KARV Y || EES October 18,2012 FMCG high double-digit growth in past four quarters largely due to strong growth in Soaps & Detergent (S&D) segment. Marico is consistently growing with high double digit volume growth in past six-seven quarters with remarkable growth in Parachute franchise, Besides, Recovering from the phase marked with huge pressure post-acquisition of Henkel India (Henkel), Jyothy Labs has remarkably improved performance in past three quarters while boosting confidence on better visibility guidance that resulted in sharp uptick in the stock price. Exhibit 60: 6M Stock Performance Exhibit 61: YTD Stock Performance Tm 1 — HUL 0— Nestle Nese — Dabur > — Colgate gee —— Marico ‘ico —— Jyothy Jyotny | crt crt} Emam ot —<<<— Baja Corp Bajsicorp | Asian Pains inti _— Titan io =— SK Consumers CK Consumers — Britannia Btennis Jubilant FoodWorks Jubilant FoodWorks —— oo) ms 0 S750 : 250507501000 Source: Boner, Karvy stitution Research Source: Bloomberg, Karcy Institutional Research Exhibit 62: Quarterly Net Sales Growth (% Relative Chances of Positive Companies Juno Sep) Dect Mari Juni Sepit Dect Mari? Jun Earnings Surprise Tc 180 «179 ~«197 5S 19718027. - Gale EBTTDAMargin HULY 67 97 15 [4a0 153198 172204 1764 Companies surprise Surprise Nestle India 202-78 265 wade? ire Low Low Dabur 193 147 166-306 HA HB MS 23021 HUL Medium Colgate 130 132138126156 19120179205 Nestle India Medium Marico isa 125 [221 292320251 294184 218 Dabur Medium. Medium —Jyothy Labs 26 114 95 77) (185) 72 «(126403706 Colgate Meum ow Emami 22 US 43k Marica Medium Medien GPL Jyothy Labs High High Bajaj Corp. uso 192 [241 276 304314 308 335 295] Sure: Company, Karey nstional Reich Pidite Industries 203137 264-224-209 ~—*1K6 —*1GA__—14.3__—18 “Sours Company, Karay institutional Research, * Domstic Baines Exhibit 63: Quarterly EBITDA Margin Expansion (bps) Companies Jun-l0 Sep-10 Dect0 Marit Jun-i1 Sep-t1 Dect Mari Jun2 ire 2a 0) a OS HUL 32) (169) Gos) 8) (4) [Fg 268 NestleIndia 31), 0) 478) ay [09 932m Dabur 16 9 (io) (125) (133) 224) ay 39 Colgate 38278 (758) (34) 753) 6 Marico (5) an) @6) = ais) [a (76) 262 Jyothy Labs 35) 20185) (720) 1.906) [1803 513304 Emami (67) (1.356) (1.166) (489) (298) (330) 36) GcPL, a2) a7) 5) 73) GBI) an) Bajaj Corp 358 GH) 18 (1,056) (1.013) a4) 321 Qi) 92110) G90) (2 onal Resear 26KARV Y IIE cuts FMCG D. FMCG Sector to Show ~16.4% Sales CAGR during FY12-15E FMCG companies have shown robust sales growth of -19.7% (largely price-driven) in FY12 v/s 15.9% CAGR in past 5 years. Most of the FMCG companies, during last year, passed on extra cost pressure through consistent price hike and their brand equity played key role in maintaining volume growth too. We anticipate slightly slower sales CAGR of -16.4% during FY12-15E as we expect further price hike would be limited going forward, We expect ITC & HUL to show 16.4% & 15.7% CAGR in FY12-15E, while Nestle, Dabur, Colgate, Marico & Jyothy Labs should deliver 16.2%, 17.8%, 18.0%, 18.9% & 21.0% CAGR, respectively in FY12-15E. Exhibit 64: Sales Growth Trend NetSalesGr.(%) FYO!_—_FY05_—FYos__—FYO7_—Fvos— F090, FY FY2 FYE FYE FYE ie wa 7S FSCSCi‘dBSC‘iSC‘iSSCGAS*«éSSSC*«*SSSSC SSC HUL 20 9) 94 76 4 i84 88 Mt 71 158 1S8 AST Nestle India 102 39° «039 HSS BS. Dabur 26 812499 KS MS MSH 18ST Colgate as) 28 18764 OAS 20980 Marico uy 1A SALA HAA Iyothy Labs 3928499382109 Source: Company, KarayInsitational Resear E. Expect EBITDA CAGR of 17.4% during FY12-15E, Softening key commodity prices, higher sales contribution by premium products and cost rationalisation initiatives would help companies to improve operational profitability. We expect EBITDA CAGR of 17.8% during FY12-15E. The EBITDA margin of ITC, HUL, Dabur, Marico and Jyothy Labs is expected to expand by 126 bps, 41 bps, 92 bps, 173 bps and 395 bps, respectively during FY12-15E. Exhibit 65: Expect Better EBITDA growth then Sales Growth EBITDA Gr(%) _FYos__FYO5 Fos Fo? FYos.