KARV Y || EES October 18,2012 FMCG 1. RIVER Score ‘As per our RIVER (Range, Innovation, Value Proposition, Engage and Reach) analysis, we believe HUL, ITC and Nestlé India are best placed among its peers. Range: The range of any brand in terms of price points and variety should be considered as a key trait, It is observed that the companies have benefited by launching products at low price points that ensures high volume and the margins. Innovation: This trait is the key for any industry and FMCG industry is not an exception. Innovations includes: consistent improvement in usability, product extension, packaging and quality etc. Value Proposition: Unlike the days when the consumers’ psyche was largely governed by “Value for Money” concept, now the consumers buy products through mathematical matrix that calculates each item's weightage in monthly budget. The importance of brand plays key role in choosing products. Engage: It is observed that brand loyalty has been reducing over a period of time ‘with consistent changes in brands. The companies should bring in products with improved features, packing, quality and better schemes to fulfill the new demand. Reach: [tis a proven fact that long-term survival of any brand depends on its reach to the customers. Good companies consistently develop their distribution channel and always wait for the opportunities to come to challenge the competitor. Exhibit 39: RIVER Scores Particulars ITC _HUL Nestle Dabur Colgate Maricojyothy Labs Range 25 30, 2025. 25 Innovation 20 25 20 20-2020 20 Value Proposition 20 «25 «30302020 20 Engage 20 «30 «200220 20 each, 25 250 202s 808 25 Total mos sss 9 no “Source: Company, Karvy Tstitutiona Research, Scares: 1-3 where 3 i forthe Bat IL. Leadership Position We give highest ranking to ITC on account of >80% market share in the cigarette business. The ranking is followed by the HUL for leadership in Soaps, Detergent and Skin Care categories and Colgate for Oral Care categories. Exhibit 40: Leadership Position and Contribution in Bu: Companies Leadenbip Contabuon i) __Contbation 9 ine Cigereve s UL Soaps, Detergent and Skin Care 58 Nestle India Noodles, Infant Foods 48 Dabur —_Chywanprash, Hair Oil, Glucose 20 Colgate Toothpaste a Marico air Oi “55 Jyothy Labs _Whitener “20 Source: Company, Karay TosiKARV Y || EES (October 1, 2012 FMCG IIL. Operational Profitability ITC enjoys robust operational profitability on account of its unarguable leadership the Cigarette business and low exposure to commodity prices. We give highest ranking to ITC which is followed by Nestle and Colgate who also have strong pricing power on their key brands. Exhibit 41: EBITDA Margin Profile 360 20 180 90 TIC Colgate Neste India Dabur HUL——Marico_Jyothy Labs “Sources Company, Karvy Institutional Research IV. Category Growth We give highest ranking to HUL and Nestle on account of better outlook of those categories in which they have strong presence, HUL's Soap & Detergent categories are getting benefits of premiumisation while Skin care is more of higher consumption driven category. Nestle's Infant foods and Noodle category also persist high growth momentum. Exhibit 42: Category Growth Key Category Category Growth (%) Ranking Low single digit volume growth, large part of the growth comes from frequent price hike Soaps & Detergent is largely price driven me Cigarette ° Soaps, Detergent and HUL Spee category while Skin care is having healthy mix 13 of volume and price growth [Noodles is Healthy mix of volume and price Nestle India Noodles, Infant Foods _growth while Infant food is largely price 3 riven Chyawanprash, Hair Dabur Orel “Healthy mix of volume and price growth 2 Colgate Toothpaste Healthy mix of volume and price growth ii Mario Hair Oil Healthy mix of volume and price growth 2 Low single digit volume growth, Jyothy Labs | Whitener large part of the growth comes from frequent " price hike “Sours Compa, Karay istttional Research 2KARV Y || EES odtber38,2012 FMCG V. Commodity Exposure We give highest ranking to ITC because of its low dependence on input prices, This low dependence is followed by Colgate and Nestle. Exhibit 43: RM (°% of sales) «0 525 450 375 Jyolky labs HUL Maric —DaburNestleIndia