KARV Y IIE FMCG Sector is trading at 32x P/E (12M forward earnings) Oxia Gao Odtbs OnaE OctIO O82 FMCG Sector P/E at 140% premium to Sensex P/E Ad 0 es Ostte Os04 OSS ONO OIO Os Premium to Sensex (8) “Source: Beomberg, Karey Institutional Research FMCG Sector PAT Growth & Valuation ery 0 60 190 200 180 100 0 “Source: Bloomberg, Company, Karey Dnstutonal Research October 18,2012 FMCG A. Concern is not on the FMCG Valuation Premium (Our concern is not over ~140% FMCG valuation premium over Sensex, which is almost at peak level of past several years. However, our concern is to maintain such high valuations by the FMCG companies, going forward. ‘The FMCG sector currently trades at ~32x on 12-month forward earnings, which is almost at its highest level. Valuation premium expansion of sharp 47bps during past 12-months was not only because of 24% jump in FMCG valuation but also on 4% decline in Sensex valuation. Weak macro fundamentals vis-i-vis subdued domestic business growth has changed the investment target to FMCG sector where business is largely neutral on currency risk, high interest rate and consumer demand. Hence, at current juncture we believe net earnings growth of companies would play a key role in their stocks’ performance. We prefer stocks on relative basis, where the scope of earings growth is strong and valuations are relatively at comfort level. B. FMCG Sector to Deliver almost twice PAT Growth of Sensex companies in the Next Three Years. Analyzing the historical relationship between FMCG sector & Sensex, we found that FMCG sector's valuation rise/decline has relevance on its net earnings growth rise/decline over the Sensex performance. In FY05-FYO8 period, there was an absolute decline in FMCG sector valuation vs. absolute rise in Sensex. During that time, FMCG sector's net earnings growth was significantly lower than Sensex net earnings growth. Therefore, absolute valuation decline for FMCG sector is possible going forward, only if the earnings growth would be considerably lower than the Sensex earnings. However, we don’t expect such poor show to repeat in coming years. The companies under our coverage universe would report earnings growth of 18.1% earnings growth during FY12-15E vvis-3-vis our estimated earnings growth for Sensex at 11.6% CAGR over FY12-15E. As at current juncture, we don’t see such scenario hence, we are bullish that FMCG sector's valuation to sustain, going forward. We prefer stocks on relative basis, where the scope of earnings growth is strong and valuations are relatively at comfort level. Our Top Picks are: ITC, Dabur, Marico & Jyothy Labs.KARYV Y | EEE ether, 202 FMCG ExhbILS:_Historial Trend of FMCG Valuation a ms A Attn! ial 20 ws O80 OO Ono ONOS ONO OMT OOS ONO? ORDO OmtR —aucesictor tie) Yeas Ave PE OY Year Avg PEO Yeas Avg) Source: Blomberg, Karoy institutional Research Exhibit 6: Valuation Comparison between FMCG Sector and Sensex 360 m0 sea 180 240 140 180 100 120 60 Oot ORAS —OMOL—CONMS OMNES «ORT ONGR OM OND Oni Omid IMEC Secor PIE) Sensex PE (RH) ‘Source: Bloomberg, Karey Institutional Research Exhibit 7: Valuation & Profitability Comparison between FMCG Sector and Sensex Fyo2 FYO3 FYOs FYO5 —FY06 FYO7 FOS FYO9 FYIO FYI FYI2 FYIS* FMCG Sector Median P/E 8 164 77 155 197 21 i 25 296 264 268 9A Sensex Sector Median P/E ws 97 10 7 12 15368130 IS 6A 1K 130 FMCG Sector P/E Premium 572 684-627 357 —49.7—«638—279—«670—573_—S7A_ 9171292 a aE | BMC FECA) C73 ems) ms 07) 07) 6 FMCG PAT 24 Month Avg. Growth (%) M397 «37 120 © 00 172,—*s«dBSAS BOD 197 2169 Sensex PAT 24 Month Avg. Growth (%) 163242268 217_—284_HS_—BB AY 74_—SL_—80_—122 ‘Sour Blomberg, Karey inaitational Resor Tall DateKARV Yl am (October 18,2012 FMCG C. Earnings Performance of FMCG Sector vis-a-vis Other Sectors Observing and juxtaposing the performance of FMCG sector vs. other sectors, we have found that the former is among the