triple blend of Whey, Soy and Casein; much better
GSK Consumer Protein drink
tasting than the incumbent.
Source: Company websites, Credit Suisse research
Structural drivers in place as long arch trends

While what is new are the catalysts we discussed, there have been structural drivers afloat
in India for packaged foods to grow for a while. These are long arch trends and will play
out over decades. The three major structural drivers are
■ Working women: There has been a general trend of an increasing proportion of

working women in India. This naturally lends itself to greater consumption of packaged
food or cooking aids as against homemade food, given the constraints on time.
■ Nuclear families: There has also been a move towards nuclear families, and there
has been a rise in the use of packaged foods among nuclear families.
■ Rising cost of household help: The cost of household help in India, while still way
below that in other emerging markets, has been rising faster than packaged food
inflation as a long arch trend. This is also gradually leading to increased consumption
of packaged foods and cooking aids.

1 May 2018
The US$200 bn branded foods opportunity

Branded foods There are multiple structural drivers which will sustainably grow the per capita packaged
market to grow ~5x foods consumption in India, which is currently significantly lower even when compared to
in the next ten other emerging markets. We expect overall packaged foods to grow ~3.5x over ten years
years from the current size of ~US$75 bn to ~US$270 bn, implying a CAGR of 13%. Branded
packaged foods, in our estimate, would grow even faster at 17% CAGR and will grow ~5x
from US$40 bn to US$200 bn over the next decade. The non-commoditised branded
packaged foods categories (excluding edible oils, dairy and branded rice and flour) are
3000
likely to grow even faster at 18% CAGR over the next ten years.
Figure 30: S-curve for global per capita packaged foods consumption—India is at the start of a steep curve
2500
Switzerland
2000 Japan
Packaged foods per capita (US$)
Australia
Sweden
USA
France
1500 Canada
Italy
United Kingdom Germany
Argentina Spain
1000
Chile
Russia Greece
Mexico South Korea

Brazil
500 South Africa
India 2027 (basis CS
Thailand projections)
Vietnam China
Indonesia
India 2017
0
- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000
GDP per capita (US$)

Source: Euromonitor, Credit Suisse estimates
Where is the headroom for growth the highest?

There is large headroom for growth in almost all packaged food categories in India. All the
three levers of growth in a consumer staples category—rising per capita consumption,
increasing share of branded sales within each category, and premiumisation—are
available to be juiced. Even larger food categories in India, like biscuits and savoury
snacks, have only 30-40% per capita consumption as compared to the average emerging
market levels. Categories like baby food and baked goods are below 10%. Some
categories may have a cultural reason for lower consumption in India compared to the
emerging market average; for example coffee (Indians predominantly drink tea) and
noodles (which is a main food segment in countries like China).

1 May 2018
Figure 31: India packaged food consumption is very Figure 32: Most categories have large gaps with
low versus both developed and emerging markets emerging market average on consumption
45%
Total packaged foods per capita consumption
India packaged foods per capita % EM average
40% 40%
35%
35%
30%
30%
25%
25%
20%
20% 15%
15% 10%
5%
10%
0%
Processed Veg.
Baby Food
Biscuits
Ready Meals
Tea
Soups
Coffee
Dairy
Savoury Snacks
Breakfast Cereals
Juice
Sauces
Soft Drinks
Baked Goods
Ice Creams
Chocolates
Spreads
Pasta
Bottled Water
Noodles
5%
Processed Meats
0%
India % DM average India % EM average
We expect branded packaged foods to grow 5x in ten

years, non-commoditised to lead the growth
We project growth for the packaged foods categories over the next ten years. At an
aggregate level, we expect India’s per capita foods consumption to reach ~US$200 which
will be in sync with our per capita GDP, at that stage and consumption levels of similar
income level countries today (Figure 33 and Figure 34). With population growth at ~1%,
the overall packaged foods market is expected to grow ~3.5x in ten years to US$270 bn, a
CAGR of 14% (Figure 35).
Figure 34: Compared with other countries in that

Figure 33: India per capita GDP to be ~US$5,000 in bracket suggests India packaged food consumption
ten-years’ time (2027) Packaged
can be foods consumption
~US$200 perper capita
capita of countries
by 2027 near US$5000 GDP/ capita
India nominal GDP growth for the next 10 years (2017-27) 12.0% Packaged
India population growth over the next 10 years 1.0% GDP per foods per
Country capita (US$) capita (US$)
India per capita GDP growth CAGR over 10 years 10.9% India 1,852 58
India per capita GDP in 2017 (US$) 1,852 Vietnam 2,306 160
India per capita GDP in 2027P (US$) 5,207 Indonesia 3,859 166
South Africa 6,089 368
Thailand 6,336 308
China 8,583 251
Mexico 9,249 578
Source: World Economic Forum, Credit Suisse estimates Source: Euromonitor, Credit Suisse estimates
Figure 35: We estimate India’s packaged foods market to be ~US$270 bn by

2027
Metric 2007 2017 2027P
India per capita packaged foods market (US$) 13 58 200
% CAGR 16% 13%
India population (mn) 1,151 1,307 1,443
% CAGR 1.3% 1.0%
India packaged foods market (US$ bn) 15 75 270
% CAGR 18% 14%
Source: Euromonitor, Credit Suisse estimates

1 May 2018
However, we expect the branded segment to grow much faster, at 17%, which translates
into 5x increase (from US$40 bn to US$200 bn) in the market size over the next decade.
For category level forecasts, we factor in cultural issues and catalysts for growth
At a category level, when we project potential growth in packaged foods categories, we
factor in (1) the gap in per capita consumption versus other emerging markets, (2) cultural
factors (like India is a tea drinking country, and hence, coffee will have lower consumption,
noodles will not be a core meal item), and (3) enabling drivers like uninterrupted electricity
in retail stores helping some categories which need controlled ambient temperature. We
also take into account the fact that some of the commoditised categories such as rice and
edible oil have shown high growth in the past due to high price increases, which we have
assumed will not be the case in the future.
Figure 36: Our forecasts for the growth of each packaged foods category
Overall packaged foods Branded packaged foods
Category 2012 2017 2012-17 CAGR 2027P 2017-27P CAGR 2017 2027P CAGR
Edible oils 6,255 19,666 26% 42,456 8% 7,866 25,474 12%
Dairy 8,307 17,574 16% 54,581 12% 4,393 21,832 17%
Rice 2,162 4,449 16% 11,541 10% 222 1,154 18%
Savoury snacks 1,672 4,325 21% 22,635 18% 1,730 13,581 23%
Biscuits 2,406 4,216 12% 13,093 12% 2,740 11,784 16%
Chocolates 1,834 3,846 16% 20,129 18% 3,846 20,129 18%
Sauces/ dressings 1,010 2,360 18% 12,352 18% 1,888 9,882 18%
Baked Goods 1,308 2,148 10% 13,300 20% 1,289 10,640 24%
Soft drinks 1,343 2,100 9% 5,447 10% 2,100 5,447 10%
Tea 1,286 1,914 8% 5,944 12% 1,340 5,052 14%
Juice 785 1,776 18% 10,999 20% 1,776 10,999 20%
Ice creams 777 1,719 17% 8,996 18% 1,719 8,996 18%
Supplements 808 1,391 11% 7,278 18% 1,251 7,278 19%
Bottled water 478 1,330 23% 8,234 20% 1,197 8,234 21%
Other hot drinks 679 1,177 12% 5,190 16% 1,177 5,190 16%
MFD 674 1,162 11% 2,508 8% 1,162 2,508 8%
Herbal products 679 1,094 10% 4,825 16% 766 4,825 20%
Noodles 692 829 4% 3,074 14% 746 3,074 15%
Baby food 326 706 17% 4,368 20% 706 4,368 20%
Coffee 357 634 12% 2,795 16% 507 2,515 17%
Breakfast cereals 136 358 21% 1,875 18% 358 1,875 18%
Ready meals 128 299 19% 1,562 18% 299 1,562 18%
Pasta 134 249 13% 1,302 18% 249 1,302 18%
Spreads 95 248 21% 1,296 18% 248 1,296 18%
Processed veg. 101 217 17% 1,136 18% 217 1,136 18%
Processed meats 86 194 18% 1,809 25% 194 1,809 25%
Sports nutrition 66 141 17% 622 16% 141 622 16%
Energy drinks 68 127 13% 665 18% 127 665 18%
Soups 36 80 17% 417 18% 80 417 18%
RTD beverages 11 17 10% 157 25% 17 157 25%
Source: Euromonitor data for 2017, Credit Suisse estimates for 2027
Non-commoditised categories to grow ~2x faster than of commoditised categories,

