KARV Y || EES odtber38,2012 FMCG Exhibit 22: Past 1 Year's Market Cap Trend in Large Cap Exhibit 23: Past 1 Year's Earnings Trend between Large E Mid Cap FMCG Index & Sensex Cap & Mid Cap FMCG & Sensex we a , 160, “ 1 ® é & 2 &@ 3&8 #F 8 Fre 10 mM FR —sexspxindes ——Lane ap Mn metecp esp es Source: Bloomberg, Karey Insttadional Research, Note Index is based on Karey. Source: Bloomberg, Karey Instational Research, Note lex i based on Karey Coverage Only Coverage Only jt 24: Large Cap & Mid Cap FMCG Sales Growth Exhibit 25: Large Cap & Mid Cap FMCG EBITDA. Index of Last Year Growth Index of Last Year 130 ro 1 ns 15 m2 108 106 roo + oo 4 re Fra Large Cap FMCG =Mid Cap FMCG Large CapIMCG © Mid Cap FMCG Source: Blooerg, Karey Tatttinal Research, Note der B based on Karey Source Blomberg, Karey Institutional Research, Notes Ie based om Karey Coverage Oniy Coverage Oniy How do we see Business going forward? We expect the mid-cap FMCG companies would operationally perform better than their large-cap counterparts. The mid-cap FMCG companies would be benefited on account of * Focus on development of product basket, "Better foothold in the International space, * Consistent focus on distribution expansion, and "Unlocking value in the recent acquisitions. * Cost rationalisation initiatives We expect Mid Cap FMCG companies would show ~19% EBITDA CAGR during FY12- 15E as compared to ~17% EBITDA CAGR in the Large Cap companies. We believe higher stock run up by large cap companies has captured most of the earnings upside while we expect enough space in the mid cap companies. Therefore, 1 expect Mid Cap companies has more potential to give better stock return as compared to Large Cap companies. nKARV Y || EES odtber38,2012 FMCG Exhibit 26: Next 3 Years’ Estimated Sales Growth Trend Exhibit 27: Next 3 Years’ Estimated EBITDA Growth in Large Cap & Mid Cap FMCG ‘Trend between Large Cap & Mid Cap FMCG 164 180.0 vas 160.0 132 1400 16 1200 ro + sooo + rR FYBE FYE FYISE rR FYE, Pye, PYIsE, ee Large Cap FMCG aeMid Cap FCG ee Lage Gap FMCG we Md Cap FMCG Source: Bloomberg, Karey Institutional Research, Note: Index ts based on Karey Source: Bloomberg, Karey Institutional Research, Note nde i based on Karey Coverage Only Coverage Only E. Quant analysis of BSE FMCG Index to forecast the Index Market Cap in 2013FY and 2014FY: Stocks from BSE-FMCG Index are taken for the analysis and Market Cap is forecasted for the year 2013 and 2014. Historical data of PAT from 2003 to 2012 has taken for the analysis. Statistically it was seen that PAT of individual companies are highly correlated with the Market Cap of that companies. The following equation is used for finding the statistical relationship between the PAT and Market Cap values of the stocks. Mktcap' = Const'+ pi* PAT! Here we represent the stock of BSE-FMCG sector. ‘Through regression equation we derived the (correlation coefficient) and const, value. Estimated PAT of individual companies have derived through fundamental analyses and used it to obtain the Market Cap of BSE-FMCG Index 2013 and 2014, Even we applied the tstatistics (test) for verifying the result, We used the STATAI2 software for the analysis. STATA is very powerful software which can even test the multicollinearity and validation of the equation. Exhibit 28: Market Cap Forecast for BSE FMCG Companies Ponticulars Ge mad FAL RAT Avg MiGapa0i8 eae, ME MMGPROR ey MapaT Colgate-Paim. 52316194 151776 280 142,482, 169,485, Nestle India 10731 12,296 402% 48 45,960 531,200 HUL 3268 37,751 90,7765 238 912,397 106,020 ie Pal2 8689 173,604 229 2,116,761 2,520,796, Tata Global 4276 4927 69292 79 71291 7691 Dabur India 778 9,305 185,359 302 203,874 aria United Spists 3360 4683 79,268 83 92,643 103,651 Jubilant Food. 15890 2.187 76,023, 7a 110,557 160,356 Godrej Consumer 7159 8828 163204 23 159,802 197,136 United Breweries 2254 3044 143,080, 756 181,280 241,068, ‘Source: Blomberg, Karoy Institutional Research 2KARV Y IIE (October 18,2012 FMCG It was observed that Market Cap of Colgate is expected to decrease in 2013 as against increase in Market Cap of rest of the other companies. In 2014, we expect better performance of these companies would result into higher increase in Market Cap as compared to 2013. ‘These forecasted Market Cap of companies are extended for the finding the BSE- FMCG Index. Market Cap of all the stocks are regressed with the index value of FMCG. BSE-FMCGhioie = qiStiNCe + Brie MKtcapstow + Bowe * MKtcapo + Bl *Mktcap™ + BA *Mkteapl™ + Blais *Micteapmeuesis! + BOs *MkteapP ar + Besteoet *Mktcaprnitcnnt + Bind *Mkteapstoed + Bore *MiktcapCotns + ntttew !Miktcapinieew First, Regression has been done between the stocks’ market capital and BSE-FMCG sector index value from the above equation. It was found that there is a strong case of Multicollenearity between the market capital of stocks and FMCG-index value, We tried to remove the multicollinearity by taking the weight defined by BSE FMCG weight. We tried to eliminate almost all the multicollinearity existing in the data. It can be seen from the correlation coefficient in the below table that