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December 2009

Consumer Monopolies

Standing tall
Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com); Tel: +91 22 3982 5404

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

Consumer Monopolies

Contents

Page No.

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

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

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

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

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

Monopolies are best placed to capitalize emerging growth scenario ...... 16-17

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

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

Annexure I - Emerging income trends in urban and rural India .............. 21-23

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

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

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

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

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

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

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

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

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

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

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

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

4 December 2009 2

Thematic Report
SECTOR: FMCG

Consumer Monopolies
BSE Sensex: 17,102 S&P CNX: 5,109 4 December 2009

COMPANY NAME PG. India is on the threshold of a structural uplift in consumer demand. We are approaching
ITC 25
the inflexion point, at which the impact of rising per capita income, favorable demographics,
Hindustan Unilever 33 changing lifestyle and growing rural prosperity will combine to accelerate the FMCG
sector’s growth rate. While the FMCG sector has a steady profit growth trajectory, we
Nestle India 41
believe consumer monopolies can grow exponentially in the emerging scenario due to
Asian Paints 50 strong brands, captive consumers, high pricing power and better terms of trade. Consumer
United Spirits 58 monopolies could be one of the best themes to play the domestic consumption story.

Colgate 66
What are consumer monopolies?
Marico 73
Consumer monopolies are companies that occupy a dominant position in a product category
Titan Industries 79
or segment. We have identified companies in the consumer space that have emerged as
GSK Consumer 87 monopolies using criteria such as 1) market share at least 3x that of its nearest competitor
and 2) the brand or brand portfolio contributes at least 50% of sales or profits of the
Gillette India 94
company.
Jyothy Laboratories 100

A monopoly is established over years and is aided by factors such as regulations, first-
mover advantage, technology breakthroughs, distribution, brands and industry consolidation.
Monopolies enjoy 1) strong pricing power, 2) revenue growth visibility, 3) better terms of
trade with suppliers and distributors, 4) rising margins, 5) low capex, and 6) low to negative
working capital. All the companies covered in this report, except United Spirits and ITC,
have significantly increased their RoE over the past five years.

COMPETITIVE POSITION OF COMPANIES COVERED

COMPANY CATEGORY MKT. NEAREST COMPETITOR *MKT. % SALES VOLUME SALES FY10

SHARE SHARE CONTRI- GROWTH FY07-10 EBITDA

(%) NAME MKT SH. (%) X BUTION (%) CAGR (%) MARGIN (%)

Asian Paints Decorative Paints 45 Kansai Nerolac 14 3.2 93 12 19 18
Colgate Palmolive Oral Care 49 HUL 26 1.9 95 13 15 22
GSK Consumer Malted Drinks 70 Cadbury 15 4.7 90 9 20 17
Gillette India Male Grooming 40 House of Malhotra 14 2.9 74 10 12 30
Hindustan Unilever Toilet Soaps 45 Godrej Consumer 11 4.1 24 4 10 20
Detergents 35 P&G 14 2.6 25 8 18 12
Skin Care 50 Emami 5 10.0 11 20 N.A 30
ITC Cigarettes 82 Godfrey Phillips 10 8.2 42 5 13 53
Jyothy Labs Fabric Whitener 72 Reckitt Benckiser 5 14.4 60 5 12 30
Marico Pure Coconut Oil 55 Shalimar 8 7.0 32 10 21 18
Nestle Instant Noodles 80 Top Ramen 11 7.3 22 22 26 20
Baby Food 85 Heinz 15 5.7 34 10 15 25
United Spirits IMFL 59 Radico Khaitan 9 6.1 100 13 30 19
* Times nearest competitor Source: Company/MOSL

4 December 2009 3

etc) HLL-P&G price war.5 17. Parachute. Colgate-Protex. etc Shift in consumer wallet share 10x increase in NREGA allocation Improved availability New brands Fall in interest rates. The companies in the consumer monopoly universe have posted sales CAGR of 16-20% over FY04-09.9 17. low penetration. Axion. This will change the shape of India’s income pyramid. snacks) Optima. The low to negative working capital operating cycle indicates their bargaining power with suppliers and the trade. 3) huge economies of scale to manufacture and distribute goods in the interiors. L'Oreal. favorable demographics.4 20. Sara Lee. Surf.5 16. Chawyanprash. 4 December 2009 4 . We expect a sharp increase in demand for value for money products from the people moving out of poverty and for premium products from a fast emerging upper middle and affluent class.0 10. Rising aspiration levels End of P&G-Godrej JV *Sales growth of HUL (adjusted for acquisitions).3 20. It includes 1) the the emerging growth ability to invest in innovation and technology.0 17. increased availability and distribution expansion will increase the FMCG growth rate to over 20%.5 16.5 7.2% CAGR over FY10-14 to reach growth acceleration US$1.0 20.0 16.8 18. EXPECT FMCG GROWTH TO ACCELERATE (%) 21. Rising income levels in urban and rural India and benefits from increasing affordability. and 4) generic brands (Maggi.7 3. Consumer Monopolies Indian consumer market approaching inflexion point.4 18. We the threshold of major estimate per capita nominal GDP will grow at 12. 2) strong distribution clout with both organised scenario retailers and the general trade.666 in 2014. Vim.0 -1. GSK and Colgate taken as a proxy for FMCG growth prior to FY00 Source: MOSL Monopolies best placed to capitalize on emerging growth scenario Consumer monopolies are We believe consumer monopolies have some in-built advantages that will enable them to best placed to capitalize on stay ahead of the pack in the emerging growth and competitive scenario.0 16. which act as key differentiating factors.5 18. sales growth to accelerate India’s FMCG market is on India’s US$25b FMCG market is on the threshold of major growth acceleration. Palmolive.7 12. durable prices care.0 3.5 17. juices.Organics & Le Sancy. which could have far reaching implications on consumer demand as per MGI (McKinsey’s Global Institute). noodles. Nestle.0 8. Emergence of new categories (skin Rising awareness (HUL . paints. Revlon.0 -2. Cerelac and Nescafe).5 FY93 FY96 FY99 FY02 FY05 FY08 FY11E FY14E KEY GROWTH ENABLERS GROWTH DRAG GROWTH RESURGENCE SUSTAINED HIGH (1993-1999) (2000-2006) (2007-2012) GROWTH (2013-15) Reduction in excise duty Agri-degrowth/drought Agri GDP growth of 3% Decline in rural from 70% to 30% poverty Pent-up demand post liberalization 3-5% CAGR in agri prices 10-15% increase in crop prices Emergence of urban middle class Entry of P&G.

2 57.4 17.4 United Spirits Buy 14. Maintain Buy.5 22.3 19.4 13.5 and 22.3 24.9 ITC Buy 16.5% in 1HFY10 and a benign tax environment will aid faster conversion from other forms of tobacco to cigarettes. We estimate 15% EBIT CAGR in cigarettes and 19.4x FY11E EPS of Rs51. The stock trades at 28x CY10E EPS of Rs93.0 128.7 47. Sales growth will be mainly volume led indicating strong to report PAT growth of 22% demand for various monopolies. We expect 14% volume CAGR which can further increase from favorable regulatory changes for rationalization in excise or a gradual ban on country liquor.9 26. Consumer Monopolies We expect our We expect our consumer monopoly universe to report sales growth of 16.7 5.9 164.9x CY11E EPS of Rs114.1 20.0 20.9 41.2 Glaxo Smithkline* Buy 18. The stock trades at 26. Besides.6 20.4 59.8 21. Top picks ITC: ITC has a strong monopoly in cigarettes.9 17.1 51.3 22.5 Titan Industries Neutral 24.0 14.7 66.7% PAT CAGR over FY10-12.7 17. FY10 pertains to CY09 and FY11 to CY10 Source: MOSL 4 December 2009 5 .5% and PAT consumer monopoly universe growth of 22% over FY10-12.7 22.1 71.8 17.2 11.3% PAT CAGR over FY10-12.4 57.3 17.5 80.0 158.8 14.3 Colgate Buy 16.1 40.8 11.0 84.4 17.0 21.2 93.0 97. Buy ITC.0 31.7 12.2 4.6 12. Nestle and United Spirits: United Spirits is a play on gains from a monopoly situation in the world’s United Spirits fastest growing IMFL (spirits) market.6 17.1 61.7 22.4 20.2 22.3 HUL Neutral 13. VALUATION COMPARISON COMPANY SALES GR.1 16.4 74.2 28.5 114.8 31. (%) PAT GR.0 22.8 19.6 14.3 21.3 25.8x FY12E EPS of Rs61.5 12.6 *Year ending December.5 129.5 22.3 14.2. We estimate 22% PAT CAGR over CY09-11.9.1 and 21.2 45. Cigarette volumes have grown 6. (%) EPS (RS) P/E (X) ROCE (%) RECO FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E Asian Paints Neutral 16. Nestle India: We expect Nestle India to gain most from the likely growth in the processed foods segment.3 44.5 Marico Buy 18.2 22. Maintain Buy.8 16.4 15.1 18.0 36. We expect a 43. which contribute 40% to its net sales and 87% to PBIT.8 145. Maintain Buy with SOTP-based target price of Rs292.4 20.6 41. we expect most of the companies in our universe over FY10-12 to report 200-500bp increase in RoCE over FY10-12.9 18.1 35.1 143.0 12. We believe a monopoly in noodles and baby food will enable it to beat average growth for the sector.1 Nestle* Buy 20.4 21.4 16.7 18.8 35.4 18.

COMPETITIVE POSITION OF COMPANIES COVERED COMPANY CATEGORY MKT. Although the FMCG sector has a steady profit growth trajectory. consumption story b) The brand or brand portfolio in the monopoly segment should contribute at least half the sales or profits of the company.9 74 10 12 30 Hindustan Unilever Toilet Soaps 45 Godrej Consumer 11 4. What are consumer monopolies? Consumer monopolies are companies that occupy a dominant position in a product category or segment.0 32 10 21 18 Nestle Instant Noodles 80 Top Ramen 11 7. product (innovation. Consumer Monopolies Monopolies rule Consumer monopolies India is on the threshold of a structural uplift in consumer demand.7 34 10 15 25 United Spirits IMFL 59 Radico Khaitan 9 6. place (distribution) and promotion (advertising.2 42 5 13 53 Jyothy Labs Fabric Whitener 72 Reckitt Benckiser 5 14.9x the nearest competitor but the gap is increasing. Besides. % SALES VOLUME SALES FY10 SHARE SHARE CONTRI. GROWTH FY07-10 EBITDA (%) NAME MKT SH. This monopoly position enables a company to dictate terms in aspects like pricing. lead to high market shares changing lifestyle and growing rural prosperity will combine to increase the FMCG sector's and a strong franchise of growth rate. Consumer monopolies have strong brands that lead to high market shares and a strong franchise of captive customers.9 95 13 15 22 GSK Consumer Malted Drinks 70 Cadbury 15 4. Moreover it is global leader in oral care and this segment contributes more than 95% to its sales and profit. NEAREST COMPETITOR *MKT. We focused on the Consumer monopolies following financial parameters: could be one of the best themes to play the domestic a) Market leadership with a share that is at least 3x that of the nearest competitor. usability and packaging). We are approaching have strong brands that the inflexion point.1 24 4 10 20 Detergents 35 P&G 14 2.3 22 22 26 20 Baby Food 85 Heinz 15 5.4 60 5 12 30 Marico Pure Coconut Oil 55 Shalimar 8 7.A 30 ITC Cigarettes 82 Godfrey Phillips 10 8. sales mix and contribution to profits from a particular category. So we believe that Colgate is an emerging monopoly. terms that others in the segment will follow.6 25 8 18 12 Skin Care 50 Emami 5 10. A monopoly is seen as a company's position to dictate terms in its segment.7 90 9 20 17 Gillette India Male Grooming 40 House of Malhotra 14 2. (%) X BUTION (%) CAGR (%) MARGIN (%) Asian Paints Decorative Paints 45 Kansai Nerolac 14 3. We have identified companies in the consumer space that have emerged as monopolies using criteria such as market share.2 93 12 19 18 Colgate Palmolive Oral Care 49 HUL 26 1. at which the impact of rising per capita income. publicity and sales promotion).0 11 20 N.1 100 13 30 19 * Times nearest competitor Source: Company/MOSL 4 December 2009 6 . This ensures pricing power and better terms of trade. favorable demographics. we believe captive customers consumer monopolies can grow exponentially in the emerging growth scenario. Consumer monopolies could be one of the best themes to play the domestic consumption story. we looked at qualitative factors such as recent trends in market share and the emerging competitive landscape in that product category. Colgate Palmolive has market share 1.

such as regulations. while GSK Consumer did the same in the malted food drinks category and we believe it will continue to reap the benefit from its first-mover advantage. First-mover advantage First-mover advantage has helped to create monopolies in certain product categories. for instance. Philip Morris and RJR out of India United Spirits IMFL High import duty and a ban on liquor advertising have prevented companies like Diageo and Pernod Ricard from establishing a strong presence Nestle Baby foods Ban on advertising and solicitation has restricted the entry of players like Danone and Bristol-Meyers-Squibb Source: Company/MOSL 2. effort to grow the business. Regulations Regulations can create monopolies. technological distribution. Some of the regulations that have helped to create monopolies are 1) Banning FDI in an industry HIGH DUTIES ARE ENTRY BARRIERS 2) Restricting advertising of a product or category of products EXCISE (% IMPORT 3) Imposing high duties and taxes on new/imported brands OF SALES) DUTY (%) IMFL ~50 ~65 Cigarettes ~50 ~60 Such conditions give companies that are already in the market a big advantage because they prevent new players from entering it. innovate and increase brand strength. United Spirits and Nestle have benefited. Consequently. We observe that factors such as regulations. In the Indian consumer space. It has a 73% market share in the Rs13b category Hindustan Unilever Toilet soaps HUL created the category by launch of Lifebouy in 1895 Titan Industries Jewelry First company to launch branded studded jewelry in India Source: Company/MOSL 4 December 2009 7 . IMFL and baby food. to create a monopoly 1. first-mover advantage. However a monopoly is established over years and reflects a management's relentless first-mover advantage. increase competitiveness. companies such as ITC. Such players have created the category and nurtured it over time to maintain their position. distribution. regulations have created monopolies in segments such as cigarettes. that erect barriers to new entrants to a market can help existing players to emerge as monopolies. MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION ITC Cigarettes Ban on FDI in tobacco and on tobacco advertising have kept companies like Japan Tobacco. brands and breakthrough. Nestle created the instant noodles category. MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION LIFEBUOY SOAP: LAUNCHED IN 1895 Glaxo Smithkline Malted food GSK Consumer created the MFD category in 1961 and has 70% Consumer drinks market share in this Rs24b category Nestle Instant Nestle created the instant noodles category with the launch of Maggi noodles 25 years ago. Government policies. Consumer Monopolies How monopolies are created We observe that factors A monopolistic situation provides companies/brands with pricing power and steady growth. brands and industry consolidation help to create a monopoly. industry consolidation help We analyze some of the critical factors. technological breakthrough.

which transformed the paint market and enabled the company to gain a significant advantage over its competitors 11 United Spirits IMFL United Spirits belongs to the UB Group. must be backed by innovation to keep a brand relevant over time. this gives it an advantage in distribution. acting as a strong entry barrier. MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION Jyothy Fabric A new formulation in Ujala fabric whitener replaced Robin Blue Laboratories whitener as the market leader in the category Gillette India Shaving The launch of shaving systems transformed the shaving products systems market. was positioned as an "easy to cook and good to eat" snack Hindustan Unilever Detergents Surf has emerged as generic brand for detergents Toilet soaps Lux has emerged as a soap focusing on beauty Source: Company/MOSL 5. Strong distribution. which has provided deep rural reach. SURF: GENERIC DETERGENT BRAND MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION Asian Paints Decorative Strong brand and mascot of Gattu (a boy with a paint-can and paints brush) led the brand drive and positioned the brand strongly Marico Industries Parachute Blue-colored bottles became synonymous with coconut oil coconut oil GSK Consumer Malted food Horlicks has emerged as an iconic brand among malted drinks. Distribution and reach Superior distribution can propel a company to a leadership position. was drinks positioned as a drink fulfilling a family's daily body requirements Nestle Instant noodles Maggi has emerged as a generic brand. The innovation or technological breakthrough has resulted in transformation that altered the product category and changed market leadership. Product innovation/technological breakthrough CUTTING EDGE INNOVATION Path-breaking product innovation enable companies to become consumer monopolies. Source: Company/MOSL 4 December 2009 8 . which in turn gives it a sales push Hindustan Unilever HUL has access to more than 8m retail outlets. consequently some brands have emerged as generic brands. This involves a high degree of consumer satisfaction. Brands aid monopoly creation Brands sometimes reach an iconic status. which leads in the IMFL and beer markets. putting Gillette on its way to monopoly status Source: Company/MOSL 4. however. Consumer Monopolies 3. The company has Asian Paints Nerolac started project Shakti. It provides the company with a strong headstart and makes the products available to larger sections of a target population. DEALER NETWORK TWICE AS LARGE MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION AS NEROLAC’S (NOS IN '000) Asian Paints Decorative Asian Paints started the concept of installing tinting machines with 22 paints distributors.

enabled companies like Colgate and Gillette to maintain their leadership in their respective categories. learning from other emerging markets and R&D support. In-depth understanding of relevant categories. MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION Colgate Oral care Colgate draws its strength from Colgate Palmolive USA. Shaw 2004-Pre 2009-Post Wallace and Triumph Dist to consolidate the industry and increase its Acquisition Acquisition market share to 55% (earlier 25%) and emerge as a monopoly Hindustan Unilever Toilet soap HUL acquired TOMCO. Consumer Monopolies GLOBAL LEADERSHIP IN ORALCARE 6. Marico and UNSP have been able to emerge as UNITED SPIRITS: MARKET SHARE monopolies due to the acquisition of competitors. Global leadership of parent Global leadership of a parent company can be a competitive advantage leading to creation of a monopoly. which Gillette has a 70% share has global leadership in oral care in the global shaving Gillette India Shaving Gillette has a 70% share in the global shaving systems market due to systems its cutting edge products. creating a monopolistic structure. The Indian company draws strength from systems market the parent Source: Company/MOSL 7. Acquisition of competitor Acquisition of competitors can result in reduced competition and consolidation of market share. which provided brands like Hamam and Rexona Source: Company/MOSL 4 December 2009 9 . DOUBLED AFTER ACQUISITIONS (%) MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION 55 31 Marico Coconut oil Acquisition of Nihar from HUL enabled Marico to increase its market share in coconut oil to 55% and exercise strong pricing power United Spirits IMFL United Spirits (erstwhile McDowell & Co) acquired Herbertsons.

and strong related to outpacing players. or distributors due to their strong bargaining power. low growth in a monopoly segment. which enable them to stay ahead. Monopoly companies are well placed to grow ahead of the segment growth and consolidate their market position.4 47.5 The companies often introduce innovations.3 input cost pressure as their price movement is likely to be followed by the industry. 2) pricing power. Marico in the case of copra suppliers. Innovations 45. BETTER TERMS OF TRADE HAVE REDUCED THE OPERATING CYCLE (DAYS OF SALES) ITC 18 Nestle -63 Colgate -125 HUL -184 Source: Company/MOSL 4 December 2009 10 . These arrangements act as entry pricing power or improved barriers for competitors. enables companies to reap which are ultimately reflected in their returns ratios.6 „ Better terms of trade: Monopolies enjoy better terms of trade with suppliers and FY04 FY05 FY06 FY07 FY08 FY09 distributors. However. such as United Spirits and HUL. Nestle with milk suppliers. have exclusive arrangements with dealers/ category volume growth. This ensures competitive prices (higher gross margins) despite existence of price warriors in their categories. Economies of scale coupled with a strong position in the market boost their bargaining power with input suppliers. which are ultimately reflected in their „ Steady revenue growth visibility: Monopoly brands/portfolios position a company return ratios to capture opportunities offered by a category. Sales are mostly based on advance payment/PDC. Most monopolies operate in medium to high growth categories. ITC in tobacco and United Spirits in glass bottles suppliers. GSK Consumer in malted PUSHES UP GROSS MARGINS (%) food drinks or HUL in toilet soaps. This enables them to maintain margins despite 47. benefits. high innovation: Often market leaders are price leaders in PARACHUTE: PRICING POWER their respective categories: Asian Paints in decorative paints. such as Colgate in the case of laminate tubes suppliers. 37. 46. is a potential threat in the medium term. which ensures minimum sales terms of trade for their weak brands.1 35. The benefits might be The trade plays an important role in promoting under-penetrated categories. and/or 3) improved terms of trade. which enable companies to operate with minimal working capital (negative in some cases). The monopolies bundle sales. which is accompanied by stiff competition and low entry barriers. „ Strong pricing power. Consumer Monopolies Benefits/implications of a consumer monopoly A monopolistic situation A monopolistic situation enables companies to reap quantitative and qualitative benefits.6 ensure improvement in the sales mix through the introduction of value-added products. The benefits might be related to 1) quantitative and qualitative outpacing category volume growth.

3 93.1 34.3 43.0 companies maintain HUL 92.1 31.7 22.6 7.3 Marico 31.0 33.4 23.0 Colgate 84.8 72.1 119.5 29.7 58.5 92.0 113.1 48.3 51.5 40.3 Titan 34.5 121.6 27.6 153. have report.7 33.2 39.0 shareholder value creation United Spirits 28.3 75.7 76.8 25.5 8.9 74.8 Titan 19.6 52.0 36.2 56.8 41.1 73.4 65. enabling Marico 44.2 Nestle 55.2 33.6 26.0 86.0 104.1 126.6 32.9 37.8 42.6 GSK Consumer 13.6 HUL 56.9 Nestle 84.6 42.8 27.5 Colgate 37.0 35.1 25.0 Source: Company/MOSL IMPLICATIONS OF BEING A MONOPOLY: A SNAPSHOT ASPECT REASON Steady revenue growth visibility A monopoly position ensures a company grows at least in line with the industry and consolidates its position Superior EBITDA margins A monopoly ensures strong pricing power and the ability to increase margins and pass on a cost push to consumers Low working capital requirement Strong bargaining power with the trade and suppliers High RoE High profit margins and low working capital investment provide higher RoE High dividend payout ratio Monopoly companies have a payout ratio of 40-70% due to high growth visibility and low capital requirement Source: Company/MOSL 4 December 2009 11 .8 4.2 36.4 50. except United working capital boost monopolies' returns ratios. have significantly increased their RoE over the significantly increased their past five years.9 103.2 6.8 56. except United Spirits and ITC. Consumer Monopolies All the companies covered in „ High return ratios: Rising margins. ROE OF MOST COMPANIES HAVE BEEN ON A STEADY UPTREND (%) FY05 FY06 FY07 FY08 FY09 FY10E FY11E Asian Paints 32.8 26.1 43.7 25.2 7.3 74.0 41.3 29. Most of the companies we cover in this report have a payout of 40-70%.8 25.0 75.5 ITC 24.0 40.4 25. All the companies covered in this Spirits and ITC.4 44.3 42.0 70.7 27. We believe successful companies maintain a balance between payouts and re-investment.6 84.3 United Spirits 12.6 56.2 34.8 33.7 Source: Company/MOSL „ Cash flows and high payouts: Steady profit growth and no significant capex help monopolies to pile free cash flows.7 13.1 34.0 17.9 23. low capex.7 16.6 39.8 8.5 37.4 73.8 31.1 8.3 156. TREND IN PAYOUT (%) FY05 FY06 FY07 FY08 FY09 FY10E FY11E Asian Paints 52.8 42. high asset turns and low to negative this report.5 7. enabling shareholder value creation.5 72.0 146.8 27.2 25.1 24.1 6.8 58.5 34.6 42.0 We believe successful GSK Consumer 43.1 80. This enabled dividend payouts of more than 80% (Colgate.8 25.4 44.3 12.5 33.4 128.6 16.3 42.0 74. HUL RoE over the past five years and Nestle).0 and re-investment.2 19.5 73.1 121.9 84.9 a balance between payouts ITC 39.0 42.3 70.

jewelry and eyewear in Titan. 4 December 2009 12 . healthy cash flows and good visibility. Besides. sustained soaps. Marico’s Parachute growth. Consumer Monopolies How consumer monopolies are placed on the BCG matrix ITC’s cigarettes. The business operates in a category with mid to high single-digit volume growth but the pricing is constrained due to stiff competition at the top end and in the mass market. hotels and paper in ITC. United Spirits' IMFL. nutrition. As the companies consolidate their leadership position in the respective and HUL’s skin care are categories over the coming years. Colgate and Maggi). Nestle's Maggi and United Spirits) and operating leverage in advertising/distribution costs (Asian Paints. and Titan’s watch division are cash cows for We believe brands/brand portfolios like ITC's cigarette portfolio. brands/brand portfolios like Asian Paints' decorative range. their respective companies Marico's Parachute coconut oil. United Spirits’ products are rising stars for these companies. Nestlé’s infant on a BCG (Boston Consulting Group) matrix. increased penetration (HUL's skin care products. Colgate’s toothpaste range. chilled dairy in Nestle. they are likely to reap significant benefits in terms of rising stars product mix (Asian Paints. Nestlé’s Maggi noodles in the coming years. water and foods in HUL and mosquito repellant and dish wash liquid in Jyothy Labs. HUL's toilet soaps. This has reduced EBIT margins in the business from 20-22% earlier to 12-13% currently. New FMCG. Profit margins are high as the companies have strong market shares. HUL’s toilet Brands that are in a monopoly position enable their companies to achieve fast. The businesses are operating in segments that have volume growth of 5-10%. like functional foods in Marico. The businesses are poised for major growth IMFL. Nestlé's infant nutrition. Nestle (Infant HUL-Detergents Titan (Watches) Nutrition) 5 ITC (Cig) HUL-Toilet Soaps Jyoti Dogs Cash Cow s 0 0 20 40 60 80 100 Market Share (%) Source: Company/MOSL Asian Paints’ On the other hand. which ensure economies of scale. We have plotted various consumer monopolies coconut oil. which is used to create new growth avenues. BCG MATRIX OF VARIOUS COMPANIES/ PRODUCT CATEGORIES Question Marks Stars Titan (Jew elry) Nestle (Noodles) 20 HUL-Skin Care Volume growth (%) 15 UNSP APNT Gillette Colgate 10 Marico GSK Cons. Colgate's decorative range. the company is gradually losing market share in the segment. United Spirits and Titan's jewelry). Nestlé's Maggi noodles and HUL's skin care toothpaste. Jyothy Labs' Ujala and Titan's watch division are cash cows for their respective companies. Colgate. We believe HUL's detergent division falls in the Dogs category. They generate free cash flow.

CHANGING SHAPE OF INDIAN PYRAMID (MILLION HOUSEHOLDS) 1985 1995 2005 2015 2025 Global (>Rs1.000k) 0 0 1.2% CAGR over FY10-14 India's consumer market is relatively small because a large section of the population to reach US$1.666 IN 2014 2.3 106 93.000k) 0. 12. PER CAPITA NOMINAL GDP IS EXPECTED TO INCREASE BY 12.000- increase in demand for Rs500. increased availability and distribution expansion will increase growth in the coming years. The number of households in this category has already declined by 24m in section will fuel a major the past 10 years.000 Per Capita GDP expected to grow to US$1.3 9.100 Capita GDP from 2003 CAGR of 11.5 Strivers (Rs500k-Rs1. Indian consumer market approaching inflexion point We estimate per capita India has the world's twelfth largest consumer market (aggregate consumer spend of nominal GDP will grow at US$370b in 2005).8% 650 CAGR of 2. We estimate per capita nominal GDP will grow at 12. favorable demographics. Rising income levels in urban and rural India and benefits from increasing affordability. low penetration.666 in 2014 (40-45%) is still in the deprived class.666 in 2014 from US$1.1 Seekers (Rs200k-500k) 2 5 10.2% CAGR TO US$1. this 101m in 2005.5 33. on par with Brazil. which could have and aspirers categories will far reaching implications on consumer demand as per MGI (McKinsey's Global Institute).1 74.000/year) will increase five times over 2005-15 and seekers and aspirers will constitute consumer goods two-thirds of India's households.031 in 2008 1.2% 200 2010E 2011E 2012E 2013E 2014E 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: MOSL Households in the seekers This trend is expected to change the shape of India's income pyramid.666 in 2014.550 CAGR of 12.4 5. despite having a population that is six times larger.9 Aspirers (Rs90k-Rs200k) 10 30 91. Consumer Monopolies FMCG demand to accelerate India's US$25b FMCG market is on the threshold of major growth acceleration.5 2.25 0.1 Deprived (<Rs90k) 121 125 101. constitute two-thirds of The number of households in the deprived category is expected to fall to 74m in 2015 from India’s households.2% CAGR over FY10-14 to reach US$1.9 55. The increase will help to enhance the purchasing power of the consumer and reduce the number of people living below the poverty line.9 Total 133 161 207 244 281 Source: MGI's Bird of Gold 4 December 2009 13 .2 3.1 94. Number of households in seekers category (income of Rs200. We believe this section of the population will fuel a major increase in demand for consumer goods.2% Acceleration in Per 1.1 49.

0 91. skin care.0 3. Washing Powder 90.0 86.0 Source: Industry/MOSL Favorable demographics Decline in dependecy Consumption of goods and services in India will increase significantly in the coming years.0 96.5 0.1 0.0 93.0 16.0 0.0 Packaged Fruit Juices 16.9 0.0 0.7 7.0 Malaysia 6.2 1. oral care.3 0. instant coffee.0 increased penetration Low Penetration Categories Utensil Cleaner 29. Consumer Monopolies Low penetration and per capita spends PER CAPITA CONSUMPTION (%) COUNTRY LAUNDRY SHAMPOO SKIN CARE TOOTHPASTE DEODORANTS China 2. DEPENDENCY RATIO DECLINING (%) 64% OF POPULATION IN THE AGE GROUP OF 14-59 (%) 0-14 Years 14-59 Years Above 60 72 68 63 64 64 64 60 60 58 52 48 35 32 29 27 25 23 12 9 11 7 8 8 1985 1995 2005 2015 2025 2001 2006 2011 2016 2021 2026 Source: Company/MOSL 4 December 2009 14 . shampoo and Medium Penetration Categories processed food offer strong Toothpaste 56.2 2. shampoo and processed food offer strong growth potential through increased penetration.2 0.0 96.0 oral care.0 89.0 62.9 2.6 Thailand 3.0 Skin Cream 23.0 46.0 30.4 2. and 4) lower savings focus due to increased security and visibility of the future income.0 Hair Oil 94.8 1.4 0. 3) the impact of media exposure and boost demand communication due to the rising number of televisions and cell phones.9 1. ratio and higher proporation Some of the key likely contributors are 1) expected decline in dependency ratio from 60% of population in high currently to less than 54% by 2015 and to 48% by 2025.3 0.7 2.4 0.0 Indonesia 1.4 7.0 93.0 89.1 India 1.0 growth potential through Shampoo 51.0 79.0 30. skin creams. 2) 62% of the population being in consumption age group will the high consumption age group of 14-59 years.0 Detergents Bar 88.0 10.0 19.0 59.8 Source: Industry/MOSL We believe categories like deodorant.0 Categories like. MARKET PENETRATION (%) CATEGORY ALL INDIA URBAN RURAL High Penetration Categories Toilet Soap 91.0 45.

etc) HLL-P&G price war. This is expected to increase demand for basic food staples considerably. GSK and Colgate taken as a proxy for FMCG growth prior to FY00 Source: MOSL 4 December 2009 15 .000 a year rural poor and urban lower class population.7 12.0 -2.0 8.4% of households). paints.3 20.8m in 2005. Axion. EXPECT FMCG GROWTH TO ACCELERATE (%) 21.8m by 2015 „ Many consumers are likely to indulge in choice driven consumption. durable prices care.Organics & Le Sancy. the middle boosting demand for and upper middle class will be chief contributors to this.0 -1. Rising aspiration levels End of P&G-Godrej JV *Sales growth of HUL (adjusted for acquisitions).8 18.0 17.5 17. there will be 111m fewer rural households in the deprived category by 2015.5 7. „ Increased demand for value for money products in personal care and household products will require product modifications to improve affordability. mostly among the exceeding Rs500.5m by 2025 (28% of households) from 1.0 10. „ According to MGI.7 3. increase demand for premium and super premium products in urban India.4 20. Emergence of new categories (skin Rising awareness (HUL .0 16.8m by 2015 (8. increasing demand for mass market FMCG products. noodles. premium FMCG products „ MGI (McKinsey's Global Institute) India consumer demand model estimates that. this is expected to boost demand for premium FMCG products. Sara Lee. and packaged food. Consumer Monopolies McKinsey Global Likely trends in consumer demand Institute expects that „ A large number of consumers are likely to use branded FMCG products for the households with incomes first time.5 16.000 a year will increase to 5.9 17.5 16.5 18.4 18. Palmolive. Revlon. L'Oreal. dairy products. urban households with incomes exceeding Rs500.4% of households) and to 36. Colgate-Protex.0 20. boosting demand for poultry. etc Shift in consumer wallet share 10x increase in NREGA allocation Improved availability New brands Fall in interest rates. which will (8. Nestle. snacks) Optima.5 FY93 FY96 FY99 FY02 FY05 FY08 FY11E FY14E KEY GROWTH ENABLERS GROWTH DRAG GROWTH RESURGENCE SUSTAINED HIGH (1993-1999) (2000-2006) (2007-2012) GROWTH (2013-15) Reduction in excise duty Agri-degrowth/drought Agri GDP growth of 3% Decline in rural from 70% to 30% poverty Pent-up demand post liberalization 3-5% CAGR in agri prices 10-15% increase in crop prices Emergence of urban middle class Entry of P&G.5 17.0 3. juices. will increase to 5.0 16.

