FMCG Sector Report[1]

According to OECD-FAO, soft commodity prices are expected to increase

structurally and rise at c4% CAGR until 2019 driven by higher prices of

wheat (11%), vegetable oils (6%), whole milk powder (6%) and oil seeds

(4%).

We expect higher input costs will result in c140bp contraction in gross

margins over FY10-13 for companies under our coverage. While GSK

Consumer and Colgate will be least affected, Marico is likely to be the

worst affected by rising input prices.

Increasing competition should limit pricing power as well as result in

higher advertisement and promotion expenditure.

Historically, FMCG index mirrors the movement in food inflation and

competitive intensity.

Valuations are at an all-time high. We expect HUL and Marico to be worst

affected by high inflation and rising competition, and hence, initiate

coverage with a Sell rating and target price of INR234 and INR112,

respectively. Our earnings expectations are c10% lower than consensus.

We believe GSK Consumer is relatively better placed and hence, initiate

coverage with a Buy rating and target price of INR2,576.

Higher agricultural production, drop in food prices and higher demand

remain the key risks to our call.

Analyst:

Sweta Jain

022- 42208915

[email protected]

Rising costs and high valuations provide discomfort

FMCG l India Research l January 07, 2011

2

FMCG Sector Report

January 07, 2011

Contents

Industry Section

Investment summary 3

Investment thesis 5

Input cost inflation a key challenge 6

Soft commodity prices to increase in long term… 6

Rising input costs to affect margins; HUL and Marico to be worst affected 10

Stock performance to mirror food inflation and competitive intensity 12

Competitive landscape is intensifying… 12

Stock performance affected by higher food inflation and intensive competition 14

Our assessment 15

Valuation and risks 16

Valuation snapshot 17

Risks 18

Company Section

Colgate-Palmolive (India) Ltd 21

Dabur India Ltd 26

Godrej Consumer Products Ltd. 34

GlaxoSmithKline Consumer Healthcare Ltd. 39

Hindustan Unilever Ltd. 47

Marico Ltd. 54

Nestle India Ltd. 62

3

FMCG Sector Report

January 07, 2011

Investment summary

According to a joint assessment by OECD-FAO, prices of soft commodities will rise

structurally, with an estimated c4% CAGR increase until 2019. Rising input costs will

affect margins by c140bp for consumer companies over FY10-13E.

Increasing competitive intensity will limit pricing power. Historically, stock prices

mirror the movement in food inflation and competitive intensity.

We prefer companies with absolute market leadership like GSK Consumer, Nestle,

and Colgate and players that operate in niche categories with low MNC interests like

Dabur in ayurveda.

Input cost inflation is likely to keep margins under pressure. Managing higher raw material prices with

intensifying competitive landscape will remain a key challenge for consumer companies in future. We

believe absolute market leadership giving higher pricing power justifies premium valuations for

companies such as GSK Consumer.

Rising soft commodity prices to increase concerns on profitability…

While current food index as measured by FAO is up 22% YoY for November 2010 (driven by an increase

in edible oils and cereal prices), it is estimated that soft commodity prices will continue to remain firm with

c4% CAGR until 2019. Improving demand environment combined with rising supply concerns across

global markets will lead to a broader demand-supply mismatch; resulting in an upward price trend over a

long term. Moreover, crude oil prices are also on a rise, thereby increasing packaging costs for all FMCG

companies, which will adversely affect profitability going forward.

… which, along with higher competition will restrict margin expansion

Moreover, competitive landscape is intensifying, which will limit pricing power going ahead. Increasing

food inflation combined with higher competition will put pressure on companies’ profitability and thereby,

stock prices. Historically, it is seen that stock performance mirrors the movement in food inflation and

competitive landscape. We believe companies with absolute market leadership and strong brand equity

will be relatively better placed to maneuver brand innovations along with pricing interventions to maintain

their market position and financial profitability.

FMCG stocks trading at all-time high valuations, GSK Consumer is our top pick

Improving economic growth combined with rising consumerism has assisted strong double-digit volume

growth for the FMCG sector, which has re-rated the entire FMCG universe. We believe strong brand

equity, higher pricing power and low raw material cost sensitivity will help GSK Consumer and Nestle to

sustain the premium valuations. We believe, at the current price, GSK Consumer is the most attractive

play on the domestic F&B space and hence, initiate coverage with a Buy rating and target price of

INR2,576. We expect HUL and Marico to be worst affected by rising input costs and increasing

competition. Hence, we initiate coverage with a Sell rating and target prices of INR234 and INR112,

respectively.