branded to grow ~1.3x faster than overall growth
We think categories such as rice, dairy (liquid milk), and edible oils are commoditised in
nature as the scope of value addition by packaging these products is limited. These,
however, are very large and currently make up for 55% of overall packaged foods
consumption. We expect these to grow at a much slower rate of 10% over ten years while
the remaining non-commoditised portfolio should compound at ~18% rate. Likewise,

1 May 2018
several categories such as biscuits and savoury snacks within the packaged food
consumption pie have high unbranded shares which will fall over time. We expect branded
packaged food sales to grow in high-double digits versus a 14% CAGR for the overall pie.
Figure 37: Branded packaged foods to grow faster Figure 38: Commoditised segments (oil, rice, dairy)
than overall packaged foods to grow slower than non-commoditized segments
300 180
14% CAGR 18% CAGR
160
250
140
17% CAGR
200 120
10% CAGR
100
150
80
100 60
40
50
20
-
-
Total packaged foods (US$bn) Branded (US$bn)
Commoditised (US$bn) Non-commoditised (US$bn)
2017A 2027P
2017A 2027P
Figure 39: Commoditised segments (rice, oil, dairy) Figure 40: ..but about 2/3rds of the future growth
make up 55% of the total food consumption pie … would be driven by non-commoditised segments
India share of packaged foods (2017) Share of incremental category sales (2017-2027P)
Biscuits
Snacks
5% Chocolates
6% 8%
Rice
Dairy 6% Biscuits Rice Sauces
23% 5% 4% Snacks 5%
9%
Baked
Chocolates 6%
5% Colas
Tea
Sauces Dairy 2%
2%
Baked 3% 19% Juice
Edible Oils 3% 5%
26% Colas
3% Ice Creams
Tea
Edible Oils 4%
2% Supplements
12% Water 3%
Juice
4%
Others 2% Hot Drinks
Water Others
3% MFD 2%
2% 4%
Hebral MFD Ice Creams Noodles Hebral 1%
Coffee 1% 2% Supplements 2% Coffee 2%
1%
1% 2% 1% Baby Food
Baby Food Noodles Hot Drinks 2%
1% 1% 2%
Outside of commoditised products, chocolates, biscuits, and savoury snacks will

be the largest contributors to incremental growth
We expect ~US$130 bn of incremental turnover to come from non-commoditised
packaged foods over the next ten years. This is where the profit growth for most foods
companies will come from. Our top-down analysis suggests that chocolates, biscuits, and
savoury snacks will drive ~40% of the incremental sales over the next ten years.

1 May 2018
Figure 41: Within non-commoditised, snacks, Figure 42: Chocolates and snacks likely to grow the
chocolates, and biscuits the largest segments fastest over the next ten years
Share of incremental non-commoditised (2017-2027P)
Share of non-commoditised (2017)
Colas Tea
Sauces 3% 3%
Tea
7% 5% Baked Juice
Baked Colas Sauces 9% 7%
6% 6% Juice
8%
5%
Ice Creams
Chocolates Ice Creams Chocolates 6%
11% 5% 13%
Supplements Supplements
Biscuits 5%
Biscuits 4% Water
7%
12% 5%
Water
4%
Snacks Hot Drinks
Snacks Hot Drinks 15%
MFD 3%
12% Others 3%
MFD 1%
7% Hebral 3% Hebral
3% Others 3%
Coffee
Coffee 6% Noodles
Noodles 2%
2% 2%
2%
Baby Food Baby Food
2% 3%
Most attractive categories with strong growth and

high profitability
We overlay the potential growth rates of the branded sales and profitability of categories to
identify the most attractive categories from the point of view of growing profits in packaged
foods. We conclude that chocolates, baby food, baked goods, coffee/ready-to-drink
beverages have the best combination of growth and profitability. While we do not have
detailed financials of every category, we have used discussions with industry participants
to estimate the divergence in profitability of various categories. The key factors that
determine the profitability of categories are (1) competitive intensity in the category, and
(2) presence of unbranded consumption in the category. Infant nutrition, chocolates, and
coffee come out as categories with high growth potential and also high levels of
profitability.

1 May 2018
Figure 43: Chocolates, baby food, baked goods, coffee/ready-to-drink beverages have the best combination
of growth and profitability
12
Growth potential versus profitability for different categories
(bubble size represents relative category size)
Profitability scores (low to High on scale: 1 to 10)
10
Chocolates
Coffee Baby Food
MFD
8 Spreads
Sauces/ Baked
Noodles
Dressings Goods
RTD
6 Juice beverages
Tea Soups
Soft Drinks Biscuits Breakfast
Cereals Savoury
4 Snacks
Dairy Ice
Creams
Processed
2 Meats
Edible Oils
0
5% 10% 15% 20% 25% 30%
-2
Growth potential of the category (estimated 10 year growth rate)
Nestlé and The packaged foods market is very large and diverse and is spread over a large number
Britannia well of categories. As a result there are many companies which play in different segments of
placed and equally packaged foods. Among our coverage Nestlé, Britannia and GSK have their entire
strong plays; small business in packaged foods. There are companies like HUL, Dabur, and Marico which
companies to play also have some presence in packaged foods; however, for their overall business this is not
in lower margin something which moves the needle in a big way. ITC is another large player in packaged
categories foods which is the dominant part of its FMCG business. However, for ITC, profits from
packaged foods do not make a meaningful contribution to its overall profits. There are also
some companies that we do not cover, like Prataap Snacks and Manpasand Beverages,
who play largely in packaged foods.
Figure 44: Nestlé, Britannia, and GSK are pure play Figure 45: Share of profits from packaged foods for
foods companies these companies
120% 120%
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
Nestle Britannia GSK Dabur HUL ITC Marico Nestle Britannia GSK Dabur HUL Marico ITC
% of sales from foods % of EBITDA from foods
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

1 May 2018
Figure 46: Heat map highlighting current and potential categories for different companies

1 May 2018
Nestlé, Britannia equally strong plays, small

companies to play in lower margin categories
Within our coverage, we see both Nestlé and Britannia as being strong plays on the long-
term potential of packaged foods. These companies have potential to grow their existing
business and also enter new categories. For the long-term attractiveness of the
companies under our coverage we look at three factors:
■ The attractiveness of their current mix of categories: Here we overlay our analysis
on potential growth rates of various categories with the current business mix of the
company. This is a weighted average growth for the company assuming it is able to
maintain its current market share.
■ Potential to gain market share within existing categories: In this metric, we

qualitatively access the potential to gain market share within the existing categories
that the company operates in. This is based on the various growth drivers like
distribution and white spaces within existing categories.
■ Potential to grow by entering new categories: This is the potential growth from new
categories. While it is not possible to predict new category success with a high degree
of certainty, we look at the potential right to win for the existing brands of a company,
and management’s own intent to capture the same.
Figure 47: We score companies on three factors to gauge long-term potential