few, which has maintained its high earnings momentum in past six quarters. Exhibit §: QUFY13 Performance Exhibit 9: Q4FY12 Performance Exhibit 10: Q3FY12 Performance Teck _ Teck Teck Realty Realty Realty et — Power Power Metals = Metals Metals iT — TT Health Care F Health Care iad Wace Consumer. Conse Conse capital Goods capital Goods aptal Condes Penk Sank re Sank Auto Auto Auto 600) 50) - 250 500 (200) 60) 200 450 700 400) 200) - 200 400 “Source: Bloomberg, Karey Institutional Research Source: Bloomberg, Karey Institional Reseach Source: Bloomers, Karey Institutional Rescarch Exhibit 11: Q2FY12 Performance Exhibit 12: QUFY12 Performance Exhibit 13: Q4FY11 Performance Teck Teck Teck Real Real Real Power Power Power Metals Metals Metals i i 1 Health Care Health Care Health Care ied Face Tee Const. Consume. Consume. Capital Goods Capital Goods Capital Goods Pea Bank Pe pan Pe an ‘utD ‘Auto Auto 200) (170) 0) 90 220 200) 50 300 550 500 (200) 200 ano 60.0 600 “Source Bloomberg, Keroy Institutional Research Source: Bloomberg, Karey Insiuional Research Source Bloomberg, Karey Institutional Research Our View: The FMCG sector has consistently performed strongly over the past few quarters as compared to the other sectors that justifies valuation premium to some extent.KARV Y || EES odtber38,2012 FMCG D. Large Cap & Mid Cap FMCG Index and Sensex Exhibit 14: Past 5 Years’ Market Cap Trend in Large Cap Exhibit 15: Past 5 Years’ Earnings Trend between Large & Mid Cap FMCG Index & Sensex Cap & Mid Cap FMCG & Sensex 0 x0 21 20 is! in ° see 222 55 8 ee $85 58 £8 ES Be 6 & 2£ E & — sensor — Large Cap, Mid Cop ssa stargeCop) eeMid cap) —— Sensex Source: Blomberg, Karey Institutional Research, Not: Inder ¥ based on Karey. Source: Bloomberg, Kary Insational Research, Noe lex i Basel om Karvy Coverage Only Coverage Only Exhibit 16: Large Cap & Mid Cap FMCG Sales Growth Exhibit 17: Large Cap & Mid Cap FMCG EBITDA Index of Past 5 Years Growth index of Past Yeas ma a 1s “0 wo | cate stapecaptcc | end ap tcc cae stamecptice |e witcaprice Source: Company, Karey Institutional Research, Note: Index ts based on Karey Source: Company, Karey Institutional Research, Note: Index is based on Karey Coverage Only Coverage Only Our View: The mid-cap FMCG companies have outperformed large-cap FMCG companies & Sensex during the past five years, owing to better earnings growth. The mid-cap companies have not only outpaced the sales growth vis-a-vis large- cap FMCG companies, but their operational profitability improvement was also ahead of the large-cap counterparts.KARV Y || EES odtber38,2012 FMCG Exhibit 18: Past 3 Years’ Market Cap Trend in Large Cap Exhibit 19: Past 3 Years’ Earnings Trend between Large & Mid Cap FMCG Index & Sensex Cap & Mid Cap FMCG & Sensex 20 a0 200 10 150 Mo 100 ts 0 wo a2 83 53 948 z a § 2262 5 8 2 a & 8 : 5 § —sensptindex Lange Cap _——Mid Cap ee ee Source: Bloomberg, Karey Instifdional Research, Note: Index ts based ow Karey Source: Bloomberg, Karey Institutional Research, Noe nex i based on Kary Coverage Only Coverage Only Exhibit 20: Large Cap & Mid Cap FMCG Sales Growth Exhibit 21: Large Cap & Mid Cap FMCG EBITDA Index of Past 3 Years Growth Index of Past 3 Years 110 700 0 ws 0 0 wa 15 100 + 100 + 2 E E E g 5 z g wets cy Os ead ap OS masts cap MCG) a vd ap FES Source: Company, Karvy Insitational Research, Note: Index ts based on Karey Source Company, Karoy Institutional Research, Note: Index is based on Karvy Coverage Only Coverage Only Our View: The Large-cap FMCG Index outperformed the Sensex & Mid-cap FMCG Index during the past 12-months. The large-cap companies through their strong pricing power expanded their EBITDA margin by ~90 bps in FY12 contrary to a decline of -80 bps by the mid-cap companies. Therefore, large-cap Index has given average return of 53% in the past 12-month, as compared to the average return of 44% by the Mid-cap Index. 10