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FMCG Sector Report

January 07, 2011

GSK Consumer: Best play on domestic food and beverage space

Rating: Buy TP: INR2,576 Upside:12%

GSK Consumer, with a dominant position in the lesser-competitive and under-penetrated malted food

drink (MFD) category, is well placed to attain strong volume growth and pass on input cost inflation to

consumers with greater ease. Further, successful brand extensions to non-MFD categories and a healthy

balance sheet, supporting inorganic growth opportunities, would engender incremental growth triggers.

We expect earnings to grow at 22% CGAR during CY09-12, which is one of the highest in our coverage

universe. We value GSK Consumer on an average of DCF and PER basis to arrive at our target price of

INR2,579, which provides 12% potential upside from the current levels.

HUL: High costs to put pressure on margins

Rating: Sell TP: INR234 Downside: 28%

We expect HUL to face headwinds from increasing crude oil prices and rising competition. We expect

HUL will have difficulty in maintaining its operating margins due to higher dependence on the ageing

soaps and detergents category and increasing competition in personal care segment. We forecast a

contraction of 173bp in EBITDA margins over FY10-13.

Moreover current valuations at 31x our FY12E EPS, a 20% premium to its one-year forward mean PER,

appear rich. Hence, we initiate coverage with a Sell rating on the stock with our target price of INR234,

based on an average of DCF and PER methodologies.

Marico: High copra prices to result in consensus downgrade

Rating: Sell TP: INR112 Downside: 10%

We believe rising copra prices, which are up 67% YoY, will provide margin pressures and result in

consensus downgrade. While we expect the company to record earnings CAGR of 15% over FY10-13, it

will be lower than the company’s earning CAGR of 28% achieved over FY05-10. Hence, we believe the

premium of 37% to its historical one-year forward mean PER, which the stock is commanding currently,

should reduce and revert to its mean in future.

We value Marico at INR112 based on an average of DCF and PER methodologies. Our target price

provides 10% potential downside from the current levels and hence, we initiate coverage with a Sell

rating on the stock.

Key risks to our assumption

Substantial increase in agricultural crop production, thereby reducing prices of soft commodity, and

continuing higher consumer demand are the key risks to our assumptions.

5

FMCG Sector Report

January 07, 2011

Investment thesis

Company Rating Target

price (INR) Upside

(%) Key catalyst Key risk Financial forecasts

Share price performance

(3-month)

Colgate Upgrade to Buy

946 9.5 Strong volume growth; lower input cost inflation

Increase in competition to restrict pricing power

Earnings CAGR to cap at 9% over FY10-13E owing to higher tax provisions

(2.5)

Dabur Hold 102 (0.6)

Inorganic growth opportunities to maintain growth momentum

Higher input costs to restrict margin expansion

18% earnings CAGR over FY10-13E

(4.8)

GCPL Hold 414 5.7

Increasing visibility of international operations could re-rate the stock

Increase in palm oil prices to put pressure on margins

Consolidation to aid 26% earnings CAGR over FY10-13E

(1.9)

GSK Consumer Buy 2,576 12.0

Strong presence in low-competitive malted drink category to aid robust earnings CAGR

Increasing competition could result in higher A&P spends

One of the fastest growing companies with earnings CAGR of 22% over CY09-12E

14.8

HUL Sell 234 (28.3)

Rising input costs, intensifying competition in its main categories

Increase in market shares with increasing focus on competitive growth

7% earnings CAGR over FY10-13E

7.1

Marico Sell 112 (9.9) Escalating copra prices to curtail margin expansion

Excise duty settlement could provide c10% upside to our estimates

Earnings CAGR of 15% over FY10-13E

(7.1)

Nestle Sell 3,405 (12.6)

Intensifying competition could challenge pricing power and result in margin pressure

Continuing pricing interventions and new product launches without negative impact on volume growth

17% earnings CAGR over CY09-12E

19.3

Valuation matrix

Company CMP (INR)

Market cap

(INRbn)

EPS CAGR

(%) PER (X) RoE (%) RoCE (%)

Dividend yield (%) Rating

Upside (%)