Company Category growth Market share gain New category Overall score
potential (1 to 3) potential (1 to 3) potential (1 to 3) (sum of scores)
Nestlé 3 2 3 8
Britannia 2 3 3 8
GSK 1 1 2 4
Nestlé
■ The attractiveness of its current mix of categories (High): The blended average
potential growth that Nestlé could deliver over the next ten years assuming the market
share it holds within the branded sales is strong at ~18%. All its categories—infant
nutrition, coffee, noodles, chocolates etc.—have strong growth potential.
■ Potential to gain market share within existing categories (Low): Nestlé is already a
dominant No.1 player in most of the categories it operates in. In chocolates, where it is
not dominant, the incumbent is very strong and we see limited scope to gain share.
■ Potential to grow by entering new categories (High): Nestlé has strong potential to
enter new categories. Malted food drinks, nutritional supplements, ready-to-drink, ice
creams, water, and dairy.
Britannia
■ The attractiveness of its current mix of categories (Medium): Being largely in

biscuits currently, potential growth over the next ten years, assuming market share it
holds within the branded sales is ~17%.
■ Potential to gain market share within existing categories (High): Britannia is not a
dominant market leader and has ~32% market share in biscuits. Many initiatives like
expanding distribution and launching new products in biscuits are focused at market
share gain, which has been gradually happening and should continue over the next 5-
10 years.

1 May 2018
■ Potential to grow by entering new categories (High): Britannia has recently

articulated its vision of becoming a ‘total foods company’, and is planning to enter one
or two new categories every year. It is starting with a joint venture to bring filled
croissants into India with Greek firm, Chipita. We believe Britannia could also enter
categories such as chocolates and savoury snacks where the brand has a right to
dominate.
GSK Consumer
■ The attractiveness of its current mix of categories (Low): The malted food drinks
category in India has low growth headroom, and thus, assuming GSK is able to hold its
market share, growth is likely to be muted at ~10%.
■ Potential to gain market share within existing categories (Low): GSK has a
dominant 64% market share, and the other players in the category have their own core
geographies of strength. Thus, we see limited scope to gain share.
■ Potential to grow by entering new categories (Medium): Till recently, this potential
was very low, as GSK globally was not keen to extend the nutritional equity of the
brands. However, this business is on the block and the new owners would, in our view,
try to strive to expand the brands into other categories.
Figure 48: Ten-year growth potential for companies assuming they hold their current shares within the
branded sales of each category—Nestlé/ Britannia could grow at 18/17%; GSK at a slower 10%
Rs bn
2017 2027P Company sales
Company Category Category Company Category size Company sales % projected growth Sales in 2027 vs. 2017
size sales CAGR
Baby Food 45 21 280 127 20% 6.2x
Noodles 48 21 197 87 15% 4.1x
Coffee 32 14 161 71 17% 5.0x
Nestlé Chocolates 246 13 1,288 68 18% 5.2x
Dairy 281 31 1,397 153 17% 5.0x
Sauces/ dressings 121 5 632 28 18% 5.2x
Total 774 105 3,955 535 18% 5.1x
Biscuits 175 70 754 303 16% 4.3x
Britannia Baked Goods 82 15 681 121 24% 8.3x
Total 258 85 1,435 424 17% 5.0x
GSK MFD 74 42 161 90 8% 2.2x
Could ITC or Patanjali be a disruptor?

ITC is a large player in packaged foods with a strong presence in branded flour, biscuits
and salted snacks, noodles and juices. The total foods business of ITC was ~Rs80 bn in
FY17 and is growing in double digits. ITC has built this business from scratch, starting in
the early 2000s. It used its strong cash flows in cigarettes to fund losses in the FMCG
business in the first ten years. There is, thus, a relevant question if ITC could be a
disruptor in any other categories in foods, and thus, impact profitability of the sector. While
ITC has strong ambitions in foods, it is also now looking to move up its operating margins
in the business. Thus, in existing large categories such as biscuits, salted snacks, and
ITC well suited to noodles we expect ITC to also be focused on margins improvement. In new categories like
enter the dairy juices it has used its deep pockets to be very aggressive initially. Among other potential
segment
categories it is looking at are dairy, chocolates, and coffee. We expect that given the high
capex needs in dairy, it could be well suited for ITC to invest while other mainstream
companies in foods stay away from high capex commitments. Also, dairy will be very
meaningful for ITC as it is a large category and can be scaled up.

1 May 2018
Figure 49: ITC has grown its packaged foods Figure 50: This has been achieved on the back of
business at over 20% CAGR over the last decade sizeable capex spends
ITC foods sales (Rs bn) 7.0%
90 6.0%
80 5.0%
70
4.0%
60
3.0%
50
40 2.0%
30 1.0%
20 0.0%
10 ITC FMCG Nestle Britannia HUL
- Capex % sales (10 year avg.)

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Source: Company data, Credit Suisse estimates Note: ITC FMCG includes foods and other FMCG such as personal care, garments, and
stationery. Foods is ~80% of total FMCG. Source: Company data, Credit Suisse research
Figure 51: ITC has been able to use its strong

profits from the cigarette business…. Figure 52: …to fund losses in its FMCG business
80 160 2
70 150 -
140 (2)
60
130 (4)
50 120 (6)
40 110 (8)
30 100 (10)
90
20 (12)
80
(14)
10 70
(16)
- 60
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 (18)
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
ITC cigarette margins (%) (LHS) Cigarette ROCE (%) (RHS)
ITC FMCG margins (%)
Source: Company data, Credit Suisse estimates Note: ITC FMCG includes foods and other FMCG such as personal care, garments, and
stationery. Foods is ~80% of total FMCG. Source: Company data, Credit Suisse research
Patanjali likely to Patanjali has been another large player in packaged foods, playing in almost all
play on converting categories. However, the material success for Patanjali has come in more commoditised
commoditised or medicinal segments like ghee (clarified butter), edible oils, branded flour, medicinal
categories into juices, health supplements and spices. There has been very limited traction in biscuits,
branded ones chocolates, and juices. Thus, we believe Patanjali will derive most of its growth from
converting these commoditised segments from non-branded to branded, which in itself is a
huge revenue opportunity, but does not impact other listed players.