4 December 2009 16 . on one hand. Surf. market share and products relevant to their class of customers. the mass and the class. lower middle and middle class Distribution: Consumer companies will need to alter their distribution (8m outlets) to cater to 1) organized retail in metros and tier-2 cities and 2) outlets in rural areas. Consumer Monopolies Monopolies best placed to capitalize on emerging growth The emerging demand scenario will accelerate FMCG growth rate. and an addressable market in rural areas. Consumer monopolies we believe have some in-built advantages that will enable them to stay ahead of the pack. Vim. Brand association will be key to success in a scenario where there is increasing fragmentation in categories such as household care. Technology will be a key Technology and innovation: We believe technology will be a key differentiator in growth differentiator in growth rates rates. Both the factors will play premium products to cater to out differently and require significant investment in new product development. Most of the owners of such brands are consumer monopolies. Monopolies have huge Economies of scale: The emerging demand scenario will require companies to cater to economies of scale. The emerging scenario will require companies to innovate on two fronts 1) launch . noodles and skin creams. toilet soaps.the emerging scenario will premium products to cater to a fledging rich and upper income class and 2) initiate low require companies to launch cost solutions to cater to a rising lower middle and middle class. Parachute. Cerelac and Nescafe. Monopolies can invest in technology and solutions to cater to a rising development due to their strong cash flow. Monopolies have huge economies of manufacture and distribute scale. But the terms of trade and change in operating environment will require companies to innovate and evolve their capability to cater to both. which enables them to maintain high recall and triggers repeat purchases. which would enable them to manufacture and distribute goods in interiors at low goods in the interiors at low costs and compete with the low price unorganized sector. which demand for value for money products in rural areas and small towns where the cost of would enable them to distribution and logistics is higher than bigger cities. We believe monopolies have sufficient clout with organized retailers. costs and compete with the low price unorganized sector Brands: We expect brands to emerge as a key differentiating factor as many new players will enter product segments to exploit the growth potential. Chawyanprash. brands and pricing power. detergents. Some brands that have achieved generic status are Maggi. low cost the rich and initiate low cost solutions and efficient production techniques. despite increase in competitive activity. Monopolies usually emerge as a generic name for a category. Surging rural demand will require significant investment to expand direct distribution to ensure brand availability and visibility. Bargaining power with organized retail (~15-20% of expected sales by 2020) will be a function of category strength. to expand distribution.

0 Shalimar 2 3 2 2 9 Cigarettes ITC 4 5 5 5 19 1.9 Godfrey Philips 3 3 1 3 10 Watches Titan Inds 4 3 5 5 17 1. „ Nestlé’s Maggi noodles.3 P&G 3 5 2 2 12 *Ranked on a scale of 1-5.0 across price points Radico Khaitan 2 3 2 2 9 Coconut Oil Marico 5 3 5 5 18 2. RELATIVE STRENGTH INDEX OF VARIOUS MONOPOLIES (DESCENDING ORDER) BRANDS TECHNO. SCALE SUSTAIN. United Spirits’ s IMFL.7 huge market share gap over Top Ramen 2 3 1 1 7 competitors and presence IMFL United Spirits 4 4 5 5 18 2. TOTAL RELATIVE LOGY ABILITY STRENGTH Skin care from HUL is the Skin Care HUL 4 4 4 4 16 3. 4. five being the highest Source: MOSL Key takeaways Detergents’ monopoly of HUL „ Skin care from HUL is the strongest monopoly due to huge market share gap over is the weakest due to rising competitors and presence across price points. Marico's Parachute coconut oil and ITC’s cigarettes are very strong monopolies. Technology: Technology intensity/sensitivity of the product(s).7 GCPL 2 3 2 3 10 Fabric Whitener Jyothy Labs 5 3 5 5 18 1.9 Timex 2 4 2 1 9 Jewelry Tanishq 5 5 5 5 20 1. and scalability. geographical presence. consumer perception.8 Gitanjali 3 4 2 2 11 Toothpaste Colgate 5 5 5 5 20 1. emergence of substitutes and financial strength. 2.6 Reckitt Benckiser 3 4 2 2 11 Male Grooming Gillette 5 5 3 5 18 1. 3.5 Kansai Nerolac 3 5 2 3 13 Detergents HUL 4 5 4 3 16 1. Brands: Presence across price points.6 HOM 3 2 3 3 11 Paints Asian Paints 5 4 5 5 19 1.7 Cadbury's 3 4 2 3 12 Infant Food Nestle India 5 5 5 5 20 1. Consumer Monopolies Relative strength index of monopolies We have assessed relative strength of consumer monopolies over their nearest competitor on four criteria: 1.7 HUL 3 3 3 3 12 Malted Food Drink GSK Consumer 5 5 5 5 20 1. Scale: Market share. Sustainability: Threat of competitors. etc. competition across segments „ Detergents monopoly of HUL is weakest due to rising competition across segments and declining market share and declining market share. potential new entrants (local/global). 4 December 2009 17 .7 Heinz 3 4 2 3 12 Toilet Soaps HUL 5 4 5 3 17 1.2 strongest monopoly due to Emami 2 1 1 1 5 Noodles Nestle 5 4 5 5 19 2.

6 23 48.7 Marico 20.0 31.8 13.9 ITC Buy 16.1 143.3 18.6 Source: Company/MOSL We expect our consumer We expect our consumer monopoly universe to report sales growth of 16.8 19.6 18 34.2 28.7 5.4 57.8 145.2 Glaxo Smithkline* Buy 18. ROCE.1 71.4 16. FY10 pertains to CY09 and FY11 to CY10 Source: MOSL 4 December 2009 18 .4 20. the past three years ROCE for most of these companies has been very healthy.2 45.0 128.3 24.3 44.4 17.6 *Year Ending December. (%) EPS (RS) P/E (X) ROCE (%) RECO FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E Asian Paints Neutral 16.1 16.0 20. which indicates efficient working capital management and low capex requirements.4 59.9 Colgate 14.8 14.3 -184 128.5 114.6 33.3 14. VALUATION COMPARISON COMPANY SALES GR.1 GSK Consumer 19.4% over FY10-12.9 35.7 17.1 35.1 61.9 164.5 Marico Buy 18.7 16.7 22.2 22. Nestle and Colgate have exceptionally high ROCE due to low capital employed.3 25. MONOPOLIES HAVE HIGHER MARGINS. The operating 16-20% (excluding the cycle for most of these companies indicates their bargaining power with suppliers and the impact of acquisitions) over trade.3 Colgate Buy 16.0 158.0 14.4 21.7 18.2 22 41.8 35. (%) PAT GR.4 13.5 30 59. Colgate has a negative operating cycle of 126 days due to credit it gets from suppliers.1 51.4 74.6 14.5 Titan Industries Neutral 24.9 18.3 19.3 21.2 93.6 17.2 4.8 17.1 33.4 17.7 22.8 11.2 ITC 12.5 12.5 110 36.0 97.5% and PAT monopoly universe to report growth of 22.4 15.0 84. Margins will expand for most of the companies.9 26.5 22.8 23.9 17. Sales growth will be mainly volume-led.3 HUL Neutral 13.4% raw material costs boost profitability.0 12.7 59 15. Colgate and Nestle to over FY10-12 report maximum expansion in profit margins.0 22.6 41.1 18.0 12.4 United Spirits Buy 14.8 16.5 22. indicating strong sales growth of 16.3 19.7 47.1 7.8 31.3 22.9 41.0 Titan Industries 28.6 12.6 Nestle 21.1 20.1 -126 152.2 11.0 21.6 22.9 17.3 21.6 20.8 21. as lower PAT growth of 22.7 66.5% and demand for various monopolies.4 13.3 United Spirits 30.1 Nestle* Buy 20.5 129.4 30.2 57.2 22. Asian paints.3 17. REQUIRE LOW WORKING CAPITAL 3 YEAR (%) FY10 (%) COMPANY SALES PAT EBITDA OPERATING ROCE CAGR CAGR MARGIN CYCLE (DAYS) Asian Paints 19.5 80.5 -63 164.5 12.0 36.7 12.8 31.4 HUL 13. We expect ITC. Consumer Monopolies Financial performance and valuations The companies in the The companies in the consumer monopoly universe have posted sales CAGR of 16% to consumer monopoly universe 20% (excluding the impact of acquisitions) over the past three years.3 17.4 18.1 40.4 20. EBITDA margins have posted sales CAGR of varied from 16% for HUL to 55% for ITC (cigarette business on net sales).

We believe that faster conversion from other forms of tobacco to cigarettes will enable sustained 14% PBIT CAGR in cigarettes.8 1.5 and 22.2 168.3 50.5 34.352 3.7 43. it will beat The stock trades at 28xCY10E EPS of Rs93.2 364 436 509 ITC 256 10. growth for the sector. Nestle India .8 24.350 30.5 2.8b) is unlikely to turn around in the next couple of years. We estimate 22. Cigarette volumes have grown 6. Buy with SOTP-based target price of Rs292.5% in 1HFY10 despite an increase in VAT in a cigarettes will enable few states and imposition of pictorial warnings on packaging.965 3.7 2.8 1.038 4.High on acquisitions United Spirit's ability to United Spirits is a play on gains from a monopoly situation in the world's fastest growing straddle the portfolio across IMFL market.365 4.274 2. We expect a 44% PAT CAGR over FY10-12. * December year ending Source: MOSL 4 December 2009 19 .8 123.6 391 470 548 Marico 107 3.015 1. Buy. We estimate 19.895 2. However its new FMCG business (losses Rs4. from the likely growth in the We believe being a monopoly in noodles and baby food will enable it to beat average processed foods segment .673 71.8x FY12E EPS of Rs61.994 3.7 2. average growth for the sector United Spirits .911 Colgate 685 27.794 3. We expect other divisions sustained 14% PBIT CAGR like paperboards and the agri-business to grow steadily while hotels will start improving in cigarettes for ITC from 2HFY10.421 Glaxo Smithkline* 1.4 139.2 3.427 57.470 2.Go for gold Nestle India will gain most We expect Nestle India to gain most from the likely growth in the processed foods segment.9 94.654 Most Probable target price.5 8.3 29.4 19. baby food. The grow ahead of the market ability to straddle portfolio across price points will enable the company to grow ahead of the market.5 24. Buy.495 2. TARGET PRICES FOR STOCKS BASED ON STEADY GROWTH SCENARIO COMPANY CMP FY10 P/E FY14 P/E BAND (RS) EPS (RS) (X) EPS (RS) 20X 24X 28X Asian Paints 1.8 18. Favorable regulatory changes for rationalization in excise or a gradual ban on country liquor will increase growth rates significantly.4 23.1 25.615 76.2 26.351 45.4xFY11E EPS of Rs51.2.9xCY11E EPS of Rs114.The smoke king Faster conversion from ITC has a strong monopoly in cigarettes.459 United Spirits 1.4 168 202 236 Nestle* 2.218 1. We expect the IMFL share in the spirits market to rise gradually as this price points will enable it to segment is growing at 11-12% against 5-6% growth in the country-liquor segment.3% CAGR in earnings over FY10-12.2% PAT CAGR over CY09-11. We expect noodles.7 124.493 HUL 272 10.1 and 21.711 Titan Ind 1. Consumer Monopolies Top picks ITC .9. chilled dairy products and chocolates to be key a monopoly in noodles and revenue growth drivers for Nestle India.9 27. which contribute 40% to its net sales and 87% to other forms of tobacco to PBIT. The stock trades at 26.

800 2.000 0 1.000 4.600 2.400 0 600 Apr-98 Apr-98 Apr-02 Jan-98 Feb-99 Feb-99 NESTLE INDIA Oct-98 UNITED SPIRITS Dec-99 Feb-03 Aug-99 Dec-99 4 December 2009 MARICO INDUSTRIES Sep-00 May-00 Sep-00 Dec-03 Jul-01 Mar-01 Jul-01 May-02 Oct-04 Dec-01 May-02 Mar-03 Sep-02 Mar-03 Aug-05 Jul-03 Jan-04 Jan-04 Apr-04 Nov-04 Jun-06 Nov-04 Feb-05 Sep-05 Sep-05 May-07 Nov-05 Jul-06 Jul-06 Consumer Monopolies: PE Bands Sep-06 May-07 Mar-08 Jun-07 May-07 Mar-08 Apr-08 Mar-08 Jan-09 Jan-09 Jan-09 Jan-09 Nov-09 Nov-09 Nov-09 Nov-09 8x 25x 9x 20x 15x 12x 26x 15x 30x 40x 28x 42x 10x 30x 35x 20x 18x 34x 20x 25x 16x 24x 50 170 290 410 530 0 300 600 900 1.400 1.850 Jan-98 COLGATE Jan-98 Apr-98 Apr-98 Oct-98 Oct-98 Feb-99 Feb-99 ASIAN PAINTS Aug-99 GSK CONSUMER Aug-99 Nov-99 Nov-99 May-00 May-00 Sep-00 Sep-00 HINDUSTAN UNILEVER Mar-01 Mar-01 Jul-01 Jul-01 Dec-01 Dec-01 May-02 May-02 Sep-02 Sep-02 Mar-03 Mar-03 Jul-03 Jul-03 Jan-04 Jan-04 Apr-04 Apr-04 Nov-04 Nov-04 Feb-05 Feb-05 Sep-05 Sep-05 Nov-05 Nov-05 Jul-06 Jul-06 Sep-06 Sep-06 Jun-07 May-07 May-07 Jun-07 Apr-08 Mar-08 Mar-08 Apr-08 Jan-09 Jan-09 Jan-09 Jan-09 Nov-09 Nov-09 Nov-09 Nov-09 8x 10x 12x 14x 16x 10x 18x 15x 20x 10x 15x 20x 25x 30x 18x 22x 26x 30x 34x 38x 25x 30x 35x 20 Consumer Monopolies .000 3.200 50 500 950 1. ITC 0 100 200 300 400 0 40 80 120 160 1.400 3.000 2.200 1.200 0 800 1.

They are expected to account for 85% of urban households and 70% of consumption by 2015 and the rich class will account for 7% of households and 28% of consumption. urban India will firm McKinsey's estimates.170 Deprived (<90k) CA % 9 5 6. construction.406 12 46 32 R 81 51 2.9% CAG 66 86.620 53 65.Emerging income trends in urban and rural India The middle class will account for 70% of urban consumption According to McKinsey’s Urban India accounts for 30% of its population and 52% of GDP. The increased expenditure on incremental consumption urban consumption will be driven by (1) 60% increase in population led by normal growth demand in the economy in and increase in urbanization to 37% from the current 30% (318m to 523m). urban India will account for two-thirds of incremental account for two-thirds of consumption demand in the economy in the coming years.1 21 308. and (2) the coming years Development of a robust labor market and increasing employment opportunities. transport and communication. 4 December 2009 21 .5X BY 2025 THE MIDDLE CLASS WILL CONSTITUTE 85% OF URBAN INDIA BY 2015 Global (>1000k) Strivers (500-1000k) Seekers (200-500k) Aspirers (90-200k) GR 378. URBAN HOUSEHOLD CONSUMPTION (RS) TO INCREASE 2. people have been shifting away from agriculture to percolate to rural India areas such as trade. deprived class to decline to 29% The benefits of liberalization The proportion of the rural population that is dependent on agriculture has declined from and transformation of the 75% in 1994 to less than 67% and the share of agriculture in rural GDP has declined to economy have begun to 48% from 60% in 1994. Rural employment mix changing.5x earnings of those in the agricultural sector. Those employed in the non-agricultural sector have ~2-2. According to consultancy estimates.416 49 26 18 10 4 2 4 6 1 0 1 0 1 3 1985 1995 2005 2015 2025 1985 1995 2005 2015 2025 Source: Industry/Bloomberg/MOSL The middle class will emerge as a big growth driver in urban India. The benefits of liberalization and transformation of the economy have begun to percolate to rural India. Consumer Monopolies Annexure I . Rural India will emerge as a new driver of consumption Rural India accounts for 70% of the population but less than 48% of its GDP. which augurs well for an increase in consumer demand and improved standard of living. As the non-agricultural sector GDP has been growing at 12-15% CAGR (nominal) since 2004 and it will reduce share of agriculture in rural GDP.351 115. In rural areas.

4 11. Besides agricultural income will increase because of (1) rising income from segments like fruit.8 66. electricity. thus increasing income and improving life of the bottom end of the rural population.4 42.2 58 51.2 26.76t in FY09 in areas like infrastructure.000) is declining.8 20 29. irrigation and housing.2 28. (3) contract 4 December 2009 22 . 3) Changing face of agriculture: Agricultural income has increased 40-50% over the past 2-3 years due to higher minimum support prices of crops. 2) Bharat Nirman: This rural infrastructure development program had a spend of Rs1.9 19. This will increase rural employment and ease infrastructure bottlenecks. Allocation under NREGS has been increased from Rs42b in FY07 to Rs400b in FY10.1 Government’s rural focus has 1970-71 1980-81 1993-94 1999-00 2007-08 begun to impact the lives of the common people and SHARE OF RURAL POPULATION BY INCOME CLASS (%) actual change might be faster than anticipated Global (>1000k) Strivers (500-1000k) Seekers (200-500k) Aspirers (90-200k) Deprived (<90k) 96 90 Inflexion point 65 47 48 32 46 29 20 8 6 4 3 1 1985 1995 2005 2015 2025 Source: MGI Bird of Gold/Bloomberg/MOSL Agricultural income The proportion of households in the deprived category (annual household income of has increased 40-50% over <Rs90. MGI expects the proportion of deprived households in rural India the past 2-3 years due to to fall to 46% by 2015. milk and livestock. This scheme will thus cover 39% of rural households.7 15. which will include mainly marginal farmers and landless laborers. Consumer Monopolies NON-AGRICULTURAL INCOME COMPRISES 52% OF RURAL INCOME Agriculture & Allied Industry Services 14. (2) food processing industries reducing wastage and provide employment.6 28. We believe the government's rural focus has begun to impact the higher minimum support lives of the common people and actual change might be faster than anticipated due to: prices of crops 1) NREGS (National Rural Employment Guarantee Scheme): The NREGS assures 100 days' work to the rural poor every year (wages are Rs100/day). roads.6 73. sanitation.3 14.

We believe some of the bottlenecks and drawbacks associated and drawbacks associated with rural selling. easy availability stores. demand power in all villages by 2012 Distribution Better connectivity to large centers More choice. organized sector setting up reasonable cost. such as infrastructure. telecom (rural products.000 villages out of a total of urban centers (population >5. are on the wane. Rising accessibility and viability Some of the bottlenecks The increase in rural income is attracting marketers. which is expected to increase per capita consumption to current urban consumption levels communication. demand and by 2017.000) acting 600.000 non 200. and volumes. most others have basic roads. better quality products at nearby. Consumer Monopolies farming reducing income uncertainties. communication. accessibility and consumer districts.000 villages as hubs for small villages Low cost Companies launching value for money Increase in volumes will lower overheads unorganized products and expanding direct and distribution cost competition distribution to reduce cost of intermediation Lack of Increased exposure to media Demand for high quality and branded awareness (rising TV penetration). and (5) productivity gains from improved irrigation and farm practices. volumes. This will increase the viability of marketing in rural India. addition of new products to mobile density). (4) better price discovery through use of technology under initiatives like E Choupal. such as infrastructure. literacy (women consumption basket and children) Source: Industry/Bloomberg/MOSL PER HOUSEHOLD CONSUMPTION IN RURAL INDIA (RS '000) 158 116 104 67 45 50 Urban India 1985 1995 2005 2015E 2025E 2005 Source: MGI/MOSL 4 December 2009 23 . innovations like Shakti and E Choupal Wide geography 78% of the rural population reside in Hub-and-spoke model with 20. are on the wane RURAL INDIA SET FOR A MARKETING SPLASH PROBLEM AREA REMEDY POTENTIAL IMPACT Roads and power 50% rural population in connected Easy servicing. demand with rural selling.

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

8 5.1 25.636 8.4 35. 3 Company strategy to sustain its edge 4 Valuation and view „ ITC has modernized plants with capex exceeding „ We estimate 19% PAT CAGR over FY10-12. 100 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Stock info Financial & valuation summary YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ Equity Shares (m) 3.3 17.8 17.213 14.Cap.6 29. „ Stability in tax rates and removal of undue tax „ The cigarette business contributes 57% of ITC's gross advantage to other forms of tobacco can significantly sales and 87% of its EBIT. Classic. which „ Punitive taxation of cigarettes (v/s other tobacco) has comprises 90% of the cigarette market.671 10. (US$ b) 20.6 25.0 23.Cap.4 1.811 39.2 14. Buy with SOTP based target of Rs292. 325 „ ITC bolstered distribution at the grassroots level with sharper sales focus and accountability in cities.827 32.2 03/11E 206. which will improve at 20. „ Over the years ITC has innovated packaging for its STOCK PERFORMANCE (ONE YEAR) cigarette brands.8 4.0 20.5 3.5 21.1 4. „ ITC is present only in the filter segment.0 18.6 M. Bristol.1 34.6.8 32. Capstan and are expected to grow steadily henceforth.696 54.8 6. Perf. Sales Filter.12 Rel. resulted in a decline in the share of cigarettes in total „ Godfrey Phillips is the second largest player with tobacco consumption from 20% to 14%.4 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 271/156 03/09A 155.423 12.247 46.8x FY11E EPS of Rs12. cigarettes 10x. EPS of Rs14. ITC Sensex .Rebased „ ITC has taken lower price increases in low end brands 400 like Capstan and Scissors. (Rs b) 966.7 5. 10% market share and VST has 5% of the market.3 and 17. 175 Fiama Di Wills and Vivel Di Wills personal care products enable surrogate advertising.774. accelerate cigarettes' volume growth.6 35.6 7.3 25.7 4 December 2009 25 . 250 „ ITC's Wills Lifestyle range of readymade garments.4. Consumer Monopolies SECTOR: FMCG ITC – The smoke king Buy CMP: Rs256 Target Price: Rs292 Bloomberg: ITC IN Consumer Monopolies: Investment argument framework 1 Market share and position 2 Trends and opportunities „ ITC has 82% value market share in India's Rs120b „ Huge growth opportunity in cigarettes as bidis outsell cigarette market.4 6. which are key growth drivers after the phase out of non-filter cigarettes.ITC's key brands are Wills Filter.6 24.7 03/12E 232. „ Cigarette control regulations are at par with global „ ITC dominates segments like Regular and standards after the implementation of pictorial Kings. It trades Rs15b in the past three years. Gold Flake warnings and a smoking ban in pubic places.8 10.6 4. Scissors. (%) -7/21/-38 03/10E 176.8x FY12E quality.4 12.7 M.4 16. India Kings.

5-5 Classic Marlboro >85mm >5. VST has 5% value share. which comprises about 90% of the cigarette market. NavyCut Four Square Kings 75-85mm ~4. B&H. Its key brands are Wills Filter. low per capita consumption and huge scope to convert bidi users to cigarettes. Insignia Stellar.7/stick SUB-CATEGORY PRICE POINT/STICK (RS) ITC'S BRANDS GODFREY PHILLIPS BRANDS <70mm ~2 Capstan. which is ~8x that of its nearest competitor.0% 85% 80% 17.0% 15. India Kings. CIGARETTE VOLUME SHARE CIGARETTE VALUE SHARE GTC Others VST GTC Others 6% 2% 5% 2% 1% GPI GPI 13% 10% Rs1.5 India Kings. Classic. Scissors. Capstan and Bristol. Godfrey Phillips. 555. Scissors Red and White. We believe the long-term growth potential for cigarettes is huge given their low share in tobacco consumption. Gold Flake Filter. ITC ITC: CIGARETTE PORTFOLIO ITC commands 82% market share by value STRADDLES ACROSS PRICE POINTS ITC dominates India’s Rs120b cigarette market with 82% market share by value (and 71% share by volume). CIGARETTES ARE 15% OF TOBACCO CONSUMPTION IN INDIA 23% 100% 21. 1971-72 1981-82 1991-92 2002-03 2008- 09E Source: Company/MOSL 4 December 2009 26 . Four Square 70-75mm ~3.5-4. Bristol.9/stick Bidis outsell cigarettes by 10 times.8/stick VST ITC ITC 8% 82% 71% Source: Industry/MOSL ITC dominates segments such as Regular and Kings.0% 20. COMPETITIVE MATRIX OF CIGARETTE BRANDS AND PRICE POINTS Rs2. ITC is present only in the filter cigarette segment.0% 60% 50% 15% China USA Pakistan Nepal India Global Av. the second largest player with 10% market share. Rs4. Jaisalmer Source: Industry/MOSL Cigarettes—a long-term growth opportunity In the past decade cigarette volumes have grown in low to mid single digits.5 Goldflake.

ITC

PER CAPITA CIGARETTE CONSUMPTION IS LOW (STICKS IN NOS)

1,886
1,771

India has one of the
lowest per capita cigarette
consumption... 844
618
488
303 243
85

USA China Pakistan Nepal Sri Lanka Bangladesh India World Av

BIDI MARKET PRESENTS HUGE GROWTH POTENTIAL (BILLION STICKS)

1,643
Sm oking tobacco m arket is
am ong the largest globally

...even as it is the second
700
largest smoking tobacco
market globaly
451
328 258
215
100

China USA Japan Russia Indonesia India

Source: Company/MOSL

Tax-rate stability, favorable policies can unlock growth potential
Punitive taxation of cigarettes (v/s bidis and other tobacco products) has resulted in a
decline in the share of cigarettes in total tobacco consumption to about 15% currently
from 20% in 1991-92.

ITC – CIGARETTE EXCISE DUTY AND VOLUME GROWTH TRENDS (RS/'000 STICKS)

YEAR FY05 FY06 FY07 FY08 FY09 FY10E

Filter
>85mm 1,780 1,960 2,058 2,181 2,181 2,181
75-85mm 1,450 1,595 1,675 1,775 1,775 1,775
Favorable tax
70-75mm 1,090 1,200 1,260 1,336 1,336 1,336
environment boosts
<70mm 670 740 777 824 824 824
cigarette volume growth
Non Filter
60-70mm 450 495 520 551 1,322 1,322
<60mm 135 150 158 167 820 820
Excise Increase (%) 0 10 5 5 390 (<60mm) 0.0
140 (60-70mm)
ITC’s Volume Growth (%) 7.1 8.4 7.1 -0.7 -2.9 6.5
Source: Company/MOSL

4 December 2009 27

ITC

Stable tax rates positively affect cigarette volume growth. Cigarette volumes have grown
by 6.5% in 1HFY10 (8% in 2QFY10) indicating positive volume impact due to stable
taxes this year. We believe rationalization of taxes on cigarettes versus other tobacco
products can help this market to grow rapidly.

ITC has been at the forefront of innovation in cigarettes
Over the past three years ITC has been at the forefront of modernisation in the cigarette industry. Over the past
ITC has spent Rs15b to three years ITC spent Rs15b to modernize its plants, which has helped to enhance product
modernize its plants, which quality. It has also introduced innovative packaging for its cigarette brands. ITC, which is
has helped to enhance present across segments, has been conscious in taking price increases in lower-end regular
product quality filters like Capstan and Scissors, which have become important brands after the phase-
out of cheaper non-filter cigarettes. ITC’s leadership is also ensured by the government’s
FDI regulations, which make entry of foreign players difficult. We believe ITC will continue
to dominate the Indian cigarette industry in the coming years.

CIGARETTE MODERNISATION CAPEX UP (RS B)

5.5
4.5 5.0

ITC is expected to
continue to dominate the
2.1
Indian cigarette industry in
the coming years 1.2

FY05 FY06 FY07 FY08 FY09

Source: Company/MOSL

Lifestyle retailing, personal care provide surrogate advertising
ITC’s personal-care products ITC launched Wills Lifestyle brand of premium garments, which provide ad support to the
under the Fiama Di Wills Wills brand. Besides, the Wills Lifestyle brand has been extended to events like fashion
and Vivel Di Wills brands weeks to make it more popular. ITC’s personal-care products under the Fiama Di Wills
also aid brand recall and Vivel Di Wills brands also aid brand recall.