FY10-13E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E

Colgate 864 117 8.9 26.8 24.8 118.9 106.8 146.6 141.3 2.7 3.0 Upgrade to Buy

9.5

Dabur 103 179 18.4 31.0 24.9 52.6 49.5 50.4 48.5 1.2 1.6 Hold (0.6)

GCPL 392 127 25.8 25.6 20.7 36.8 32.2 31.8 25.0 1.6 1.9 Hold 5.7

GSK Consumer*

2,300 97 22.2 33.5 27.4 29.0 29.5 43.4 44.2 1.0 1.2 Buy 12.0

HUL 326 711 7.3 34.0 31.0 76.4 76.1 91.6 91.8 2.1 2.5 Sell (28.3)

Marico 124 76 15.0 26.1 23.7 37.3 31.5 30.8 30.0 0.6 0.8 Sell (9.9)

Nestle* 3,898 376 17.3 46.1 39.3 121.1 105.7 150.9 129.8 1.4 1.5 Sell (12.6)

Note: * Calendar year ending Source: PUG Research

6

FMCG Sector Report

January 07, 2011

Input cost inflation a key challenge

FAO’s food price index is up 25% YoY for December 2010, driven by increase in soft

commodities. Oil price and cereals indices are up 55% and 39% YoY, respectively.

OECD-FAO’s joint study estimates soft commodity prices to rise structurally and

increase at c4% CAGR until 2019.

We expect increasing commodity prices will adversely affect operating margins of

FMCG companies, especially HUL and Marico, by 90-173bp. We believe consensus

numbers do not factor in higher commodity prices.

According to FAO-OECD, soft commodity prices are expected to structurally be on an uptrend and

increase c4% CAGR over the next decade amid increasing demand-supply mismatch. Recovery in

demand scenario and continuing supply concerns across the international markets will lend

support to firm prices in future. Companies such as HUL and Marico are likely to see their

operating margins contract by 90-173bp over the next two years.

Soft commodity prices to increase in long term…

Increasing uptick in demand led by economic recovery, combined with rising supply constraints due to

unfavourable weather conditions, has fuelled recent rise in soft commodities prices. Food and Agriculture

Organization of the United Nations’ (FAO) food price index has increased 22% and 25% YoY for

November and December, respectively. This increase is driven by worsening outlook for crops in key

producing countries, which will likely result in stock draw-downs and lead to demand-supply mismatch.

Chart 1: FAO’s food price index at all-time high

Source: FAO

With demand growth expected to remain healthy and continuing uncertainty on supply conditions along

with weakening dollar, it is expected that prices will remain firm in future. The joint assessment of

Organization for Economic Co-operation and Development (OECD) and FAO in a recent report (OECD-

FAO Agricultural Outlook 2010-2019) indicates average 4% price CAGR until 2019, for major

commodities such as wheat, coarse grain, vegetable oils and dairy products in the domestic market. We

believe in this study and have factored a rising input cost scenario in our estimates.

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FMCG Sector Report

January 07, 2011

OCED-FAO joint assessment and price forecasts

Chart2: Indexed prices

Chart 3: Coasre grains to rise at 3% CAGR

Source: OECD-FAO, PUG Research Source: OECD-FAO

Chart4: Wheat price to rise highest; 11% CAGR

Chart 5: However, sugar price to decline 2%

Source: OECD-FAO Source: OECD-FAO

Chart6: Prices of vegetable oils to increase @6%

Chart 7:Oilseed prices also likely to be firm with 4% rise


Chart8: Skimmed milk powder prices to rise 4%

Chart 9:Whole milk powder price to remain higher at 6%


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8

FMCG Sector Report

January 07, 2011

Untimely rains likely to impact production adversely

Monsoons in India have been 2% above the long-term average, according to the Indian Metrological

Department. Although the first advance estimates released by GoI indicate a YoY increase in production

of major crops, untimely rains are likely to affect crop production in this season and also are raising

concerns on the Rabi crop production. Hence, it is likely that prices will continue to remain firm in future

as well and managing higher input costs will be a key challenge for consumer companies in India.