1 May 2018
Asia Pacific/India
Packaged Foods
Nestlé India (NEST.BO / NEST IN)

Rating OUTPERFORM
Price (30-Apr-18, Rs) 9,406 UPGRADE TARGET PRICE
Target price (Rs) (from 9,600) 10,500
Upside/downside (%)
Mkt cap (Rs/US$ mn)
11.6
906,920 / 13,659
Strong portfolio, in turnaround phase
Enterprise value (Rs mn) 892,986
Number of shares (mn) 96.42 ■ Nestlé’s current portfolio has high growth potential. Nestlé has a
Free float (%) 38.0 diversified portfolio across many packaged food categories. The major
52-wk price range (Rs) 9,406-6,476
ADTO-6M (US$ mn) 7.7
segments are infant nutrition and baby food, noodles, coffee, dairy, and
Target price is for 12 months. chocolates. The blended average potential growth of these categories over
the next ten years is ~18%, as most of these have large gaps in per capita
Research Analysts
consumption, and thus, high growth headroom. Also, chocolates and dairy
Arnab Mitra
91 22 6777 3806
have tailwinds from improving front-end supply chain. Nestlé has large
arnab.mitra@credit-suisse.com market share in most of its categories as the No.1 or No.2 player.
Rohit Kadam, CFA
■ The company is in a turnaround phase. Nestlé is witnessing a turnaround
91 22 6777 3824
rohit.kadam@credit-suisse.com after seven years of flat volumes, driven by the new focus on volume growth
and innovations. Margins obsession led to lower innovation, lower advertising,
and defocus on volumes. With a lot of focus on core products and a large
number of product launches, the turnaround has begun and is now likely to
gain momentum. What adds a great degree of comfort is that the double-digit
volume growth in CY17 had been broad based, innovative and volume led.
■ Margin expansion potential from operating leverage, lower input costs.
Nestlé is likely to see significant gross margin tailwinds in CY18 as some of
its key input costs (milk, sugar and wheat flour) are seeing deflation setting in
which will start reflecting in costs going ahead. What will also help are the
GST rate cuts from 28% to 18% in chocolates/coffee, which will help grow
volumes more aggressively. Also, we see potential for margin expansion from
the operating leverage effect on depreciation and fixed expenses.
■ We increase our target price, maintain OUTPERFORM. Our reverse DCF
implies that Nestlé is pricing in 15% growth over the next ten years, while our
analysis indicates 17-18% growth. Hence, we raise our target multiple for
Nestlé to 50x Mar-2020 (from 45x), as the high growth phase is likely to last
longer for the company given the tailwinds in the category. Our target price
moves to Rs10,500 (from Rs9,600). We maintain our OUTPERFORM rating.
Share price performance Financial and valuation metrics
Year 12/17A 12/18E 12/19E 12/20E
Revenue (Rs mn) 100,096.0 114,146.1 130,291.1 148,731.4
EBITDA (Rs mn) 21,570.3 25,951.0 31,548.0 37,232.7
EBIT (Rs mn) 18,147.8 22,319.6 27,706.6 33,181.3
Net profit (Rs mn) 12,892.8 15,653.4 19,380.3 23,171.1
EPS (CS adj.) (Rs) 133.79 162.35 201.01 240.32
Change from previous EPS (%) n.a. 0.0 0.0 0.0
Consensus EPS (Rs) n.a. 159.19 187.66 223.71
EPS growth (%) 28.8 21.3 23.8 19.6
The price relative chart measures performance against the P/E (x) 70.3 57.9 46.8 39.1
S&P BSE SENSEX IDX which closed at 35,160.36 on Dividend yield (%) 0.7 1.4 1.7 2.0
30/04/18. On 30/04/18 the spot exchange rate was EV/EBITDA (x) 41.4 34.4 28.1 23.7
Rs66.4/US$1 P/B (x) 26.51 25.76 24.88 23.91
Performance 1M 3M 12M ROE (%) 40.1 45.1 54.1 62.3
Absolute (%) 14.7 26.5 40.3 Net debt/equity (%) (41.6) (37.9) (52.8) (68.5)
Relative (%) 8.0 28.9 22.8 Source: Company data, Thomson Reuters, Credit Suisse estimates

1 May 2018
Nestlé India (NEST.BO / NEST IN)

Price (30 Apr 2018): Rs9,406; Rating: OUTPERFORM; Target Price: (from Rs9,600) Rs10,500; Analyst: Arnab Mitra
Income Statement (Rs mn) 12/17A 12/18E 12/19E 12/20E Company Background
Sales revenue 100,096 114,146 130,291 148,731 Nestlé is India’s largest player in packaged foods with market-
Cost of goods sold 43,269 48,530 55,254 62,913 leading positions in a large number of categories such as noodles,
EBITDA 21,570 25,951 31,548 37,233 instant coffee and baby food.
EBIT 18,148 22,320 27,707 33,181
Net interest expense/(inc.) 7 7 7 7 Blue/Grey Sky Scenario
Recurring PBT 19,910 24,259 29,841 35,530
Profit after tax 13,769 16,618 20,441 24,338
Reported net profit 12,252 15,653 19,380 23,171
Net profit (Credit Suisse) 12,893 15,653 19,380 23,171
Balance Sheet (Rs mn) 12/17A 12/18E 12/19E 12/20E
Cash & cash equivalents 14,574 13,696 19,596 26,351
Current receivables 890 1,015 1,158 1,322
Inventories 9,025 10,291 11,747 13,410
Other current assets 949 990 1,036 1,089
Current assets 25,438 25,991 33,538 42,172
Property, plant & equip. 26,162 24,530 22,689 20,638
Investments 21,085 21,085 21,085 21,085
Intangibles 0 0 0 0
Other non-current assets 942 942 942 942
Total assets 73,626 72,548 78,253 84,836
Current liabilities 37,849 35,768 40,231 45,329
Total liabilities 39,420 37,339 41,802 46,900
Shareholders' equity 34,206 35,209 36,451 37,936
Minority interests 0 0 0 0
Total liabilities & equity 73,626 72,548 78,253 84,836
Cash Flow (Rs mn) 12/17A 12/18E 12/19E 12/20E
EBIT 18,148 22,320 27,707 33,181
Net interest 0 0 0 0
Tax paid 0 0 0 0
Working capital 4,803 (3,513) 2,818 3,218 Our Blue Sky Scenario (Rs) (from 12,000) 12,080
Other cash & non-cash items (2,801) (3,028) (4,478) (5,952) Our blue sky scenario assumes a strong recovery in the infant
Operating cash flow 20,151 15,778 26,046 30,447 nutrition business with sustained market share gains and continued
Capex 0 0 0 0 new product launches.
Free cash flow to the firm 20,151 15,778 26,046 30,447
Investing cash flow (1,343) (2,000) (2,000) (2,000) Our Grey Sky Scenario (Rs) (from 7,680) 8,400
Equity raised 0 0 0 0 Our grey sky scenario assumes a risk that Nestlé reverts back to
Dividends paid (9,980) (14,650) (18,138) (21,686) being excessively profit focussed, and thus, slows down new
Financing cash flow (10,856) (14,657) (18,145) (21,693) product launches. Volume growth may slow down following this
Total cash flow 7,952 (879) 5,901 6,754 which can cause the stock's P/E multiple to derate.
Adjustments 0 0 0 0
Net change in cash 7,952 (879) 5,901 6,754 Share price performance
Per share 12/17A 12/18E 12/19E 12/20E
Shares (wtd avg.) (mn) 96 96 96 96
EPS (Credit Suisse) (Rs) 133.79 162.35 201.01 240.32
DPS (Rs) 65.25 129.88 160.81 192.26
Operating CFPS (Rs) 209.00 163.65 270.14 315.79
Earnings 12/17A 12/18E 12/19E 12/20E
Growth (%)
Sales revenue 8.5 14.0 14.1 14.2
EBIT 18.0 23.0 24.1 19.8
EPS 28.8 21.3 23.8 19.6
Margins (%)
EBITDA 21.5 22.7 24.2 25.0
EBIT 18.1 19.6 21.3 22.3
Valuation (x) 12/17A 12/18E 12/19E 12/20E
P/E 70.3 57.9 46.8 39.1 The price relative chart measures performance against the S&P BSE SENSEX
P/B 26.51 25.76 24.88 23.91 IDX which closed at 35,160.36 on 30-Apr-2018
Dividend yield (%) 0.7 1.4 1.7 2.0 On 30-Apr-2018 the spot exchange rate was Rs66.4/US$1
EV/sales 8.9 7.8 6.8 5.9
EV/EBITDA 41.4 34.4 28.1 23.7
EV/EBIT 49.2 40.0 32.0 26.5
ROE analysis (%) 12/17A 12/18E 12/19E 12/20E
ROE 40.1 45.1 54.1 62.3
ROIC 60.3 73.1 97.2 156.0
Credit ratios 12/17A 12/18E 12/19E 12/20E
Net debt/equity (%) (41.6) (37.9) (52.8) (68.5)
Net debt/EBITDA (x) (0.66) (0.51) (0.61) (0.70)
Source: Company data, Thomson Reuters, Credit Suisse estimates