WILLS LIFESTYLE AND PERSONAL CARE BRANDS ENABLE SURROGATE ADS

Source: Company/MOSL

4 December 2009 28

ITC

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

ITC’s profit Paper
Agri Paper
and Pack Cigar- 5% 11%
aging ettes
15% 42% Hotels
Agri 7%
21%

New
FMCG
New -10%
Hotels Cigare
5% FMCG ttes
17% 87%

Source: Company/MOSL

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

20 Sales Grow th (%) EBIT Grow th (%)
PBIT Margin (%)

15

10 54.8 55.0
55.4
54.0

5 53.1
53.8 53.7

0
FY10E

FY11E

FY12E

FY10E

FY11E

FY12E
FY06

FY07

FY08

FY09

FY06

FY07

FY08

FY09

PAYOUT RATIO OF 45-50% FREE CASH FLOW IS MOVING UP

Dividend (Rs/share) Payout Ratio (%) EPS (Rs) FCF/ Share (Rs) 14.4
12.3
49.5 49.9
48.0 46.8 10.5
51.1 46.8
10.0
48.6 8.3 8.6
8.5
7.1 7.4
6.3
5.7 4.9
4.9
4.3 3.5
3.5 3.7
2.6 3.1
0.8 1.3
FY10E

FY11E

FY12E

FY10E

FY11E

FY12E
FY06

FY07

FY08

FY09

FY06

FY07

FY08

FY09

Source: Company/MOSL

4 December 2009 29

0 849 225 Paper 34 10 EV/EBITDA 5.881 42.0 53.4 EBIT (Rs m) -2. benign tax in consumer upgradation from bidis to cigarettes will accelerate growth rates.355 9.9 13.684 38.965 -3.436 4.0 56 15 cigarettes will still account Gross Value 1.8 20.527 Growth (%) 48.310 EBIT margin (%) 40.471 30.272 55.6 -1.9 EBIT (Rs m) 36.952 62.835 -3.413 11. ITC has environment will promote invested Rs37b over the past three years in non-cigarette businesses like paper and consumer upgrade from paperboard.729 4.0 EBIT (Rs m) 4.3 11.0 36.9 6.5 10.531 5.0 10.6 13.0 New FMCG Net Sales (Rs m) 25.3 and 17.8x FY11E EPS of Rs12.568 89.056 36.5 19.4.8 Per Share (Rs) 292 Source: MOSL 4 December 2009 30 .0 20.5 15.193 Growth (%) 12.831 Growth (%) 10.6 33. The stock trades at 20.0 Agri business Net Sales (Rs m) 38. Our estimates factor in to post 13% CAGR over 6% volume growth and 5% increase in excise duty.7 12.292 2. CIGARETTES ACCOUNT FOR 77% OF THE SOTP VALUE OF ITC (FY12E.635 -4.162 2.5 19.239 EBIT margin (%) 21.254 53.0 5.785 -2.9 EBIT (Rs m) 1.652 EBIT margin (%) 3.6 2.9 Net Sales (Rs m) 66.0 Hotel Net Sales (Rs m) 10. RS B) SALES EBITDA BASIS MULTIPLE (X) TOTAL EV RS/SHARE Cigarettes 117 65 EV/EBITDA 13.426 Paperboards Net Sales (Rs m) 21.838 49.586 104.962 5.0 33.5 16.258 10.7 -7.967 EBIT margin (%) 54.785 33.8x FY12E EPS of Rs14.606 Growth (%) 12.086 6.104 No of Shares 3.562 4.963 3.7 54. We estimate 23% CAGR in non cigarette EBIT bidis to cigarettes and over FY10-12.8 22.0 19.095 6.4 55. We estimate 19% PAT accelerate growth CAGR over FY10-12.0 48 13 ITC invested Rs37b in the Agri 54 6 EV/EBITDA 5.815 36.0 12.194 116.5 -0.0 EBIT (Rs m) 4.0 31 8 past three years in non.121 9. however cigarettes still account for 82% of EBIT.8 55.340 41.5 Source: Company/MOSL Valuation and view Cigarette EBIT is expected We expect cigarette EBIT to grow at 13% CAGR over FY10-12.9 18. hotels.108 3.7 -2.763 7.096 30.2 19.460 39.579 26.3 9.7 16.9 22.5 73 19 cigarette businesses.3 6.7 14.5 6.350 75. A benign tax environment and increase FY10-12. Buy with SOTP based target of Rs292.8 32.060 48. but Hotels 12 6 EV/EBITDA 10.8 7. agri and new FMCG.0 15. ITC SEGMENTAL BREAK-UP FY08 FY09 FY10E FY11E FY12E Cigarettes Volume Growth (%) -0.057 Net Cash 47 for 82% of EBIT in FY12 Net Value 1.405 47.971 Growth (%) 11. New FMCG 49 -2 EV/Sales 1.

471 2.6 12.3 EBIT Margin (%) Cigarettes 55.517 FMCG .8 52.9 32.2 23.111 1.341 10.215 5.6 -2.6 -6.406 10.6 Source: Company/MOSL 4 December 2009 31 .4 -25.7 19.Others 6.1 Agri business 40.4 56.5 14.500 10 -2.9 20.0 17 18 17 7.740 Agri business 18.633 Hotels 2.814 11.0 -3.2 -33.Others NA NA NA NA NA NA Hotels 32.5 127.361 36.904 EBIT (Rs m) Cigarettes 9.059 7.Others -1.5 10.7 -6.1 10.0 -2.9 -28.7 21.SEGMENTAL PERFORMANCE (QUARTERLY BASIS) 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 Sales (Rs m) Cigarettes 36.259 9.0 24.283 Paper and packaging 6.8 43.7 30.3 17.015 39.Others 27.4 -17.593 7.5 667.4 15.222 1.234 1.282 39.1 -13.0 3.7 10.3 18.2 -51.1 EBIT growth YoY (%) Cigarettes 2.270 -1.136 7.9 53.7 -15.254 12.2 -9.9 FMCG .0 -3.4 30.5 24 10.8 Hotels 35.9 -50.6 9.9 29.0 Hotels 17.278 1.5 52.728 1.388 7.271 7.1 23.283 2.6 18.8 8.1 -54.614 10.3 10.9 Paper and packaging 42.4 16.0 Paper and packaging 23.1 36.519 1.RHS 14.2 14.166 -1.Others -17.3 FMCG .493 41.1 24.2 -48.3 FMCG .641 6.1 Agri business 4.3 16.862 Sales growth YoY (%) Cigarettes 5.936 7.831 FMCG .026 7.6 -14.2 17.7 13.9 10.8 80.7 4.210 1.005 6.223 8.069 11.0 -13. ITC ITC: Recent trends Cigarette volume growth on uptrend (%) Cigarettes margin expansion spurs EBIT growth 7.2 Agri business 32.5 EBIT (Rs m) .5 17.4 17.9 Paper and packaging 20.1 9.7 -28.606 41.6 10.6 16.3 55.1 10.0 -3.000 17 16 -1.LHS EBIT Grow th (%) .9 22.500 24 2.345 8.0 -4.390 2.7 18.000 5.2 -64.173 -998 -850 Hotels 853 687 911 711 306 316 Agri business 765 764 502 531 999 1.5 2 0 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 ITC .4 11.2 8.6 56.741 Paper and packaging 1.594 8.8 3.226 -1.

907 -53.429 -29.190 13.827 176.1 25.808 133.587 142. -27.376 -1.403 3.870 34.038 56.393 Deff Tax 722 3.9 Depreciation -4.423 54.6 9.769 3.051 -45.3 14.7 35.611 87.505 45.659 1.0 Total Expenditure -95.990 EPS 8.7 12.467 Deferred Liability 5.015 Closing Balance 5.6 10.703 10.798 170.281 46.4 32.070 -1.370 Net Fixed Assets 61.378 44.7 22.706 Basic (Rs) Operational Income 2.266 18.686 Incr/Decr of Cash -3. Charges -251 -183 -300 -258 -258 EV/Sales 6.6 12.0 0.125 -151.172 147.719 76.823 61.035 68.464 1.0 0.6 21.736 3.106 Capital WIP 11.000 Curr.5 Profit after Taxes 31.8 -32.3 Change (%) 15.900 -16.867 -39.2 15.463 24.267 74.0 40.962 Less: Accum.535 84.353 43. -19.292 -27.530 Change in Networth 437 437 0 0 0 Others 16.776 1.774 3.221 2.973 -1.2 Margin (%) 32.1 12.7 Int.7 Valuation (x) Margin (%) 33.7 24.028 113.201 32.496 RoE 25.486 Capital Employed 128.2 22.4 56.8 -32.4 21.078 11.530 OP/(loss) before Tax 42.1 16.687 8.206 Application of Funds 128.9 17.606 RoCE 35.804 227.423 54.204 45.3 16.4 41.9 13.8 8.742 10.8 Other Income .461 61.671 46.576 154. and Prov.0 36.456 13.826 Depreciation and Amort.000 Investments 29.3 5.0 EBITDA 46.6 34.853 59.7 Profit before Taxes 45.206 11.000 -12.6 10.7 Payout % 42.345 1.300 12.184 6.6 Deferred Tax -827 -2. Assets.0 16.0 29.324 8.2 18.532 62.2 25.775 80.4 21.790 1.470 CF from Invest.257 59.231 -19.9 23. L&A 70.886 1.2 14.486 Cash P/E 27.8 Dividend Yield (%) 1.0 0.030 -21.332 968 -16.767 6.271 -34.5 Asset Turnover (x) 1.857 50.3 4.194 CF from Operations 31.363 -22. Liab.0 1.859 -10.4 P/E 31.7 6.1 14./Div.369 6.530 -20.629 1.9 32.0 1.774 CASH FLOW STATEMENT (RS MILLION) Reserves 116.5 20.475 153.324 8.451 8.6 22.372 Other Liabilities 3.5 14.141 32. Depn.0 7.323 47.Recurring 3.531 E: MOSL Estimates 4 December 2009 32 .385 -5.696 Cash EPS 9.856 -7.385 5.325 Net Current Assets 25.587 115.206 11.4 25.352 -26.296 -114.8 Return Ratios (%) Tax -13.7 33.213 Leverage Ratio BALANCE SHEET (RS MILLION) Debt/Equity (x) 0.377 Cash and Bank Balance 5.742 10.271 -22.834 -1.6 17.4 -32.726 -25.044 43. and Fin.232 -17.494 6.193 81.915 207. Activity -14.856 7.231 -105.774 3.324 8.8 35.577 137.532 (Incr)/Decr in Debt 136 -369 -116 0 0 Curr.702 10.7 4.820 155.061 5.361 230.9 48.225 4.409 Account Receivables 7.316 P/BV 8.952 196. Received 3.3 14.631 10.293 71.7 34.909 -32.984 70.946 1.582 1.587 (Incr)/Decr in WC -4.346 28.881 175.671 46.4 1.943 4.410 Inventory 40.155 1.5 16.081 84.397 29.9 5.4 Total Revenue 141.860 -16.9 2.299 -19.517 -15.636 39.184 -6.103 Gross Block 89.494 -6.300 4.8 4.000 10.616 18.672 11.5 3.213 Working Capital Ratios Change (%) 16.997 49.372 Account Payables 27.622 -19.0 0.659 1.493 5.570 21.397 -12.1 1.0 Y/E MARCH 2008 2009 2010E 2011E 2012E Share Capital 3.281 66.104 DPS 3.2 4.767 6.726 -25.0 40.690 -15.659 Int.742 10.5 Tax Rate (%) -31.247 232.992 182.015 Interest Paid -251 -183 -300 -258 -258 Direct Taxes Paid -14.804 227.621 -1.4 3.141 15.403 3.592 Change (%) 14.123 81.966 16.0 Reported PAT 31.429 102.782 Provisions 13.810 62.460 37.467 EV/EBITDA 20.7 23.106 Loans 2.689 211.622 -16.848 -4.110 64.3 42.798 170.8 Debtor (Days) 19 16 18 18 18 Margin (%) 22.0 1.718 48.764 3.6 Change (%) 17.021 204.330 Add: Opening Balance 9.764 3.432 -16.1 5.111 CF from Fin.3 4.4 33.225 4. ITC Financials and valuation INCOME STATEMENT (RS MILLION) RATIOS Y/E MARCH 2008 2009 2010E 2011E 2012E Y/E MARCH 2008 2009 2010E 2011E 2012E Net Sales 139.1 35.7 1.433 -17.172 147.589 50.688 72.217 178.144 1.000 10.203 22.679 89.050 52.579 Dividend Paid -15.064 38.603 20.976 -24.518 -135.952 196.597 105.201 32.811 206.774 3.703 10.756 Y/E MARCH 2008 2009 2010E 2011E 2012E Net Worth 120.8 35.636 39.561 34.491 Extraordinary Items 0 0 0 0 1 (Incr)/Decr in FA -21.1 18.147 -21.5 23.268 12. 4.002 5. 44.5 -32.5 16.627 -3.4 1.8 34.1 5.909 (Pur)/Sale of Investments 1.8 BV/Share 32.3 8.4 10.1 6.351 157.606 40.5 12.8 25.8 41.587 130.8 31.

908 13.136 10. Distribution 255 in premium outlets has been increased.5 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 306/211 03/09A* 167.4 and 20. Surf Excel and Ponds to cater to the premium segment.0 22.4 28.12 Rel.7 28. Soap with GCPL (soaps 10.636 9. 3 Company strategy to sustain its edge 4 Valuation and view „ HUL's portfolio in soap.3.5 128. Rin and Surf Excel (detergent). „ HUL has limited competition in the premium segment STOCK PERFORMANCE (ONE YEAR) (Dove.1 26. P&G (detergents 13.5%) volumes are expected to grow at 4% CAGR while and Emami (skin care 5%). detergents volume should expand at 8% CAGR.398 28. Competition from Hind.Cap.8 24.9 92. (%) -10/-5/-70 03/10E 179.8 121. HUL has a strong lead over the competition like China and Indonesia are 30-35% lower. consumers to mid priced and premium products. 180 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Stock info Financial & valuation summary YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ Equity Shares (m) 2. Lux 405 and Lifebuoy to improve the price value equation. China's and 35% of Indonesia's.2 92. „ GCPL (toilet soap).9 1. „ HUL's key brands are Lux.8 17.7 * EPS for 12 months (April 08-March 09) 4 December 2009 33 .457 22. Perf.617 20. (Rs b) 592. Consumer Monopolies SECTOR: FMCG Hindustan Unilever – Soap opera Neutral CMP: Rs272 Target Price: Rs293 Bloomberg: HUVR IN Consumer Monopolies: Investment argument framework 1 Market share and position 2 Trends and opportunities „ Hindustan Unilever has 45% market share in the toilet „ Although soap and detergent have product penetration soaps category. Lifebuoy.6 2.4 11.0 93.2 M.8 18. (US$ b) 12.3 138.Rebased home-grown brands is weak in the premium segment. Per capita spend is only 10% of creams and 280bp in detergents).177. per capita spends in comparison to peers creams. Wheel.2 3. EPS of Rs13. Pears and Surf Excel).5 18.5 18.750 11.0 2. Ghari (detergents) and Emami „ Rising awareness of skin care and a need to look (skin cream) have increased market share. Neutral. The stock straddles price points.2 19. detergent and skin creams „ We estimate 14% PAT CAGR over FY10-12.3 03/11E 203.6 M. 600bp in skin penetration is 17%. 330 „ HUL has increased focus on Dove.Cap. 480 „ HUL has cut prices and revamped products in its mass-market brand range including Wheel.8 25.3 16. Unilever Sensex .5 14.8 03/12E 228. 35% in detergents and 50% in skin of 85-90%.9 2.623 24. Dove and Pears „ The mass market segment in soap and detergent is (toilet soap). „ HUL lost market share in these segments in the „ Skin creams have 22% penetration and rural past 18 months (980bp in toilet soap. 70-75% of volumes with a huge opportunity to upgrade Fair and Lovely and Ponds in (skin creams).6. This will enable the company trades at 24xFY11E EPS of Rs11.0 128. good will drive demand for skin creams by 20% CAGR.5 129.9%).5xFY12E to retain consumers as they upgrade.2 7.8 20. Rin.

and its detergent market share is 2. 35% in has 45% market share in the detergents and 50% in skin creams.4% ITC 3% Fena 6. MARKET SHARE: TOILET SOAP MARKET SHARE: DETERGENT MARKET SHARE: SKIN CARE Others HUL HUL Others HUL Others 23% 44% 35. However.0% 5. However over the past 18 months HUL lost market share of these segments while its 980bp in the toilet soaps segment. while GCPL (toilet soap). Rin and Surf Excel (detergents). Ghari (detergents) and Emami (skin care) increased their market shares in the mass segment. is present across Dove and Pears (toilet soap).5% 12. P&G has 13.6% 25. 600bp in the skin care segment and 280bp in the detergents competitors are not segment. which is among the highest in FMCG categories.0% 3. Fair and Lovely various price points in all and Ponds (skin creams).5% 4. PRODUCT PORTFOLIO SPANNING ACROSS INCOME LADDER Source: Company/MOSL Per capita spends. HUL’s key brands are Lux.0% Cavin Reckitt P&G Wipro GCPL Nirma Ghari care 4% Nirma 13. Hindustan Unilever A strong monopoly in toilet soaps. India’s per capita spends are 30-35% lower than those of its peers. Soap volumes are expected to grow 4% CAGR and detergent 4 December 2009 34 . HUL is present across price points in all these segments while its competitors are not. Skin creams offer significant advantage to HUL as the second competitor is just 10% of its size. the spends are expected to converge in the coming few years.0% 32. which Hindustan Unilever (HUL) has 45% market share in the toilet soap segment. But the definition of penetration includes infrequent users.5% of the detergents detergents and 50% in skin market and Emami has 5% of the skin care market.9% market share in the toilet soaps market. 35% in GCPL has 10.5% 5. potential for penetration to drive steady volume growth Soaps and detergents have product penetration of 85-90%. The company has a big lead over its nearest rivals: toilet soap segment. detergents.5% Amw ay L Oreal Emami 6% 9% 11% 8. Wheel. like China and Indonesia. which is reflected in lower per capita spends. Lifebuoy.0% 49.6x.0% Source: Company/MOSL HUL’s market share in toilet soaps is 4x that of its nearest competitor. creams. skin creams Hindustan Unilever.

HUL OFFERS MORE THAN 30 VARIANTS ACROSS PRICE POINTS PRICE/ HUL ITC GCPL NIRMA RECKITT WIPRo 10 GM Super Premium 4. which will increase demand at the premium end. Emami led the race. Lifebuoy Vivel Fairglow Nima Jeeva Sub Popular 0. indicating segment comprises 70-75% of a big opportunity to upgrade consumers to mid priced and premium products. the mass market detergents categories.7 Breeze Superia No1 Nirma Santoor Market Share (%) 44. Nirma. The company’s segments and price points.5 8.9 7. Hindustan Unilever In the soaps and detergents volumes are expected to expand at 8% CAGR over coming 3-5 years. which gives the company a None of its competitors has such a comprehensive product portfolio.5 10. Fena. which will grow by over 20% CAGR in 3-5 years.5%.3 Lux. Nivea Premium Lakme. Vaseline 150-300 Garnier Popular Fair & Lovely 35-100 Emami Source: Company/MOSL 4 December 2009 35 .2 premium products Indonesia 1.9 0.2 7. Lux Int.6 2.7 Source: Company/MOSL Skin creams have a 22% penetration and rural penetration is only 17%. the mass market segment comprises 70-75% of volume. Ponds and L’Oreal entered the premium anti-ageing and beauty creams segment.5 Source: Company/MOSL SKIN CREAMS – PREMIUM SEGMENT TO EMERGE AS MOST COMPETITIVE SKIN CARE HUL BRANDS PRICE (RS) KEY COMPETITOR Super Premium Ponds 450-600 Oil of Olay.4 Thailand 3. Vivel Di Wills Cinthol Dettol Popular 1. This gives HUL the unique advantage to unique advantage to upgrade consumers as their incomes increase. Henko 145 Premium Surf Excel Blue 119 Henko Stain Champion 107 Popular Rin 67 Tide 67 Mid-priced Sunlight/Wheelgold 50 Ujala. Similarly. In the soaps and categories. Ghari 12% Source: Company/MOSL TOILET SOAPS . Rising awareness of skin care and aspirations to look good will drive demand for skin creams.0 Dove. Product portfolio HUL’s key strength HUL’s brands straddle HUL has a monopoly in the toilet soaps.3 Malaysia 6.9 7. Oil of Olay. This has resulted in 30-40% growth of this segment. Super Nirma 50 Sub-Popular Wheel 30 Ghari.5 Liril.0 8. upgrade consumers as their incomes increase DETERGENTS – THREE-PLAYER MARKET BEYOND RS60/KG SEGMENT DETERGENT HUL BRANDS PRICE (RS/KG) KEY COMPETITOR PRICE (RS/KG) Super Premium Surf Excel 145 Ariel. L’Oreal. The per capita spend is only 10% of China’s and 35% of Indonesia’s. with its brands straddling segments and price points. indicating an opportunity to upgrade COMPARISON OF PER-CAPITA SPENDS ACROSS CATEGORIES (US$) COUNTRY LAUNDRY SKIN CARE consumers to mid priced and China 2.8 India 1. volume. followed by HUL and Nivea. skin creams and detergents markets. Mr White 30 Market Share 35% P&G 12. launching fairness creams for men. strength lies in its portfolio approach.4 0.2 3. Pears Fiama Di Wills Premium 2. Tide Natural.

4 52. increasing adspends and revamping distribution. We believe HUL might not be able to regain market share without denting margins.0 54. HUL and ITC have products that cater to all market segments.0 44.2 46.8 49.2 36.3 49. its share is 2. it would be able to retain its monopoly status in these categories because: „ There is a huge gap between its own market share and that of its nearest competitor. 4 December 2009 36 . HUL HAS LOST 980BP IN TOILET SOAPS HUL HAS LOST 280BP IN DETERGENTS HULHAS LOST 600BP IN SKIN CARE 39.1 37. HUL’s share is 4x that of its nearest competitor in the toilet soaps market. But HUL’s brands are better established since ITC is a relatively new player.6x that of its nearest rival in the detergents market and as much as 10x that of its rival in the skin creams market. „ Despite near term pressure. from growth in the premium segment. after a lag.2 50.3 37. The loss has been in the mass end of the market because national and regional players have been aggressively expanding their distribution and product ranges. since competitors’ direct distribution expansion is a key reason for HUL’s loss of market share. Market share declined by 980bp in the toilet soaps category. We believe growth in the mass market will be a key driver in the medium term. HUL will benefit. New MNCs and Indian companies will enter the skin care market because of the growth opportunities it offers. HUL increased prices during the commodities boom and easier availability of competitive products dented HUL’s market share. HUL initiated corrective action such as cutting prices across categories. „ HUL’s portfolio strategy enables it to cater to consumers at all price points.2 37. Henkel and P&G are in the mid and premium segments whereas HUL is in the economy segment as well. 280bp in the detergents market and 600bp in the skin creams segment in the past 18 months.7 53.6 52. Hindustan Unilever BRANDS LOSING MARKET SHARE HUL losing market share due to competition in the mass segment HUL has been losing market share in the toilet soaps. from which it will benefit after a lag. In the detergents market.1 54. some niche domestic players cater to the economy segment whereas MNCs are in the premium segment.5 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Sep-08 Sep-09 Sep-08 Sep-09 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Sep-08 Sep-09 Source: Company/MOSL HUL is driving consumer upgradation We believe HUL will be one of the big beneficiaries of an expected consumer upgrade to LEADING PREMIUM BRANDS premium products as disposable incomes increase.1 50. In the skin care market. In the toilet soaps market. recovering it would be a function of its own initiatives as well as competitive intensity in the market.4 35. detergents and skin care segments in the recent past.9 54.4 48.3 38. Even if HUL’s market share in some of these segments declines. However.6 51.

We estimate HUL has 20% EBIT margins in toilet soap and skin care. checks and considerable credit from its suppliers Valuation and view HUL is losing market share in soaps. but its and detergent margins declined to 10-12% after the price war with P&G. detergents which can impact profit margins. We estimate these three product segments contribute 60% to HUL’s topline. detergents and skin creams. detergents and skin creams due to new launches and distribution expansion by HUL is losing market the competition.3% PAT CAGR over FY10-12.8% sales CAGR and 14. Hindustan Unilever PREMIUM LAUNCHES HAVE BEEN WELL RECEIVED Source: Company/MOSL Monopoly status ensures higher margins. Maintain Neutral. We expect heightened competition in core categories of soaps. Although HUL is trading at lowest P/E premium to peers on a historical basis. loss of market share and increase in competitive activity will continue to drag down stock performance. 4 December 2009 37 . however its monopoly in these segments is not under threat. We estimate than its competitors in HUL’s toilet soap margins are more than 20% and its margins in skin creams are over various segments 30%.5xFY12E EPS of Rs13. Strong bargaining power Strong bargaining power with dealers and the trade has ensured HUL gets payment through with dealers and the trade post-dated checks (PDCs).4 and 20. low capital payment through post-dated requirement and a high payout ratio of 80-85%. Margins in the detergents market have declined over the past few years to 10-12% from 20% due to price wars.. We expect HUL to increase investment in advertising and trade push share in soaps. The stock trades at 24xFY11E is not under threat EPS of Rs11.3. but more than 70% to its profitability. The net has ensured HUL gets working capital has been a negative Rs19b-20b. We estimate monopoly in these segments 12. superior return ratios HUL has higher margins HUL has higher margins than its competitors in various product segments. This has ensured 110% ROCE. It also gets considerable credit from its suppliers.

7 12.8 10.5 7.9 7. Hindustan Unilever SALES GROWTH REMAINS SLUGGISH (%) LOW INPUT COSTS BOOSTS MARGIN (%) 13.5 74 75 72 65 56.3 -18 -18 -18 -19 -20 FY10E FY11E FY12E FY09* CY05 CY06 CY07 FY10E FY11E FY12E FY09* CY05 CY06 CY07 SHARE BUYBACK BOOSTS ROE (%) HEALTHY PAYOUT RATIO SUSTAINS (%) 113 121.8 14.8 56.2 9.9 14.0 84 86 93.2 11.1 14.0 13.3 92.0 16.6 7.2 16.3 11.3 -14 -14 7.5 92.5 16.8 14.1 121.2 FY10E FY11E FY12E FY10E FY11E FY12E FY09* FY09* CY05 CY06 CY07 CY05 CY06 CY07 FOUR YEAR PAT CAGR AT 11.5 FY10E FY11E FY12E FY09* CY05 CY06 CY07 FY10E FY11E FY12E FY09* CY05 CY06 CY07 *15 month period Source: Company/MOSL 4 December 2009 38 .3% (CY06-FY10) MONOPOLY ENSURING NEGATIVE WORKING CAPITAL (RS B) 17.8 13.4 16.

2 7.1 9.9 45 12 Jun-08 Jun-09 Mar-08 Mar-09 Sep-07 Dec-07 Sep-08 Dec-08 Sep-09 Mar Jun Sep Dec Source: Company/MOSL 4 December 2009 39 .1 63.000 111 3.5 48.4 18.2 11.0 49 16 8.600 94.4 9.0 Jun-08 Jun-09 Mar-08 Mar-09 Sep-07 Dec-07 Sep-08 Dec-08 Sep-09 Jun-08 Jun-09 Mar-08 Mar-09 Sep-07 Dec-07 Sep-08 Dec-08 Sep-09 Palm oil prices: Up 50% from the bottom LAB prices (Rs/kg): Up 28% from the bottom 5.3 13.8 -4.4 14.109 1.2 11.935 67.0 11. Hindustan Unilever Hindustan Unilever: Recent trends Volume growth (%) declines QoQ Lower volume growth impacts FMCG sales growth (%) 21.8 10.6 21.8 71.0 2.6 10.6 11.0 2.000 128 122.0 1.0 3.5 47 14 11.8 18.5 1.4 6.185 2.1 3.3 15.RHS 51 18 49.LHS 2006 2007 2008 2009 EBITDA Margins (%) .8 11.000 94 90.0 12.5 10.2 8.000 77 2.000 60 Jun-09 Jan-09 Mar-08 Dec-06 Nov-09 May-07 Oct-07 Jun-06 Jun-07 Jun-08 Jun-09 Feb-07 Feb-08 Feb-09 Aug-08 Oct-06 Oct-07 Oct-08 Oct-09 Gross margins: Boosted by low input cost Investment in A&P: At a new high (% of sales) Gross Margins (%) .8 8.4 10.8 12.3 2.1 Malaysian Ringgit\Metric Tonnes 4.3 19.0 10.4 11.2 9.

731 -4.585 224.9 71. (Exp)/Income 1.154 Valuation (x) Change (%) 13.100 (Incr)/Decr in FA 2.402 29.5 -12.945 98.7 Other Income .796 7.0 BALANCE SHEET (RS MILLION) Y/E MARCH CY07 FY09 FY10E FY11E FY12E CASH FLOW STATEMENT (RS MILLION) Share Capital 2.110 57.478 29.215 18.679 -24.3 Total Revenue 138.0 23.278 24.286 25.558 -1.150 76.8 18.369 5.6 12.8 Return Ratios (%) Tax 3.5 12.9 7.597 1.200 RoE 121.9 14.690 CF from Fin.721 1.372 163 2.0 48.560 28.177 11.965 22.817 39.3 138.128 -21.0 20.200 Gross Block 26.217 5.5 -11.2 Change (%) 13.641 742 -2.0 22.1 121.0 24.597 1. Assets.279 -7.392 20.818 4.7 46.133 Less: Accum.180 Reserves 12.177 2.393 177.512 105.617 CF from Operations 16. FY09 Fifteen month ending 4 December 2009 40 .3 14.8 2.457 203.530 -23.256 24.4 13. Liab.398 Cash EPS 8.1 6.3 2.615 23.217 5.0 Deferred Tax 389 0 521 582 680 RoCE 160.235 58.716 8.3 16. and Fin.278 24.9 Tax Rate (%) 18.2 129.849 Dividend Paid -23.154 Loans 885 4.123 -19.5 Profit after Taxes 17.5 Change (%) 15.8 25.075 56.5 22.788 Dividend Yield (%) 3.2 0.579 7.8 16.691 206.8 Debtor (Days) 12 10 12 12 12 Margin (%) 12. -11.748 31.720 8.282 Others -1. Received 2.560 28.245 32.8 12.180 2.4 12.320 30. Charges 255 253 217 183 150 EV/EBITDA 27.5 23.058 117.3 14.384 1. 51.9 Profit before Taxes 21.405 8.814 2.908 Working Capital Ratios Change (%) 13.396 Change in Networth -8.5 10.219 1.056 1.434 5.279 7.5 9.720 2.750 28.248 20.724 30.068 16.054 -1.2 19.9 Non-rec.991 2.169 2.285 -4.180 2.594 1.1 Depreciation 1.7 15. L&A 32.937 3.8 16.007 22.379 91.991 10.677 26.408 19.1 7.395 -19.220 4.9 -4.5 Int.6 Operating Exp 45.254 20.402 29.7 14.6 17.691 28.209 Inventory 19.906 3.838 6.2 43.906 3.006 2.467 E: MOSL Estimates.314 997 1.6 9.363 50.757 69.2 18.699 65.958 Add: Opening Balance 4.8 2.5 23.285 -2.420 Incr/Decr of Cash -2.5 92.244 6.677 -2.3 93. FY09 Fifteen month ending E: MOSL Estimates.225 16.786 -286 -3.278 22.883 1.785 33.5 Margin (%) 14.196 -25.016 179.006 97.219 -27.1 3.5 10.824 -43 65 0 0 Reported PAT 19.5 92.622 1.500 Investments 14.9 16.009 1.643 -5.435 21.244 -6.217 Application of Funds 15.7 Cash P/E 31.132 EV/Sales 4.317 (Incr)/Decr in WC -2.764 27.779 2.050 37.8 24.611 Account Receivables 4.Recurring 2.679 44.231 40.228 -1.908 Leverage Ratio Debt/Equity (x) 0.413 Account Payables 28.464 30.245 32.721 1.2 28.305 Int.075 -19.569 -18.0 128.750 28.425 EPS 8.731 Closing Balance 2.1 0.581 200.336 -289 -289 Others 6.353 37.563 -16.8 22.8 3.3 40.1 0.127 DPS 9.595 7.0 12.5 12.1 16.984 8.000 2.4 COGS 72.535 18.466 -12.686 27.8 3.251 28.623 228.038 3.294 20.480 22.220 4.280 -12.500 1.342 32.379 2.009 1.1 0.281 67.180 2.754 202.500 1.5 8.4 73.124 2.953 1.2 16.068 20.379 2.636 87.906 3.7 -3.4 11.7 12.2 11.782 381 -11 0 0 Cash and Bank Balance 2.289 27.021 -8.390 Capital WIP 1.916 P/BV 41./Div.6 128.0 8.5 7.817 34.5 Gross Profit 66.432 25.824 -43 65 0 0 Deferred Charges 2.835 25.247 Y/E MARCH CY07 FY09 FY10E FY11E FY12E Net Worth 14.3 12.466 (Incr)/Decr in Debt 159 3.750 -14.856 4. Activity -33.9 12.427 OP/(loss) before Tax 20.859 34.2 BV/Share 6.2 2.619 73.932 Other Liabilities 15.342 32.7 26.136 -2.334 -2.724 30.0 11.009 1.021 8.3 16. Hindustan Unilever Financials and valuation INCOME STATEMENT (RS MILLION) RATIOS Y/E MARCH CY07 FY09 FY10E FY11E FY12E Y/E MARCH CY07 FY09 FY10E FY11E FY12E Net Sales 136.8 16.685 108.336 -17.201 24.229 Curr.834 25.316 -19.8 17.9 74.916 Capital Employed 15.610 16. 14.701 Change in Deff 122 -424 -172 -184 -196 Net Fixed Assets 15.142 44.8 Margin (%) 15.171 Provisions 6.696 -18. and Prov.056 1.220 4.8 P/E 34.568 29.136 24.817 36.012 -1.709 Curr.565 111.5 11.774 40.936 32.2 2.497 24.838 62.946 38.3 11.731 Interest Paid -255 -253 -217 -183 -150 Direct Taxes Paid -3.117 EBIDTA 20.643 5.3 23.323 CF from Invest.194 19.721 1.8 Asset Turnover (x) 9.548 2.271 Payout % 113.500 (Pur)/Sale of Investments 9.2 14.4 65.1 6.536 25.473 Extraordinary Items 1.904 3.250 Net Current Assets -18.946 38.9 13.161 -103 1. Depn.9 19.544 -23.876 3.973 Basic (Rs) Other operating income 1.