Table 1: Estimates for major Kharif crops vs. historical production

Production (mn tonnes) 2006-07 2007-08 2008-09 2009-10 2010-11* Variance of 2010-11

Vs. 2009-10 (%)

Rice 80.2 82.7 84.9 75.9 80.4 5.9

Food grains 110.6 121.0 118.1 103.8 114.6 10.4

Groundnut 3.3 7.4 5.6 3.7 5.6 51.4

Soya bean 8.9 11.0 9.9 10.1 9.8 (3.0)

Total Oilseeds 14.0 20.7 17.8 15.7 17.3 10.2

Sugarcane 355.5 348.2 285.0 277.8 324.9 17.0

Note: * First advance estimates Source: Ministry of Agriculture

Chart 10: Weekly food inflation in India (2010)

Source: Mospi

Industry interactions suggest that prices will be higher for certain commodities such as copra, liquid

paraffin, and palm oil. Although palm oil prices have reduced 11% from their peak levels, they are 48%

higher YoY. According to industry experts, it is expected that palm oil supply will remain tight until April

2011 and any possible recovery will not be as strong as earlier ones, resulting in high prices in coming

months. Similarly, copra prices are c67% higher YoY and are expected to remain firm in the near future.

Copra constitutes 40% of total raw material cost for Marico, whereas palm oil is a major raw material for

HUL and GCPL. We believe these companies would find it difficult to maintain their margins in future.

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FMCG Sector Report

January 07, 2011

Chart 11: Milk price trend

Chart 12: Barley price trend

Source: Mospi Source: Bloomberg

Chart 13: Palm oil price trend

Chart 14: Copra price trend

Source: Bloomberg Source: Bloomberg

Increasing packaging costs could further impact margins

We expect costs of packaging material that forms less than 10% of total sales and 15-20% of total input

costs, to remain firm in future. High density polyethylene (HDPE), a crude derivative and a key ingredient

in packing material, is seeing an uptrend in prices since September 2010 and it was up 5% YoY for

December quarter. We expect crude prices to hover at USD85-95/bbl, with an upward bias, in future.

With increasing HDPE prices, packaging costs for consumer companies would increase, thus restricting

expansion of margins.

Chart 15: HDPE price trend

Chart 16: Crude versus HDPE price movement

Source: RIL Source: RIL, Bloomberg

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10

FMCG Sector Report

January 07, 2011

Rising input costs to affect margins; HUL and Marico to be worst affected Consumer companies that significantly depend on a single commodity are vulnerable to volatility in prices

of that commodity. Nestle, GCPL, Marico, and GSK Consumer are highly dependent on one commodity

— milk, palm oil, copra and malt and malt extracts, respectively. When input costs increased significantly,

these companies saw sharp reduction in margins. When palm oil prices increased sharply, GCPL’s

operating margins declined by 460bp in FY09. Similarly, when prices declined to low levels in FY10,

EBITDA margins expanded by 510bp.

Table 2: High dependence on one raw material

Company Raw materials % to total input cost

GCPL Oils and fats 55%

HUL Chemicals and perfumes 48%

Nestle Milk and skimmed milk 43%

Marico Copra 40%

GSK Consumer Malt and malt extract 30%

Dabur Herbs, etc. 28%

Source: Companies, PUG Research

Chart 17: GCPL margin vs palm oil price movement

Chart 18: Marico margin vs copra price movement

Source: Company, Bloomberg, PUG Research Source: Company, Bloomberg, PUG Research

Chart 19: Nestle margin vs milk price movement

Chart 20: GSK margin vs malt price movement

Source: Company, Mospi, PUG Research Source: Company, Bloomberg, PUG Research

In rising input cost scenario, we prefer Colgate as it has low dependence on any single commodity and

GSK Consumer and Nestle as they have lower input cost sensitivity to earnings. We believe that HUL

and Marico will be worst affected due to rising cost pressures and estimate their operating margins to

decline 90-173bp until FY13. Moreover, crude oil prices are also on a rise, thereby increasing packaging

costs for all FMCG companies, which will adversely affect profitability going forward.

Table 3: Expected decline in operating margins

Company FY10 (%) FY13E (%) Change (bp)

Colgate 21.7 23.1 1.44

Dabur 18.4 18.4 0.00

GCPL 20.0 19.2 (0.76)

GSK Consumer 16.2 16.3 0.17

HUL 15.7 14.0 (1.73)

Marico 14.1 13.2 (0.90)

Nestle 20.2 20.2 0.06


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11

FMCG Sector Report

January 07, 2011

Chart 21: Indexed prices

Source: Bloomberg, Mospi, PUG Research


Source: Bloomberg, PUG Research


Source: Bloomberg, RIL. PUG Research

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12

FMCG Sector Report

January 07, 2011

Stock performance to mirror food inflation and competitive

intensity; Prefer GSK Consumer, Nestle, Colgate and Dabur

Competitve intensity is increasing; we believe it will limit pricing power going ahead.