1 May 2018
Asia Pacific/India
Packaged Foods
Britannia Industries Limited (BRIT.BO)

Rating OUTPERFORM
Price (30-Apr-18, Rs) 5,507 UPGRADE TARGET PRICE
Target price (Rs) (from 5,550) 5,850
Upside/downside (%)
Mkt cap (Rs/US$ mn)
6.2
661,136 / 9,958
In a ‘sweet’ spot
Number of shares (mn) 120.06 ■ Britannia well positioned to consistently gain market share in biscuits
Free float (%) 49.3 category. Britannia has ~32% market share in biscuits, which we expect to
gradually move up by ~100 bp every year over the next 3-4 years, driven by
Target price is for 12 months. (1) increasing share in the 'Hindi Belt' led by distribution expansion, (2) launch
of premium products, and (3) gradual shrinking of the unorganised sector
Research Analysts
after GST. We expect volume-led 13% revenue CAGR over FY18-20.
Arnab Mitra
91 22 6777 3806 ■ Margin expansion to re-start as input costs are coming off and cost
arnab.mitra@credit-suisse.com
savings programme continues. Gross margins declined YoY in FY17 and
Rohit Kadam, CFA
91 22 6777 3824
1H FY18 due to significant inflation in inputs like wheat flour, edible oil, and
rohit.kadam@credit-suisse.com sugar. Britannia hiked prices with a lag which caused margins compression.
However, this is reversing as prices of wheat, sugar, and milk are coming off.
Britannia's RM index was up over 10% YoY in FY17, and has now come
down to just 1% in 3Q FY18. We expect this to go into deflation over the next
3-4 quarters, if current spot prices hold. We expect agri inflation to remain
structurally soft over 2-3 years. Britannia continues to drive supply chain
efficiencies, which will further aid the recovery in margins.
■ Non-biscuit segments hold promise in the long run, but we are wary of
dairy. We believe Britannia as a brand has the 'right to win' in many food
categories outside of biscuits. There is potential to leverage the brand and
distribution in many new categories which management is in the process of
identifying. One of the initiatives has been to enter into a JV with Chipita, a
Greek company, for long shelf life 'filled croissants'. We are only wary of the
dairy segment, which is a very tough category to make money in.
■ We increase our target price, maintain OUTPERFORM. We increase
earnings by 2-6% for stronger growth and higher margins expansion as input
costs like sugar have fallen further. Our target price moves to Rs5,850 (from
Rs5,550). We maintain our OUTPERFORM rating.
Year 3/17A 3/18E 3/19E 3/20E
Revenue (Rs mn) 89,622.8 97,219.7 109,624.5 126,254.6
EBITDA (Rs mn) 11,863.7 13,197.8 16,500.7 20,513.7
EBIT (Rs mn) 10,671.0 11,840.3 14,971.1 18,713.8
Net profit (Rs mn) 8,845.7 9,778.8 12,258.1 15,330.6
EPS (CS adj.) (Rs) 73.71 81.49 102.15 127.75
EPS growth (%) 9.7 10.5 25.4 25.1
Rs66.4/US$1 P/B (x) 24.51 19.99 16.77 13.96
Absolute (%) 10.8 17.4 51.8 Net debt/equity (%) (0.2) (9.8) (8.5) (16.1)
Relative (%) 4.1 19.8 34.3 Source: Company data, Thomson Reuters, Credit Suisse estimates

1 May 2018
Britannia Industries Limited (BRIT.BO / )

Price (30 Apr 2018): Rs5,507; Rating: OUTPERFORM; Target Price: (from Rs5,550) Rs5,850; Analyst: Arnab Mitra
Sales revenue 89,623 97,220 109,624 126,255 Britannia is one of the largest biscuit manufacturing companies in
Cost of goods sold 55,887 57,687 63,621 72,045 India. The company also has presence in diary and bakery
EBITDA 11,864 13,198 16,501 20,514 segments.
EBIT 10,671 11,840 14,971 18,714
Recurring PBT 13,040 14,420 18,076 22,606
Profit after tax 8,843 9,779 12,259 15,331
Current receivables 1,792 1,943 2,191 2,524
Inventories 6,615 7,175 8,090 9,318
Other current assets 14,705 15,446 16,657 18,282
Current assets 24,319 28,953 31,462 38,917
Investments 5,021 7,010 9,034 10,405
Intangibles 0 0 0 0
Total assets 41,088 48,357 56,359 66,385
EBIT 10,671 11,840 14,971 18,714
Tax paid 0 0 0 0
Working capital (4,503) (593) (1,067) (1,479) Our Blue Sky Scenario (Rs) (from 6,250) 7,020
Other cash & non-cash items (420) (704) (1,183) (1,583) Our blue sky scenario valuation is Rs7,020. The same can be
Operating cash flow 5,748 10,543 12,721 15,651 achieved if (1) there is sustained moderation in input costs, and (2)
Capex (2,538) (2,003) (5,000) (3,000) market share gains from the second-largest player, Parle,
Free cash flow to the firm 3,210 8,540 7,721 12,651 accelerate.
Investing cash flow (2,725) (3,992) (7,024) (4,371)
Equity raised 379 0 0 0 Our Grey Sky Scenario (Rs) (from 4,100) 4,680
Dividends paid (3,178) (3,683) (5,908) (7,388) Our grey sky scenario valuation is Rs4,680. The same can be
Financing cash flow (2,692) (3,370) (5,563) (7,010) achieved if (1) there is a sharp increase in input costs, and (2) rising
Total cash flow 331 3,182 134 4,270 competitive intensity from Parle and ITC hurts margins.
Adjustments 0 0 0 0
Net change in cash 331 3,182 134 4,270 Share price performance
Per share 03/17A 03/18E 03/19E 03/20E
Shares (wtd avg.) (mn) 120 120 120 120
EPS (Credit Suisse) (Rs) 73.71 81.49 102.15 127.75
DPS (Rs) 21.98 25.47 40.86 51.10
Operating CFPS (Rs) 47.90 87.86 106.01 130.43
Earnings 03/17A 03/18E 03/19E 03/20E
Growth (%)
Sales revenue 4.1 8.5 12.8 15.2
EBIT 2.5 11.0 26.4 25.0
EPS 9.7 10.5 25.4 25.1
Margins (%)
EBITDA 13.2 13.6 15.1 16.2
EBIT 11.9 12.2 13.7 14.8
Valuation (x) 03/17A 03/18E 03/19E 03/20E
P/E 74.7 67.6 53.9 43.1 The price relative chart measures performance against the S&P BSE SENSEX
P/B 24.51 19.99 16.77 13.96 IDX which closed at 35,160.36 on 30-Apr-2018
Dividend yield (%) 0.4 0.5 0.7 0.9 On 30-Apr-2018 the spot exchange rate was Rs66.4/US$1
EV/sales 7.4 6.8 6.0 5.2
EV/EBITDA 55.7 49.8 39.9 31.9
EV/EBIT 62.0 55.6 43.9 34.9
ROE 39.6 32.6 33.8 35.3
ROIC 32.1 28.3 30.8 33.5
Net debt/equity (%) (0.2) (9.8) (8.5) (16.1)
Net debt/EBITDA (x) (0.00) (0.24) (0.20) (0.37)