7 164.7 158. Health Bhi.5 115.8 4.5 30.9 1.6 53. The product has undergone significant change with variants like Vegetable Atta Noodles. Mucilon and Naturnes. which can be STOCK PERFORMANCE (ONE YEAR) launched in India.4 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range (Rs) 2.010 114. The parent company has brands like Gerber. „ Nestlé's Maggi has 80% market share in the Rs13b „ Instant noodles grew 30% in CY08 and are tipped to instant noodles category.255 11. „ Maggi noodles are available in 15 variants and two 2. „ Nestle has launched Maggi noodles in Rs5 packs to 1.2 22.1 18. (%) -6/33/-1 12/09E 50.4 169.615 Target Price: Rs3.219 9. Entry Nissin is theclosest rival with 11% market share. (10-12%). two years old.5 22.9 22. inherent potential in this category. milk). Consumer Monopolies SECTOR: FMCG Nestle India – Go for gold Buy CMP: Rs2.4 15.9 26.335 12/08A 43. 1.8 28. Nestle Sensex . „ The stock trades at 28xCY10 EPS of Rs93.Rebased „ Nestle has repositioned Maggi Noodles with its 3.2 42.9 M. valuations to sustain given strong visibility of growth „ Nestle has launched Nido to cater to children over and high payout ratio of 72%.011 93.5 and The company has introduced innovations like Nan2 22.5 34.907 7. Top Ramen from Indo grow by 18-20% CAGR over the next few years.9 5.242 5. Buy.8 125.2. Stock info Financial & valuation summary YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ Equity Shares (m) 96. (Rs b) 252.2 22.08% of total food instant noodles category since last 25 years with grain consumption in India which indicates the numerous innovations.374 76.000 increase the product penetration in small towns and Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 rural areas. We expect premium Milk Formula and innovations in Cerelac.6 31.2 28.500 and Chinese variants.083 Bloomberg: NEST IN Consumer Monopolies: Investment argument framework 1 Market share and position 2 Trends and opportunities „ Nestle has a monopolistic (~85%) market share in „ Infant food and nutrition will grow in low double digits the Rs15b infant foods and nutrition category.0 33.000 cup packs. due to its limited use since it is used by „ Nestle has brands like Cerelac and Nestum (infant infants aged three months to two years.739/1. Farex from Heinz is the only significant „ Product launches that cater to this segment and competitor in infant foods. 3 Company strategy to sustain its edge 4 Valuation and view „ Nestle is in the forefront of infant food technology. there food) and Lactogen and NIDO (infant and children are restrictions on advertising.4 4 December 2009 41 .649 58.4 12/11E 73.9xCY11 EPS of Rs114.5 3.1 172.0 44. Besides.12 Rel.3 119. of new players and private labels will accelerate growth „ Nestle is credited with nurturing and evolving the „ Instant noodles consumption is 0. Perf. (US$ b) 5.6.8 M.5 119. Maggi claims to provide 20% of children's daily calcium and protein 2.Cap.0 4.Cap.000 campaign Taste Bhi.1 12/10E 61. extend its usage can expand the category.500 needs.

which boosts profitability of the segment relative to Nestle's average gross margins. NUTRITION SALES MIX NESTLE HAS ~85% SHARE Exports Heinz Milkmaid 5% Yoghurt 15% 4% 10% Baby Foods Ghee 32% 5% Nestle 85% Milk 10% Milk Pow ders 34% MULTIPLE BRANDS/VARIANTS IN INFANT NUTRITION Source: Company/MOSL Baby food.5 1.3 11.8 7. NUTRITION: VOLUMES INCH UP Volume Grow th (%) Realization Grow th (%) 16.4 6.4 1.9 CY03 CY04 CY05 CY06 CY07 CY08 9MCY09 Source: Company/MOSL India a tough market for infant food The government's restrictions and regulations make India a tough market to operate in for infant foods and nutrition. We believe Nestle India has strong pricing power and superior profit margins in baby foods. India’s guidelines regarding the formula for infant foods are stricter than those of some of its neighbors and advertising in the category is banned. Farex from Heinz is its key competitor in infant foods.7 10. MILK PRODUCTS.1 7.2 10. Nestle India Milk Products and Nutrition Nestle dominates the infant nutrition market Nestle commands 85% of the Rs15b infant foods and nutrition market with brands such as Cerelac and Nestum (infant foods) and Lactogen.1 6. nutrition account for 66% of category sales Nestlé’s baby food and nutrition comprise 66% of the company's category sales.3 5. INFANT NUTRITION MARKET: MILK PRODUCTS.6 2. Nestle India follows the following guidelines: 4 December 2009 42 . Nestogen and Nan (infant milk).3 10.7 2.

commands 80% of INSTANT NOODLES: MAGGI HOLDS 80% MARKET SHARE the market Chings Wai Wai Private 3% 4% Labels Top Raman 2% 11% Maggi 80% Source: Company/MOSL 4 December 2009 43 . aimed at nutritional needs of children aged over two years. years ago. 6 Does not supply free samples and food packs to patients. Mucilon and Naturnes that can be launched in India TECHNOLOGICAL SUPPORT OF PARENT IS A COMPETITIVE ADVANTAGE FOR NESTLE INDIA Source: Company/MOSL Nestle has 80% of the Instant Noodles market Nestle India. Supply and Distribution) Act. which has brands like Gerber. 3 Does not advertise or promote infant milk and substitutes and infant foods to public. 2 Encourages continued breast feeding for up to two years. which Nestle has 80% in the Rs13b Instant Noodles market. 7 Does not distribute educational material for these products in hospitals. Top Ramen is the second largest is credited with starting player with 11% share. 1992 (IMS Act). It has introduced innovations like on the growth Nan2. Feeding Bottles and Infant Foods (Regulation of Production. 3 and variants of Lactogen and Nestogen. Instant Noodles comprise nearly 70% of India’s noodles category in India 25 noodles market. Nestle India 1 Complies with the IMS Act and WHO code of marketing of breast-milk substitutes. 3 Nestle has strong technological support from its parent company. Nestle is well placed to 10-12% and Nestle is well capture growth in this category because: placed to capitalize 1 Nestle is at the forefront of infant-foods technology. Nestle India is credited with creating and nurturing the Instant and nurturing the instant Noodles category in India 25 years ago. Nestle poised for 10-12% sales growth in Infant Food and Nutrition Infant food and nutrition Infant Food and Nutrition as a category will grow 10-12% as the use of these products is as a category will grow by limited to children aged between three months and two years. 4 Warns users of consequences of incorrect use of infant-milk substitutes. 5 Does not use pictures of babies and women on its infant-milk substitute packaging. 2 Nestle has launched Nido. 8 Follows the Infant Milk Substitutes.

PREPARED DISHES SALES MIX Soups Others Ketchup 5% 2% 13% Instant Noodles 80% PREPARED DISHES: HIGH DOUBLE DIGIT VOLUME GROWTH Volume Grow th (%) Realization Grow th (%) 30.5 5. Noodles have been the category past three years growth driver in the recent past.8 8. which category growth in the has other products like ketchup and soups in this category. 4 December 2009 44 .5 -1.1 24. We believe the category will continue to drive high double-digit growth in the coming next few years years because: 1 Instant noodles have higher acceptance among children today than they did 10-15 years ago. Nestle India MULTIPLE VARIANTS HELP EXPAND THE CATEGORY Source: Company/MOSL Noodles are 80% of category sales for Nestle India Noodles have enabled 25% Maggi noodles account for 80% of the prepared dishes category for Nestle India.3 20.0 19. The category has given Nestle India volume growth of 25% in the past three years and noodles have grown at more than 30%.0 -0.1 4. Instant noodles have emerged as a viable snacking and food option in a CAGR of 18-20% over the India. are likely to consume it more often than adults do.7 CY03 CY04 CY05 CY06 CY07 CY08 9MCY09 Source: Company/MOSL 18-20% CAGR likely for instant noodles over CY08-13 Instant noodles grew 30% in Instant noodles grew 30% in CY08 and are tipped to post a CAGR of 18-20% over the CY08 and are tipped to post next few years.6 4.8 16.6 9.6 0.9 3. Children. who today consume the product from the age of two to three.

1 56.08% of India’s food grain consumption.0 51. Nestle has been drawing on support of its parent to launch innovations. Thai and those made from wheat flour and pulses. Nestle India 2 Noodles. Maggi claims it provides children with 20% of their daily requirement of calcium and protein 3.2 52.1 53. 3 Manufacturers have launched five-rupee packs. dal atta noodles and Chinese variants 4. These are increasing the product appeal across sections of the population. Nestle has repositioned Maggi noodles on the nutrition platform with the slogan Taste Bhi Health Bhi. price increases have been minimal to keep it affordable. However over the past noodles has given it stronger five years Nestlé’s gross margins declined by 400bp due to 1) rising input costs. Noodles are not technology intensive and brand.8 20.1 21.3 20. underscores the potential in the category.0 55. evolved due to availability of options ranging from regular flavors to Chinese. Besides. 2) lower volume growth and higher price increases. the past five years IMPROVED PRICING POWER RESTRICTS MARGIN CONTRACTION Gross Margins (%) EBIDTA Margin (%) 21. which is helping to expand the category in small towns. which is likely to expand the market.2 55.1 17. as a category. and 3) promotion of small packs.0 55. 4 Leading organized retailers have launched private-label instant noodles.6 53.0 21. Rice Mania was developed by the Singapore-based R&D centre of the parent company. taste and category growth rates flavor are key factors in this product category.5 2001 2002 2003 2004 2005 2006 2007 2008 2009E Source: Company/MOSL 4 December 2009 45 . Nestle has strong brand equity in this market. Maggi noodles are available in 15 variants and two cup-packs. Nestle to maintain above industry average growth in instant noodles Nestle is expected to grow We estimate Nestlé’s instant noodles volumes have been growing by more than 25% a Maggi noodles sales above year over the past three years.4 19.1 20.6 52. Nestle has strong association of the brand with children and adults 2.3 19. 5 Instant noodles consumption is 0. Monopolistic situation powers growth Nestlé’s monopolistic Nestlé’s monopolistic position in baby foods and noodles has given it stronger volume position in baby foods and growth and higher margins than its peers over the past five years. Nestle launched Maggi noodles in five-rupee packs to increase product penetration 5. EBIDTA margins have been sustained margins than its peers over at 20-21% due to lower adspends and strong operating leverage. priced at a 10-20% discount to branded products. We believe Nestle will grow Maggi noodles sales above category growth rates because: 1. The product has undergone significant change with variants like vegetable atta noodles.

7 31.500 25 -0.2 6.5 We estimate 22% 17.6 -4 0 500 0 2009E 2010E 2011E 2005 2006 2007 2008 CY09E CY10E CY11E CY05 CY06 CY07 CY08 BETTER TERMS OF TRADE Inventory Days Debtors Days Creditors Days 120 104 102 99 95 95 95 87 90 74 68 65 66 67 65 Nestle has negative 63 working capital due to 60 better terms of trade 30 4.2 8 61 40 3.5 4.500 75 32 120 103 116 30.5b in CY04 and DPS rose to Rs42. 238 Oils 210 Sugar and Green Coffee prices are up sharply.0 119 125 120 9.5b in CY08 from Rs2. Robust PAT growth and increased asset turns enabled ROE to increase from 55% in CY04 increased to 120% in CY08. FCF rose to Rs4. Nestle India MAJOR INPUT PRICES HAVE BEEN ON AN UPTREND 260 Green Coffee Milk Wheat Flour Sugar Green Coffee. 30% in the past two years. Sugar.(Rs m .4 3.9 5.2 22. 158 160 vegetable oil prices are benign Milk.500 FCFO .5 in CY04.5 0 CY05 CY06 CY07 CY08 CY09E CY10E CY11E Source: Company/MOSL 4 December 2009 46 .RHS 30. 103 Oils.7 4.LHS) 100 44 160 DPS . 116 110 Wheat Flour.1 6. SUSTAINED PAT GROWTH (%) HIGH CASHFLOW GENERATION PAT Grow th ROE (%) 12.5 4. 88 60 CY07 3QCY09 Source: Company/MOSL Nestlé’s PAT grew 20% over CY04-08.500 50 20 80 PAT CAGR over CY09-11 59 22.5/ share from Rs24.

The stock trades at 28xCY10E EPS of Rs93. We expect Nestle to launch products from its parent’s nutrition portfolio.2% volume CAGR over CY09-11 while margin expansion would be a muted 40bp. We expect premium valuations to sustain given strong visibility of growth and high payout ratio of 72%. Products & Beverages - Rs 10 .2.4% 16% Choclate & 10% Nutrition - Confec- 7% tionery - Re 1 .17% Dishes & Rs 5 . SMALL-SIZED SKUS ARE KEY GROWTH DRIVERS RS5 SKU IS 53% OF SMALL PACK SALES PREPARED DISHES ACCOUNT FOR 66% OF SMALL PACK SALES Milk 50 Paise .9xCY11E EPS of Rs114. We expect Maggi noodles to be a major growth driver with 20% volume CAGR for coming few years. We expect 20% sales CAGR and 21.5 and 22.66% Source: Company/MOSL 4 December 2009 47 .10% 17% Prepared Rs 2 .5% PAT CAGR over CY09-11. Buy. Nestle India Valuation and view Nestle is the best play on the emerging growth opportunity in the processed foods segment.53% Cooking Aids . particularly in the wellness and therapeutic segment. We estimate 16.

8 18. Milk Products & 54 25 tionery 53.3% 52 22 21.1 21. Nestle India Nestle India: Recent trends 9MCY09 sales mix Operating leverage boosts EBITDA margins Choclate & Gross Margins (%) (LHS) EBIDTA Margin (%) (RHS) Confec.5% 14.6% Sales Volume ('000 tons) Sales (Rs b) Sales Volume ('000 tons) Sales (Rs b) 9.2 16.5 94.8 14.6 50 19 19.5 Prepared Dishes & 48 16 3QCY07 4QCY07 1QCY08 2QCY08 3QCY08 4QCY08 1QCY09 2QCY09 3QCY09 cooking Aids Beverages 25.6 17.3 112.1% Milk products and nutrition: Volumes up 10.3 4.9 91.4 9MCY08 9MCY09 9MCY08 9MCY09 Source: Company/MOSL 4 December 2009 48 .3 5.8% Prepared dishes and cooking aids: Volumes up 19.8 7.7 101.4 46.5 14.2% Beverages: Volumes decline 9% Sales Volume ('000 tons) Sales (Rs b) Sales Volume ('000 tons) Sales (Rs b) 5.6 32.1 31.3 5.1% Nutrition 52.3 52.4 9MCY08 9MCY09 9MCY08 9MCY09 Chocolates and confectionery: Volumes up 5.

078 19.9 18.9 Debtor (Days) 4 5 5 5 5 Non-rec.986 -57.341 7.305 4.476 -12.924 8.3 19.443 -808 -1.0 0.2 136.927 Capital WIP 1.118 (Pur)/Sale of Investments 595 -1.817 11. Activity -5.896 7.1 3.007 13.234 16.3 Change (%) 23.5 155.940 5.5 21.739 Account Payables 5.5 21.151 15.787 1.3 42.6 Change (%) 24.5 22.528 11.0 -27.1 Working Capital Ratios Margin (%) 13.219 73.0 21. -2.5 26.8 15.250 -3.063 Depreciation and Amort.2 DPS 42.6 8.186 -1.2 Total Expenditure -34.662 Leverage Ratio BALANCE SHEET (RS MILLION) Debt/Equity (x) 0.7 20. Depn.067 10.807 9.981 -47.929 -10.048 16.2 88.4 125.8 4.1 78.348 Net Curr.960 2.204 1.010 13.0 Y/E DECEMBER 2008 2009 2010E 2011E 2012E Share Capital 964 964 964 964 964 Reserves 3.5 72.5 3.746 -4.622 (Incr)/Decr in FA -2.5 93.1 61.066 -3.559 -1.4 Margin (%) 18.7 15.6 34.090 -6.2 22.701 13 162 6 Def.279 2.379 Investments 349 1.011 11.384 3.510 Cash and Bank Balance 1.6 Other Inc.0 107.0 Net Sales 43.649 7.901 Closing Balance 1.575 3. -6.228 Inventory 4.9 95.546 1.374 9.605 -39.835 EV/Sales 5.7 115.0 -29.600 12.500 Account Receivables 456 650 779 931 1.656 9.546 -1.0 EBITDA 8.2 Margin (%) 20. 341 384 428 567 708 P/BV 53.349 5.586 -3. -308 -339 -373 -410 -451 Asset Turnover (x) 9.776 Int.2 155.302 1.380 -9.3 Adjusted PAT 5.710 Basic (Rs) Export Sales 3.146 1. and Fin.758 8.0 20.9 172.796 22.451 14. Nestle India Financials and valuation INCOME STATEMENT (RS MILLION) RATIOS Y/E DECEMBER 2008 2009 2010E 2011E 2012E Y/E DECEMBER 2008 2009 2010E 2011E 2012E Domestic Sales 41.155 13.239 8.2 22. Assets.1 16.627 -8.220 -4 872 1.255 88.212 -7.794 -6.185 12.2 19.638 59.333 11.937 236 249 411 Appl.077 6.1 3.0 26.8 Int.189 -6.639 11.269 16.010 -4.844 2.0 RoCE 169.638 10.535 9. 924 1.450 CF from Operations 8.1 8.1 7.904 7./Div.092 1.600 3.733 5.6 -27.4 2.6 2.0 70.557 -6.657 BV/Share 49.177 -68.212 -7.1 14.791 4.6 20.311 Interest Paid -17 -16 -16 -16 -16 Net Fixed Assets 7.5 114.380 -9.326 49.840 13.017 -10.519 -7.7 20.9 19.2 22.377 7.017 -10.1 119.519 11.109 -1.0 70.014 Incr/Decr of Cash 1.904 7.755 Curr.5 55.0 0. and Prov.112 Change (%) 31.988 EPS 58.242 Dividend Paid -4.4 79.7 123.302 -1.4 Reported PAT 5.9 Depreciation -924 -1. Received 341 384 428 567 708 Gross Block 14.206 2.083 18.416 -7.932 14.9 22. Ch.109 1.340 -1.0 Tax -2.042 Cash EPS 68.4 17.242 50.937 23.037 10.749 18.6 21.893 CASH FLOW STATEMENT (RS MILLION) Loans 8 8 8 8 8 Y/E DECEMBER 2008 2009 2010E 2011E 2012E Capital Employed 4.7 7.739 Provisions 6.937 236 249 411 417 CF from Invest.468 Dividend Yield (%) 1.835 Less: Accum.626 28.562 8.901 OP/(loss) before Tax 7.071 Curr.773 6.744 19.0 30.423 -2.907 61.100 7.5 21.193 -4.742 5.4 20.4 29. Tax Liability -369 -594 -860 -1.860 -5.605 -2.117 11. Assets -3.0 0.742 5.528 11.388 71. (Exp)/Inc.6 21. 11. L&A 7.5 14.056 3.0 14.979 7.785 Others -415 Other Liabilities 49 63 76 91 109 CF from Fin.264 1.7 110.9 22.5 22.238 1.386 1.641 -9.1 98.927 Return Ratios (%) Deferred Tax 36 -225 -267 -326 -428 RoE 119.4 26.555 10.1 2.0 Excise 1.058 -5.468 1.586 -3.637 10.0 70.423 -2.792 2.327 (Incr)/Decr in WC 2.535 9.0 0.753 Direct Taxes Paid -2.0 22.017 9.7 24.2 PBT 8.018 6.703 11.713 9.750 -3.1 21.0 P/E 44. -17 -16 -16 -16 -16 EV/EBITDA 28.9 4.926 13.7 21..531 17.2 28.611 Valuation (x) Change (%) 24.228 85.1 65.343 15.936 236 249 411 417 E: MOSL Estimates 4 December 2009 49 .430 Payout % 72.746 -4.527 9.7 -27.615 Add: Opening Balance 378 1.2 20.3 Cash P/E 38.0 130.066 -3.364 15.929 Net Worth 4.530 9.3 Tax Rate (%) -29.769 4.6 76.4 12.035 8.8 164.931 6. of Funds 4.0 158.010 Others 1.750 -4. Liab.8 33.Rec.

The stock economy range offering Utsav to Royale at the top trades at 20. „ Decorative paint volumes are growing at 1. Color World and Home Solutions) in the paints category. 12% and 9% „ Favorable demographics.670 80.3 33.800 its lead over competition.9 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1. „ The company keeps competitive pricing (4. interest rates and tax incentives) is likely to give a However. 6kg in emerging economies).2xFY12E end.2 12.849 71.734/681 3/09A 54. which will boost have enabled it to retain its position. 900 „ Asian Paints has a distribution reach of 22.9 8.5 3/12E 84.5 2. Consumer Monopolies SECTOR: FMCG Asian Paints – Colors of a leader Neutral CMP: Rs1. (Rs b) 160.0 20.632 4.7 38.7 57.Cap. (%) -8/36/4 3/10E 62.5 3/11E 72.9xFY11E EPS of Rs80 and 17.2 6.Rebased changes). Stock info Financial & valuation summary YEAR NET SALES ADJ. changing lifestyle and rising respectively. increase realizations and accelerate growth for branded players.9 40.5 17.4 2.9 24. key players with market share of 14%.8 -3.014 41. Besides there is growth „ Kansai Nerolac. Kansai (Kansai Nerolac) and Nikon.7 M. EPS of Rs97.0 12. aspirations have increased use of branded paints. Perf. 3 Company strategy to sustain its edge 4 Valuation and view „ Asian Paints' products straddle segments with an „ We estimate 17% PAT CAGR over FY10-12.0 1.942 Bloomberg: APNT IN Consumer Monopolies: Investment argument framework 1 Market share and position 2 Trends and opportunities „ Asian Paints leads in Rs120b decorative paints „ Per capita consumption of paints in India is ~1kg (~3- market with 45% share among organized players.720 9.500 Play and Apex Ultima ) and technological innovations 1.1.2 59.4 48.6 4 December 2009 50 .4 10.9 2.3 39.0 13.Cap.6.4 44.5% STOCK PERFORMANCE (ONE YEAR) realization CAGR over FY05-09 including mix Asian Paints Sensex .PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ Equity Shares (m) 95. demand for paints. Neutral.400 tinting machines (2x 600 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 the nearest competitor).8 M. „ The company has led product innovations (Royale 1. Asian Paints' strong brands and distribution significant push to new housing stock.5 57. Berger Paints and ICI India are other potential from conversion of lime wash users to paints. low Nobel (ICI).317 97.000 dealers and more than 12. „ The decorative paints segment has MNCs like Akzo „ Increasing affordability of homes (rising incomes.3 1.1 21.12 Rel.6 14. (US$ b) 3. Focus on volumes enabled it to maintain 1.8 10.5-2x GDP „ Premium end market fast evolving from growing trend growth.4 70.604 7.3 60 6.673 Target Price: Rs1.200 (tinting machines. branded players are growing faster on of premium finishes and designer paints. This will account of up-trading from the non-branded segment.7 23.

ACE Superior Economy 8 Apex Mid-Range 9 Apex Ultima. It has played a significant role in de-commoditizing the product segment and consumer involvement in making the buying decision has increased over the past decade.Apex Duracast Premium 11 Interior Emulsion Royale Play Designer Premium 35-55 Royale Premium 16 Asian Paints Interior Wall Finish Mid-Range 13 Enamel Utsav Enamel Economy 9 Apcolite. Kansai Nerolac. Consequently growth at the premium end (emulsion/enamel) has outpaced that of the low-end category. Thus a market. Asian Paints BRANDS ACROSS PRICE POINTS Asian Paints holds 45% of the decorative paints market Asian Paints has about 45% market share in the Rs120b decorative paints industry and the second biggest player. Rs15/sqft RANGE OF DECORATIVE PAINTS PORTFOLIO BRANDS POSITIONING *PRICE/SQFT Exteriors ACE. has about 15% share. 45% MARKET SHARE IN THE ORGANIZED DECORATIVE PAINTS SEGMENT Others 20% Rs9/sqft Asian Paints ICI 45% 9% Beger Nerolac 12% 14% Rs11/sqft Source: Company/MOSL Asian Paints’ brand-building initiatives have boosted its growth and expanded the category. Asian Paints has led innovations in the category by launching Royale Play and Apex Ultima. Berger and ICI have 12% and 9% market share respectively. which was painter/contractor-led has now become a virtual B-I-Y (Buy It Yourself) segment. Premium 14 Premium Semi Gloss enamel Premium 15 Rs16/sqft onwards Distemper Utsav Economy 9 Tractor Mid-Range 10 *Including labor and other consumables Source: Company/MOSL 4 December 2009 51 . in sync with consumers’ changing aspirations. signaling a rising trend in consumer up-trading.

5-2x GDP growth and we expect the trend to strengthen in the next five years. especially at the bottom of the pyramid.600 800 0 2005 2006 2007 2008 2009 Source: Company/MOSL Over the past decade. We believe the decorative paints category (Rs120b) in India holds immense potential in aspirations and lifestyle terms of increasing penetration of branded paints and up-trading consumers from economy changes are expected to to premium segments. OPPORTUNITY TO UPGRADE: COST OF ASIAN PAINTS UTSAV V/S UNORGANIZED (LIMESTONE) Rs3/sqft Rs10/sqft Rs15/sqft Source: Company/MOSL The paints segment can benefit from a growing trend of construction of affordable homes. Besides expected to strengthen in the increasing demand at the bottom of the pyramid (distemper). Improving affordability can spur property demand and paints are likely to be a natural beneficiary. Asian Paints Decorative paints: Set to ride the consumerism wave Rising per capita income. EASIER AVAILABILITY OF FINANCE STRENGTHENS DEMAND FOR HOMES (RS B) 3. Over the past decade paint demand has averaged GDP growth and the trend is 1.5-2x without affecting volume growth.400 1. 4 December 2009 52 .200 ~20% CAGR in Hom e Loans 2. We believe rising per-capita income. Per-capita consumption of paints in India is about 1. branded paints aspirations and lifestyle changes will result in more consumers in the lower middle class moving from unbranded to branded paints.2kg against 3- result in consumers in 6kg in emerging economies and the potential to convert non-users/limestone users to paint moving from unbranded to users is huge. paint Despite being a relatively price-elastic category major players have raised average prices demand has averaged 1. we expect the paint category next five years to also benefit from higher growth in the premium segment.

000 dealers and more as large as its nearest than 12.5-2X GDP GROWTH Real GDP Grow th Paint Industry Grow th 15. In the face of competition from ICI.000 32 (tinting machines) 14 5. Asian Paints introduced MNCs like Kansai and ICI. The ability to straddle price points (Rs5/ needs and retain consumers sq ft to Rs125/sq ft) enables the company to fulfill diverse consumer needs and retain as they upgrade to emulsions consumers as they upgrade to emulsions.4 5.7 10. Asian Paints PAINT DEMAND GROWTH VOLUME HAS AVERAGED 1.5 9.000 22. Asian Paints introduced innovations such as: path-breaking innovations „ Tinting machines offering consumers wide color options.0 16.0 7. which make painting a new experience „ Samplers. which let consumers to feel a product before committing money for painting.0 9. „ Asian Paints Home Solutions introduced the service concept with a complete solution for painting.500 dealers have Color World 12.000 2001 2005 2009 Asian Paints Nerolac Source: Company/MOSL In the face of competition Product innovations built brand loyalty: Asian Paints has been at the forefront of new from MNCs like Kansai and concepts and innovations in the decorative paints market.1 7.1 8.000 56% of Asian Paints 14.0 14.0 8.5 8.0 11. „ Concepts like Wall Fashion and Royale Play.8 5.8 3.0 15.5 8.400 11.0 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Source: Company/MOSL Asian Paints’ ability to Asian Paints well-placed to maintain competitive edge straddle price points enables Straddles price points: Asian Paints’ products range from Utsav at the bottom end to it to fulfill diverse consumer Royale Play and designer finishes at the top end. Asian Paints’ distribution Wide distribution with tinting machine: Asian Paints’ distribution network is more network is more than twice than twice as large as its nearest competitor’s. It has more than 22.000 56 17. 4 December 2009 53 .6 6. competitor’s DISTRIBUTION REACH/TECHNOLOGICAL INNOVATIONS DEALER NETWORK TWICE AS LARGE AS NEROLAC’S Dealership (nos) Color World (nos) Dealership (nos) (%) Of Outlets 22.0 13.0 9.400 Color World outlets with tinting machines.8 7.500 2.2 5.7 6.0 14. „ Exterior paint (Apex) in a market dominated by cement paints for external use.

9 FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Source: Company/MOSL Capacity ramp-up plans over Asian Paints’ stable gross-margin band of 40-42% enables it to offer competitive prices the next few years indicate and keeps at bay competitors and new entrants.8 4.1 42.9 12.. healthy returns ratio The monopolistic situation The monopolistic situation has helped Asian Paints to grow ahead of the market and gain has helped Asian Paints to from gradual up-trading by middle-class consumers.5 21. and gain from gradual Realizations increased by a mere 4% including gains from an improved product mix. This strategy has enabled steady consumer Asian Paints’ management’s upgrading and long-term production planning.5 15 34. HEALTHY ROE OF 35-40% (%). Domestic sales reported a 19% CAGR grow ahead of the market over FY04-09.8 13.5 65 45. Asian Paints is setting up a facility in Rohtak confidence in sustaining and contemplating another plant in Maharashtra.3 9.7 3.2 90 42.8 38. Asian Paints ASIAN PAINTS DESIGNER COLLECTION HAS KEPT PACE WITH CHANGING ASPIRATIONS OF CONSUMERS Source: Company/MOSL Monopoly ensures steady growth..8 3 41.2 -3..8 17.BACKED BY ROBUST PAT GROWTH (%) 44.0 43.7 17. .0 38.7 40 29.0 14 41.9 3.7 39.5 21.4 14.5 70.2 4.8 43.0 13.7 36.0 33. Capacity ramp-up plans over the next volume growth few years indicates the management’s confidence in sustaining volume growth..4 -10 FY10E FY11E FY12E FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY06 FY07 FY08 FY09 Source: Company/MOSL 4 December 2009 54 . backed by volume CAGR of 15%.5 13.1 -4. upgrades by middle-class PRICE INCREASES HAVE BEEN MINIMAL (%) …GROSS MARGINS MAINTAINED AT 40-42% consumers Volume grow th Realisation grow th 44. beating the industry average of 11-12%.

4 December 2009 55 . we estimate 12.5% PAT growth in FY11 due to 70bp margin decline (higher input costs and overheads on the Rohtak facility). paint sales volumes increased by 1. Historically. strong financials.6 42. strong financials.8x GDP growth. Although EBIDTA margins seem to have structurally moved up from 15-16% to 17-18%. Neutral.9xFY11E EPS of Rs80 and 17.1. We estimate 17% PAT CAGR over FY10-12.0 39.2 42.6-1. high utilization of manufacturing facilities and steady growth status. ROE increased steady growth and investor to 41% from 31% and the dividend payout ratio has been steady at 40%. for Asian Paints relative to benchmark indices Valuation and view Asian Paints continues to be a strong play on rising consumerism and housing demand in India.2 1.8 42.0 1.7 0.3 2. low PAT growth (estimates of 12%) in FY11 can result in near term underperformance. Asian Paints PAYOUT RATIO OF ~40% A DIVIDEND YIELD OF ~2% 56. ensured an increase in ROCE to 52% from 41% over the past five years.1 43.9 2.7 41. Long term prospects look encouraging. The stock trades at 20. We estimate 14% volume CAGR over FY10-12.8 FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY06 FY07 FY08 FY09 Source: Company/MOSL Monopolistic business Tight control over overheads.0 0.3 2. Monopolistic friendly policies have business status.2xFY12E EPS of Rs97. steady growth and investor friendly policies have ensured ensured premium valuations premium valuations for the stock relative to benchmark indices.