As seen historically, stock prices react negatively to rising food inflation as well higher

competition.

Market leadership, niche play and brand innovations would remain the key to pricing

power and sustaining higher profitability. We prefer absolute market leaders such as

GSK Consumer, Nestle and Colgate and niche category plays like Dabur.

Increasing food inflation combined with higher competition will put pressure on companies’

profitability and stock prices. We believe that in an escalating competitive environment, market

leadership and brand innovations would be instrumental in driving higher margins. In this

scenario, we prefer players such as GSK Consumer, Nestle and Colgate, which are relatively

better placed with absolute market leadership and strong brand equity, and Dabur with its niche

brand positioning.

Competitive landscape is intensifying…

Competition in the domestic consumer space, especially oral care, skin care and packaged foods, is

intensifying with many domestic and MNC players looking at increasing market share. Danone has

launched value-added milk and milk products in India and it has strong plans to tap baby foods and

packaged water markets in India. P&G recently entered the domestic hair colour market and is

contemplating an entry in toothpaste segment in the near term. We expect competitive activity to remain

high in sectors such as personal care and packaged food and beverages going ahead.

Table 4: Competitive activities increasing with new product launches

Company Category Remarks

Indian companies

Britannia Functional flavoured milk Actimind positioned as functional flavoured milk

Baked snacks Time Pass

Nestle Chocolates Yorkie, Aero

Prepared Dishes Maggie variant – Romantic Capsica

ITC Instant noodles Sunfeast Yippee!

Fairness cream Vivel Active Fair launched in June 2010 in Kerala

Marico Hair oils Parachute Advanced in cooling hair oil segment

Zydus Wellness Health drinks Launched ActiLife, an adult health drink

MNC players

GSK Consumer Instant noodles Foodles as a brand extension of Horlicks

Danone Value added milk products Chocolate smoothies, Choco Plus, plain and flavoured yogurts, Danone Dahi.

Coco Cola Flavoured milk Mazaa Milky Delite

P&G Hair colours Wella, hair colour brand

Source: PUG Research

13

FMCG Sector Report

January 07, 2011

… leading to pricing pressure and higher A&P spends

We expect increasing competition will lead to undercutting by existing players in the future, limiting price

increases. Moreover, we expect with increasing competitive activities, players will have to spend higher

on their product’s advertising and promotions. Hence, we expect A&P spends to increase across the

companies going forward.

Chart 24: Higher competition to lead to increase in A&P spends


We believe that those with presence in a low competitive category, or with absolute market leadership

and higher pricing power, would be relatively better placed to capitalize on the increasing consumerism in

the domestic markets. Moreover, with rising input costs, ability to increase product prices would remain

the key for better profitability. Hence, we prefer companies like Nestle, GSK Consumer and Colgate, as

we believe market dominance, in their respective categories, provides higher room for maneuvering

pricing to sustain profitability. Besides, we also like Dabur’s niche positioning in the herbal and ayurveda

space, which has low MNC interest.

Table 5: Absolute market leaders

Company Category Market share

Nestle Instant noodles 80%

GSK Consumer Malted health drink 60%

HUL Skin care 59%

Dabur Foods 52%

Colgate Toothpastes 51%

Marico Hair oils 31%


Notwithstanding the increasing competition, companies have raised product price in soaps, hair colours,

and detergents. While this indicates that some pricing power has returned, we believe it will only partially

offset higher increase in raw material prices. Although we have factored in a c5% price escalation in our

estimates, we do not anticipate such price hike to aid margin expansion, which is expected to remain

subdued owing to rising input costs and higher A&P expenditure.

-

2

4

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8

10

12

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16

18

HUL Dabur GCPL Colgate Marico GSK Consumer

%

Average FY05-10 FY13E

14

FMCG Sector Report

January 07, 2011

Stocks performance affected by higher food inflation and intensive competition

We analyzed our FMCG index return sensitivity to food inflation data. We understand that the index

returns mirrors the movement in food inflation. When food inflation is low, index has given high returns

and vice- versa. Moreover, stock prices have been adversely affected by higher competitive activities and

eroding market shares. Going forward, we expect that as food inflation continues to remain firm and the

domestic market witnesses higher competition, our FMCG index will witness lower returns in future.

