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SPARK CONSUMPTION DESK - 10 YEARS, TOP 10 LEARNINGS

Diary of a Consumer Analyst

July 23, 2020

 TEJASH SHAH  tejash@[Link]  +91 22 6176 6802

 MADHAV PVR  madhav@[Link]  +91 44 4344 0060
 SANTOSHKUMAR  santoshkumar@[Link]  +91 44 6660 3037

 Analyst Certification and Required Disclosures begin on last two pages – Click
Page 1
here
SPARK CONSUMPTION DESK
10 Years, Top 10 Learnings

In one of the most acclaimed movies of our times – The Dark Knight, there is a legendary dialogue by Harvey Dent – “You either die a hero or live SPARK CONSUMPTION
long enough to see yourself become the villain”. The philosophy is applicable to many fields, but in our opinion, it resonates most with the world 23 July 2020
of investing. Come August, as SPARK CONSUMPTION DESK reaches the milestone of a decade of its existence, we ask the same question to
ourselves, on how to survive long enough and yet not turn into a villain.
Honestly, just in the sheer mood of reflection (and bugged by WFH) we started scribbling our top observations/learnings of the last decade as a 400
team. As a lot of these learnings have come from our clients, hence in the spirit of sharing, it is fair that the same, if documented, should be
shared back with the clients at large. 300

And as Jim Collins [Good to Great fame] says that for an academician or a teacher, his/her experiences are utter waste, if they can’t be shared with 200
the world at large. The same applies to relatively lowly learnings of SELL side analysts as well.
100
1. Personal Biases should be kept Personal – The worst part of being a consumer analyst is that everyone & their uncles will have opinions on
your sector and hence you’ll have to overcome a plethora of PERSONAL BIASES. And the most dangerous of all will be your own. Initially, we 0
missed many good stocks (footwear, FMCG etc.) because the consumer in us couldn’t align with the brand. But Indian consumer is way more Mar-10 Mar-14 Mar-18
plural and complicated to be fully defined by an analyst stuffed in his AC cubicle. Hence, looking at the aggregate number is the best way to
overcome the bias. BTW, on this point, a consumer analyst envies his Pharma counterpart the most, because it is easier for a layman to argue NSEFMCG NSECON
with a consumer analyst on Horlicks than a pharma analyst on Hydroxychloroquine. NIFTY

2. IPOs + Financial investor exits = Premature deliveries – As they say, IPO = It’s Perhaps Over-priced. Though we can’t generalize, but can
safely state from experience that in IPOs. one needs to bring his/her best analytical foot forward. The game isn’t designed fairly, and
information asymmetry can be perilous, mainly because of the limited cyclical history of the business. Though in the last decade, we have had
blockbuster IPOs in the sector like Avenue Supermart, V-Mart, etc., but as far as the total count goes, the scale is very much tilted in favour of
disappointing results. As per our read, the most unsuccessful consumption IPOs in the last decade were great developing stories but sub-scale
businesses. And pre-mature IPOs burdened the weak model further with heavy expectations.
3. Growth is a ‘Gangajal’ for most Corporate Governance Sins – Perhaps not true for other sectors, but largely true for consumption. The huge
gulf between a bad management and a visionary management can be bridged with maximum of 3-4 quarters of consistent growth and good RESEARCH ANALYSTS
guidance. Similarly, the journey works backwards as well. In consumption, market sensitivity to Corporate Governance concerns like Pledge
shares, Inter Corporate Deposits, Related Party transactions, etc. get active only during a bad growth phase and is forgotten during a good TEJASH SHAH
phase. Sometimes even a quarter of robust growth is good enough to jump the CG hump. Obviously, integrity violation of reported financials tejash@[Link]
is beyond any redemption. But for lower degree Corporate Governance issues – Growth is a time-tested vaccine. +91 22 6176 6802

4. Have Faith on your thesis and doubt your Faith – The worst phase of an analyst (or any practicing investor) is to stop questioning his/her MADHAV PVR
investment thesis. In the VUCA world, where business cycles are getting compressed and disrupted on a regular basis, having doubts on your madhav@[Link]
thesis helps to refine the thesis further. Hence, we frequently resort to our favourite INVERT THINKING framework, it has helped us to avoid +91 44 4344 0060
many (not all) mistakes. But, still sometimes we get carried away. SANTOSHKUMAR
santoshkumar@[Link]
+91 44 6660 3037

find SPARK RESEARCH on Bloomberg [RESP SPAK <go>] | FACTSET | REFINITIV EIKON Page 2
 Spark Consumption Desk | 10 YEARS, TOP 10 LEARNINGS