2 16.000 17.5 17.1 29.4 25.0 61.000 Dec-07 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Sep-08 Sep-09 Jun-08 Dec-08 Mar-09 Jun-09 Sep-08 Sep-09 0 Low input costs boost margins All time high EBITDA and EBITDA margin Raw Material Cost (%) EBITDA Margin (%) EBITDA (Rs m) .2 15.300 56.5 13.1 8.3 30.4 1.9 14.3 2.LHS Grow th (%) .0 5.6 2.2 12.700 63.000 25.1 20.6 13.000 101 25.7 58.9 18.9 23.1 14.5 10.5 12.9 18.000 90 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Jan-06 Jul-06 Oct-06 Jan-07 Jul-07 Oct-07 Jan-08 Jul-08 Oct-08 Jan-09 Jul-09 Oct-09 Apr-06 Apr-07 Apr-08 Apr-09 Source: Company/MOSL 4 December 2009 56 .7 18.8 61.7 58.7 18.2 13.RHS 3.200 100 22.000 14.000 111 110 34.100 98 10.4 14.8 5.0 19.900 16.700 46.9 16.9 12. Asian Paints Asian Paints: Recent trends Sales growth primarily volume led (%) ~12% price cut impacts sales growth Volume Grow th Realization Grow th Sales (Rs m) .7 12.5 58.100 13.8 1.5 14.RHS 20.000 25.0 15.3 58.5 9.2 13.8 11.LHS EBITDA Margins (%) .000 120 53.2 56.0 18.1 60.3 500 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 Dec-07 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Sep-07 Sep-08 Sep-09 Turpentine oil prices rule easy (Rs/KL) Titanium dioxide prices sluggish (Index) 58.6 8.

0 21.245 -1.849 7.604 84.8 71.799 6.072 54.171 3.5 16.967 -3.632 62.4 80.1 BALANCE SHEET (RS MILLION) Y/E MARCH FY08 FY09 FY10E FY11E FY12E Share Capital 959 959 959 959 959 Reserves 8.0 42.0 10.987 21.4 Depreciation 592 744 897 1.690 10.204 10.3 0.1 24.222 Incr in Debt 310 -334 -414 750 700 Others 2.112 14.728 Int.407 20.107 2.2 1.5 38.6 2.834 7. Charges 212 263 329 248 185 EV/EBITDA 24.793 16.124 -299 -4.323 3.631 Valuation (x) Change (%) 38.983 -1.523 11.507 8.050 Y/E MARCH FY08 FY09 FY10E FY11E FY12E Deferred Liability 391 533 760 959 1.824 12.851 Net Current Assets 3.2 1. Received 596 517 654 768 939 Capital Employed 13.7 12.284 Issue of Shares 0 0 0 0 0 Cash and Bank Balance 1.233 11.5 38.4 125.720 5.341 29.054 1.720 Basic (Rs) Change (%) 20.3 Minority Interest 189 216 256 323 393 Adjusted PAT 4.0 3.543 18.5 7.481 7.526 CF from Operations 6.579 -1.066 Loans 2.086 2.3 Cash P/E 33.317 Working Capital Ratios Change (%) 45.326 2.040 1.570 5.769 -4.0 23.2 2.603 5.7 PBT Before Minority 4365 4230 7105 7993 9710 RoCE 57.1 0.421 9.875 -4.022 -2.0 14.3 11. Assets.280 Dividend Yield (%) 1.752 3.8 17.086 3.542 6.834 Inventory 7.664 1.821 Dividend Paid -1.245 OP/(loss) before Tax 6.1 19. -3.8 108.750 2.381 8.088 Closing Balance 1.824 -2.083 3.7 12.346 Others -1.500 2.000 Investments 2.4 16.4 57.903 5.4 40.285 -2.764 Min Int/ Dt 96 324 483 522 679 Account Payables 5.403 24.299 25. 6.366 -3.7 EPS 43.1 Exceptional/Prior Period inc -84 -35 626 0 0 Reported PAT 4.337 6.345 9.7 49.0 97.7 4.3 62. and Prov.6 2.185 -2.7 Profit before Taxes 6.9 Tax 1.104 1.107 2.1 16.0 42.900 12.5 35.631 Minority Interest 574 756 1.017 Less: Accum.130 9.670 9.3 42.3 10.8 31.5 Operating Expenses 11690 14232 15694 18530 21356 Payout % 39.104 1. and Fin.5 33.4 44.921 14.079 Other Liabilities 4.8 3.000 -3.484 7.350 2.8 31.540 16.250 Incr in FA -2.4 8.3 250. Activity -2.9 Margin (%) 41.444 23.284 Gross Block 12.327 11.195 -862 -1.811 2.2 31.413 6.694 10.670 9.964 -4.399 6.035 8.3 6.6 48.281 -3.032 15.326 Application of Funds 13.568 CF from Fin.8 4.7 32.865 11.334 1.6 11.447 29.997 19.222 14.403 -208 332 -2.085 Net Fixed Assets 5.222 14.0 41.5 Debtor (Days) 10 10 11 11 11 Margin (%) 9.140 4.066 6.606 6.251 11.012 1.957 9. Liab.0 14.106 CASH FLOW STATEMENT (RS MILLION) Net Worth 9.3 13.511 4.3 48.370 10.092 3.6 42.936 17.1 2.2 0.317 Leverage Ratio Debt/Equity (x) 0.500 500 2.908 -1.7 18.519 -5.5 DPS 19.7 EBITDA 6.073 14.014 6.737 Pur of Investments -839 1.8 12.905 -2. L&A 14.9 2.9 70.350 2.614 19.350 2.511 -4.2 1.355 Provisions 1.021 -1.502 19.447 29.8 10.774 24.614 20.6 80.338 Capital WIP 1.865 3.736 13.928 -1.124 5.4 20.694 Account Receivables 4.694 10.475 2.0 12.022 CF from Invest.875 -1.810 3.8 42.7 20.8 Int.140 7. 11.703 14.995 3.1 39.258 Incr/Decr of Cash 53 997 -753 976 -104 Godwill on Cons.4 15.864 (Incr)/Decr in WC 1.995 -3.900 12.142 921 2.5 59.540 16. Depn.104 1.5 41.4 161.0 Return Ratios (%) RoE 42.194 11.326 2.9 17.4 42.176 4.767 784 2.107 2. Asian Paints Financials and valuation INCOME STATEMENT (RS MILLION) RATIOS Y/E MARCH FY08 FY09 FY10E FY11E FY12E Y/E MARCH FY08 FY09 FY10E FY11E FY12E Net Sales 44.2 Margin (%) 15.1 24.0 Asset Turnover (x) 4.810 2.928 1.978 7.7 Gross Profit 18296 20926 26594 30752 35987 BV/Share 102.606 6.407 20.776 8.3 0.9 57.3 2.475 7.719 6.284 Tax Rate (%) 31.9 20.026 9.088 Interest Paid -212 -263 -329 -248 -185 Direct Taxes Paid -1.655 Curr./Div.029 3.106 EV/Sales 3.614 16. 444 506 506 506 506 Add: Opening Balance 1.1 Raw Materials 25776 33706 35766 41852 48732 Cash EPS 49.656 -1.7 -3.2 39.859 8.360 72.774 24.8 90.3 17.7 P/E 38.7 33.222 E: MOSL Estimates 4 December 2009 57 .811 -2.6 202.834 Curr.6 Other Income 596 517 654 768 939 P/BV 16.

Seagram and Radico expect this ratio to decline as consumers upgrade.12 Rel. Antiquity Blue and low-calorie vodka.6.1 and 21. This is „ United Spirits has brands like Royal Challenge. Consumer Monopolies SECTOR: FMCG United Spirits – High on acquisitions Buy CMP: Rs1. It also launched „ Liquor advertising in not allowed in India.8 M.3 13. pushing up sales of segments like vodka and premium Signature. which 400 ensures Scotch for IMFL blending.990 51. and Dalmore.9 3.0 03/11E 73.9 3.2 1.600 packs of whisky.681 1. 1.4 03/12E 83.7 7.9 8.1 15.PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ Equity Shares (m) 117.6 2.1 66.000 power with distributors and bottlers.9 21. (US$ b) 3.203 5. higher consumption among the educated.933 7.1 21. leading to except rum (Mohan Maekin). „ United Spirits owns Whyte and Mackay.8xFY12E EPS of Rs61.Cap.This provides bargaining 2. consolidate its position in South India. Herbertsons „ We estimate 44% consolidated PAT CAGR over and Triumph Distilleries to assume market FY10-12. the number of „ United Spirits has 19 brands that sell more than a persons in the legal drinking age will increase by 150m million cases each year. Scotches and whisky. (%) 21/32/-38 03/10E 63.2 M.3 14.875 23. McDowell No 1 and Romanov.3 11. „ United Spirits has launched tertapacks and blister 1. have 9% and 8% market share respectively.8 9.0 24.8 3.Rebased alcoholic beverages group. Antiquity. brandy and gin) „ Social taboo attached to drinking is fading.257 61. 3 Company strategy to sustain its edge 4 Valuation and view „ United Spirits acquired Shaw Wallace.3 26.9.6 14.2 20. Innovative products include Pinky Vodka. (Rs b) 159.9 58.7 43.200 „ United Spirits gains from surrogate advertising through its IPL team Royal Challengers and football 800 club (East Bengal).548 Bloomberg: UNSP IN Consumer Monopolies: Investment argument framework 1 Market share and position 2 Trends and opportunities „ United Spirits has 55% market share in the 159m „ Country liquor accounts for 60% of spirit sales. Buy.4 3. Bagpiper.603 30.9 3.0 18. STOCK PERFORMANCE (ONE YEAR) „ United Spirits is part of the UB Group. in all the segments (whisky.869 3.4 2. „ IMFL industry volumes are expected to increase at 11-12% excluding the upside from regulatory changes. we case IMFL market in India. Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Stock info Financial & valuation summary YEAR NET SALES ADJ. The company has leadership in current decade (2001-2011).415/426 03/09A 54.9lts.350 Target Price: Rs1.4xFY11E EPS of leadership.8 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1. vodka.Cap.5 12. which makes Scotch brands like Whyte and Mackay. Director's Special. The stock trades at 26. Perf. Isle of Jura it extremely difficult to establish brands.7 33.0 4 December 2009 58 .1 13. It is merging Balaji Distilleries.7 5. which will Rs51. India's largest United Spirits Sensex . „ Per capita consumption is 0.

Strong entry barriers make the market more lucrative for existing players. USL's top four brands have retail sales value exceeding US$2. Alcazar. Golconda. Romanov Note: Brands in blue are millionaire brands Source: Company/MOSL LEADING BRANDS IN VODKA IMFL market a huge growth opportunity Country liquor accounts for 60% of spirit sales. Director’s Special. Although we do not expect big changes in distribution. John Exshaw. rum and brandy in FY09.5b. the size of IMFL will increase by 40%. ~6X NEXT BIGGEST PLAYER Others. there are restrictions on distribution. United Spirits LEADING WHISKY BRANDS United Spirits leads the IMFL segment United Spirits commands 55% of India’s IMFL market. which consists of 159m cases. 55 Radico. Liquor advertising is not allowed in India. Director’s special Rum McDowell No1 Celebration. 8 Source: Company/MOSL UNITED SPIRITS HAS BRANDS ACROSS IMFL SEGMENTS PRODUCT SEGMENT BRANDS Whisky Scotch/Super Premium Whisky Antiquity Blue and Rare. United Spirits has 19 brands. McDowell No1 and Romanov. Besides. vodka. we expect an increase in distribution outlets and rationalization of taxes in the coming years. which sold over 16m cases in FY09. DSP Black Label Regular/Low End McDowell No1. 4 December 2009 59 . Bagpiper. Signature. Even if 25% of the country liquor market is added to the IMFL market. Seagram has 9% market share and Radico Khaitan has 8% in this market. Carew Vodka White Mischeif. United Spirits’ brands comprise Royal Challenge. 5 USL. inter-state movement of spirits and high taxes. 5 Jagatjit. The McDowell No1 umbrella brand sold 31. 5 BDA.5m cases of whisky. We believe that increase in affordability will further boost IMFL demand. Bagpiper. The company leads in virtually all the segments— whisky. Antiquity. which sell more than a million cases every year. 9 Seagrams. Honey Bee Gin Blue Riband. Old Cask Brandy McDowell No1. Green label. brandy and gin— though Mohan Maekins leads in the rum segment. 12 Diageo. We expect a gradual ban on country liquor across states. 1 Mohan Meakin. Whyte and Mackay Premium Royal Challenge and Signature. IMFL volumes are growing at 11-12% v/s 5-6% volume growth for country liquor. This would increase liquor demand. Bagpiper is India’s largest whisky. USL HAS ~55% MARKET SHARE.

5 (POPULATION IN M) 2011 94.6 4. The social stigma attached to drinking is fading. LOW PER CAPITA CONSUMPTION.8 485 455 UK India Thailand Russia Brazil USA World 0% 20% 40% 60% 80% 100% Source: Company/MOSL 4 December 2009 60 . IMFL volumes are expected to grow 11-12% excluding the upside from favorable regulatory changes. YOUNG POPULATION POSITIVE FOR IMFL >60 years 20-59 years 0-19 years (LITERS) 9.5 5.STEADY LONG TERM GROWTH POTENTIAL Spirits Industry USL: PREMIUM WHISKY BRANDS 384m cases IMFL 159m cases Country liquor 225m cases Expected growth – 11-12% Expected growth – 5-6% Whisky Rum Brandy Vodka Gin IMFL share 58% IMFL share 20% IMFL share 17% IMFL share 3. leading to higher consumption among the educated. United Spirits IMFL.2 636 447 4.5 8.5% IMFL share 2% Exp growth -15% Exp growth 6% Exp growth 15% Exp growth 20% Exp growth 4% Major Brands Major Brands Major Brands Major Brands Major Brands McDowell No 1 Bacardi McDowell No 1 Smirnoff Blue Riband Royal Stag Old Monk Honey Bee Romanov Carew 8PM McDowell John Exshaw White Mischief Hayward’s Bagpiper Celebration Old Admiral Magic Moments Aristocrat Director’s Special Old Admiral Golconda Alcazar Contessa Source: Company/MOSL Per capita consumption is only 0. This is enhancing sales of segments such as vodka.9 2001 70. State taxes account for 70% of the MRP of liquor and a rationalization will increase demand significantly. premium Scotches and whisky.0 0.9 liter and the number of people in the legally permissible age range will increase by 150m in current decade.7 4.

4 United Spirits acquired Whyte and Mackay. which is among the top five Scotch whisky companies in the world. 3 United Spirits does surrogate advertising through its IPL team Royal Challengers and football club. CONSOLIDATION OF SPIRITS BUSINESS OF UB GROUP McDowell & Co Demerger of Investments into McDowell Holdings Merged Companies Shaw Wallace and Company Phipson Distillery Ltd Herbertsons Ltd Triumph Distillers and Vintners Baramati Grape Inds United Distillers McDowell International Brands United Spirits United Spirits Ltd Source: Company/Motilal Oswal Securities 2 United Spirits launched packaging innovations like small tetra-packs and blister packs for whisky. Herbertsons and Triumph Distillers to assume market leadership. United Spirits UNSP: RECENT INNOVATIONS United Spirits' strategy to maintain monopolistic position United Spirits has emerged a monopoly due to industry consolidation and acquisitions. the football team retains its original name. While the IPL team is named after one of its key brands. It is merging with Balaji Dist will consolidate its position in south India. East Bengal. The company’s innovative products include Pinky Vodka. The company is undertaking the following initiatives to maintain its competitive edge: 1 United Spirits acquired Shaw Wallace. which is the largest alcoholic beverage group. This provides the company with a Scotch inventory of 108m liters and brands like Isle of Jura. ROYAL CHALLENGE BANGLORE IPL TEAM ENABLES SURROGATE ADVERTISING Source: Company/MOSL 4 December 2009 61 . This provides bargaining power with distributors and bottlers. Antiquity Blue and low-calorie vodka. The company has launched Blue Riband Gin in flavors and a diet version of McDowell No1. United Spirits is part of the UB Group. Dalmore and Whyte and Mackay.

A strong market position enables United Spirits to cut overhead costs like freight and 31 achieve economies of scale in production and distribution. The monopolistic situation has increased EBIDTA margins to 18.7 15.8 75 FY10E FY11E FY12E FY06 FY07 FY08 FY09 50 FY 08 FY 09 FY 10E FY11E FY 12E ADVERTISING COST GOING DOWN (%) HIGH BARGAINING POWER IN PACKAGING Advertising Cost Staff Costs Packaging Cost (per case) 10.1 increase EBITDA margins 6.2 22.1 6.0 163.2 25.5 25.7 50.7 14.3 18. VOLUMES SET TO INCREASE MARGINS TO MOVE UP Sales Volume (m Cases) Gross Margin % LHS 150 Volume Grow th EBITDA Margin (%) . United Spirits has emerged as India’s largest consumer of glass bottles.9 % of Sales 10.4 10. and 3) distribution controls have helped United Spirits to consolidation in the Indian emerge as a monopoly.0 FY10E FY11E FY12E FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY06 FY07 FY08 FY09 Source: Company/MOSL 4 December 2009 62 .6 18.1 100 47.3 6.2 157. The monopolistic situation has been achieved by consolidation in the Indian IMFL strongest consumer industry. This situation has enabled the company to save costs and improve IMFL industry profitability on the following fronts: UNITED SPIRITS: MARKET SHARE 1.5% in FY05.8 and advertising will 7. United Spirits Monopoly has enabled margin expansion United Spirits has United Spirits has emerged as one of the strongest monopolies in the Indian consumer emerged as one of the space.6 179. Besides.2 45.8 22.RHS 19.5 43.8 7.8 16. 55 2.4 18.1 7.1 8.9 161. state regulations that impose 1) high duties on imports 2)restrictions and monopolies.8% in FY08 from 2004-Pre 2009-Post 5.5 Lower input cost 7.0 15.5 22. providing savings in procurement costs. Acquisition Acquisition 4. 3.7 9.7 22. cartons and ENA.5 by 180bp over FY10-12 6.6 by 15% CAGR 45.7 125 15.0 173.9 23.6 15.1 expected to increase 11.6 43.7 169.3 8.0 Sales volumes are 48.4 6. achieved by duties on movement of liquor.5 169. Unwarranted promotional campaigns and undercutting has given way to more rational DOUBLES AFTER ACQUISITION (%) pricing and a competitive environment.

023 Whyte & Mackay Int in USL Holding 532 0 0 will contribute Rs8.173 EPS (Rs) 29.7 GBP/Re 76. distribution advantages and assured Scotch supply from Whyte and Mackay make it a sustainable monopoly.246 EBITDA Margin (%) 31.699 EBITDA Margin (%) 18.257 Adj Share Capital 1.278 Depreciation 367 355 344 Tax 530 538 601 Tax Rate (%) 35.0 PAT 984 999 1. Huge scale (volumes to cross 100m cases in FY10).172 1.034 10.972 2.6 71.432 2.173 EPS (Rs) 5. The worst seems to be over given capital infusion of Rs25b.4 Interest 2.172 1.9.4m treasury shares will enable further debt reduction.247 4.974 14.1 and 21. The stock trades at 26.023 consolidated EPS by FY11 Adj Share Capital 1.423 66.0 8. Standalone volumes and PAT will grow at 15% and 32% respectively over FY10-12.203 83.2 USL .869 73.3 30.5 Total 51. sale of 8.394 will increase by 32% CAGR EBITDA Margin (%) 16.172 1.990 7.066 Adj Share Capital 1.772 13.172 1.955 EBITDA 4.Consolidated Sales 63. United Spirits USL CONSOLIDATED FINANCIALS CALCULATIONS (RS M) FY10E FY11E FY12E USL Standalone Sales 47.9 11-11.982 56.973 PAT 3. which would translate into 44% PAT CAGR on a consolidated basis.7 over FY10-12 Interest 2. 19 millionaire brands across price points.9 Source: Company/MOSL Valuation and view United Spirits is the best bet on demand for spirits in India.9 Source: Company/MOSL USL HOLDINGS DEBT REDUCTION (USD) Debt (April 2009) 620 Debt Repayment 530 Treasury Stock Sale 190 QIP 240 Internal Accruals 20 Consolidated debt Domestic Debt 80 has decline to Rs52b Balance Debt 90 due to treasury stock sale and QIP CONSOLIDATED DEBT RS B INTEREST RATE (%) Whyte & Mackay 30.4 18. We estimate 120bp margin expansion over FY10-12.0 73.9 PAT 3.7 20.0 7-8 Standalone 21.6 30.6 51.485 4.774 2.173 EPS (Rs) 30.400 USL Standalone profits EBITDA 8.172 1.870 13.0 19.1 61.0 35.933 EBITDA 11.871 6.172 1.0 37.5 to Adj PAT 585 999 1.355 2.5 8.312 4.7 18.7 41.7 51.4xFY11E EPS of Rs51. Buy.603 5.396 12.7 Whyte & Mackay (inc USL Holdings) Sales 13.8xFY12E EPS of Rs61. 4 December 2009 63 .670 16.

8 18.9 51.0 22.4 4.6 46 17.8 46. 28.9 19.8 147 7. 450 3.4 44 42.7 Source: Company/MOSL 4 December 2009 64 .3 17.3 1.9 300 3 East.1 49 20 17.9 39 10 10. 13.1 133 5. Others.3 18.2 48. 600 Value/liter (GBP) 6 4.2 8.7 150 150 156 10.4 10.1 21. North.9 16.9 5 3.0 148 9.0 38.2 8.6 18. United Spirits United Spirits: Recent trends Quarterly trend in domestic IMFL sales (m cases) High input costs impact margins FY08 FY09 FY10 Gross Margin (%) EBITDA Margin (%) 25.9 5.9 17.2 20.0 48.7 45.5 22.5 4.7 138 7.0 52.9 9.5 19.2 54 25 24.8 21.4 111 110 104 101 103 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Whyte and Mckay Scotch inventory value rising Geographical sales mix (%) Inventory (m litre) Value (m GBP) CSD.2 150 2 0 0 Mar-08 Dec-08 Mar-09 Sep-08 Sep-09 Acquisition Rest of On South. 13.3 34 5 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 1Q 2Q 3Q 4Q ENA prices have stabilised at Rs150/case Adspend is falling (% of sales) FY08 FY09 FY10E FY08 FY09 FY10 11.6 West.0 21.6 20.6 Pradesh.2 15 16.0 Andhra 5.

791 12.036 55.091 Bank Deposit 4.143 -6. Depn.327 -5.002 1.438 4.952 68.534 -5.827 11.8 8.531 -10. Liab.584 2.5 5.990 7.995 -22.3 0.670 16.2 14. and Prov.4 21.543 -8.418 Net Fixed Assets 10.649 2.974 14.7 43.5 3.200 -1.598 2.316 23.771 55.100 2.455 Capital Employed 88.319 -2.362 1.666 28. Activity 56.951 Capital WIP 534 288 500 500 500 Incr/Decr in WC -10.584 Net Current Assets 21.370 4.5 0.877 50.951 Dividend Yield (%) 0.6 Non-rec.176 -5.919 25.253 100.372 Interest Paid -5.1 0.247 3.2 3.0 19.000 -1.000 Curr.490 6.091 E: MOSL Estimates 4 December 2009 65 .3 21.063 1.1 0.293 Y/E MARCH 2008 2009 2010E 2011E 2012E Loans 66. (Exp)/Income 1.099 9.280 3.919 Depreciation and Amort.503 5.584 2.584 2.875 Msc Expenses 967 733 735 735 735 Add: Opening Balance 5.253 100.180 EPS (Ex.982 8./Div.724 10.700 78.490 6.362 Foregin Monetary term 0 5.514 7.371 Goodwill 53.7 Int.985 22.357 -6.788 -3.4 15.2 8.537 37.5 8.598 5.076 -5.448 -7.1 61.748 Closing Balance 5.7 0.766 15.2 Change (%) 56.7 24.385 12.062 14.812 Investments 2.478 40.933 18.3 13.161 16.374 13.8 14.000 -1.203 83.6 8.Recurring 1.2 0.1 48.256 1.9 Reserves 19.8 40.959 700 0 0 Reported PAT 2.247 -3.875 3.790 6.496 3.275 54.3 1.362 1.661 916 2.648 23.444 -6.515 54.544 8.782 Dividend Paid 174 176 367 514 735 Account Payables 8.234 4.786 -699 Curr.084 4.0 2.446 -9. 741 926 893 904 926 Less: Accum.808 8.8 Depreciation -741 -926 -893 -904 -926 Cash P/E 50.268 (Incr)/Decr in Debt 51.256 Debt/Equity (x) 2.552 -44.081 13.9 3.244 -4.6 20.9 20. Assets.738 CF from Operations -8.598 5. Charges -5.463 16.280 3.827 -51.2 35.325 -8.731 3.939 52.738 44.8 344.438 4.3 37. -48.257 Return Ratios (%) Change (%) -35.6 3.253 Other Liabilities 3.0 30.8 Valuation (x) Margin (%) 21.4 23.458 20.5 3.9 32.896 -58.260 44.431 4.0 18.3 1.5 13.723 9.598 5.706 -1.943 106.603 5.000 Cash and Bank Balance 5.616 -16.295 48.261 58. L&A 34.547 Direct Taxes Paid -2.2 7.7 51.1 Margin (%) 3.153 51.3 21.502 9.7 3.3 Other Income . Treasury stock) 18.234 4.036 14.8 13.1 1.257 Working Capital Ratios Debtor (Days) 66 59 65 65 65 BALANCE SHEET (CONSOLIDATED) (RS MILLION) Asset Turnover (x) 0.748 OP/(loss) before Tax 8.919 24.418 EV/Sales 3.8 8.702 -3.738 44.377 16.269 16.1 EBITDA 9.1 Tax 2.687 Provisions 1.9 Total Revenue 46.9 11.3 Total Expenditure -36.6 2.965 Application of Funds 88.039 16.208 P/BV 5.301 -4.119 9.854 42.880 11.037 99.5 1.038 756 798 853 EV/EBITDA 15.088 2.2 18.909 29.097 Others 506 -4.783 -4.0 35.3 440. -6.037 Minority Interest 1.1 14.0 238.139 3.825 101.327 -5.101 CF from Fin.3 3.5 2.9 14.9 28.773 Int.4 5.645 1.751 1.256 1.887 22.6 0.738 -5.744 Msc Exp -967 -234 2 0 0 Account Receivables 8.959 700 0 0 (Incr)/Decr in FA -48. and Fin.650 -7.370 8.699 Change (%) 123.765 23.6 RoCE 11.249 14.140 0 0 Inventory 14.7 20.753 Basic (Rs) Other Operating Inc 3.717 50.037 99.100 2.469 Others 5.869 73.533 -67.9 65.466 5.050 (Pur)/Sale of Investments -75 -12.917 4.574 9.5 0.9 3.234 Issue of Shares 4.9 35.598 Extraordinary Items 1.3 Adjusted PAT 1.268 Incr/Decr of Cash -340 -5.448 -7.110 -876 251 2.097 -3.076 -5.9 26.234 DPS 1.943 31.825 101.853 11.927 11.661 -916 -2. 13.372 46.850 17.2 6.9 P/E 73.973 7.1 66.5 22.990 7.677 -4.681 63.943 106.303 5.778 9.723 20.947 CF from Invest.496 -3.0 Profit before Taxes 4.7 BV/Share 257.039 47.176 -5.0 92.501 1.992 63 0 0 0 CASH FLOW STATEMENT (CONSOLIDATED) (RS MILLION) Net Worth 22.3 9.473 16.541 59.2 16.919 23.041 78.063 1.731 3.919 43.0 18.029 -1.228 2. United Spirits Financials and valuation INCOME STATEMENT (CONSOLIDATED) (RS MILLION) RATIOS (CONSOLIDATED) Y/E MARCH 2008 2009 2010E 2011E 2012E Y/E MARCH 2008 2009 2010E 2011E 2012E Net Sales 42.240 11.038 756 798 853 Gross Block 16.6 14.238 11.1 6.933 Cash EPS 26.559 4.234 4.738 -5.4 58.3 5.628 16.738 44. Received 1.820 9.234 -4.212 -1.1 0.8 Y/E MARCH 2008 2009 2010E 2011E 2012E Leverage Ratio Share Capital 886 1.721 -4.8 54.0 Payout % 8.3 12.4 Tax Rate (%) 57.7 388.980 8.1 RoE 7.2 18.630 -1.

12 Rel.Rebased oral care is unmatched. „ Colgate derives technology support from its parent 550 Colgate Palmolive US. economy: Cibaca and Colgate Toothpowder) 30% tax exemption. Colgate 300 Sensitive and Zigzag toothbrushes.1 29.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range (Rs) 735/380 03/09A 16. popular: CDC.8 18. recommended brand by doctors.1xFY11E will enable it to target consumers across income EPS of Rs31 and 18.1 26.5.3 13. Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Stock info Financial & valuation summary Equity Shares (m) 136.1 43.209 31.9 144.6 154. (Rs b) 93. 44% penetration is rising (13% increase in 2001 to 67%) share in the Rs5b toothpowder market and 37% from new users and consumer upgrades from share in the Rs4b toothbrush market. which has enabled the launch 425 of innovative products like Active Salt.925 4.3 M.8 24. sampling in schools.0 14. Buy. valuable brand in Indian consumer market.6.Cap. (%) -9/16/-15 03/10E 19. groups.4 M.3 150.9 25.5 17.2 5. toothpowder to toothpaste. consumer uptrading (toothpowder to toothpaste). „ Colgate has been ranked as the most trusted brand „ Only 7% of Indians brush their teeth twice daily (~61% in the Indian Brand Equity survey making it the most in China. education and affordability „ Colgate offers oral care products across formats and (attractive entry points of Rs5/10) will provide steady price points and is the most preferred and double digit growth to oral care.8 146. Herbal and Maxfresh toothpastes and Colgate 360.830 4.4 143. It has „ Toothpaste presents an exciting opportunity as the 52% share in the Rs30b toothpaste market.948 2. „ Colgate leads in all three oral care segments.902 21. (US$ B) 2.8 4 December 2009 66 .0 03/12E 26.8xFY12E EPS of Rs36.1 4.958 36.Cap.3 26.3 35.683 27.3 22.1 3.5 145. 3 Company strategy to sustain its edge 4 Valuation and view „ Presence of brands across segments (premium: Total „ We estimate 16% PAT CAGR (FY10-12) due to 600bp and Sensitive. Consumer Monopolies SECTOR: FMCG Colgate – Smile all the way Buy CMP: Rs685 Target Price: Rs803 Bloomberg: CLGT IN Consumer Monopolies: Investment argument framework 1 Market share and position 2 Trends and opportunities „ Colgate is the leader in the Rs40b oral care category „ The oral care market offers exciting long term growth with a 49% market share. STOCK PERFORMANCE (ONE YEAR) „ Wide distribution (81% retail outlets) and focus on Colgate Sensex .2 03/11E 22.1 152. The stock trades at 22.9 1. Perf.6 20. HUL (26% market share) opportunities from first time users (Datun) and and Dabur (11% market share) are key competitors.3 25.2 32. dentist endorsements and Oral Health Month have enabled 675 Colgate get closer to consumers.1 153.2 3. Consumer activation 800 programs like Disha. 86% in Malaysia). „ Rising hygiene awareness.9 16.700 3. Maxfresh and Active rise in tax rate in FY11 as the Baddi unit moves to Salt.