Chart 25: High food inflation .. restricting PAT growth…

Chart 26: …. Further leading to lower stock returns

Note: Our FMCG index includes companies under our coverage. Note: Our FMCG index includes companies under our coverage.

Source: Bloomberg, PUG Research Source: Bloomberg, PUG Research

Chart 27: HUL’s stock price underperformance during

higher competition….

Chart 28: Colgate’s stock price underperforming when

local regional players had become strong…

Note: Our FMCG index includes companies under our coverage. Note: Our FMCG index includes companies under our coverage.


-30.0

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(40.0)

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HUL FMCG Index

Increasing underperformance due to losing market shares

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Colgate FMCG Index

Increased competiton from local players

15

FMCG Sector Report

January 07, 2011

Our assessment

We believe GSK Consumer emerges as a clear winner, as it has the lowest earnings sensitivity to raw

material costs; and is well-placed, with its strong market leadership, to pass on rising cost pressure to

consumers with greater ease. Similarly, we prefer Nestle, which has a strong position in the market place

with its well-established brands like Maggi and Cerelac. Colgate, with a strong product portfolio straddling

different price points, also emerges as a strong player in India’s oral care segment. We expect HUL and

Marico to be the worst-hit companies in the scenario of rising competition and input costs as these will

erode their margins going forward.

Table 6: Assessment matrix

Company Strong brands Competitive intensity

Pricing power

Input cost scenario

New product pipeline

Winner / Runners-up

Colgate Colgate Dental Cream, Cibaca

Medium High Neutral Low Winner

Dabur Dabur Amla, Babool Increasing Medium Rising Medium - Variants Winner

GCPL Godrej Powder Hair Dye, Godrej No. 1, Good Knight

High Low Rising Low, Could increase from inorganic synergies

Runner-up

GSK Consumer Horlicks, Boost Low High Rising High - Horlicks variants

Winner

HUL Lifebouy, Lux, Wheel High Medium Rising Low Runner-up

Marico Parachute, Saffola Medium Medium Rising High – brand extensions

Runner-up

Nestle Cerelac, Maggi Increasing High Rising Medium - Maggi variants

Winner


16

FMCG Sector Report

January 07, 2011

Valuation and risks

FMCG stocks have rallied recently and are trading at all-time high valuations. BSE

FMCG index has increased by 32% in 2010.

We prefer GSK Consumer and initiate coverage with a Buy rating and target price of

INR2,576. We believe HUL and Marico will be worst performers during high inflation

and rising competition. Hence, we initiate coverage with a Sell rating on these stocks

with a target price of INR234 and INR112, respectively.

Higher agricultural production and decline in soft commodity prices along with higher

consumer demand are main upside risks.

FMCG stock have rallied recently and are trading at all-time high valuations, driven by increasing

consumerism aiding strong volume growth in urban as well as rural India. While Nestle and GSK

Consumer are trading at c75-95% premium, other companies in FMCG universe are trading at 10-

35% premium to their historical one-year forward average PER. We expect strong leadership

position with lower competition supporting robust growth to justify higher premium for GSK

Consumer.

Improving economic growth combined with rising consumerism has assisted strong double-digit volume

growth for the FMCG sector, which has re-rated the entire FMCG universe. While Nestle and GSK

Consumer are trading at 75-95% premium to their historical one-year forward mean PER multiples, HUL

is trading at 20% premium to its historical average. We believe that, relatively, a higher premium for GSK

Consumer is sustainable because of its strong brand equity, higher pricing power and low raw material

cost sensitivity.

Table 7: Valuations at all-time high

Company

Valuations (x) Premium

% PER (x) on FY12E EPS one-year forward mean PER

(Since 2002/03 - 2010)

Colgate 24.8 19.9 24.7

Dabur 24.9 23.1 7.6

GCPL 20.7 16.5 25.5

GSK Consumer 27.4 15.6 75.5

HUL 31.0 25.8 20.2

Marico 23.7 17.3 36.9

Nestle 39.3 20.2 94.7


Our valuation methodology

We value the consumer sector based on an average of DCF and PER methodologies. We analyze the

current scenario of rising input cost inflation and escalating competitive intensity and accordingly assign

premium and discount to the stocks’ historical PER average to arrive at fair price on PER basis. Similarly,

for DCF, we have assumed risk free rate of 7.5% with an equity premium of 5% for the CAPM model. For

terminal growth, we have factored in 3% rate and arrived at fair value of individual stocks forecasting the

future 10-year growth based on a GDP multiplier.