1 May 2018
Asia Pacific/India
Packaged Foods
GlaxoSmithkline Consumer Healthcare

(GLSM.BO / SKB IN)
Rating OUTPERFORM
Price (30-Apr-18, Rs) 6,109 COMPANY UPDATE
Target price (Rs) 7,100
Upside/downside (%)
Mkt cap (Rs/US$ mn)
16.2
256,903 / 3,869
Earnings upsides likely post divestment
Number of shares (mn) 42.06 ■ GSK Consumer on the block. GSK’s parent (GSK plc) has announced that
Free float (%) 28.0 it is looking at options for either fully or partially divesting its stake in the listed
Indian entity, GSK Consumer (GSK), and its overall nutrition business, to part
Target price is for 12 months. fund its acquisition of Novartis’ stake in its global consumer JV.
Research Analysts ■ GSK’s core category does not have high growth headroom, but brands
Arnab Mitra have strong pricing power and nutritional equity. GSK’s business is largely
91 22 6777 3806 in malted food drinks (MFD), a category which, in our view, does not have very
arnab.mitra@credit-suisse.com
high growth headroom. India’s consumption of MFD is already very high, and
Rohit Kadam, CFA
91 22 6777 3824
we do not expect the category growing more than ~10% over the next decade,
rohit.kadam@credit-suisse.com including ~5% from pricing. However, GSK has over 64% market share and
two very strong brands, Horlicks and Boost, which have strong pricing power.
These brands also have great nutritional equity and could be potentially
extended into many nutrition-oriented food categories.
■ Massive cost savings and margin expansion possible after company is
taken over. GSK has a relatively high fixed cost structure in India. Employee
costs at ~12% of sales compared with 5-7% for other FMCG companies in
India. Also, other expenses are very high at 22% of sales. If the company is
taken over by any existing consumer company in India, there could be very
large savings on employee, distribution and other overheads of close to 300-
400 bp. GSK could lose the distribution business of OTC products, which could
adversely impact the PBT by 7-8%. However, assuming cost savings, we think
earnings could be boosted by ~15% post the divestment.
■ Deal structure uncertain, however, risk-reward positive. There is
uncertainty on the deal structure and investors are worried if minority
shareholder interests will be protected if the brands are sold globally.
However, as the bulk of the nutrition business is in India, we expect the
brands and the company to go hand in hand. We also expect GSK to
maintain its high corporate governance standards. We maintain our TP of
Rs7,100 and OUTPERFORM rating.
Year 3/17A 3/18E 3/19E 3/20E
Revenue (Rs mn) 39,864.6 42,749.5 48,725.5 55,891.7
EBITDA (Rs mn) 8,334.9 8,671.9 10,469.6 12,543.9
EBIT (Rs mn) 7,693.2 7,889.7 9,473.0 11,333.0
Net profit (Rs mn) 6,566.8 6,821.4 7,989.1 9,350.5
EPS (CS adj.) (Rs) 156.15 162.20 189.97 222.34
EPS growth (%) (4.5) 3.9 17.1 17.0
Rs66.4/US$1 P/B (x) 8.23 7.55 6.90 6.30
Absolute (%) 0.2 -6.3 19.1 Net debt/equity (%) (98.9) (91.7) (91.8) (92.9)
Relative (%) -6.4 -3.8 1.6 Source: Company data, Thomson Reuters, Credit Suisse estimates

1 May 2018
GlaxoSmithkline Consumer Healthcare (GLSM.BO / SKB IN)

Price (30 Apr 2018): Rs6,109; Rating: OUTPERFORM; Target Price: Rs7,100; Analyst: Arnab Mitra
Sales revenue 39,865 42,749 48,726 55,892 GlaxoSmithkline Consumer Healthcare is a player in the fast-moving
Cost of goods sold 12,969 14,307 16,311 18,713 consumer goods sector in India, with market share of over 65% in
EBITDA 8,335 8,672 10,470 12,544 malted foods.
EBIT 7,693 7,890 9,473 11,333
Recurring PBT 10,104 10,494 12,291 14,385
Profit after tax 6,567 6,821 7,989 9,350
Current receivables 3,210 3,442 3,924 4,501
Inventories 4,611 4,945 5,636 6,465
Other current assets 4,266 4,409 5,026 5,765
Current assets 42,962 44,024 48,762 54,624
Investments 0 0 0 0
Intangibles 0 0 0 0
Total assets 48,324 51,096 56,837 63,488
EBIT 7,693 7,890 9,473 11,333
Tax paid 0 0 0 0
Working capital 721 (749) 774 928 Our Blue Sky Scenario (Rs) 8,400
Other cash & non-cash items (631) (286) (487) (772) Our blue sky scenario assumes the malted food drinks category has
Operating cash flow 7,783 6,854 9,760 11,490 been sluggish over the last few years. GSK consumer is a market
Capex (684) (2,492) (2,000) (2,000) leader in this category and has taken a series of steps to revive
Free cash flow to the firm 7,099 4,363 7,760 9,490 growth. A sharper-than-expected recovery in growth for the
Investing cash flow (684) (2,492) (2,000) (2,000) company can lead to a positive surprise to our numbers. Also, some
Equity raised 0 0 0 0 of the new premium launches, if they fire well can contribute
Dividends paid (3,543) (4,009) (4,811) (5,773) meaningfully to growth. These lead to our blue sky target price of
Financing cash flow (796) (3,793) (4,811) (5,773) Rs8,400.
Total cash flow 6,303 570 2,949 3,717
Adjustments 0 0 0 0 Our Grey Sky Scenario (Rs) 6,100
Net change in cash 6,303 570 2,949 3,717 Our grey sky scenario assumes if indeed the slowdown is not due to
Per share 03/17A 03/18E 03/19E 03/20E issues like excessive pricing and lack of market development and is
Shares (wtd avg.) (mn) 42 42 42 42 more structural in nature, growth rates will continue to disappoint
EPS (Credit Suisse) (Rs) 156.15 162.20 189.97 222.34 leading to our grey sky target price of Rs6,100.
DPS (Rs) 66.00 79.20 95.04 114.05
Operating CFPS (Rs) 185.07 162.98 232.07 273.20 Share price performance
Earnings 03/17A 03/18E 03/19E 03/20E
Growth (%)
Sales revenue (3.6) 7.2 14.0 14.7
EBIT (1.5) 2.6 20.1 19.6
EPS (4.5) 3.9 17.1 17.0
Margins (%)
EBITDA 20.9 20.3 21.5 22.4
EBIT 19.3 18.5 19.4 20.3
Valuation (x) 03/17A 03/18E 03/19E 03/20E
P/E 39.1 37.7 32.2 27.5
P/B 8.23 7.55 6.90 6.30
Dividend yield (%) 1.1 1.3 1.6 1.9
EV/sales 5.7 5.3 4.6 3.9
EV/EBITDA 27.1 26.0 21.3 17.5
EV/EBIT 29.4 28.6 23.5 19.3 The price relative chart measures performance against the S&P BSE SENSEX
IDX which closed at 35,160.36 on 30-Apr-2018
On 30-Apr-2018 the spot exchange rate was Rs66.4/US$1
ROE 22.2 20.9 22.4 24.0
ROIC 807.7 324.1 210.4 247.9
Net debt/equity (%) (98.9) (91.7) (91.8) (92.9)
Net debt/EBITDA (x) (3.70) (3.60) (3.26) (3.02)

1 May 2018
Prataap Snacks (DIAMOND IN)

Market cap: US$0.5 bn
Company description: Prataap Snacks Ltd. (PSL) is primarily a savoury snacks company
selling a variety of snacks such as potato chips, extruded snacks, branded packaged
traditional Indian snacks under the Yellow Diamond brand. The company has recently
launched a sweet snack product priced at Rs5 for the mass market. Prataap was started
by Mr. Arvind Mehta and Mr. Amit Kumar Kumath in 2003 and went public in Oct-2017.
The share of potato chips (which has been the main product of the company) has come
down from 75% of sales six years ago to 25% now, as the company has added new
products to its portfolio. Prataap manufactures most of its products in-house, with only 7-
8% outsourced. PSL operates five manufacturing facilities, of which three facilities (Indore,
Assam-1 and Assam-2) are owned and two facilities (Kolkata and Bengaluru) are on a
contract manufacturing basis. Prataap has pan-India distribution with >3,500 distributors,
though its presence is the strongest in west India and relatively weak in south India.
Figure 53: Product portfolio for Prataap Snacks
Product Description
Potato chips Classic potato chips available in nine flavours, competes with 'Lays'
Chulbule (random extruded) Rice grit & corn grit based snack, available in seven flavours
Rings and Puffs (shaped extruded) Corn grit based snack, market leader in the 'rings' segment
Namkeen (traditional Indian snacks) Green gram based snack, 23 varieties
Pellet snacks Wheat based, targeted at kids
Yum Pie (sweet offering) Cake with jam and chocolate, targeted at kids
Source: Company data, Credit Suisse research
Growth drivers: Management is looking at 18-20% growth over the next three-to-four
years. This will come from market share gains in existing markets as well as distribution
expansion in weak states such as AP, UP, Punjab, Goa and HP. It plans to launch two
more savoury snack products as well as 3-4 sweet snacking options in the near future.
Figure 54: Key financials for Prataap Snacks
Financial metrics (Rs mn) FY13 FY14 FY15 FY16 FY17
Sales 3,445 4,468 5,606 7,579 9,055
EBITDA 283 214 356 572 424
margin 8.2% 4.8% 6.4% 7.6% 4.7%
PAT 149 54 99 274 99
CFO 115 129 329 433 426
Capex (671) (503) (411) (522) (588)
ROE 10.1% 3.3% 5.4% 13.5% 4.3%
ROCE 12.7% 4.9% 9.9% 16.0% 6.1%
Debt/EBITDA 1.0x 1.8x 0.9x 0.8x 1.5x
Source: Company data
Figure 55: Valuation metrics Figure 56: Shareholding pattern