This presence has helped it to reach out to a broad consumer base across income levels. Sensitive 37 Premium Pepsodent. Colgate is present in the category and 37% in the premium toothpaste market with its Total and Sensitive brands. Meswak and Dabur Red toothpaste across segments. with Colgate Dental toothbrushes segment Cream.9 2QFY08 3QFY08 4QFY08 2QFY09 3QFY09 4QFY09 1QFY10 Toothpaste Toothbrush Source: Company/MOSL 4 December 2009 67 .Rs65/150gm 49.Rs56/200gm Source: Company/MOSL TOOTHPASTE VOLUMES: IN A NEW GROWTH ORBIT (%) …REFLECTED IN MARKET-SHARE GAINS (%) 18 50.6 15 Premium . 44 Value for Money Dabur Lal Dant Manjan Lal Dant Manjan Toothbrushes Rs5b Colgate 360.6 13 11 14 14 49.6 16.2 5.2 49. Colgate Colgate leads in the oral care market Colgate has 52% share in Colgate. commands 49% market share of the the toothpaste market. Active Salt Popular Pepsodent .Rs27/200gm Red.6 15. 44% share in the share in the toothpowder toothpowder category and 37% in the toothbrushes segment.2 49.1 35. This compares favorably with HUL’s positioning in the premium and popular segments (Pepsodent and Close-Up respectively) and the herbal positioning of Dabur with its Dabur Lal Dant Manjan. Oral-B Value for Money Binaca Popular .2 49. Babool.2 8 3QFY07 4QFY07 1QFY08 2QFY08 3QFY08 4QFY08 2QFY09 3QFY09 4QFY09 2QFY07 4QFY07 2QFY08 4QFY08 2QFY09 4QFY09 2QFY10 Colgate has gained market share across various MARKET SHARE IN TOOTHBRUSH (%) 3 YEAR GROWTH: COLGATE V/S CATEGORY (%) segments in oral care Category Colgate 38. a pure play in the Rs40b oral care market. Babool Toothpowders Rs4b Colgate Toothpowder.9 35.4 10 10 10 48.2 10 9 11 48. Close-Up Colgate Cibaca Value for Money Anchor. Maxfresh. and Cibaca in the value- for-money category.2 13. Active Salt and Maxfresh brands in the popular market. COLGATE’S PRODUCT PORTFOLIO STRADDLES ACROSS PRICE POINTS COLGATE: LEADING ALL THE WAY CATEGORY MKT SIZE MAJOR BRANDS MKT POSITIONING COMPETITORS (RSB) SH (%) Toothpastes Rs30b Total.7 37.2 37.0 38.2 37. Colgate has 52% share in the toothpaste market. 44% oral care category. Dabur Value for money .1 49. Sensitive 52 Premium Meswak CDC.

But it lags the 90 consumption in 108 China (219gm) and 60 80 in Malaysia (285gm) 30 0 2005 2008 Source: MOSL UPTRADING FROM TOOTHPOWDER TO TOOTHPASTE IS ACCELERATING Toothpaste Toothpow der Sharp increase in penetration of toothpaste led by uptrading from 57 54 toothpow der 51 44 44 50 44 46 45 36 35 36 35 35 35 35 34 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Company/MOSL ALL INDIA TOOTHPASTE PENETRATION RISING (%) 2005 2008 Urban 74. Toothpaste per capita consumption has oral hygiene. especially in rural India.9 79. Higher reach of media. where per capita consumption is rising.5% CAGR India’s per capita toothpaste consumption has increased 120 to 108gm. Colgate Oral care: Rural growth story here to stay The oral care category has We believe the oral-care category has entered a new growth phase led by rising awareness entered a new growth phase. for oral hygiene.0 Rural 37. Besides. However it holds immense potential for in rural India growth considering the consumption in China (219gm) and Malaysia (285gm).6 57. led by led by rising awareness for higher penetration and frequency of brushing. rising awareness and increasing affordability (Rs. TOOTHPASTE: PER CAPITA CONSUMPTION GROWS 10.6 45.5/10 SKUs) among rural Indians have pushed the younger generation to move directly towards toothpaste.0 All India 48.0 Source: Company/MOSL 4 December 2009 68 . But the pace of upgrade of Datun and toothpowder users will be gradual. especially increased to 108gm currently from 80gm in 2005. only 7% of Indians brush their teeth twice daily against 61% in China and 86% in Malaysia.

partnerships with the IDA/dentist community. the world leader in oral care. CONSUMER MIGRATION FROM DATUN TO TOOTHPOWDER AND TOOTHPASTE Rs0. SUSTAINED SALES TRACTION OVER FY09-11E Colgate has entered a phase 32. Colgate Sensitive and ZigZag toothbrushes.2 15.000 15.9 24. which makes it a candidate for an emerging monopoly.30 per use ~Rs0. with a wide reach (81% outlets in FY09 up from 49% in FY06).000 a candidate for an emerging monopoly 0 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Source: Company/MOSL 4 December 2009 69 . 13. has niche positioning. developed markets We believe parental support will ensure steady gains for Colgate particularly as HUL’s parent Unilever got out of the oral care segment in some large. This enables the company to capture recall: It is the most trusted consumers at all income levels. Active Salt.6 17. developed markets.0 of high-volume growth on 15.8 consumer upgrades and a 16.000 Net Sales (Rs m) Grow th (%) 16. Emerging monopoly ensures increased margins Colgate’s emerging monopolistic position has enabled it to report a steady 15% CAGR in sales and 27% in PAT over FY05-09.5 13. Colgate Colgate well placed to maintain competitive edge Brand-building initiatives Portfolio across price points: Colgate's product portfolio straddles several price points. quit the oral care also launched Colgate 360. Dabur. Oral Health Month and awareness campaigns in schools will enable Colgate to maintain its lead in the market. though an emerging player.4/0. Consumer-activation programs like Disha. of innovative products such as Colgate Total. Colgate Unilever.6 per use Source: Company/MOSL Oral care focus and consumer activation: Colgate is an oral-care focused company.0 strong brand equity. consumer upgrades and a rational pricing environment. Colgate’s parental support Parent's technology: The company draws its strength from R&D and technology of its will ensure steady gains parent. segment in some large. Colgate Palmolive USA. We believe Colgate has entered a phase of high-volume growth on strong brand equity. We estimate 16% sales CAGR over FY09-11.25 per use ~Rs0. Colgate’s brand-building initiatives have helped it to acquire Indian brand the highest brand recall: it is the most trusted Indian brand. Herbal and Sensitive.000 rational pricing environment. which makes it 8. This has enabled the launch particularly as HUL’s parent. have helped Colgate to Colgate’s presence in the toothpowder category is a significant positive as Colgate acquire the highest brand toothpowder consumers migrate to Colgate toothpaste.

4 December 2009 70 . ADSPEND DECLINE COULD BE STRUCTURAL (%) TAX RATE TO RISE Ad-spend EBITDA Margins Tax Rate (%) 40 23. Besides.1xFY11E EPS of Rs31 and 18.7 16. which will tend and gains scale.5%).2 23.6 14. promotion (higher than We see the decline in adspend to be structural as Colgate has gained significant traction in the industry average of sales due to attractive pricing and a wide distribution network. the adspend required to maintain the equity would decline.0 19.5-17% Colgate spends 15.2 105 3.6 22 21 21 14.7 10 0 FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY06 FY07 FY08 FY09 Source: Company/MOSL Margin expansion Valuation and view over FY10-12 is expected Colgate is pure play in India's oral care market.1 17. We estimate 130bp margin expansion in FY10-12 mainly driven by operating by operating leverage leverage and lower adspends due to Colgate moving towards a monopoly situation in oral and lower adspends due care.1 34 19.4 25 25 15. This is expected lower given Colgate’s to boost EBITDA margins. as a brand evolves 10-12%).0 16.5 28 14. The in oral care stock trades at 22.9 53 58 1. We estimate 16% PAT CAGR mainly due to a 600bp increase in the tax rate in to Colgate moving towards FY11 as its Baddi unit moves from 100% to 30% tax exemption.0 14.2 147 146 5.5% adspend in FY10 to be on the strengthening position conservative side. We have assumed 15.6 17. Buy. but we don’t rule out upside on this front. Colgate has average a monopoly situation P/E multiple of 22x due to 150% RoCE and more than 80% dividend payout ratio.0 15.4 28 17.1 20 2.6 3. which we expect will tend lower given Colgate’s strengthening position.8xFY12E EPS of Rs36.5-17% of sales on advertising and promotion (higher than the industry of sales on advertising and average of 10-12%).3 16.1 18. We expect 14% volume CAGR over to be 130bp driven mainly FY10-12.2 16 19 16 FY10E FY11E FY12E FY04 FY05 FY06 FY07 FY08 FY09 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Source: Company/MOSL Colgate has ROE of 153% and dividend payout Colgate has ROE of 153% and dividend payout ratio of 80% (dividend yield of 2.2 30 4. Colgate Colgate spends 15. ratio of 80% REDUCTION OF SHARE CAPITAL HAS BOOSTED ROE (%) HIGH PAYOUT RATIO ENSURES HEALTHY YIELD 40 EPS Dividend Yield % 153 156 6.4 37 22.5.

4 48.8 57.0 18.5 19.6 18.2 19.2 55.9 56.5 15.7 2QFY07 4QFY07 2QFY08 4QFY08 2QFY09 4QFY09 2QFY10 2005 2006 2007 2008 1QFY10 Gross margin rising Lower adspend boosts margin expansion 59.5 11.2 18.5 13.8 8.2 32.5 16.0 16.2 13.5 20.8 17.2 30. Colgate Colgate: Recent trends Toothpaste: Volume growth in new orbit Colgate gains share at the expense of HUL (%) 18.0 48.5 29.0 28.0 15.0 Colgate (LHS) HUL (RHS) 15.7 Ad spend (% of sales) EBIDTA Margin 25.0 56.6 16.3 21.7 22.8 15.0 56.0 14.9 11.6 47.6 20.3 2QFY07 4QFY07 2QFY08 4QFY08 2QFY09 4QFY09 2QFY10 2QFY07 4QFY07 2QFY08 4QFY08 2QFY09 4QFY09 2QFY10 Mentha oil price trend (US$/ton) Calcium carbonate price trend (US$/ton) 850 160 748 144 750 140 650 120 567 550 100 96 482 89 450 80 Mar-07 Jun-07 Dec-07 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Sep-07 Sep-08 Sep-09 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Source: Company/MOSL 4 December 2009 71 .4 57.4 15.9 12.0 14.4 56.0 14.4 10.0 9.0 54.8 29.9 56.5 10.0 57.7 16.0 10.9 54.9 55.0 12.0 10.5 19.0 46.1 49.6 17.0 9.

2 152.0 19.631 Capital WIP 76 47 104 149 185 (Incr)/Decr in FA -214 273 -307 -245 -236 Investments 726 383 980 882 1.041 4.726 1.0 Adjusted PAT 2.698 7.091 1.249 9.0 75.695 1.102 CF from Fin.7 17.8 22.9 3.575 6.958 Leverage Ratio BALANCE SHEET (RS MILLION) Debt/Equity (x) 0.472 6.388 Account Receivables 92 111 124 144 169 Change in Equity -1.3 Operating expenses 6.068 Net Current Assets -1.130 3.6 32.700 22.703 4.735 RoE 104.622 2.231 -3.612 1.453 4.572 (Incr)/Decr in Debt 4 0 -3 0 1 Others 1.2 31.919 3.325 -136 -394 160 545 Add: Opening Balance 1.224 20 0 0 0 Cash and Bank Balance 1.551 -2.413 3.6 24.0 0.1 22.434 5.3 70.7 25.443 2.069 -98 1. L&A 4.0 0.2 5.582 -2.948 19.572 E: MOSL Estimates 4 December 2009 72 .931 5.192 13.496 4. Received 214 318 303 376 454 Capital Employed 1.317 2.693 -4.0 36.183 CF from Invest.921 3.4 13.317 2.055 Dividend Paid -2. Activity -3. and Fin.350 Other Liabilities 422 528 562 613 670 Provisions 1.033 2.504 4.115 4.047 3.0 75.638 Others -54 -300 0 0 0 Account Payables 3.027 2.1 18.6 29.0 3.503 Cash EPS 18.413 8.0 23.0 24.958 Working Capital Ratios Change (%) 44. Depn./Div.017 5.902 3.6 15.050 (Pur)/Sale of Investments 607 343 -597 98 -168 Curr.120 6.1 23.3 24.4 17.535 11.1 145.754 -3.483 3.974 1.821 Net Fixed Assets 1.6 Margin (%) 19.7 20.7 16.3 56.683 4.914 1.734 16.3 22.117 1.8 38.4 23.434 1.3 154.9 20.4 18.8 24.873 1.0 10.503 4.925 26.3 Reported PAT 2.903 (Incr)/Decr in WC 988 -120 160 537 682 Less: Accum.276 -2.183 1.441 Deferred Liability -278 -177 -219 -287 -370 Int.683 4.9 Profit before Taxes 2.327 BV/Share 11.2 26.1 18. Colgate Financials and valuation INCOME STATEMENT (RS MILLION) RATIOS Y/E MARCH 2008 2009 2010E 2011E 2012E Y/E MARCH 2008 2009 2010E 2011E 2012E Net Sales 14.0 16.508 9.902 3. and Prov.0 Change (%) 51.0 20.3 75.8 Financial Other Income 214 318 303 376 454 P/BV 57.0 28.9 57.0 Other Operating Income 633 760 613 670 701 EBITDA 2.3 16.7 23.474 1.9 19.486 2.919 3.1 25. 5.524 5.2 16.007 -3.4 4.886 3.323 8.1 146.007 1.2 150.443 2.9 15.7 18.1 35. -2.739 1.8 Margin (%) 19.511 2.1 56.5 12.163 2.0 29.2 18.376 4.3 23.8 15.253 4.4 Deferred Tax -22 103 -42 -68 -83 RoCE 103.8 56.033 2.1 143.9 14.6 153.391 2.661 -3.2 3.438 2.2 Tax Rate (%) 20.901 4.6 14.3 Int.209 4.4 26.511 2.472 6.830 Basic (Rs) Change (%) 13.919 7.271 CF from Operations 3.4 12.443 2.735 Gross Block 4.235 -3.9 17.3 17.406 9.482 5.5 144.8 20.999 2.937 6.328 7.513 -2.5 Gross Margin (%) 57. Liab.0 18.342 5.2 23.2 18.601 CASH FLOW STATEMENT (RS MILLION) Net Worth 1.051 15. Charges 14 11 20 20 20 EV/EBITDA 31.5 COGS 6.412 Closing Balance 1.1 17.504 4.209 4.4 Gross Profit 8. Assets.1 31.417 3.2 23.0 Y/E MARCH 2008 2009 2010E 2011E 2012E Share Capital 136 136 136 136 136 Reserves 1.2 27.434 -1.504 Application of Funds 1.0 21.441 Valuation (x) Change (%) 51.421 5. 394 615 -904 -147 -404 Inventory 756 824 1.478 2.610 Dividend Yield (%) 1.412 Interest Paid -14 -11 -20 -20 -20 Direct Taxes Paid -625 -448 -884 -1.439 2.614 3.994 3.587 Payout % 76.1 DPS 13.749 1.693 -4.650 1.6 Return Ratios (%) Tax 625 448 884 1.737 Y/E MARCH 2008 2009 2010E 2011E 2012E Loans 47 47 44 44 45 OP/(loss) before Tax 2.4 43.0 27.413 3.7 P/E 40.511 2.0 15.2 32.0 EPS 17.886 3.6 3.5 23.482 5.557 5.866 Incr/Decr of Cash 326 1.026 2.0 0.376 4.874 11.3 27.9 2.5 Asset Turnover (x) 25.543 6.4 Cash P/E 37.381 -3.8 Debtor (Days) 2 2 2 2 2 Margin (%) 15.413 3.5 25.391 2.8 Depreciation 198 229 241 253 264 EV/Sales 6.3 4.857 8.351 Curr.8 32.0 0.

884 2. category every year (~10% growth) due to new user „ Other prominent players in the category include additions.7 and market share as its share is 7x more than its nearest 18.7 20.483 5.2 03/11E 32. reducing 80 sensitivity to copra prices.6 2. rival. higher penetration for the category.4 32.Cap.368 3. STOCK PERFORMANCE (ONE YEAR) „ Marico has led innovation in the category through Marico Sensex .2 2.4 47. holds 48% from Rs6.3 4 December 2009 73 . (%) -1/27/23 03/10E 27.7 22.273 3.8 M. „ We estimate that branded pure coconut oil accounts „ Price-led competition among national brands has been for 32% of Marico's sales but contribute more than minimal after the exit of HUL in FY06 (Marico acquired 50% of its profits. Perf.2 37.9 42.9 7.6 45. 40 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Stock info Financial & valuation summary YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ Equity Shares (m) 609.2 27.0 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 113/49 03/09A 23. (Rs b) 65.4 17.7xFY12E EPS of Rs5.5 32. (Size has doubled „ Marico's flagship brand.9 16. ·„ Partnerships with the Coconut Development Board 60 and copra farming community have enabled Marico to secure quality inputs at reasonable prices.5 29. 120 „ Investment in brand building have enabled Marico to de-commoditize the category. (US$ b) 1.5 2.849 4.463 2.0 14.9 M. Buy. Consumer Monopolies SECTOR: FMCG Marico – Well oiled Buy CMP: Rs107 Target Price: Rs114 Bloomberg: MRCO IN Consumer Monopolies: Investment argument framework 1 Market share and position 2 Trends and opportunities „ Marico is leads in the Rs15b branded pure coconut „ Rising income and aspiration levels have resulted in oil market with a share of 55%. Nihar).5 10.6 12. Parachute.2 18.4 44. 3 Company strategy to sustain its edge 4 Valuation and view „ Marico's focus has been to expand the category size „ We estimate PAT CAGR of 21% over FY10-12. The of coconut oil rather than to aggressively capture stock trades at 22.4 03/12E 38.7 5.12 Rel.6.3 28.037 3.Rebased packaging like blister packs and wide-neck packs. Regional brands „ Growth of the branded coconut oil market is expected like Panchratna and Kera account for the rest of the accelerate (12-14%) led by category expansion and market. Shalimar (~8%) and Dabur (5%). market share and Nihar and Oil Of Malabar accounts „ We estimate ~Rs2b-3b is added to the coconut oil for 7%. upgrades from loose oil (40% of the category).3 1.5b in 2004 to Rs15b in 2009). Regional players' prices are at 8-10% discount to Marico's. Resulting brand loyalty 100 meant significant pricing power for Marico.7.1 1.3 22.9xFY11E EPS of Rs4.8 22.0 48.Cap.0 14.608 2.

Regional coconut oil market and brands like Panchratna. Marico Marico: Beyond market share Marico has a 55% share Marico has a 55% share in the Rs15b branded pure coconut oil market.0 8. Marico acquired Nihar and MARICO: 55% MARKET SHARE IN COCONUT HAIR OIL Oil of Malabar to consolidate BRAND MARKET SHARE (%) the branded coconut oil Parachute 48 market and has been a key Nihar 6 Oil of Malabar 1 beneficiary of the growing Source: Company/MOSL coconut oil market BRANDED COCONUT OIL: MARICO LEADS PARACHUTE: DOUBLE DIGIT VOLUME GROWTH 12. Shalimar and in the Rs15b branded pure Dabur are the other key players with a market share of 8% and 5% respectively. We believe increased use of coconut helped branded coconut oil oil (penetration and frequency of use) and upgrades from loose oils to branded consumption sales to grow 15% CAGR helped this growth.5 9. The and upgrades from loose oils coconut oil segment (both branded and loose) posted sales of 9% CAGR over FY04-09 to branded consumption and branded coconut oil posted sales of 15% CAGR.0 11.6b in FY04 to Rs8b in FY09 (CAGR of ~25%). and Dabur with 5% share Over the past five years Marico has maintained its market share and has been a key beneficiary of the 15% CAGR of branded coconut oil sales.0 Dabur Marico Shalimar FY10E FY11E FY12E 5.0 32. its key competitors are Shalimar.0 11.0 Others 11. SHARE OF LOOSE OILS DECLINED FROM 53% IN FY04 TO 40% IN FY09: A RS25B OPPORTUNITY Branded Unbranded/Loose 60 53 47 40 2004 2009 Source: Company/MOSL 4 December 2009 74 . with 8% share Marico acquired Nihar and Oil of Malabar to consolidate the branded coconut oil market. Unorganized/loose oils constitute about 40% of the coconut oil market over FY04-09 (down from 53% in FY04) and we expect their share to fall to 25% in the next five years.0% FY06 FY07 FY08 FY09 8. We estimate Parachute brand to have grown from Rs2. Kera and others compete largely on a price proposition.0% Source: Company/MOSL Opportunity to uptrade Increased use of coconut oil The branded coconut oil market presents high visibility of growth and profitability.0% 10.0% 55.

We believe pure coconut oil (Parachute) is a cash cow for Marico and the high returns thus generated are invested in new growth engines like Saffola. „ Being the biggest consumer of copra in India. Marico has initiated partnerships with the Coconut Development Board and the copra farming community. In 2005 when copra prices slipped Marico did not reduce the price of Parachute resulting in a 1. Rs1 Blister pack „ Marico’s investments over the years on brand building have enabled it to de-commoditize the category. It is going through a similar phase in the current cycle as well. The segment yields high margins for Marico and we see visibility of growth and profitability from pure coconut oil for several years to come. Kaya and other recent prototypes. These have helped to increase the relevance of the brand to existing and new consumers. due to pricing power 38 in Parachute 36 9 9 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Source: Company/MOSL 4 December 2009 75 . which reduced its sensitivity to copra prices. Rs5 SKU We like the management’s strategy of not pursuing market share from regional brands in price-led competition. We expect Marico’s coconut margins for Marico and we oil franchise to post 10-12% volume growth over the next five years and 3-4% realization see visibility of growth and growth. We expect the trend to continue 2009 from Rs7b in 2004 and in the medium term. Branded coconut market doubled to Rs15b in oil market doubled to Rs15b in 2009 from Rs7b in 2004. We believe Marico is well placed to maintain its leadership in the product category because: „ Marico led the innovation in the category through packaging like blister packs (Re1 SKUs). resulting in category expansion. Besides. it focused on expanding the coconut oil market instead of pursuing market share. wide-neck. and flip packs. The resultant brand loyalty gave Marico significant pricing power. Parachute is estimated to contribute about 32% of Marico’s sales and 50% of profitability from pure gross profit. enabling Marico to secure quality inputs at reasonable prices.000bp margin expansion. Besides. coconut oil going forward MARGIN PUSH LED BY PRICING POWER IN PARACHUTE (%) Gross Margin EBITDA Margin 14 13 13 13 13 13 13 50 47 45 49 48 Margins have 47 47 increased significantly. PARACHUTE: PACKING INNOVATION Strategy to maintain leadership Marico led consolidation in the industry with the acquisition of Nihar and Oil of Malabar. new users enter the coconut oil market (about 10% growth) this trend is expected to every year. adding Rs2b to the category. Wide neck pack Monopoly in Parachute has enabled 900bp gross margin expansion The coconut High pricing power has enabled Marico to retain benefits of copra price declines thereby oil segment yields high enabling gross margin expansion (FY06 is a case in point). Marico The branded coconut oil Rising incomes and aspiration levels have resulted in higher penetration. Growth of the branded coconut oil market is continue in the medium term expected to accelerate (12-14%) led by category expansion and upgrades from loose oils.

MARICO'S GEOGRAPHICAL SALES MIX MARICO'S DOMESTIC SALES MIX South Others Kaya Bangladesh Egypt Parachute Africa Sw eekar 13% 6% 8% 3% 38% 3% 7% Middle East 6% India 80% Saffola Hair Oils 20% 16% Source: Company/MOSL 4 December 2009 76 . Buy.6 0.7xFY12E EPS of Rs5.1% over FY10- 12.3%.6 0.6 0.7. PAT is expected to increase 21. The stock currently trades at 22.6 37 33 32 30 FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY06 FY07 FY08 FY09 Source: Company/MOSL Valuation and view We expect Marico to maintain a strong monopoly in coconut oil and in the wellness segment. Marico Steady cashflow from the The company is still in a growth phase in other categories wherein investment in brands Parachute stable is expected could help Marico to be a major player in hair oil and processed food. While benign prices of copra will be a key growth driver in the near term. HEALTHY ROE (%) LOWER YIELD DUE TO INVESTMENT IN NEW BRANDS Pricing pow er Dividend Yield (%) in Parachute Im pact of new 51 50 businesses 0.7 and 18. Haircode and Fiancée will be key drivers.9xFY11E EPS of Rs4.6 0. going forward.7 0. We estimate sales CAGR of 18. increased profitability in Kaya. We believe the to help Marico to develop existence of a steady cashflow from the Parachute stable will help to develop other other segments segments. through its niche positioning of Saffola.6 45 0.

9 48.9 46.7 12.7 52.1 14.350 2.450 10 10 3.0 6.000 13 11 63.000 11 11 4.0 12.800 Dec-07 Feb-08 Jun-08 Oct-08 Dec-08 Feb-09 Jun-09 Oct-09 Apr-08 Aug-08 Apr-09 Aug-09 Dec-07 Jun-08 Dec-08 Jun-09 FY08 Sep-08 FY09 Sep-09 Saffola: Sales promotions/price cuts boost volumes (%) Safflower prices (Rs/ton): Benign 28 100.7 1.500 9 70.800 Jun-07 Dec-07 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Sep-07 Sep-08 Sep-09 Dec-07 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Sep-07 Sep-08 Sep-09 Parachute: Double digit volume growth in 1HFY10 (%) Copra price (Rs/Qtl): Hits a low 14 5.4 47.800 50.7 30 47.LHS Sales Grow th (%) Gross Margins EBITDA Margins 7.7 3.7 14.300 28 23 4.000 3 50.3 45.7 45.000 68.000 19 80.800 24 23 20 14.7 13.000 Feb-08 May-08 Nov-08 Feb-09 May-09 Nov-09 Aug-08 Aug-09 Dec-07 Jun-08 Dec-08 Jun-09 FY08 Sep-08 FY09 Sep-09 Source: Company/MOSL 4 December 2009 77 .000 22 22 90.2 49.1 13.2 12.900 2.995 9 9 8 3.6 12.300 18 16 13.000 60.900 3. Marico Marico Industries: Recent trends Sales growth impacted by price cuts/discounts Lower input costs boost gross margins (%) Sales (Rsm) .8 9.2 49.

557 Others -388 -148 -518 -43 -43 Current Libilities 2.749 4.447 3.6 0.7 Operating Expenses 6.849 3.4 28.6 0.303 5.2 Working Capital Ratios Margin (%) 8.897 4.785 11.4 25.368 2.6 16.0 24. Marico Financials and valuation INCOME STATEMENT (RS MILLION) RATIOS Y/E MARCH 2008 2009 2010E 2011E 2012E Y/E MARCH 2008 2009 2010E 2011E 2012E Net Sales 19.254 8.192 Incr/Decr of Cash 325 169 -210 355 -225 Deferred Tax Liability 982 641 854 521 106 Add: Opening Balance 427 753 922 712 1.330 3.146 4.762 16.1 2.200 Curr.0 24.7 5.463 32.4 0.285 9.3 17.0 1.7 4.6 29.6 16.0 32.638 19.2 10.8 2.4 29.2 7.6 Tax Rate (%) 18.1 49.537 3.070 170 -1.040 3.327 2.727 8.483 Change (%) 60. Depn.678 2.7 14.5 14.534 2.544 7.2 11.5 16.945 2.740 9. Assets.043 13.884 27.4 19.0 25.2 0.5 22.750 1.667 13.160 Net Worth 3.027 Valuation (x) Change (%) 24.8 2.550 Account Receivables 863 1.926 2.926 5.112 -888 -450 Others 1.250 -3.281 6.037 2.600 3.5 22. and Prov.7 9.7 Change (%) 43.035 -2.3 8.059 -795 -1.535 6.066 842 E: MOSL Estimates 4 December 2009 78 .236 1.560 2.273 Basic (Rs) Change (%) 22.1 Debtor (Days) 17 17 16 17 17 Extraordinary items 105 -150 -41 0 0 Asset Turnover (x) 2.036 3.929 Capital WIP 647 577 250 200 200 Extraordinary Items 0 0 0 0 0 Goodwill 842 850 842 842 842 (Incr)/Decr in FA -1.1 Cash P/E 32.6 0.299 1.1 23.2 EBITDA 2.535 13.849 3.037 10.399 8.800 (Pur)/Sale of Investments 0 -121 -679 -800 -2.500 1.400 3.303 5.790 8.7 0.5 DPS 0.0 27.0 22.394 -992 Provisions 392 355 471 497 575 Net Current Assets 2.0 48.803 2.750 2.2 Margin (%) 10.158 3.037 10.7 0.4 EPS 2.040 3.1 Profit after Taxes 1.887 2.0 Current Tax (excl MAT Ent) 157 70 395 525 642 Return Ratios (%) Deferred Tax 202 339 273 375 458 RoE 50.4 2.2 13.535 13.5 6.159 -938 -116 -450 -1.727 8.719 7.4 10.0 3. -1.9 4.2 20.159 -1.8 24.724 4.0 23.597 Dividend Paid -467 -467 -463 -463 -499 Curr.1 11.Recurring 96 122 152 189 318 P/BV 20.638 1.1 Depreciation 309 358 515 481 552 EV/Sales 3.890 5.885 Direct Taxes Paid -157 -70 -395 -525 -642 Intangibles 627 684 627 627 627 (Incr)/Decr in WC -827 -1.6 47.062 -478 -707 -526 Less: Accum.7 13.2 45.4 44.9 3.561 3.6 Int.6 2.5 16.3 3.9 12. -1.0 RoCE 42.724 4.7 0.691 1.3 22.5 16.050 23.672 2.393 1.549 -3.7 COGS 10.2 7.7 17.071 Closing Balance 752 922 712 1.934 3.066 842 (Incr)/Decr in Debt 1.8 P/E 41.108 1.728 5.635 -2.1 32.5 8.579 3.9 12.7 0.7 22.967 Net Fixed Assets 1.954 3.605 3. Liab.269 1.066 Application of Funds 6.5 15.6 22.6 0.583 Dividend Yield (%) 0.761 Issue of Shares 0 0 0 0 0 Cash and Bank Balance 753 922 712 1.981 CF from Fin.829 4.3 45./Div. Activity 215 -444 -2.4 10.5 48.3 Margin (%) 47.769 Y/E MARCH 2008 2009 2010E 2011E 2012E Loans 3.425 3.787 9.0 18.285 9.885 5.6 3.390 3.105 13. 2.7 13.6 8.5 12.1 Y/E MARCH 2008 2009 2010E 2011E 2012E Share Capital 609 609 609 609 609 CASH FLOW STATEMENT (RS MILLION) Reserves 2.9 49.586 2.526 Payout % 25.608 38.8 0.951 3.9 12.6 Gross Profit 9007 10780 13701 15969 18552 BV/Share 5.9 Reported PAT 1.3 3.2 19.027 Capital Employed 6.481 2.6 42.749 CF from Invest.000 Investments 0 121 800 1.493 1.463 3.069 Int. and Fin.462 2.483 Leverage Ratio BALANCE SHEET (RS MILLION) Debt/Equity (x) 1.093 -1.1 0.5 Profit before Taxes 1.9 18. Charges 305 357 326 261 210 EV/EBITDA 27.300 OP/(loss) before Tax 2.583 CF from Operations 1.9 37. Received 96 122 152 189 318 Interest Paid -305 -357 -326 -261 -210 Gross Fixed Assets 2.7 Margin (%) 12.200 Inventory 2.913 4.4 15.061 1.031 -3. L&A 5.463 3.176 11.4 22.9 19.977 11.885 4.4 5.8 14.6 13.721 Cash EPS 3.3 Other Income .999 3.385 4.7 5.