5. Channel Check is a necessary Condition but not a Sufficient One – Philip Fisher popularised the tool of ‘Scuttlebutt’ AKA ‘Channel Checks’. It is a very powerful tool to neutralise
the management bias and get a 360* feedback on the business. But then channel checks can be one of the many tools but not the only one. Interestingly, both our top picks
(Paints, LOG, Footwear stock turnaround etc.) and top blunders (mainly in small cap retail) had a fair contribution of channel checks. Hence, it is a tool to be used with extra
sophistication. In our experience, sometimes two brothers in the same shop will have different outlooks on the same business. So, one needs to develop a robust filter to
separate biases from facts. If done rightly, Channel checks can be a fabulous tool to evaluate customer loyalty. And yes, channel checks should be avoided for Quarterly previews,
a very low strike rate.
6. All things being equal, back the most articulate management – Articulation of business strategy is an art and a rare one. And it can have a huge bearing on P/E a stock will
command. Let us elaborate with an example. Around 2014, 2 FMCG companies took price cuts in the same quarter. – in respective earning calls, one called it a “PRICE CUT” and
the other “Democratisation of Prices”. The former was accused of lack of pricing power, while the later was praised for reaching out to the mass consumers. On a serious note,
better articulation also signifies management’s clarity of thought, ability to think through complicated business problems and ability to write problem statements correctly. So no
doubt, execution is the key, but better articulation helps.
7. Wealth Destruction vs Value Destruction – The last 5 years of the decade have taught us this better than before. Though leverage is not a big concern for the sector, in some
cases, promoters’ ambitious bets in the personal domain weighed heavily on the listed companies. Hence, a lot of wealth destruction happened without much value destruction
in the business. Similarly, led by value migration, wealth destruction can start way before visible value destruction begins. Viz. TV Broadcasters, GT only oriented fashion brands,
newspapers, etc. As we look ahead, we see many such value migration led possible disruptions in the offing in the consumption space (Perhaps a separate note on that later).
8. Every price demands a narrative, sometimes “We don’t know” is the best one to offer – So, this one is our favourite. Throughout the last decade, a 10%+ monthly fall in a
particular paint company stock fuels the narrative that there is some turbulence in promoters’ families and at every 52-week high, it becomes a world class professionally
managed company. Similarly, in a packaged foods company, at every 10%+ correction, “CEO is resigning” becomes the favorite narrative to offer. We have learnt that, even at
the risk of sounding uninformed to clients, many times “I don’t know” is the best and honest answer one can offer.
9. Spreadsheets are overrated, Framework under rated – The initial urge to capture every moving part of the business in MS excel is tempting. But with experience the limitations
of the same starts surfacing. In our experience, our best ideas came from a comprehensive sector framework rather than the precision in forecasting next year’s EPS.
Spreadsheet is an imperative analytical tool to aid the process but relying solely on models to generate insights can generate faulty outcomes.
10. Corporate access, a double-edged sword – Meeting management is imperative, and can't be underemphasised. Especially in India, where the pilot is as important, if not more,
than the plane, at no point Management access can be underplayed. But purely from an objectivity angle, an overreach of the same has proved to be counterproductive. And
again, in our limited experience, we have realized that, most managements’ (there are exceptions) long term outlook is also vulnerable to get colored by current business
momentum. So like channel checks, we have learnt to utilize corporate access also with a lot of caution. Interestingly, on hindsight, we can assign our biggest mistakes to
corporate access overdose. At some passive level, it clouds thinking. Our best calls have come where we have restricted access largely to earning calls only.
Finally, it seems, the odds of winning in stock markets are not necessarily directly proportional to the years spent in markets. Market has humbled us more than often in the last
10 years and we don’t expect it to change materially in the coming 10 years. The only endeavor from our side will be not to repeat the causes of getting humbled.