80.0 % shareholding
69
AIFs
4%
60.0 50 Others
39 8% Founding
36 DII family
40.0 29 9% 23%
23
20.0 FII
8%
0.0
FY18 FY19 FY20 Sequoia
Capital
PE EV/EBITDA 48%
Valuation above is basis Bloomberg consensus. As of 31 March 2018.

Source: the BLOOMBERG PROFESSIONALTM service. Source: BSE.

1 May 2018
Manpasand Beverages (MANB IN)

Market cap: US$0.7 bn
Manpasand plays in the fast growing fruit drinks market: Manpasand is a major player
in the Rs130 bn fruit juice/drinks market with its flagship brand Mango Sip (forms over
70% of the revenue). The product comes in many pack sizes, with the lowest price point
being Rs5, making it the lowest price point in the segment. This brand is very strong in
non-metro cities and rural areas which drive over 50% of revenues. There is also a strong
presence in railways and ~20% of the revenues come from that channel.
The company has had a successful entry into aerated fruit drinks with ‘Fruits-Up’:
Manpasand entered the large Rs250 bn aerated drinks market with a fruit-based aerated
drink ‘Fruits-Up’ in 2015. The brand has rapidly scaled up. This plays on the consumer
perception that fruit-based aerated drinks are healthier than colas.
Company has had 36% revenue CAGR over FY14-17, management expects to
maintain pace: The company has grown strongly at a CAGR of 36% from FY14-17. In 9M
FY18 as well the growth has been 29%. Management expects Mango Sip to grow at 30-
35% and Fruits-Up to grow at 40-50% over the next few years.
Capacity addition a key growth driver, free cash flow negative due to high capex:
Management believes the main bottleneck for growth is capacity as the market is vacant in
smaller towns. The company initially had one manufacturing unit in Gujarat, and then set
up three new facilities to cater to north and east India. The total capacity has gone up over
3x from FY14-17. In future it plans to add a facility in South India. Overall, the company
plans to double its capacity over FY17-19. Due to large capacity addition which led to
capex, the free cash flow of the company has been negative over FY14-17.
Figure 57: Key financials for Manpasand Beverages

Financial metrics (Rs bn) FY13 FY14 FY15 FY16 FY17
Sales 2,406 2,944 3,602 5,411 7,350
EBITDA 390 457 645 1,195 1,577
margin 16.2% 15.5% 17.9% 22.1% 21.5%
PAT 224 205 299 505 726
CFO 319 23 527 816 1,456
Capex (553) (147) (1,588) (2,325) (2,793)
ROE 29.6% 23.9% 20.9% 12.7% 8.3%
ROCE 27.3% 25.3% 18.3% 10.4% 7.3%
Debt/EBITDA 1.2x 1.4x 1.6x 0.0x 0.0x
Debt/ Total capital 38.6% 40.5% 34.7% 0.0% 0.0%
Source: Company data
Figure 58: Valuation metrics Figure 59: Shareholding pattern

50.0 44.0 % shareholding
40.0 DII
32.0
12%
30.0 24.0 FII
22.0 21%
20.0 17.0 Saif Partners
13.0 18%
10.0 Others
5%
0.0 Promoter family
FY18 FY19 FY20
44%
PE EV/EBITDA
Valuation above is basis Bloomberg consensus. As of 31 March 2018.

Source: the BLOOMBERG PROFESSIONALTM service Source: BSE.

1 May 2018
Companies Mentioned (Price as of 30-Apr-2018)

Britannia Industries Limited (BRIT.BO, Rs5506.75, OUTPERFORM, TP Rs5850.0)
Colgate-Palmolive India (COLG.BO, Rs1124.15)
Dabur India (DABU.BO, Rs369.7)
Danone (DANO.PA, €67.09)
Emami Ltd (EMAM.BO, Rs1122.6)
General Mills (GIS.N, $43.74)
GlaxoSmithkline Consumer Healthcare (GLSM.BO, Rs6108.65, OUTPERFORM, TP Rs7100.0)
Godrej Consumer Products Ltd (GOCP.BO, Rs1116.8)
Hatsun Agro (HAPL.BO, Rs790.55)
Hindustan Unilever Ltd (HLL.BO, Rs1509.05)
ITC Ltd (ITC.BO, Rs281.45)
Kellogg Company (K.N, $58.9)
Kwality (KDAI.NS, Rs48.85)
MBL (MANB.BO, Rs399.2)
Marico Ltd (MRCO.BO, Rs332.85)
Mondelez (MDLZ.OQ, $39.5)
Nestle (NESN.S, SFr76.98)
Nestle India (NEST.BO, Rs9406.35, OUTPERFORM, TP Rs10500.0)
Parag Milk Foods (PAMF.NS, Rs304.75)
Prataap Snacks (PRAT.NS, Rs1378.45)
The Hershey Company (HSY.N, $91.94)
The Kraft Heinz Company (KHC.OQ, $56.38)
Disclosure Appendix
Analyst Certification
Arnab Mitra and Rohit Kadam, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views
expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Britannia Industries Limited (BRIT.BO)
BRIT.BO Closing Price Target Price

Date (Rs) (Rs) Rating
21-Feb-18 4772.20 5550.00 O*
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
3-Year Price and Rating History for GlaxoSmithkline Consumer Healthcare (GLSM.BO)
GLSM.BO Closing Price Target Price

09-Nov-15 5872.25 6430.00 O
08-Jan-16 6520.40 6700.00
09-Feb-16 5847.10 6800.00
14-Mar-16 5618.75 6600.00
19-May-16 5820.65 6550.00
15-Nov-16 5025.30 6300.00
14-Feb-17 5099.55 5900.00
12-May-17 5280.20 6000.00
08-Nov-17 5648.30 6500.00
13-Nov-17 6030.85 7100.00 O U T PERFO RM

1 May 2018
3-Year Price and Rating History for Nestle India (NEST.BO)
NEST.BO Closing Price Target Price

18-May-15 7069.00 6450.00 U
22-Jun-15 6283.80 5500.00
27-Jul-15 6246.25 5800.00 N
29-Oct-15 6282.10 6000.00
08-Jan-16 5629.85 6050.00
15-Feb-16 5059.15 5350.00
12-May-16 5703.85 5800.00
01-Aug-16 6946.95 6000.00 U
28-Oct-16 6960.50 6200.00
15-Nov-16 5980.10 5900.00 U N D ERPERFO RM
N EU T RA L
18-Apr-17 6328.40 5700.00 O U T PERFO RM
15-May-17 6611.40 5900.00
26-Jul-17 6787.30 6100.00
28-Aug-17 7051.20 7700.00 O
06-Nov-17 7597.35 8200.00
13-Nov-17 7714.65 8700.00
14-Feb-18 7260.10 9000.00
16-Apr-18 8744.70 9600.00
As of December 10, 2012 Analysts’ stock rating are defined as follows:
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*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