Colgate = ITC ERM Cost (% of sales) ‘Source: Comping, Karey Inetitutional Research VI. Net Debt Equity ITC, HUL and Colgate is zero debt companies and having negative Net Debt to Equity. Hence they account for highest ranking from this fundamental factor. Exhibit 44: Net Debt Equity 1.00 oss (019 055) 1.20) MTC HULNestleIndia Dabur Colgate —-Marico_Jyothy Labs “Sources Company, Karvy Instttional Research VII. Valuation Comfort Apart from the business fundamental, valuation comfort is also very critical for comparative analysis. We believe Jyothy Labs, Dabur and Marico are the best placed in term of valuation comfort Exhibit 45: Valuation Comfort ‘Companies Ranking inc 10 HUL 8 Nestle India 4 Dabur 2 Colgate 8 Marico n Jyothy Labs 16 1“ ‘Sources Company, Kary Isttational Research 2aKARV Y || EES odtber38,2012 FMCG Key Fundamental Triggers Evaluating the basic fundamentals, we expect this robust sales and profitability _momentum to continue aver the next two years: I. Changing Business Fundamentals reflects Growth A. Expanding International footprints a big positive divergence for the sector ‘The international business portfolio of most of the domestic FMCG companies specifically the mid-cap companies was at nascent stage in FYO4 & FY05, has become critical for their robust growth now. Today, International businesses for domestic companies like Dabur, Marico, GCPL and Emami contributes 30%, 24%, 38% and 14% of their sales, respectively. We believe that unlike FY04 & FYO5, the rising domestic competition won't affect the domestic FMCG players significantly, going forward. Exhibit 46: International Business Contribution in Revenues 20,000 aR 30% 16,000 33% 12,000 om 24% 83000 18% vy 2% 17% 15% 2% 4000 3m tae - —__ a Dabur Mario Ger. Emami aFvo9 aFvi0 rv are, Source: Company, Karey Istituto Research Exhibit 47: Dabur’s Geographical Revenue Mix Exhibit 48: Marico’s Geographical Revenue Mix ‘Afica, Others, 6% South 2 East Asia, 25% Banglade sh 40% South Alica, US, 26% ee Asia, 18% MENA, 25% Exhibit 49: Emami’s Geographical Revenue Mix Exhibit 50: GCPL’s Geographical Revenue Mix ‘ica, i ‘Afsca 35%, oS % Others, 3% Indonesia Latin le a America, Midal 15% East 20% SAARC, Midate Burope, 30% East 1% u% ‘Source: Company, Karoylstitutional Research Source: Company, Karey bstitational Researah PyKARV Y || EES Exhibit 51: HUL (October 18,2012 FMCG B. Changing Product Mix and Range ‘The FMCG companies have improved their product range in past few years and reduced their high dependence on few brands/SKUs. Consistent foray into new categories, launch of innovative products and extension of brands have considerably helped the FMCG companies, with which their current product portfolio becoming more balanced and the companies have multiple options to drive the business. Among the FMCG pack, HUL, Dabur and Colgate-Palmolive have increased portfolio size substantially in past two years. Leading the pack, HUL increased its portfolio size by 34 in FY11 (27 Launches & 7 Re-launches) & FY12 (37 Launches & 7 Re-launches). Exhibit 52: Marico Exhibit 53: Nestle 0 40 30 20 Se Launches Relaunches 15 10 g Launches a Relaunches mt ra By 20 | 4 1) 54 0 EEREEEEE se Launches Relaunches Source: Company, Karey Institutional Reseerdr Exhibit 54: Dabur India ‘Sources Company, Karey Inetttional Research Exhibit 55: Jyothy Labs Source: Company, Karey Institutional Resear ° PEE seLaunches Relaunches P10 eam Frit fm Fv? rvs [ia FY06 [it Fu a z Launches a Relaunches 155 ‘| [ | dad £ Exhibit 56: Colgate-Palmolive ge e8 al EREEREE seLaunches Relaunches Source: Company, Karey Institutional Reseerdr Exhibit 57: ITC ‘Source: Company, Karey Instttional Research Exhibit 58: Emami Source: Company, Karey Institutional Reseed Exhibit 59: Britannia Industries 25 20 | Be EERELEEE SeLaunches Relaunches 15 10 BEGEE Launches m Relaunches v0 Frio mt rR By EEREEEEE taunhes Rebun Source: Company, Karey Institutional Resear ‘Sources Company, Karey Istttional Research Source: Company, Karey institutional Resear C. Remarkable Improvement in Operational Performance In our coverage universe, HUL, ITC, Marico and Jyothy Labs have shown strong earnings growth that resulted in outperformance. HUL has surprisingly reported 28