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 Spark Consumption Desk | 10 YEARS, TOP 10 LEARNINGS

Nifty FMCG Index outperformed broader market (NIFTY Index) by 2x over the last 10 years

5-yr CAGR FY10-FY15 5-yr CAGR FY15-FY20*

FMCG 22%; CONSUMPTION 16%; NIFTY 10% FMCG 10%; CONSUMPTION 8%; NIFTY 5%

450
Continuation of
BJP government in FMCG
16%
May-19 10-yr CAGR*
400 Implementation of Currently at
GST in Jun-17 ~4% below
Rural slowdown peak level
impacting FMCG
350
Demonetisation performance
announcement in
Nov-16
CONSUMPTION
12%
300 10-yr CAGR*
BJP government
formed in May-14
Currently at
~8% below
250 peak level

NIFTY 8%
200 10-yr CAGR*

Currently at
~12% below
150 peak level

Strong market rally across most COVID-19

sectors led by government capex impact since
100 spending (double-digit growth in Feb’20
both Nifty & FMCG index each year
Strong market performance b/w FY16-19)
of ~22% CAGR from FY13-15
50
Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
Jul-20

NIFTY NSEFMCG NSECON

Source: Bloomberg, Spark Capital Research; *5-yr & 10-yr CAGR until 17th July 2020; NSECON refers to Nifty Consumption Index which includes Auto & other boarder consumption sectors

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Spark Consumption Desk | 10 YEARS, TOP 10 LEARNINGS

Consumption IPOs in last decade

WEALTH CREATORS WEALTH DESTRUCTORS
900 Company Name Years since listing Absolute Returns (%)
700
RETURN: ~77% CAGR in BAJAJ CONSUMER CARE 10 32%
500 last 3.5 years, up 565%
since listing
300
PRABHAT DAIRY 5 -39%
100
Mar-17 Mar-18 Mar-19 Mar-20
PRATAAP SNACKS 3 -41%
1500

1000 TCNS CLOTHING 2 -53%

RETURN: ~34% CAGR in
last 7.5 years, up 767%
500
since listing PARAG DAIRY 4 -59%
0
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20
TBZ JEWELLERS 8 -75%
300
250
PC JEWELLERS 7.5 -78%
200 RETURN: ~20-25%
150 CAGR in last 3.5+ years, SPECIALITY
100 up 100%+ since listing 8 -79%
RESTAURANTS
50
Nov-16 Jun-17 Jan-18 Aug-18 Mar-19 Oct-19 May-20 KHADIM 3 -85%
400

300 CAFÉ COFFEE DAY 5 -94%

Jan’20 RETURN: ~12% CAGR in
200 last 6 years, up 100% MANPASAND
CAGR ~13% since listing (as of 5 -96%
100 BEVERAGES
Jan’20)
0 *current price deeply ADLABS
May-14 May-15 May-16 May-17 May-18 May-19 May-20 impacted by COVID 5 -98%
ENTERTAINMENT

Source: Bloomberg, Spark Capital Research;

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Spark Consumption Desk | 10 YEARS, TOP 10 LEARNINGS

Performance of our coverage names in the last decade

Performance (10-yr CAGR) of FMCG coverage; ‘Unloved Unfavoured’ basket is the clear underperformer Paints pack significantly outperformed the market in the last decade
(10-yr CAGR)
33%
31%

25%
23%

20% 19% 20%

18%
16%

8%
8%
6% 5% 5%
3%

BRIT HUVR NEST MRCO DABUR ZYWL ITC JYL HMN BAJAJCON NIFTY BRGR PIDI APNT KNPL

Performance (10-yr CAGR) of Discretionary coverage; Smaller retail names (KHDM, KEKC) are the underperformers Stocks which got significantly impacted due to recent COVID-led
disruptions since Feb’20; 10-yr performance CAGR as of 31st Dec 2019
41% 40% 28%
34%
30%
23% 22% 20% 19%
10%
6% 6% 8%
0% 2%
16% 16%
ABFRL LOG RLXF VMART PAG BATA JUBI TTAN TRENT VIP ITFL KEKC WONH KHDM NIFTY 13%

9%

-51%
BATA VIP ITFL WONH NIFTY

Source: Bloomberg, Spark Capital Research; Note: 10-yr CAGR until 17th July 2020 & CAGR performance of BAJAJCON, ITFL, KHDM, VMART, WONH since respective listing

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 Spark Consumption Desk | 10 YEARS, TOP 10 LEARNINGS

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year horizon
Absolute Rating
Interpretation
ADD Stock expected to provide positive returns of >5% – <15% over a 1-year horizon SELL Stock expected to fall >10% over a 1-year horizon

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Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in
this document. This should however not be treated as endorsement of views expressed in this report:

Details of Financial Interest of Research Entity [Spark Capital Advisors (India) Private Limited] and its Associates No
Details of Financial Interest of covering analyst/ and his relatives No
Disclosure of interest statement