—FYoy—FYI0, FY FYIR FYE FYE FYISE re m2 0 472 206 22 9 23 183 91 91 185 160 HUL 10 @29)08)138 47ST) HHS Nestle India 174 02 157 120 18391 2_mH2—s2HB_ TTA Dabur 01-8229 Colgate B20 161 AO) 4515 72 24 245 SAS Mario as) 15526422240 92 2? Iyothy Labs 735) _@I74) 546 DSS 7B HOS AIS) 59D 8D—_—DS ‘Source: Company, Karey Institutional Research F. Softening Commodity Prices Many commodities have been softening from its peak level, which would help in improving the profitability of FMCG companies. Marico has been enjoying lower Copra prices (-40% of raw material cost) in past few quarters, while softening of Palm oil prices would likely to aid HUL and soap manufacturers in ensuing times. 27KARV Y IIE Exhibit 66: Commodity Price Index (October 18,2012 FMCG Exhibit 67: Commodity Price Index 700 209 1700 15.0 100 100 00 50 500 oo EEE EERE E EEE EEE g BE EE EE 5655656 5 8 5 8 58 8 686 6 5 8 Wheat @NRIOUY Sugar (NOU) TS cote TEE Stower(INRIQU) — ——=Pelm Oi INRnd) === HOPE ANRIn® Capea INRQW) Sena Ash (NR Causti Soda Lye (NRG) Soares Borg, Capit ine, Kary atta Rear Source looters Capi Tine, Karey stato esearch Net Cash and Investment (Rs mn) 85 ‘7,000 55,000 40,000 25,000 10.000 6.000) me UL Dabur Colgate syothy Labs Nestle India ‘Source: Company, Karey national Research Net Debt/Equity 100 ows 019 085) 0m ae aed £29222 a a2: : z 5 “Sources Company, Karey naittional Research Strategic Acquisitions (Past 12 Yrs) Companies ___Deal Amount (Rs mn) Dabur 12872 Matico 16,706 cere, 25,131 UL 52,670 mc tose Jyothy 7,506 Emami 3513 Britanni 962 ‘Sources Boombers G. Strong FCF will continue to be leveraged for acquisitions Unlike large cap consumer companies, mid-cap companies have been open to acquisitions to expand their revenue base. On an aggregate basis these companies have invested close to Rs.130 Bn on acquisitions. The gearing is still low and FCF from operations is still healthy we believe these acquisition strategies will continue, Dabur India, Jyothy Labs, Emami & Bajaj Corp are among the few FMCG companies having enough scope for further equity dilution in case of any likely acquisition opportunity. ITC, HUL and Colgate-Palmolive are even at negative net debt to equity. Hence, these companies have enough room for further acquisitions, Exhibit 68: Promoter Holding (°) 500 m3 60 525 400 HU Nestle India Dabur india Colgate Marico Jyothy Lab Emami Ba) Corp [Agro Tech Sk Cons Britannia “Sours Compo, Karey istttional Research 28KARV Y || EES odtber38, 2012 FMCG II. Several Socio-economic Factors Suggest Healthy Prospects A. Substantial Change in Per Capita Income The average GDP growth for last five years recorded at ~8.6%, compared to ~5.5% in last five decades. We observed that key states namely Maharashtra, Uttar Pradesh, Andhra Pradesh, Tamil Nadu, West Bengal and Gujarat have significantly contributed for this robust growth. These six states contribute over 50% to India’s GDP growth, with their contribution grew by >13% in past five years. The strong growth across states had helped the FMCG companies to deliver >15% growth in the past five years. We are positive on the sustainability of strong domestic FMCG growth for long period on account of