it is the case of multicollnearity. STSTA12 software can easily find the multicollinearity, if itexists in data Exhibit 29: Correlation Coefficient of BSE FMCG Companies MEG Colgate Nee MULE GR patae UM Gaal ae ince Too rig om 10 Nat re) UL om om am 100 mre 0% 099 agra” 100 Tata Gltl ox 09 taste Dabur 09897 ae 0880980100 Unpi 0% 0m 0030 ame 10 Ga 07098098 om 098 0am nak ost 00 Unie reese os1__om oho 95am am 0095 oe ‘Source: Karey Institutional Research After eliminating the multicolinearity and taking the ITC, HUL, Nestle, Colgate, Dabur into one group and rest of the stock in another group and done the regression. It was found that R-square is 94.3%. We got the coefficient value 330 and beta values are 0.0037 and 0.003 for that assigned group. By applying the regression result, we got the BSE-FMCG index value 5,927 and 6,680 in the year 2013 and 2014, aKARV Y || EES odtber38,2012 FMCG F, Comparative Price Performance & Valuation — Domestic vs. Global FMCG Firms Exhibit 30: Strong Earnings Growth Expectation from Indian FMCG Companies has resulted into Strong Stock Return as Compared to Global Peer Companies that widen the Premium Valuation Enjoyed by Indian companies. cor Absolute Performance (%) PEW Earning CAGR ‘Company @) sD MM MTD TYR FYE FYE Fyi2sE(%) India ie 20S 3691284 It HUL 5702758283 HA OS 195 a2 185 Nestle India 4770 27, 848K) 4310340 168 Dabur wos 82S BA RO 35 9250 192 Colgate 127 02) SD 37 loa 179 Maric m6 13 SA? 3830725 243 Iyothy Labs | WS M23 KS NST #300 MA a4 GcPL, “9 29 law TRF we O53 254 GSK Consumers 2s a) 8s 80s 39 02a 197 Emami su 0228 wa 2212 175 Britannia Industries #9 23) 0243) as) sis 82205 246 Jubilant Food Works 1307 83) 6A m6 585 8A 22 Bajaj Corp 153) 88 ALL B2 8D m1 S18 219 Europe Danone 7 16 G8) 622) 2554 70 Nestle SA 2 16 55 52 99188 22008370 92. Unilever 2M6 20297 5826 53 Reckitt Benckiser Group 36m 29 12 34 op Bo 9a 12 Henkel AG & Co 8 06 25s ow ws 27 129 Beiersdorf SB 32 s21 i250 134 us Colgate-Palmolive 2743 50g? 20 06 18 82 Procter & Gamble © 2 08 72 aa 1279165 51 Hershey 03a) 2) BF 1 19199 124 Kellogg 528 Sl Naa) By BS tay 34 Hy Heinz S18 2580s ws 63152 65 Regional China Resources Enterprise 2520), 4O) T_T). 64) 243 62 74 Tingyi (Cayman sin) Hldg Co 24 - 15 ass 383386286 157 Huabao International Holding 412), (10) IBS) SB 77 7A 63 108 China Foods 8 6) Bs m1 20 B41 196 306 Indofood Sukses Makmur 6000 43.—=—GLS2 280304 ABA 135 100 (Olam International 2 68 @4H 84 Ga uz ot 232 Hengan Intl Group m 28 ae) = 730 335 265 215 284 ‘Sour: Blomberg, Karoy Institutional Research 4KARV Y || EES odtber38,2012 FMCG Summary of the Companies under Coverage ITC: (CMP: Rs. 288; Target Price: Rs. 312) - BUY ITC’s dominance on cigarette would continue going forward, owing to extensive portfolio, large distribution network, and suitable backward integration. We expect strong pricing power and likely foray into 64 mm cigarette segment would aid ITC in maintaining healthy growth momentum. Besides, better cigarette revenue mix with pricing power, higher operational efficiency would boost PBIT/stick to 109 paisa by FY15E from 80 paisa in FY12P. Outlook & Valuation: Valuing the stock using DCF methodology ~ as relative valuation is nol feasible in the lack of suitable comparison ~ we initiate coverage on ITC with “BUY” recommendation with a target price of Rs. 312 apiece, having 8% upside potential from the CMP. HUL: (CMP: Rs. 573; Target Price: Rs. 576) - HOLD ‘The higher involvement of top management at the field level, setting up of aggressive sales targets, improvement in product portfolio and expansion in distribution network have improved the visibility in the business. We expect it ‘would help in delivering better revenue going forward which HUL was missing in previous several years. We expect sales and net earnings to show 15.7% and 17.5% CAGR during FY12-15E vs. 14% and 13.5% growth in FY10-12 respectively. Outlook & Valuation: Valuing HUL at P/E of 30x (1.8x PEG) on 24-month forward earnings - which is ~10% premium to FMCG sector's valuations and 20% higher than its past three years median P/E — we initiate coverage on HUL with “HOLD” recommendation with target price of Rs. 576 apiece, having 1% upside potential from the CMP. Nestlé India: (CMP: Rs. 4,760; Target Price: Rs. 4,564) - SELL Consistent price hike, low discretionary spending amid rising competition across all categories has been impacting Nestlé India’s volume growth for past few quarters. However, recent new launches with higher focus on rural market would aid the Company in showing better volume growth, going forward, Higher spending on capacity expansion would force Nestlé India to focus more on volume growth. As the likely pressure on pricing power would limit further expansion in EBITDA margin, we expect Nestlé India to maintain EBITDA margin at -21% in CYI2E & CYIBE. Outlook & Valuation: Nestlé India’s valuations premium has declined to 25% compared to 40% in the previous year. We give 31x (PEG of 19x) multiple on 24- month forward earnings and derive target price at Rs4,564. We initiate coverage on Nestlé India with “SELL” recommendation. 15