Investment banking relationship with the company covered No

Any other material conflict of interest at the time of publishing the research report by Spark and its associates No
Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:
 Managing/co-managing public offering of securities ; Investment banking/merchant banking/brokerage services ; Products or services other than those above in connection with research report; No
Compensation or other benefits from the subject company or third party in connection with the research report
Whether covering analyst has served as an officer, director or employee of the subject company covered No
Whether the Spark and its associates has been engaged in market making activity of the Subject Company No
Whether the research entity or its associates, has actual/beneficial ownership of one per cent. or more securities of the subject company, at the end of the month immediately preceding the date of publication
No
of the research report

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 Spark Consumption Desk | 10 YEARS, TOP 10 LEARNINGS

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensations was, is or will be, directly or indirectly,
related to the specific recommendation or views expressed in the report.
Additional Disclaimer for US Institutional Investors
This report was prepared, approved, published and distributed by Spark Capital Advisors (India) Pvt. Ltd a company located outside of the United States (a “non-US Group Company”). This report is distributed in the U.S. by LXM LLP USA, a
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exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through LXM LLP USA.
Neither the report nor any analyst who prepared or approved the report is subject to U.S. legal requirements or the Financial Industry Regulatory Authority, Inc. (“FINRA”) or other regulatory requirements pertaining to research reports or
research analysts. No non-US Group Company is registered as a broker-dealer under the Exchange Act or is a member of the Financial Industry Regulatory Authority, Inc. or any other U.S. self-regulatory organization.
Analyst Certification. Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the
subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. Please bear in mind that (i) Spark Capital
Advisors (India) Pvt. Ltd is the employer of the research analyst(s) responsible for the content of this report and (ii) research analysts preparing this report are resident outside the United States and are not associated persons of any US
regulated broker-dealer and that therefore the analyst(s) is/are not subject to supervision by a US broker-dealer, and are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with US rules or
regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.
Important US Regulatory Disclosures on Subject Companies. This material was produced by Spark Capital Advisors (India) Pvt. Ltd solely for information purposes and for the use of the recipient. It is not to be reproduced under any
circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by LXM LL P USA and elsewhere in the world by Spark Capital Advisors (India) Pvt. Ltd or an
authorized affiliate of Spark Capital Advisors (India) Pvt. Ltd . This document does not constitute an offer of, or an invitation by or on behalf of Spark Capital Advisors (India) Pvt. Ltd or its affiliates or any other company to any person, to buy
or sell any security. The information contained herein has been obtained from published information and other sources, which Spark Capital Advisors (India) Pvt. Ltd or its Affiliates consider to be reliable. None of Spark Capital Advisors (India)
Pvt. Ltd accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this
document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to
significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.
LXM LLP USA assumes responsibility for the research reports content in regards to research distributed in the U.S. LXM LLP USA or its affiliates has not managed or co-managed a public offering of securities for the subject company in the past
12 months, has not received compensation for investment banking services from the subject company in the past 12 months, does not expect to receive and does not intend to seek compensation for investment banking services from the
subject company in the next 3 months. LXM LLP USA has never owned any class of equity securities of the subject company. There are not any other actual, material conflicts of interest of LXM LLP USA at the time of the publication of this
research report. As of the publication of this report LXM LLP USA, does not make a market in the subject securities.
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Spark Capital’s research, including the recommendations recorded therein, have been objectively prepared from public sources which it believed to be reliable and therefore constitutes independent investment research, and is presented as
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and research of Spark Capital, provides investment advice in respect thereof to the extent permissible. In return for this Spark Capital pays a monthly fee and commissions earned on certain qualifying transactions to ACMI. Spark Capital’s
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This material produced by Spark Capital is solely for information purposes only and for the personal use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than
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affiliates or any other company to any person, to buy or sell any security.
Securities, money market instruments, strategies, financial or investment instruments mentioned herein may not be suitable for all investors. The information and opinions provided in this note do not constitute a personal recommendation
and take no account of the investor's individual circumstances. Investors should consider this research as only a single factor in making any investment decisions and, if appropriate, should seek advice from an investment advisor.
Spark Capital or its affiliates does not accept any liability or responsibility whatsoever for the accuracy or completeness of any information contained in its research reports. All estimates, expressions of opinion and other subjective judgments
contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and
market prices and volumes may be subject to significant variations.
Save as specifically disclosed otherwise, Spark Capital’s relationship with ACMI is not reasonably expected to impair the objective presentation of the recommendations in respect of in the research report, including any interests or conflicts of
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disclaims any such liability.

SPARK CAPITAL ADVISORS | Board: +91.44. 4344 0000 | [Link]

Spark Capital Advisors (India) Pvt. Ltd. is a SEBI registered Research Analyst bearing SEBI Registration No. INH200001459

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