4 18. (US$ b) 1.3 -2.5 M.499 Bloomberg: TTAN IN Consumer Monopolies: Investment argument framework 1 Market share and position 2 Trends and opportunities „ Titan has 60% of India's organised watch market „ Only 27% of Indians own a watch and 82% of the with annual sales exceeding 9m units.5.3 1. 1. „ Branded jewelry is less than 10% of the jewelry „ Titan has a strong presence in the domestic branded market.1 5.550 „ Tanishq has been associated with some of the best designs and offers an extensive range of jewelry in 1.8 1. branded jewelry market. (Swiss) and Licensed (Tommy Hilfiger and Hugo „ The Indian jewelry market is worth Rs800b a year and Boss). Perf.531 2.638 59.307 74. (Rs b) 60.3 1.Cap. offering huge scope for branded players. „ Titan captures the value chain from manufacturing STOCK PERFORMANCE (ONE YEAR) to branding and retailing through its own outlets.3 03/12E 65.3 22.340 3.9 37. Titan Industries Sensex .055 46.8 29.7xFY11E EPS of Rs59. and is the only jeweler with a pan-India presence.7 7.850 „ Tanishq has a huge first mover advantage in branded jewelry with 126 stores and quality assurance in gold.4 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1. which gives it a competitive advantage. Xylus with an increasing trend of multiple watches.8 44.009 45. 3 Company strategy to sustain its edge 4 Valuation and view „ Titan straddles the price value spectrum in watches „ We estimate 28% PAT CAGR over FY10-12. It has also extended its presence to mid-sized 950 cities with a no frills Gold Plus model. this high margin segment „ Tanishq has 126 stores in more than 70 Indian towns (30%+ gross margins) is growing at 20-25% a year.6 18. „ It has brands positioned at various price points:Titan „ Watches are fast emerging as fashion accessories (premium).0 30.4 0.3 36.4 18.1 13. EPS of Rs74.3 38.000.4 31.4 and 18.8 29.6.034 2.509/667 03/09A 38.6 30. (%) -2/1/-31 03/10E 44.5 25. The stock from the low priced Sonata to the Swiss-made Xylus trades at 22. Sonata (mass).5 36.385 2. Neutral. Fastrack (youth).1xFY12E and licensed brands like Hugo Boss. Consumer Monopolies SECTOR: FMCG Titan Industries – Leading in time Neutral CMP: Rs1. 650 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Stock info Financial & valuation summary YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ Equity Shares (m) 44. Indian jewelry market. jewelry market with exclusive store brands like „ Diamond-studded jewelry comprises 10-12% of the Tanishq and Gold Plus. is growing at 15% CAGR as gold and jewelry are „ Titan has more than 40% share in India's Rs70b considered family treasures.250 India.Cap.0 03/11E 55.Rebased 1.351 Target Price: Rs1.8 8.1 M.2 29.2 10.12 Rel.6 40.8 1.6 4 December 2009 79 .9 10. volumes are priced below Rs1..

designer watches. 43% (Rs400-Rs1. 11% Rs5. 13% (< Rs400). Titan Industries Titan has. Titan’s brands are positioned across various segments: Sonata (economy). About 38% of watch volumes are priced under Rs400 each and 86% are and most of this is at the priced lower than Rs1. 38% Mid-Upper Low End (Rs1. This puts Titan in a unique position to gain from expected demand growth for a basic.000) account for 13% of industry bottom end of the segment volumes and luxury watches (>Rs5.000). categories. over the years.000). 31 Titan. Xylus (Swiss).000). which spearheaded the quartz revolution in India.000). Mass (> Rs5000). offering branded to its entry into the organized jewelry segment (in 1996) and its latest foray into branded products in an erstwhile eyewear. 45 Others.000-Rs5.000. From a modest venture into quartz watches in 1984.000) account for 1% of the volumes. Maxima and several global brands in the premium segment. Other players include HMT. 55 Source: Company/MOSL INDIA’S WATCH MARKET (VALUE) INDIA’S WATCH MARKET (VOLUME) Luxury Mid-Upper Luxury Mass (> Rs5. 33% Low End (Rs400-Rs1. over the years. Titan has 60% share of the organized watch market Titan. Titan has benefited from the first mover advantage in every segment of its unorganized segment presence. Titan has. Premium watches (>Rs1.000 each. 9 Unorganized Market.000). thereby enjoying a near monopoly. functional watch to premium. UNORGANIZED SEGMENT IS ~55% OF WATCH MARKET TITAN HAS ~60% SHARE IN ORGANIZED SEGMENT Organized Market. 13% (< Rs400). Tommy Hilfiger and Hugo Boss (licensed). 48% Source: Company/MOSL About 55% of the watch About 55% of the watch market is still unorganized and most of this is at the bottom end market is still unorganized of the segment. 1% (Rs1. identified and nurtured niche categories. offering branded products identified and nurtured niche in an erstwhile unorganized segment. 4 December 2009 80 . has come a long way to reach its monopoly status (60% share in the Rs30b organized watch segment). 60 Timex. Fastrack (youth). Timex is a distant second with ~9% share. Titan (premium).

Titan is in a strong position to maintain its lead because: „ Titan’s brands straddle price points from the Rs400 Sonata to Xylus and Nebula at the luxury end.000) 8-11 Mass (< Rs400) 8-11 Source: Company/MOSL Titan well placed to maintain leadership in watches Rs700 onwards Titan continues to maintain a strong lead in the watch market.000 onwards Source: Company/MOSL 4 December 2009 81 .000-5. It has also opened seven Fastrack and 10 Sonata stores and one Helios store. Besides. Rs295 onwards FASTRACK: YOUTH BRAND WATCHES: PREMIUM SEGMENT IS GROWING AT 25-35% SEGMENT VOLUME GR. triggering 25-35% volume growth in the premium/luxury segment. Octane. This is resulting in dual ownership of watches (~5%) and those based on occasions.000-5. Zoop and Edge.000 Xylus. We believe watches have evolved from time keeping devices to fashion accessories. Fast Track Citizen. The watch market is fast evolving as most global brands are available in India through franchisee arrangements or tie-ups with organized retailers. the company has over 700 service centers.000) 4-7 Low-end (Rs400-1. which will be a multi-brand outlet for leading global brands. World Of Titan stores account for 40% of the sales of the company with a superior sales mix. Rs1. This trend is emerging among the upper middle class. Insignia. Fossil. which sell more than a million watches. However. and the proportion is less than 15% in rural India.000-Rs30. target the youth segment. availability of international brands and the emergence of high income. Swatch Rs10. casual and sports watches. Hugo Boss Rs4. This enables Titan to garner consumers at all levels. Titan has also launched watches aimed at women. Maxima Rs1. subsequent growth would be more a function of rising aspirations than functional use (time keeping) consequent to increasing penetration of mobile phones.000 onwards „ Titan has increased its thrust on distribution and retail. Timex. Rado. into which several global TITAN: PREMIUM BRAND brands in the premium segment have entered.000) 25-35 Mid-upper (Rs1. (%) Luxury (> Rs5. Nebula Omega. „ Titan’s Fastrack brands. which provide it with a distinct edge. keeping in mind discerning consumer and changing preferences. which are re-inventing the category.000 Sonata HMT. Regalia. Gold & Steel. Tissot. Titan Industries TITAN'S WATCH PORTFOLIO Watch industry volumes to grow in high single digits SONATA: VALUE FOR MONEY Watch volumes are likely to grow in high single digits. Tag Heur.000 Titan. It has 275 “World Of Titan” RAGA: LUXURY BRAND stores. indulgent consumers. Volume growth will be driven by low penetration as only 27% of Indians own a watch. Other key launches include Aqura. with sub-brands like Raga and Diva. We expect consumer upgrades to premium watches to sustain due to rising aspirations. BRANDS ACROSS PRICE POINTS PRICE POINT TITAN BRANDS COMPETING BRANDS Rs399-1. such as formal.

5 4.9 18.7 4. Branded. adding to its attraction as a long term investment.Gold prices have nearly tripled over the past five years.1 40 24 4. This works to the advantage of branded players. Reliance Retail and other mid sized players have entered the branded jewelry segment.LHS EBITDA Grow th % . „ Increasingly people are moving away from their homes for professional reasons. and 3) it being an essential part of marriages.7 20.0 18. like GoldPlus.0 2. „ Branded players have launched no frills. to grow in high teens 2) as an adornment accessory.5 20 17. ~90 model to focus on 22 carat gold jewelry and gold jewelry.1 0. Gold is considered one market in India is expected of the best assets to own due to 1) its proven worth and investment value over centuries.3 4. Branded jewelry demand to grow in high teens The branded jewelry The Indian jewelry market has grown steadily by mid single digits. Titan Industries LICENSED AND OUTSOURCED WATCHES GROWING FASTER EBITDA MARGIN IMPACTED BY RETAIL EXPANSION Titan & Fastrack Vol (m) Sonata Volume (m) Licensed Brands Sales Grow th (%) . Organized jewelry accounts for less than 10% of the Rs700b jewelry market.4 20 16 1. Titan has store brands like Tanishq (up market gold and studded jewelry).7 3.1 30 19. which are able to get an increasing set of customers based on hallmarking and brand building.9 2. Tanishq has 40% share of the organized jewelry market.9 4. The company has redefined its Unorganized .6 4.3 0 8 FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY10E FY11E FY12E Source: Company/MOSL Jewelry: Tanishq’s first mover advantage ORGANIZED JEWELRY: THE TIP OF Titan pioneered the branded jewelry segment in 1996 with the launch of Tanishq 18 carat THE ICEBERG jewelry in an industry dominated by mom-and-pop shops. Gitanjali Gems.5 18.9 4. The entry of new players and their adspends has increased awareness of branded jewelry and helped to boost its growth.9 1. 4 December 2009 82 .4 0. GoldPlus (mass market gold jewelry) and Zoya (high end studded jewelry).5 17.4 EBITDA Margin (%) . The branded jewelry market is expected to grow in high teens because „ Branded jewelry players have launched several contemporary designs to suit a generation that prefers lighter jewelry.8 4. low cost models. ~10 Competitors like Rajesh Exports.RHS 5.9 10 12 0.4 3.2 4. taking them away from their families and traditional jewelers.LHS 5. which focus on plain gold jewelry and target mid sized towns. We believe this segment comprises a very big part of sales and will boost the branded business sales.0 4.

one of India’s most trusted business groups. CAGR. We in the jewelry segment expect Titan to grow ahead of the market growth rate and maintain its share in the jewelry segment because: ? Titan has a huge first mover advantage and is the only national jeweler. The jewelry business has increased EBIDTA margins by 40bp in the past few years due to operating leverage from existing stores. Although it is the largest jeweler in India it does not lead in the big cities. existing locations offer significant scope to increase sales. Margins at the jewelry division are a function of (1) sales proportion of GoldPlus (estimated gross margin of 8%).9 50 6.LHS 10.0 10. which accounts for 40% of the jewelry market. A scale-up of this model will enable Titan to increase market share and growth in the interiors. Titan Industries Titan to maintain lead in the branded jewelry market Titan is expected to grow Tanishq has established itself as a prominent store brand in the branded jewelry segment. which should ideally be four.0 60. ? Titan launched GoldPlus. So. ? Tanishq (123 stores as at FY09) has a geographical presence in 70 towns. gold jewelry brand aimed at value conscious consumers in semi urban and rural India.9 6. It is present in prime high street locations and is increasing its store sizes to capitalize on demand. ahead of the market growth Sales and EBIDTA of the jewelry segment have grown 46% and 47% respectively over rate and maintain its share the past five years and the number of jewelry pieces sold has grown 45% CAGR. 4 December 2009 83 .9b.5 13 FY 07 Gold Plus 14 7.4% and 42. The company’s financials have been bolstered by its strong competitive position in key products and segments: ? Titan reported sales and adjusted PAT of 32. over FY04-09. to enable lower holding costs 3) spends on overheads and advertising.5% respectively. which come from its parentage.LHS 11 100 EBITDA Grow th % .RHS 20 FY 09 75 8.5 7. a low cost.0 50.5 6.0 30. In most of the big cities it is among the top 5-7 players.0 20. plain.0 Gold Coins 18 FY 11 EBITDA Margin (%) . studded jewelry (gross margin: 32%) and gold coins (gross margin: 3%) (2) stock turns.0 Diamond 24 22 Studded 24 25 5.0 Source: Company/MOSL Monopoly has ensured a rising asset turn and RoCE Titan is the most profitable specialty retailer and perhaps among the few with free cash flows. The company has 30 stores under this format and sales of Rs3.2 7 6.0 40. This trust plays a big role in ensuring the jeweler’s success.4 6.5 Tanishq Plain 52 0 4. Pricing power at the premium end in watches and better margins in studded jewelry neutralized the impact of GoldPlus sales and falling entry level pricing of Sonata.0 5. OPERATIONAL LEVERAGE TO INCREASE MARGINS STUDDED JEWELRY AND GOLD COIN MIX KEY FACTOR (%) Sales Grow th (%) .0 45 Gold 49 FY10E FY11E FY12E FY06 FY07 FY08 FY09 0. ? Tanishq offers the guarantee of purity and reliability.

5 36.6% in FY04 to 38.1xFY12E EPS of Rs74. Jewelry volumes are expected to grow at 15% CAGR.200 8. and increased capital employed was negligible at 23%.800 11. Neutral.. . RoCE increased from 12.6 FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY10E FY11E FY12E Source: Company/MOSL Valuation and view Titan is expected to maintain a strong monopoly in watches and branded jewelry. We expect watch volumes to increase by 11..7 1.2 10. Long term prospects look encouraging though there are short term concerns on volume growth in jewelry and losses in both eyewear and precision engineering. „ Over FY04-09 Titan’s sales and adjusted PAT grew 4. The stock trades at 22.6 7.0 29.3 11. We estimate 170bp margin expansion driven by 1) improved sales mix in favor of studded jewelry.0 8.2 39.0 600 FY10E FY11E FY12E FY04 FY05 FY06 FY07 FY08 FY09 0 FY06 FY07 FY08 FY09 FY10E FY11E FY12E RISING ASSSET TURNS IN THE JEWELRY BUSINESS(X). 4 December 2009 84 .9 5.8 3. 3) peak out of losses in eyewear business.8 31.8% in FY09 due to higher asset turns.400 Eye Wear (Rs m) Precision Engineering (Rs m) 12.4 and 18.6 8.5 8.BOOST ROCE (%) 5..6x respectively.7xFY11E EPS of Rs59.5 1.9% CAGR over FY10-12.1 5.A FY08 226 14 101 20 10 FY09 265 10 115 30 70 Source: Company/MOSL INCREASING CONTRIBUTION OF JEWELRY AND LOSS MAKING BUSINESS DEPRESSES MARGINS (%) 2.1 2. TITAN INDUSTRIES: RETAIL FOOTPRINT (NOS) WORLD OF TITAN SONATA TANISHQ GOLD PLUS TITAN EYE+ FY07 205 12 88 10 N.1 4. We believe the jewelry business will drive 28% PAT CAGR over FY10-12..0 4.5. Titan Industries „ Although Titan’s margins eroded due to increasing contribution from jewelry. 2) operating leverage in the jewelry business.6 38.0 45.7 25.3x and 5.

405 16.000 14.000 32 17. Titan Industries Titan Industries: Recent trends Watch margins rising Jewelry: Inventory valuations impact margins Sales Growth (%) PBIT Growth (%) PBIT Margin (%) Sales Growth (%) PBIT Growth (%) PBIT Margin (%) 135 22 20 67 100 55 20 71 56 51 49 38 16 7 29 12 21 32 44 7 12 19 33 14 5 6 14 6 3 9 2 4 15 10 -10 -3 -3 3 -15 -41 -30 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 Jewelry: Volume continues to shrink Gold prices hit new high 19.000 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Nov-09 Sep-09 FY09 sales mix: Jewelry is 72% of sales FY09 EBITDA mix: Watches are 50% of EBITDA Precision PE & Engg Eyew ear Eyew ear Watches 2% 2% Watches -6% 50% 24% Jewelry Jewelry 56% 72% Source: Company/MOSL 4 December 2009 85 .055 -3 11.500 16 INR/10g 14.500 -7.2 -7 -15 9.

235 1.1 0.346 11.379 6.0 5.8 7.806 Dividend Paid -416 -672 -559 -660 -992 Curr.8 18.9 22. Activity -315 -1.4 1.801 10.141 1.553 Closing Balance 519 547 669 1.068 6.8 -25.7 Tax Rate (%) -25.211 12.6 0.8 2.0 Depreciation -297 -418 -371 -395 -425 Int.939 CF from Invest.503 2.041 5.5 5.686 14.807 Cash EPS 40. and Fin.307 RoE 34.391 -34.352 (Incr)/Decr in WC -938 -519 -365 -1.7 1.575 1.638 3.918 5.536 1.0 17.663 4.900 7. 297 418 371 395 425 Gross Block 5. 8.1 13.4 Margin (%) 8.6 EBITDA 2.340 Basic (Rs) Change (%) 43.692 20.4 Profit before Taxes 2.1 1.8 22.1 27.3 52.8 Change (%) 27.8 10.3 44.722 Loans 2.2 66.0 6.7 DPS 9.9 Change (%) 30.423 1.725 2.190 Application of Funds 7.753 Add: Opening Balance 507 519 547 669 1.436 5.5 8.009 2.7 29.5 30.180 -50. Assets.2 16.109 Capital Employed 7.2 5.351 4.7 -22. Liab.0 31.278 CASH FLOW STATEMENT (RS MILLION) Net Worth 4. Depn.5 194.515 24.203 1.479 2.4 Margin (%) 5.8 5.162 (Pur)/Sale of Investments -204 397 0 0 0 Inventory 10.385 65.0 Return Ratios (%) Profit after Taxes 1.0 6.184 7.725 EV/Sales 2.075 11.499 1.9 54.0 Preference Share Capital 0 0 0 0 0 Reserves 3.553 Int.745 2.531 55.3 45.902 2.1 12.1 0.186 -3.6 7.638 3.9 46.930 6.8 25.7 BALANCE SHEET (RS MILLION) Y/E MARCH 2008 2009 2010E 2011E 2012E Leverage Ratio Share Capital 444 444 444 444 444 Debt/Equity (x) 0./Div.563 2.812 Cash and Bank Balance 519 547 669 1. Charges -201 -228 -361 -396 -406 Valuation (x) Other Income .773 14.662 2.561 2.754 1.5 Change (%) 22.1 24.8 7.5 10.531 Dividend Yield (%) 0.6 Margin (%) 6.937 38.0 38.8 -2.1 Cash P/E 33.493 -3.347 -1.581 5.0 EV/EBITDA 24.4 18.777 16.541 2.3 40.029 9.5 37.538 6.3 25.6 32. Received 18 53 60 19 22 Depreciation and Amort.6 1.3 241.055 2.5 8.768 Capital WIP 100 195 100 100 100 Investments 474 77 77 77 77 Extraordinary Items -80 -466 0 0 0 (Incr)/Decr in FA -366 -445 -354 -521 -639 Curr.9 29.379 10.885 4.062 1.362 5.679 3.0 24.546 3.307 Debtor (Days) 12 10 10 10 10 Asset Turnover (x) 4.108 -1.985 11.190 1.815 8.7 36.2 31.190 1.1 1.2 124.0 EPS 33.488 7.779 CF from Fin.9 8.0 -30.779 -41.6 Tax -448 -672 -723 -1.027 16.494 16.5 4.4 RoCE 31.6 14.328 1.184 7.186 Direct Taxes Paid -448 -672 -723 -1.379 10.448 8.589 2.4 4.980 4.255 3.290 18.962 1.949 -59.534 BV/Share 98.185 10.4 18.9 20.3 0.432 4.512 6.023 2.522 2.249 2.889 1.580 Provisions 702 857 1. -650 -513 -354 -521 -639 Account Receivables 965 1.075 3.4 24.2 0. -2.2 27.856 -3.8 36.2 36.009 2.539 Interest Paid -201 -228 -361 -396 -406 Less: Accum.409 Others -4 145 -502 -1 6 Account Payables 6.714 Other Liabilities 1.2 153.9 25.3 5. Titan Industries Financials and valuation INCOME STATEMENT (RS MILLION) RATIOS Y/E MARCH 2008 2009 2010E 2011E 2012E Y/E MARCH 2008 2009 2010E 2011E 2012E Net Sales 29.027 13.604 Incr/(Decr) in Debt 105 -821 -426 -200 -728 Others 992 1.128 400 Y/E MARCH 2008 2009 2010E 2011E 2012E Deferred Tax 247 182 235 317 431 OP/(loss) before Tax 2.3 59.Recurring 18 53 60 19 22 P/E 39.108 -1.9 1.448 8.7 27.838 2.049 -851 Intangibles 525 461 398 335 271 CF from Operations 977 1.9 82.2 29.6 0.4 15.9 32.1 5.0 8.4 74.6 30.6 7.967 8.918 6.3 29.5 Total Expenditure -27. and Prov.371 8. L&A 12.486 -861 -1.531 Net Fixed Assets 2.034 44.886 3.0 5.075 11.1 Extraordinary Items -80 -466 0 0 0 Working Capital Ratios Reported PAT 1.2 P/BV 13.1 0.293 1.629 10.825 -4.050 Incr/Decr of Cash 12 28 122 521 416 Net Current Assets 3.604 E: MOSL Estimates 4 December 2009 86 .0 30.5 Payout % 27.0 -28.7 18.

1 16.987 71. the market has not developed „ GSK has launched niche products like Mother's significantly.3 2. Women Horlicks and Horlicks Lite to expand the market. In the market. Horlicks.6 M. which offers a huge growth opportunity. mothers and GSK Consumer Sensex . Brown drinks variants.6 26.4 2.8 16. STOCK PERFORMANCE (ONE YEAR) „ GSK has adopted a strategy of targeting consumers at different stages of life (women.000 launched to stimulate trials by non-users. Buy.4 3.6.9 7.432 57.1x CY10E EPS of Rs71 and 16. The stock in the MFD category.9 4.692 Bloomberg: SKB IN Consumer Monopolies: Investment argument framework 1 Market share and position 2 Trends and opportunities „ GSK Consumer has 70% market share in the Rs24b „ Rising affordability and awareness will increase malted food drinks (MFD) category.465/483 12/08A 15.598 3. Perf. 3 Company strategy to sustain its edge 4 Valuation and view „ GSK has a first mover advantage and a strong brand „ We estimate 21% PAT CAGR over CY09-11.3 31.6 41. opportunity exists to expand the category among the „ Horlicks dominates the white drinks segment. like Boost.557 84.5 27. North and West.1 12/10E 22. „ LUP (low unit packs) of Rs20/90gm SKU have been 1.427 Taget Price: Rs1. penetration as less than 20% of the population „ Cadbury is the second largest player with 15% consumes MFD.9x CY11E malted drinks) has been withdrawn.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range (Rs) 1.7 6.9 16. through the launch of lower priced accounts for 70% of the MFD category.7 27. account for 30%.8 M. 700 400 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Stock info Financial & valuation summary Equity Shares (m) 42. market share. which lower middle class.Rebased 1.697 2.8 29.9 24.3 1.8 20.1 24. „ Rising product visibility and consumer indulgence in „ GSK's Horlicks has ~55% market share and brands organized retail will drive growth rates.6 2.3 12/11E 26.6 23.8 41.300 (Rs80/500gm) Horlicks Asha in Andhra Pradesh.8 38. (US$ b) 1.177 2.0 22.Cap. (Rs b) 60.600 children) that could expand the category. Maltova and Viva account for 15% of the „ ~80% of the market is in South and East India. Dabur's Chawyan Junior is the latest „ We believe a huge bottom of pyramid (BOP) entrant in the category. „ GSK is test marketing a value-for-money variant 1.1 5. frequency of purchase is 4x a year.2 4 December 2009 87 .883 44. which augurs EPS of Rs84. well for GSK.0 11.6. (%) 6/48/94 12/09E 19.6 19.Cap.431 1.4 13. Consumer Monopolies SECTOR: FMCG GSK Consumer – Mastery through malt Buy CMP: Rs1.12 Rel.6 41. Milo (globally No1 brand in trades at 20.

which augurs well for GSK. the world’s leading brand from Nestle in this segment. Milo. The MFD market has been growing at a modest 6- 8% because the products are highly priced (Rs138/500gm) and therefore lack mass appeal. low awareness Malted food drinks have been used in India as a milk substitute and their consumption is higher in states where milk is scarce. In India the white segment comprises 70% of the MFD market and the brown segment has a 30% share.. MFD: Low growth rates due to affordability. Dabur recently entered this category with its Chawyan Junior brand and HUL’s Kissan Amaze Brainfood is yet to be launched nationally. Besides. quit the Indian market. GSK has 35% share in the brown segment and Bournvita Brown Malted Food leads this category with 45% market share. . GENERIC COMPETITION FOR MALTED FOOD DRINKS GSK Consumer has 70% share in the Rs24b malted food drinks category with Cadbury and Heinz being the other prominent players Source: Industry/MOSL 4 December 2009 88 . GSK CONSUMER LEADS THE MFD CATEGORY. the brown segment is popular.. GSK Consumer KEY BRANDS IN MALTED FOOD GSK Consumer an undisputed leader in the Rs24b MFD category GSK Consumer has a 70% share in the Rs24b malted food drinks (MFD) category. Cadbury (Bournvita) and Complan from Heinz are the other prominent players with ~15% and ~13% market share respectively. where use is driven mainly by taste. the products have been facing generic competition from new products launched on the health platform... The market is skewed geographically too: the South and East account for nearly 80% of the MFD market and in the North and the West.WITH FLAGSHIP BRAND HORLICKS Others Complan 2% Others 13% Cadbury Boost 3% White Malted Food 15% 20% Horlicks 77% GSK Consumer 70% Source: Company/MOSL The malted food drinks category can be sub-divided into white and brown segments based on their flavor.

3% was boosted by 98% 9. Each brand is focused on specific needs and priced accordingly (Complan is priced about 32% higher than Horlicks). at par with Horlicks. Maltova (Jagatjit Industries) and Viva over the years. segment MALTED FOOD DRINKS DOUBLE DIGIT VOLUME GROWTH TO SUSTAIN 15.0% CY08 volume growth 11. GSK gained advantage and exclusive predominance in the sector due to its first-mover advantage and exclusive focus on this focus on this product product segment. GSK Consumer GSK has played a key role in We estimate the proportion of the Indian population consuming malted food drinks at less consolidating the malted than 20%. toffee. MALTED FOOD DRINKS: COMPETITIVE MATRIX BRAND VARIANT PRICE/GM COMPETITORS' BRAND PRICE/GM Horlicks Basic 138/500gm Complan 178/500gm Women 110/200gm Mother 230/500gm Boost Basic 135/500gm Bournvita 138/500gm Chocoblast 135/500gm Chawyan Junior 138/500gm Source: Company/MOSL GSK: Focus on category expansion. Horlicks. as the food drinks category and product has been traditionally used as a milk substitute. (3) launch of Rs20 SKU. are brown energy drinks markets as the product is used as a nutrient additive and driver for GSK flavoring agent. Horlicks has been the key driver for GSK.8% 12.1% CY05 CY06 CY07 CY08 CY09E CY10E CY11E Source: Company/MOSL We believe GSK is well placed to maintain its dominance in this product category because: „ GSK’s flagship brand. elaichi and chocolate. North and West India. which has created excitement in the white category and increased the brand’s relevance to young consumers.1% increase in exports 7.0% 10. „ Horlicks has launched flavors such as vanilla.1% 9. (2) increased awareness and brand building. Chyawan Junior has maintained pricing at Rs138/500gm. and (4) value-for-money variants aimed at the mass market. 4 December 2009 89 . even as it acquired sector due to its first-mover brands such as Boost. South and East India are predominantly white malted drinks markets. We expect penetration to increase due to (1) launch of niche products such as Women’s Horlicks and Mother Horlicks. is positioned on the nutrition platform in the white drinks segment and Boost is positioned on the energy platform in the brown drinks segment. not market share GSK gained predominance MFD as a category has evolved over the years and GSK has played a key role in in the malted food drinks consolidating the category. New entrant. We believe the category has evolved over years and is not price-led at the top end. on the other Horlicks has been a key hand.

8 230 209 65 199 216 65 180 63 63 137 181 172 62 62 130 130 110 80 CY09E CY10E CY11E CY05 CY06 CY07 CY08 CY09E CY10E CY11E CY05 CY06 CY07 CY08 Source: Company/MOSL 4 December 2009 90 . Mother Horlicks. mothers and children aged between consumers such as women. Despite a steady increase in prices of key inputs such as milk and malt (9- 16-17% due to operating 16% CAGR). GSK maintained EBITDA margins at 16-17% due to operating leverage in employee cost. between two and 10 years through variants of Horlicks NEW LAUNCHES HAVE CATERED TO A VARIED CONSUMER BASE Source: Company/MOSL „ GSK is test marketing a value for money variant.2 17.4 67 17.5 17. two and 10 years with products like Women’s Horlicks. GSK Consumer GSK is targeting various „ GSK is targeting various consumers such as women.7 17. Horlicks Asha (Rs80/500gm) in Andhra Pradesh to tap opportunity at the bottom of the pyramid. „ The company has tested the waters with LUP (low unit packs) of Rs20/90gm SKUs to stimulate trials by non-users.0 Malt and Malt Extracts 280 16. 67% over CY05-08. Acti Base mothers and children aged and Acti Grow. manufacturing cost and selling and distribution costs. GSK MARGINS STEADY INPUT COST INDEX RISING GRADUALLY Gross Margin (%) Milk Pow er EBITDA Margins (%) Milk Fluid 19.6 253 15. Despite a marginal contraction in gross margins. and the response has been encouraging.5%) and PAT CAGR of 21% EBITDA margins at over CY05-08. led by improved sales mix (contribution from value added brands and manufacturing cost and judicious price increase). GSK’s monopolistic position has enabled it to maintain gross margins of 62- leverage in employee cost. GSK ensures steady margins GSK maintained GSK reported sales CAGR of 17% (volume growth of 10. Sustained volume growth in malted foods has enabled GSK to selling and distribution costs get benefits of economies of scale and efficiency.

8 1. The stock trades at 20.6 1. even as more than 50% of its capital employed is in cash/cash equivalent.6 Dividend Yield % (RHS) 26. We estimate 10.1x CY10E EPS of Rs71 and 16.6. GSK Consumer The company posted ROE of ~25%.6% volume growth in malted withdrawal of Milo by Nestle food drinks. Historically. (Rs80/500gm).6 27. Nutribar.8 1.4 23.9x CY11E EPS of Rs84.6 2.1 1. the company has retained profits (payout ~30%) despite a low capex requirement.4 1. The company is test marketing a value-for- drinks category after the money brand. Chill Dhood. Horlicks Asha. Sustained growth in profits and increase in dividend payout (33. 4 December 2009 91 .8 35 22.4 34 33 33 32 31 CY09E CY10E CY11E CY05 CY06 CY07 CY08 CY09E CY10E CY11E CY05 CY06 CY07 CY08 Source: Company/MOSL Valuation and view GSK has GSK has had an unassailable monopoly in the malted food drinks category after the had an unassailable withdrawal of Milo by Nestle.8 2.5B CASH (%) GSK HAS LOWEST PAYOUT RATIO AMONG MNCS (%) Payout Ratio % (LHS) 27. and a 60bp margin expansion over CY09-11 despite by higher adspends on new launches.4 36 24. We expect PAT CAGR of 21% over CY09-11. Buy. GSK launched Women's Horlicks. ROE IS IMPACTED BY RS4. monopoly in the malted food Actibase and Acti Grow in the past two years.5%) can further re-rate the stock.2 25.