1 May 2018
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Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 48% (62% banking clients)
Neutral/Hold* 38% (57% banking clients)
Underperform/Sell* 13% (52% banking clients)
Restricted 2%
*For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely
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definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
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Target Price and Rating

Valuation Methodology and Risks: (12 months) for Britannia Industries Limited (BRIT.BO)
Method: We rate Britannia OUTPERFORM with a TP of Rs5,850. We value the company at 45x Mar-2020 earnings which is at a ~15% premium
to other larger Indian domestic FMCG companies like GCPL, Dabur and Marico. We reckon it deserves to trade at a premium to Indian
FMCG peers given its low share of international business and continued demonstrated market share gains in the biscuit category.
Risk: Key risks to our OUTPERFORM rating and TP of Rs5,850 are: (1) a rise in competitive intensity especially in the biscuit category; (2) any
reversal of the decline in input costs baked into our forecasts which could pose risks to margin expansion in FY19; (3) a slowdown in
overall consumption growth; (4) a high investment-led entry into dairy which could be a risk to earnings in the near term; and (5) any
change in leadership.
Valuation Methodology and Risks: (12 months) for GlaxoSmithkline Consumer Healthcare (GLSM.BO)
Method: Our target price of Rs7,100 for GlaxoSmithkline Consumer is based on 35x our Sep-2019 earnings forecast (at a 15% discount to mid-cap
FMCG peers). We have an OUTPERFORM rating as the company is gaining market share even in a slow market and driving initiatives to
spur demand growth.
Risk: Key risks to our Rs7,100 target price and OUTPERFORM rating for GlaxoSmithkline Consumer include: a slowdown in the packaged
foods segment, and increases in prices of key raw materials such as milk and sugar.
Valuation Methodology and Risks: (12 months) for Nestle India (NEST.BO)
Method: Our target price of Rs10,500 for Nestlé India is based on 50x Mar-2020 earnings forecasts which is 10% above its three-year average as
we believe Nestlé's business recovery is gathering momentum and the company is very well placed to capitalise on the packaged foods
opportunity in India. We rate the stock OUTPERFORM on the back of this thesis.
Risk: Key downside risks to our Rs10,500 target price for Nestlé India and our OUTPERFORM rating include a lower-than-expected volume
growth in the non-Maggi portfolio and the company reverting to its excessive profit focus by cutting marketing spends on new launches.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations
typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names

1 May 2018
Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): GLSM.BO, DANO.PA, GIS.N, KHC.OQ,
MDLZ.OQ, HSY.N, NESN.S, K.N, HLL.BO
Credit Suisse provided investment banking services to the subject company (GLSM.BO, NEST.BO, GIS.N, KHC.OQ, MDLZ.OQ, NESN.S, HLL.BO)
within the past 12 months.
Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-
banking, securities-related: GLSM.BO, NEST.BO, GIS.N, KHC.OQ, NESN.S
Credit Suisse has managed or co-managed a public offering of securities for the subject company (GLSM.BO, NEST.BO, GIS.N, KHC.OQ, NESN.S,
HLL.BO) within the past 12 months.
Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): GLSM.BO, GIS.N,
KHC.OQ, MDLZ.OQ, NESN.S
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (GLSM.BO, DANO.PA,
GIS.N, EMAM.BO, KHC.OQ, MDLZ.OQ, HSY.N, NESN.S, K.N, HLL.BO) within the next 3 months.
Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s):
GLSM.BO, NEST.BO, GIS.N, KHC.OQ, NESN.S
Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s):
BRIT.BO, COLG.BO, DABU.BO, DANO.PA, EMAM.BO, GIS.N, GLSM.BO, GOCP.BO, HLL.BO, ITC.BO, K.N, MRCO.BO, MDLZ.OQ, NESN.S,
NEST.BO, HSY.N, KHC.OQ
A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of
Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (BRIT.BO, GLSM.BO, NEST.BO, DANO.PA,
ITC.BO, GIS.N, EMAM.BO, KHC.OQ, MDLZ.OQ, HSY.N, NESN.S, COLG.BO, MRCO.BO, GOCP.BO, HLL.BO, DABU.BO) within the past 12
months.
As of the end of the preceding month, Credit Suisse beneficially owned between 1% and 3% of the equity and related equity derivatives of
(NESN.S).
Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (NEST.BO).
Credit Suisse has a material conflict of interest with the subject company (NESN.S) . Credit Suisse is acting as an agent in relation to Nestle’s
(NESN.S) ongoing share buy-back program. Credit Suisse Securities is M&A Advisor to The Ferrero Group on their acquisition of Nestle SA's U.S.
confectionary business.
Arnab Mitra worked as an employee in Hindustan Unilever.
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1 May 2018
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Credit Suisse - India Packaged Foods Sector

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Credit Suisse - India Packaged Foods Sector

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1 May 2018

India Packaged Foods Sector

Profitability scores (low to High on scale: 1 to 10)

Source: Credit Suisse estimates

■ Catalysts now in place to drive a sustained inflection in packaged

Good Day biscuits

Jan 2016 Jan 2018

India Packaged Foods Sector 2

Beginning of a long summer

Catalysts now in place to drive a sustained inflection

The US$200 bn branded foods opportunity

Nestlé, Britannia equally strong plays; small

India Packaged Foods Sector 3

India Packaged Foods Sector 4

Beginning of a long summer 3

Catalysts now in place to drive a sustained inflection in packaged foods 6

The US$200 bn branded foods opportunity 15

Nestlé India (NEST.BO / NEST IN) 25

Britannia Industries Limited (BRIT.BO) 27

GlaxoSmithkline Consumer Healthcare (GLSM.BO / SKB IN) 29

Prataap Snacks (DIAMOND IN) 31

Manpasand Beverages (MANB IN) 32

India Packaged Foods Sector 5

Catalysts now in place to drive a sustained

Figure 9: Catalysts in place to remove bottlenecks to packaged foods growth

But three catalysts in

Affordability of packaged foods has significantly improved

Large incumbents now putting in efforts to grow their

Source: Credit Suisse research

Source: Credit Suisse research

India Packaged Foods Sector 6

Availability: Sweeping changes in the front-end

India Packaged Foods Sector 7

Figure 12: Power outages have dropped across the

Source: Tata Group website Source: Blue Star India

(2) Smartphone apps usage in front-end sales giving better control on

India Packaged Foods Sector 8

Growth for key organised retail players 45%

FY12-16 CAGR DMart 5 year CAGR (FY12-17)

India Packaged Foods Sector 9

Affordability of packaged foods has significantly

Good Day biscuits

Source: CMIE, Credit Suisse estimates Source: Credit Suisse estimates

India Packaged Foods Sector 10

Investments: Large incumbents now putting in effort

FY06-11 FY11-17 Diary sector capex in India (Rs bn)

India Packaged Foods Sector 11

Sales comparison - HUL versus food businesses

HUL (indexed to 100) ITC Foods + NEST + BRIT

Source: Company data, Credit Suisse research

Nestlé, Britannia, ITC now investing in growing their core categories

Biscuit Cookie Good Day Chunkies Premium chocolate chip cookies

Oats based cookies for the health

Source: Britannia Industries Company website (with company approval)

India Packaged Foods Sector 12

Figure 26: Direct distribution reach has gone up

FY13 FY14 FY15 FY16 FY17 1HFY18 3QFY18

Source: Company data, Credit Suisse estimates

India Packaged Foods Sector 13

Britannia Cake Muffins filed with chocolate/ strawberry cream

Source: Company websites, Credit Suisse research

Structural drivers in place as long arch trends

■ Working women: There has been a general trend of an increasing proportion of

India Packaged Foods Sector 14