rise in urban and rural disposable income, credit easing and low per capita consumption & lower penetration level of several categories. Exhibit 69: GDP Per Capita (Constant 2000 US$) S80 0 550 40 2009 2010 20 ef § § € & EB § ‘Source: Worl Bank Data, Karoy Institutional Research Exhibit 7 Per Capita Net State Domestic Product at Current Price (Rs) 160,000 120,000 80,000 40000 @ @ En) Goa Punjab Gvjorat West Benga Haryana e E ok al oll ol a, Maharashtr Utiarakhan 1006 ‘Source: Eeonamic Survey 2011-12, Karey Institutional Research GDP Per Capita (Constant 2000 USS) _B, Lower Agriculture Dependency & Improved Monsoon Scenario ‘at India's dependence on agriculture has been reducing gradually over the last ma several years. Agriculture's contribution in GDP and employment generation has declined to 14% and 52%, compared to 18% and 60% around 7-8 years back. Indust Service y 5577 279 ‘Source: CSO, Karey Tostiational Researdk FeyKARV Y IIE (October 18,2012 FMCG Exhibit 71: Sectoral Employment Exhibit 72: Sectoral Employment Exhibit 73: GDP Mix in 2005-06 (%) Mix in 2004 (%) Mix in 2010 (%) Others, ‘Others, ‘ariel onary OT Constru Y ure, en 183, ‘Trade & Real Services Batate, 108 Induste Ss Manufa 28 turing, 122 “Sources C80, Karey Insitonal Reseach Exhibit 74: Seasonal Rainfall Scenario (1* Jun to 26% Sep) Exhibit 72 “Sours CSO, Karey Instat Research ‘Sure: C50, Karey institutional Research For the country as a whole, seasonal rainfall up to September 05, 2012 was 10% below the LPA, as against 12% by the end of last week ending August 29, 2012, ‘Therefore, consistent improvement in the seasonal rainfall has changed the perception for the lower rural demand, Week by Week Rainfall Departure (%) of LPA ‘Actual Normal % Departure ee alnfll gyintinm) ton PA 2 Sangeet a Northwest Tela 09 os ” as) mao 9 O28) ventral ia ag a 29 Cont wos 2 a wana’ South Peninsula 620 oa (10) @ Fast & northeast India 1,264 103 ao x Source ry Instat Research Consistently Increase in Urban Population Mix (%) Bee e n « e888 1880 1995 1980 1685 2000 205 2010 Rural population (%)- LHS Urban population (8) RHS Source World Bank, Karey Distitutonal Research “Sources IMD, Karey nstttional Research C. Favorable Urban-Rural Mix Rising urban population is supporting urban demand for FMCG companies, Urban population mix was 18% in 1960, which rose to 28% in 2000 and then reached to 30% in 2010. The shift in the urban: rural mix has positively changed the dynamics for FMCG companies. Apart from change in population mix, the urban income distribution has also favourably changed over a period of time. ‘The upper class in the urban income group has increased to ~36%, compared to 17% and 7% in 2002 and 1996, respectively. We believe that rise in urban population couple with improvement in urban income mix is positive for the FMCG companies under our coverage, as the urban market has higher appetite for premiumisation. Apart from the better value growth in the urban market, the FMCG companies also enjoy launching innovative premium products. D. Sharp Rise in MSPs Agriculture contributes ~50% of the employment in India hence any improvement in their income has significant role in the overall consumption pattern in India ‘The Government has taken sharp rise in Minimum Support Price (MSPs) of Kharif crops for 2012-13. The growth in MSP rates for most of the crops is highest in the past four years. HUL, Dabur and Jyothy Labs having ~50% revenue contribution from the rural markets, while Marico, Emami and Nestlé India clock 25-30% revenue contribution, 30