LHS Grow th (% YoY) .0 200 Dec-07 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Dec-07 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Sep-07 Sep-08 Sep-09 Sep-07 Sep-08 Sep-09 Milk price index rising steadily Barley prices firm (Rs/qtl) 270 1.8 16 4.6 12.2 12 12 3.040 1.500 8 7 6 7.3 170 800 Jan-06 May-06 Jan-07 May-07 Jan-08 May-08 Jan-09 May-09 Sep-06 Sep-07 Sep-08 Sep-09 Jul-09 Jul-09 Jul-09 Jun-09 Oct-09 Oct-09 Nov-09 Sep-09 Sep-09 Aug-09 Aug-09 Source: Company/MOSL 4 December 2009 92 .000 17 31.1 12.8 14.3 17.LHS EBITDA Margin (%) .2 8 1.9 33.9 63 600 62 62 18.RHS PAT (Rs m) .500 24.3 19. adspend impact profit growth Gross Margin (%) .6 61 400 9.000 16.5 19.1 195 880 881 182. GSK Consumer GSK Consumer: Recent trends Decline in exports impact 3QCY09 sales 3QCY09 volume growth at a 10-quarter low (%) Net Sales (Rs m) .4 65 800 39.RHS 1.4 65 15.069 249.LHS PAT Grow th (% YoY) .5 15.1 60 9.RHS 20 6.3 20.6 17.5 13 13 19.5 13.000 66 22.0 48.4 245 1.4 16 25.3 0 4 Mar-08 Mar-09 Dec-07 Jun-08 Dec-08 Jun-09 Sep-07 Sep-08 Sep-09 Dec-07 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Sep-07 Sep-08 Sep-09 Increased adspend impact margins Low volume growth.3 19.007 220 960 216.9 14.2 60 5.1 13.120 1.

320 6.186 5.9 Tax -1.8 57.3 19.853 -25.9 6.9 215.183 Basic (Rs) Change (%) 20.281 3.896 15.Recurring 955 890 995 1.2 8.1 2.810 3.485 Cash EPS 54.678 4.527 -225 230 -1.4 17.963 2.280 -1.035 E: MOSL Estimates 4 December 2009 93 .1 22.7 20.1 20.653 10.459 8.416 12.118 Curr.260 6. Charges -82 -65 -65 -60 -60 P/E 31.4 2.912 CASH FLOW STATEMENT (RS MILLION) Net Worth 7. and Fin.117 -1.312 Dividend Yield (%) 1.536 4.1 2.3 97.333 Closing Balance 204 394 336 758 1.772 3.3 22.877 -18.9 20.0 37. and Prov.073 10.0 2.517 4.064 -1.111 Gross Block 5.1 2.883 2.074 10. Assets.292 -3.837 12.987 3.046 Incr/Decr of Cash -732 189 -58 421 277 Deferred Tax Liability -66 -207 -370 -560 -793 Add: Opening Balance 937 205 394 336 758 Application of Funds 7.188 8.312 Investments 4.1 Payout % 33.096 Issue of Shares 0 0 0 0 0 Curr.841 3.9 13.894 -2.7 3.0 35.6 17. GSK Consumer Financials and valuation INCOME STATEMENT (RS MILLION) RATIOS Y/E DECEMBER 2008 2009E 2010E 2011E 2012E Y/E DECEMBER 2008 2009E 2010E 2011E 2012E Net Sales 15.784 1.8 71.9 2.0 Share Capital 421 421 421 421 421 Reserves 7.7 24.5 17.1 1.395 6.745 5.2 BV/Share 180.4 41.968 2.0 84.7 Change (%) 6.2 Profit before Taxes 2.432 2.916 Interest Paid -82 -65 -65 -60 -60 Capital WIP 163 163 163 163 163 Direct Taxes Paid -1.2 13.707 -21.4 38.6 12.8 11.7 306.477 5.000 (Incr)/Decr in WC -412 -758 -487 -487 -580 CF from Operations 1.3 16.3 Change (%) 16. -3. 419 431 473 560 588 Net Fixed Assets 2.755 -5.342 Debtor (Days) 10 9 9 9 9 Asset Turnover (x) 2.623 -1.3 42.2 17.9 117.896 15.4 RoE 24.4 -32.1 2.219 7.0 BALANCE SHEET (RS MILLION) Leverage Ratio Y/E DECEMBER 2008 2009E 2010E 2011E 2012E Debt/Equity (x) 0.755 3.609 9.598 31.5 4.970 -1.6 EBITDA 2.322 (Incr)/Decr in FA -148 -864 -2.4 13.475 14.8 -32.177 22.6 27.7 -34.6 5.3 18.0 36.343 Depreciation and Amort.5 Margin (%) 15.939 4.628 Other Liabilities 626 666 722 784 843 Others -211 142 148 163 188 Provisions 332 366 462 565 717 CF from Fin.609 9.8 27.557 4.404 -1.232 Inventory 2.675 -1.851 2.333 Capital Employed 7.6 P/BV 7.0 0.6 103.9 Working Capital Ratios Reported PAT 1.9 18.0 19./Div.6 13.301 3.1 EV/EBITDA 23.8 19. Activity -842 -685 -897 -1.7 2.440 Net Current Assets 904 1.896 15.990 4.0 1.2 30.894 -2.135 1.900 -2.102 2. Received 955 890 995 1.3 Depreciation -419 -431 -473 -560 -588 Valuation (x) Int.7 Deferred Tax 107 141 163 190 232 Return Ratios (%) Tax Rate (%) -33.2 EPS 44.730 4. Depn.000 8.2 20.259 Int.029 5.189 4.9 24.500 -2.8 26.609 9.837 12.2 12.6 28.8 68.8 38.859 9.700 9.2 17.1 21.371 Cash P/E 26.342 RoCE 38.8 Other Income .064 -1.196 -4.439 4. Liab.9 Margin (%) 18.6 2.6 364.3 14.5 34.694 4.837 12.000 Cash and Bank Balance 205 394 336 758 1.3 Total Expenditure -13.263 4.511 5.7 257.0 0.8 20. L&A 4.505 4.162 3.259 8.500 6.723 -4.432 2.883 2.557 4.623 -1.397 2.6 41.200 -400 -400 Account Receivables 433 479 567 665 780 (Pur)/Sale of Investments -1.035 CF from Invest. -1.404 -1.104 3.447 5.8 24.400 Others 620 730 838 958 1.089 -1.0 17.043 -15.430 3.0 0.073 10.870 3.3 Profit after Taxes 1.371 Less: Accum. 3.627 Dividend Paid -631 -827 -1.3 29.8 18.4 1.1 Margin (%) 12.422 EV/Sales 3.9 30.697 26.125 3.4 19.1 16.135 1.4 18.699 DPS 15.2 -32.431 19.281 6.7 13.186 (Incr)/Decr in Debt 0 0 0 0 0 Account Payables 2.6 19.0 0.1 82.987 3.6 Change (%) 16.333 Y/E DECEMBER 2008 2009E 2010E 2011E 2012E OP/(loss) before Tax 1.045 -1.388 3.1 22.167 2.4 41.

The stock trades at 37x CY08 EPS.5 12/07 8.1 10.724 687 21.1 30. reflecting an increasing base for disposables premium end and Vector Plus and Presto in the and advanced shaving systems.Cap.5 M.12 Rel. 400 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Stock info Financial & valuation summary Equity Shares (m) 96.Cap. STOCK PERFORMANCE (ONE YEAR) „ Brands like Vector Plus and Presto improved Gillette India Sensex . 7'O Clock and Wilkinson.3 12.4 YEAR NET SALES PAT* EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 1.7 33. CAGR and this growth rate can accelerate to 12-15% „ Shaving blades and systems comprise 75% of the in coming years led by increasing proportion of white male grooming market and deodorants. Vidyut Metallic blades.4 6. „ Gillette adopted a price skimming strategy in shaving 700 gels. „ The shaving blade brands consist of Gillette.9 5.2 17.174 36.8 * Excluding extraordinary items and provisions 4 December 2009 94 .408/601 12/06 4. Laser). 3 Company strategy to sustain its edge 4 Valuation and view „ Gillette's strength lies in the technology of its parent.2 27. 10% and 10% respectively.7 107. economy segment for the Indian market. 63. „ Gillette is targeting the upper and middle classes in 1.4 8.336 Bloomberg: GILL IN Consumer Monopolies: Investment argument framework 1 Market share and position 2 Trends and opportunities „ Gillette India has a 30% share in the ~Rs17b male „ The Indian male grooming market is growing at ~10% grooming products segment.0 -17. Consumer Monopolies SECTOR: FMCG Gillette India – Cutting edge Not Rated CMP: Rs1. twin edged disposables and shaving systems (SuperMax) and HUL (Axe) are key competitors with (twin blade and triple blade) are increasingly market shares of 14%.1 . penetrating the wet shaving market.0 1. (%) 5/39/-5 M.000 upgrade consumers.424 43.8 21. skin care account for the rest of the market. „ Steady sales growth of 10% CAGR over FY03-09 and It launched global brands like Mach III Turbo at the high margins (~27%) enabled Gillette to report high premium end and developed Vector Plus in the RoE of 23%.6 12.1 39. hair care and collar jobs and rising aspirations. Perf.7 35.Rebased affordability and increased investment in brand 1.2 12/08 6. brushes and deodorants.247 1. foams.600 building raised awareness.6.5 19. (Rs b) 94. (US$ b) 2. „ Despite being highly skewed towards double edged „ Malhotra Shaving (Topaz. economy segment.5 37.300 India and has constantly pursued strategies to 1.6 58.6 42. „ Gillette has firm control on the systems market with „ The proportion of barber service users is declining in brands like Sensor Excel and Mach3 Turbo in the India.022 1.

hair care. Other significant advanced shaving systems in players are Malhotra Shaving (Laser). It holds a 30% share in Rs17b Indian male grooming segment. shaving blades and systems comprise 75% (Rs13b) and deodorant. skin care and others account for about 6% each. which Gillette is synonymous with advanced shaving systems in India (twin blade and triple is synonymous with blade). holds a 30% share in market share is 14%. 10% and 10% respectively. Gillette has 40% share in the shaving blades and systems market while House of Malhotra has 14% share. the Rs17b Indian male grooming segment GILLETTE HAS 30% SHARE OF THE MALE GROOMING MARKET Others Gillette 36% 30% HUL Malhotra 10% Vidyut Mettalics Shaving 10% 14% Source: Company/MOSL In the male grooming market. Gillette India Gillette leads the male grooming segment Gillette. Vidyut Metallic (SuperMax) and HUL (Axe) whose India. INDIAN MALE GROOMING MARKET BLADES AND RAZORS: A RS13B OPPORTUNITY Pre Razor Shave and 14% Skin Blades Others 60% Gillette Care 37% 40% 5% Hair Care 7% Vidyut Malhotra Deo 8% Men's Razor and Mettalics Shaving Show er Blades 60% 9% 14% 6% Source: Company/MOSL GILLETTE HAS THE MOST COMPREHENSIVE OFFERING IN MALE GROOMING PRODUCTS SEGMENT Source: Company/MOSL 4 December 2009 95 .

after shave lotions and skin creams. the global leader in men’s shaving products. which will increase with availability of free flow of water and rising Skin whitening creams awareness. which account for about two-thirds of it. This will the Indian male grooming result in increasing the number of consumers using advanced shaving systems. Gillette well placed to capitalize on emerging growth opportunity Gillette is expected to be one We believe Gillette will be one of the biggest beneficiaries of change in skin care habits by of the biggest beneficiaries the Indian male population. Emami and Nivea aspirations has helped to expand this niche market. deodorants. „ Gillette has the most comprehensive range of male grooming products. The product has a push blade system. after shave lotions and deodorants. HUL is present in the shaving creams. Skin whitening creams and deodorants are the fastest by a rising proportion of growing segments of the market. „ A significant part of the population in rural India and small towns have poor frequency of shaving. Gillette India Gillette is present in major categories in the male grooming market: shaving blades and systems. and deodorants are the „ There are opportunities in increasing penetration of advanced shaving systems as fastest growing segments of rising manpower costs will reduce the proportion of barber-service users. Although small (Rs2b) these segments are likely to grow white-collar jobs and rising by over 20% CAGR. The market for shaving blades and systems is undergoing significant evolution. „ Although Gillette's long term focus remains the high end systems market. The launch of male dedicated products by HUL. Even though Gillette is not present in the high growth skin of change in the skin care creams market and has limited presence in the deodorant market in India. including shaving systems. shaving gels and foams. We believe male grooming products will maintain double digit growth as: „ A rising proportion of white collared working people will increase the incidence of daily shaving in India. which enable the company to offer a complete solution. Male grooming market to grow at 12-15% CAGR The Indian male grooming is The Indian male grooming market posted CAGR of 10% over FY04-09 and we expect expected to grow by 12-15% this to increase to 12-15% over the next three years. face creams and deodorants segments and Emami and Nivea are fast emerging as key players in the male skin care segment. it is well placed habits by the Indian male to capture the expected surge in demand for male grooming products as: population „ Gillette is backed by Gillette Co USA. The company has been educating consumers regarding the benefits of using its systems. Wilkinson and 7 O'Clock blades. „ Gillette has developed Vector Plus for developing markets like India. designed for markets where free flowing water is not available. led by a rising proportion of white- over the next three years. Sensor Excel. 4 December 2009 96 . led collar jobs and rising aspirations. The shaving blades market is dominated by double edged blades. The company is credited with the launch of top of the line shaving systems like Gillette Sensor. shaving gels. the company launched Gillette. targeting double-edged blade users. This helps to establish higher consumer connect and gradually upgrade them to systems. Mach3 and Mach3 Turbo. market and are likely to „ A rising need to look and feel good will increase the growth rates for men’s grooming grow by over 20% CAGR products like deodorants.

Steady sales CAGR of 10% Steady sales CAGR of 10% over FY03-09 and robust margins (27%) have enabled the over FY03-09 and robust company to report high ROE of 23%.8 brush 20% Safety Razor Blades FY07 FY08 FY09 28% SEGMENTAL REVENUE BREAK-UP SEGMENTAL PBIT MIX Oral Portable Oral Portable Care Pow er Care Pow er 21% 3% 14% 5% Grooming Grooming 74% 83% Source: Company/MOSL FY09 SEGMENTAL RESULTS (RS M) TREND IN MARGINS (%) REVENUES PBIT PBIT Gross Margin EBIT Margin MARGIN (%) Grooming 4.877 1.4 Oral Care 1. the stock offers yield EBIT margins of 27% have of ~1%. With a payout of 36%. portable respectively.8 27.4 Portable Power 354 47 13.9 31.615 1. enabled the company to SALES MIX (CATEGORY WISE) FY09 VOLUMES IMPACTED BY DISTRIBUTION HICCUPS report high ROE of 23% Others 27.8 62.6 26. 36% Batteries 5% 13.7 64.383 218 15. male grooming products account for 74% of sales. portable power accounts grooming products account for 6% and oral care for 20%.1 50.6 Shaving Systems Toiletries Shaving Systems 2% Volume grow th 9% and Catridges. Gillette India Ensuring high margins For Gillette India.2 Total 6.576 23. High margins and bargaining power oral care for 20% in this segment have enabled the company to maintain ROCE of over 40% and strong free cash flows. Male grooming is the most profitable segment for the company with sales power accounts for 6% and and EBIT contribution of 74% and 83% respectively. male For Gillette India.8 62. The company has EBIT and PAT margins of 27% and 16% for 74% of sales.310 26.3 29.4 FY06 FY07 FY08 FY09 Source: Company/MOSL 4 December 2009 97 .3 Tooth 2.

It has 27% EBIT to mid teens in the Indian margins in this business.0 34.1 17.0 43. 4 December 2009 98 . The company could gain significantly from the coming years the expected increase in disposable income and improved consumer lifestyles.1 40 34. We expect Gillette to maintain growth of low to mid teens in the male grooming segment in male grooming segment in the coming years.5 12.0 35 36 15.7 42 40.5 36.7 59 36.8 28 12. Not rated. The stock trades at 37x CY08 EPS. In the past couple of years Gillette's PAT fell 10% but we expect the company to gain after the integration with P&G.5 23 20 FY06 FY07 FY08 FY09 FY06 FY07 FY08 FY09 Source: Company/MOSL Valuation and view Gillette is expected to Gillette has a strong monopoly in male shaving systems where it is the global leader.7 21.. Male maintain growth in the low grooming contributes 74% to sales and 83% to profits of the company. Gillette India TREND IN ROE AND ROCE PAYOUT OF ~35% RoE RoCE EPS DPS Payout (%) 75.

3 2.6 RoE 19.4 35.6 34.1 37.945 Basic (Rs) Change (%) 69.160 1.9 Change (%) 11. Liab.537 2.468 Depreciation and Amort.7 Total Expenditure 3.1 Depreciation 156 223 140 114 Valuation (x) Int.2 1.1 34.726 2.770 Int.0 Net Worth 3.8 -22.7 39.8 17.399 -1.482 3.9 0.7 31.061 Cash EPS 25. Received 179 0 0 0 Gross Block 2.7 36.4 27.538 2.939 2.128 -1.6 -2.0 40.084 1.5 -15. 156 223 140 114 Less: Accum./Div.1 38.174 1.9 29.5 12.577 Interest Paid 0 0 0 0 Net Fixed Assets 1.6 37.909 CASH FLOW STATEMENT (RS MILLION) Loans 0 0 0 0 Deffered Tax 117 72 47 49 Y/E DECEMBER 2006 2007 2008 2009E Capital Employed 3.032 1.8 6.254 2.2 6.945 2.7 -17.5 1.7 18.580 2.132 Working Capital Ratios Debtor (Days) 27 29 38 32 BALANCE SHEET (RS MILLION) Asset Turnover (x) 1.506 CF from Fin.0 34.0 0.1 34.349 Account Payables 671 1. Gillette India Financials and valuation INCOME STATEMENT (RS MILLION) RATIOS Y/E DECEMBER 2006 2007 2008 2009E Y/E DECEMBER 2006 2007 2008 2009E Net Sales 4.475 5.900 1.160 1.336 1.327 1.235 2.093 2.621 -1.724 Curr.089 -830 Inventory 499 827 1.1 35.3 30.957 OP/(loss) before Tax 1.297 1.1 -17.822 1.6 EBITDA 1.0 Payout % 75. -71 372 -1. Depn.958 Closing Balance 2.2 BV/Share 106.0 0.007 Others 1.5 PBT 1.583 Debt/Equity (x) 0.0 17.094 2.0 0.5 12. 0 -274 -89 1 Reported PAT 687 1. Activity -1.4 Y/E DECEMBER 2006 2007 2008 2009E Share Capital 326 326 326 326 Leverage Ratio Reserves 3.249 2.7 Non-rec.928 4.933 5. L&A 4.8 EV/Sales 8. 2.640 4.424 1.2 1.297 1.443 5.156 3.9 Deferred Tax -24 -45 -25 11 Dividend Yield (%) 1.7 97.9 42.285 5.7 5.304 2.247 6.6 36.8 22.260 980 Provisions 1.9 Tax Rate (%) 37.7 36.208 3.270 3.301 4.599 3.1 43.383 1. and Prov.724 8.4 130.1 Adjusted PAT 687 1.884 DPS 15.1 26.131 Return Ratios (%) Change (%) 107.043 1.341 Curr.899 1.5 17.0 Margin (%) 14.712 3. Ch.9 110.5 12.5 Change (%) 90.360 -3.728 765 926 E: MOSL Estimates 4 December 2009 99 .152 5.1 10. (Exp)/Inc.7 35.010 CF from Invest.6 Tax 430 781 673 628 P/BV 12.149 1.301 4.7 31.354 4.9 42. 0 0 0 0 P/E 63.0 Margin (%) 26.7 -4.254 4.2 8.597 3.4 29.596 4.599 3.8 16.863 2.2 EPS 21.5 21.6 23.042 Add: Opening Balance 1. Assets.022 6.6 150.515 -1.3 0.668 4.3 RoCE 35.5 EV/EBITDA 33.297 1.294 539 527 Incr/Decr of Cash 357 -568 -963 162 Net Current Assets 2.788 2.770 Cash P/E 51.2 25. and Fin.962 1.065 918 891 Direct Taxes Paid 430 781 673 628 Capital WIP 37 6 30 24 (Incr)/Decr in WC -71 -301 -381 -172 Investments 0 0 0 0 CF from Operations 1.6 27.728 764 Application of Funds 3.1 Margin (%) 23. -1.668 4.6 38.798 1.5 -3.548 (Incr)/Decr in FA -71 372 -1.822 1.089 -830 Account Receivables 344 640 644 606 Cash and Bank Balance 2.1 11.803 -2.728 764 926 Dividend Paid -3259 -5703 -4073 -4073 Loans & Adv.739 2.4 58. 1.

0 16.6 17.9m 160 outlets and a dedicated sales force to cater to the unique requirements of the category.3 3.8 11.3x FY09 EPS of Rs5. Earlier Robin Blue „ Fabric whitener as a category has evolved from the had emerged as a generic brand in this segment in powder (Neel) to the current liquid whitener.Cap.3 3. 120 80 40 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Stock info Financial & valuation summary YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ Equity Shares (m) 72.3 27. Not Rated.8 1. market share).6 2.5 -3. „ Rising aspirations. 200 „ Distribution is crucial in the marketing of fabric whiteners and Jyothy Labs has a reach of 2.3 5.Cap. 28.2 4. name in the category.3 18.085 524 6.2 4.5.9 3.3 33.6 28. The only competitor in the high quality detergents and other stain removers.2 18.12 Rel. The stock trades at 33.3 3/09A* 3. whiteners. declining use of whites and „ Ujala has been ranked 45th among the 100 most increased use of washing machines limit a major trusted brands in India.5 .4 11. Perf.1 15.9 15.3 M. (%) 17/81/144 3/07A 4. The category has evolved increase in volume growth. Consumer Monopolies SECTOR: FMCG Jyothy Laboratories – Competition white washed Not Rated CMP: Rs184 Bloomberg: JYL IN Consumer Monopolies: Investment argument framework 1 Market share and position 2 Trends and opportunities „ Jyothy Laboratories (JLL) is the market leader in the „ Fabric whitener has 35% penetration in homes that ~Rs4b fabric whitener market with 75% market share use detergent. The category faces competition from with its Ujala brand.8 19.5 17.5% dividend consumer awareness have made Ujala a generic yield.1 M.3 21. The category is Reckitt Benckiser's Robin Blue (~5% inherent volume growth in this category is just 5%.4 3/08A 4.4 *FY09 results are for 9 months ending March 4 December 2009 100 .2 19.794 468 6. through technology and better formulation has led to „ Fabric whitener is a low involvement category with liquids occupying 80-85% share among fabric spend of only Rs12 in 6-12 months. (US$ b) 0.Rebased slabs.6. (Rs b) 13. 3 Company strategy to sustain its edge 4 Valuation and view „ Superior formulation and continued spends on „ 38% payout ratio ensures 43% ROE and 1. around Ujala in the past 20 years.5 -15.8 4.799 401 5. Break the powder (Neel) segment.4 3. „ Jyothy Labs offers a price value equation (Rs12/75ml) STOCK PERFORMANCE (ONE YEAR) that enables it to reach consumers across income Jyothy Labs Sensex .6 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA 52-Week Range 192/47 3/06A 3.471 516 6.

20 Ujala pushed Robin Blue to a small market share despite Reckitt Benckiser launching Robin Blue in liquid form Reckitt Benckiser. attractive pricing and a dedicated sales force. The fabric whitener segment is one of the few product segments segments in which rural sales in which rural sales exceed urban sales.000 2. The niche Rs4b fabric whitener category is dominated by Jyothy Laboratories’ Ujala. Jyothy Laboratories Ujala has 75% market share in fabric whiteners Jyothy Laboratories. The category has evolved as the use of the whitener in powdered form shift in the consumption (mostly by unorganized players) has fallen to an estimated 20%. Ujala pushed Robin Blue to a small market share despite Reckitt Benckiser launching Robin Blue in liquid form and a similar color (violet) formulation to Ujala. 75 Source: Company/MOSL Fabric whitener to remain a low volume growth category The fabric whitener segment Fabric whiteners have 35% product penetration. UJALA HAS 75% SHARE IN THE FABRIC WHITENER MARKET (%) Others. followed by Reckitt Benckiser’s Robin Blue with fabric whitener market. which commands 75% of the which commands 75% market share.000 1.400 10. 5 and in a similar color (violet) formulation to Ujala Jyothy Labs.000 4.200 0 0 Total Urban Rural Total Urban Rural Source: Company/MOSL 4 December 2009 101 . which is very low in comparison to more is one of the few product than 90% for detergents.600 20.000 3. trend from powdered fabric whitener to liquids Jyothy has led shift in the consumption trend from powdered fabric whitener to liquids due to superior product experience (no stains).800 30. led about 5% share. IN MILLION) FY07 FY08 FY09 FY07 FY08 FY09 40. exceed urban sales FABRIC WHITENERS (VOLUME IN '000 LITERS) FABRIC WHITENERS (VALUE.

There is no outsourcing of the product. Ujala is backed by a scalable price-value equation and price points that cater to all sections GENERIC FABRIC WHITENER BRAND of the population.9m outlets (direct reach of 1m outlets) and a dedicated sales force that caters to the unique requirements of the category with small sized and low value SKUs. Besides. category but increasing The low category growth despite 35% penetration is due to: spends on consumer „ Lack of awareness rather than lack of affordability. low consumer low consumer involvement and small unit price make it unattractive for them. Jyothy Laboratories offers a price-value proposition (Rs12/75ml) that makes the brand relevant to urban and rural consumers. 125ml and 250ml packs. This attracted large players as the has enabled improved production planning. „ Jyothy Laboratories has a reach of 2. The company has developed the distribution with a partnership approach with its distributors. which will keep the category as a slow but steady growth segment. Ujala Supreme is available in 9ml. 75ml. which has enabled the company to enter new categories. involvement and low unit the company is evolving the category. small size of the category „ Fabric whitener has not attracted large players as the small size of the category (Rs4b). The use of the product does not change with rising affordability. result in steady volume „ Rising incomes leading to lower use of white clothes except as uniforms. awareness are likely to „ Rising use of washing machines and high end detergents impacting. which offers consumers dual benefits. Ujala is a cash cow for Jyothy Laboratories and has enabled it to invest cash flows in new growth drivers like Maxo (mosquito repellant). Jyothy to retain leadership in niche segment Jyothy Laboratories has created the liquid fabric whitener category virtually from scratch. growth for Ujala We believe increasing spends on consumer awareness are likely to result in steady volume growth for Ujala. it has extended the product to include Ujala price make it unattractive Stiff and Shine. Jyothy Laboratories It is a low involvement It is a low involvement category that is growing volumes in low to mid single digits (5-6%). high level of commitment and better results. Exo (utensil cleaner) and Fabric Spa. We believe Ujala has become a generic brand for fabric whitener and is best placed to ride the increasing penetration in the segment as: „ The company has proprietary technology and product which is only manufactured in- house. Fabric whitener has not „ Jyothy's sales force is on its rolls and not on contract or on the rolls of dealers. 30ml. Ujala has gross margins of 60% with high pricing power. The company plans to take Exo utensil cleaner national and has extended its Ujala detergent powder brand to South India. The company raised prices by one rupee whenever input cost pressures pushed gross margins below the targeted 60%. Ujala a cash cow. funding expansion in new categories We estimate Ujala contributes 40% of Jyothy Laboratories' turnover and 60% of PBIT. 4 December 2009 102 . (Rs4b).

Jyothy Laboratories

India. Strong performance from Ujala fabric whitener has enabled Jyothy to report 43%
ROE and dividend payout of 38%.

FY09: SALES MIX* (%) FY09: PBIT MIX* (%)

Soaps &
Home
Detergents, 94
Care, 44

Home
Care, 6

Soaps &
Detergents, 56

ROE TREND* (%) …WITH AN INCREASING PAYOUT* (%)

18.3
17.6 36.2

15.9 30.6

19.3
18.5

11.4

FY06 FY07 FY08 FY09 FY06 FY07 FY08 FY09

*FY09 financials are for 9 months Source: Company/MOSL

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

4 December 2009 103

Jyothy Laboratories

Financials and valuation

INCOME STATEMENT (RS MILLION) RATIOS

Y/E MARCH 2006 2007 2008 2009 Y/E MARCH 2006 2007 2008 2009

Net Sales 3,794 4,471 4,085 3799 Basic (Rs)
Change (%) 17.9 -8.6 -7.0 EPS 6.5 6.8 6.5 5.5
Total Expenditure 3,184 3,818 3,314 3,221 BV/Share 35.1 40.5 45.3 48.5
DPS 1.3 1.3 2.0 2.0
EBITDA 610 653 771 578 Payout (%) 19 19 31 36
Change (%) 7.1 18.1 -25.1
Margin (%) 16.1 14.6 18.9 15.2 Valuation (x)
Depreciation -52 -62 -74 -68 P/E 28.3 27.2 28.2 33.3
Interest -1 -2 -7 -4 EV/Sales 3.2 2.8 3.0 3.3
PBT 557.0 589.3 690.3 505.8 EV/EBITDA 19.8 19.3 16.1 21.4
Change (%) 5.8 17.1 -26.7 P/BV 5.2 4.5 4.1 3.8
Margin (%) 14.7 13.2 16.9 13.3 Dividend Yield (%) 0.7 0.7 1.1 1.1
Tax 59 76 144 86
Deferred Tax 30 -3 22 19 Return Ratios (%)
Tax Rate (%) 16 12 24 21 RoE 18.3 17.6 15.9 11.4
Adjusted PAT 468 516 524 401 RoCE 18.3 17.6 15.9 11.4
Change (%) 10.4 1.6 -23.4
Margin (%) 12.3 11.5 12.8 10.6 Working Capital Ratios
Non-rec. (Exp)/Inc. 3.9 -24.4 -50.1 0 Debtor (Days) 31.0 33.2 22.6 40.7
Reported PAT 471 492 474 401 Asset Turnover (x) 1.5 1.5 1.2 1.1

BALANCE SHEET (RS MILLION) Leverage Ratio

Y/E MARCH 2006 2007 2008 2009
Debt/Equity (x) 0.0 0.0 0.0 0.0

Share Capital 73 73 73 73
Reserves 2,475 2,865 3,219 3,451
CASH FLOW STATEMENT (RS MILLION)
Net Worth 2,548 2,938 3,292 3,523
Loans 1 2 2 2 Y/E MARCH 2006 2007 2008 2009

Capital Employed 2,549 2,939 3,294 3,525 PBT before EO items 468 516 524 401
Add : Depreciation 52 62 74 68
Gross Block 1,074 1,353 2,179 2,283 Interest 1 2 7 4
Less: Accum. Depn. 240 297 365 432 Less : Direct taxes paid 90 73 166 105
Net Fixed Assets 834 1,056 1,814 1,851 (Inc)/Dec in WC -394 -324 106 93
Capital WIP 84 573 91 61 CF from Operations 216 329 878 671
Investments 17 17 23 173
Curr. Assets, L&A 1,970 1,767 2,016 2,186 (Incr)/Decr in FA -122 -398 -968 -238
Inventory 236 397 425 429 (Pur)/Sale of Investments -17 0 -6 -150
Account Receivables 322 407 253 424 CF from Invest. -139 -398 -974 -388
Cash and Bank Balance 1,277 768 955 1,002
Loans and Advances 134 195 383 331 Inc/(Dec) in networth 1,924 -217 -315 -315
Inc/(Dec) in debt 1 1 0 0
Curr. Liab. and Prov. 298 419 562 638 Less : Interest paid -1 -2 -7 -4
Account Payables 226 369 341 388 Dividend paid 91 91 145 145
Other Liabilities 0 0 0 0 Others -1,706 -313 460 -62
Provisions 72 50 221 250 CF from fin. activity 309 -441 283 -236

Net Curr. Assets 1,672 1,348 1,454 1,547 Incr/Decr of Cash 386 -510 187 48
Def. Tax Liability -57 -55 -88 -107 Add: Opening Balance 892 1,277 768 955
Appl. of Funds 2,549 2,939 3,294 3,525 Closing Balance 1,277 768 955 1,002
Source: Company

4 December 2009 104

N O T E S

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N O T E S 4 December 2009 106 .

N O T E S 4 December 2009 107 .

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