17

FMCG Sector Report

January 07, 2011

Valuation snapshot

Company CMP Rating Target FY12E PER (x)

TP on PER (INR)

Discounted cash flow (INR bn)

TP on DCF (INR)

Average TP (INR)

Upside (%)

Colgate 864 Upgrade to Buy 22 766 95 1,127 946 9.5

Dabur 103 Hold 25 104 176 101 102 (0.6)

GCPL 392 Hold 21 397 140 431 414 5.7

GSK Consumer*

2,300 Buy 25 2,100 128 3,052 2,576 12.0

HUL 326 Sell 23 246 483 221 234 (28.3)

Marico 124 Sell 21 110 70 114 112 (9.9)

Nestle* 3,898 Sell 32 3,171 351 3,639 3,405 (12.6)

Note:* Calendar year ending and TP stands for target price. Source: PUG Research

Colgate: We upgrade our rating on the stock to Buy from Hold earlier, as we believe the company is

relatively better placed with a normal input cost inflation and moderate to increasing competitive

environment. We raise our target price to INR946, which provides 10% upside from current levels.

Dabur: We like Dabur’s strategy and niche positioning of ayurveda and herbal products and believe it will

help the company to record robust growth ahead. However, the current valuations do not provide

significant upsides in the near term. Hence, we initiate with a Hold recommendation with our target price

of INR102.

GCPL: We expect GCPL to witness an 80bp contraction in operating margins owing to rising input costs

and increasing competition. We expect these concerns will continue to be an overhang in the near term.

Hence, we maintain our Hold rating on the stock with a revised target price of INR414, based on an

average of DCF and PER methodologies.

GSK Consumer: GSK Consumer, with a dominant position in the lesser-competitive and under-

penetrated MFD category, is well placed to attain strong volume growth and pass on input cost inflation

to consumers with greater ease. GSK Consumer is the best play on foods space in the domestic market,

available at attractive valuations. Hence, we initiate coverage with a Buy recommendation on the stock

with our target price of INR2,576.

HUL: Owing to increasing competition from players like ITC and P&G, we believe HUL will have to

increase its A&P budgets to protect its market shares. With increasing crude oil prices and rising

competition, especially in personal care segment, we expect HUL will have difficulty in maintaining its

operating margins; we expect a contraction of 173bp until FY13. We initiate coverage with a Sell rating

on the stock with our target price of INR234.

Marico: While we like Marico’s strong portfolio of brands including Parachute and Saffola, we believe

rising copra prices will provide margin pressures and result in consensus downgrade. The stock is

trading at rich valuations of 24x FY12E EPS. Hence, we initiate coverage on the stock with a Sell

recommendation with our target price of INR112.

Nestle: Nestle is one of the fastest-growing FMCG companies with a focus on food and beverage

segment. Its brands continue to grow robustly and the emerging packaged food industry offers healthy

long-term growth prospects. However, as current valuations of 39x CY11E EPS capture all the positives

and cap the upside, we initiate coverage on Nestle with a Sell rating.

Note: Refer to company section for a detailed discussion on valuations of individual companies

18

FMCG Sector Report

January 07, 2011

Peer valuation

Company CMP (INR)

Market cap

(INRbn)

EPS CAGR (%)

PER (X) RoE (%) RoCE (%) Dividend yield

(%) Rating Upside

(%) FY10-13E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E

Colgate 864 117 8.9 26.8 24.8 118.9 106.8 146.6 141.3 2.7 3.0 Upgrade to Buy

9.5

Dabur 103 179 18.4 31.0 24.9 52.6 49.5 50.4 48.5 1.2 1.6 Hold (0.6)

GCPL 392 127 25.8 25.6 20.7 36.8 32.2 31.8 25.0 1.6 1.9 Hold 5.7

GSK Consumer*

2,300 97 22.2 33.5 27.4 29.0 29.5 43.4 44.2 1.0 1.2 Buy 12.0

HUL 326 711 7.3 34.0 31.0 76.4 76.1 91.6 91.8 2.1 2.5 Sell (28.3)

Marico 124 76 15.0 26.1 23.7 37.3 31.5 30.8 30.0 0.6 0.8 Sell (9.9)

Nestle* 3,898 376 17.3 46.1 39.3 121.1 105.7 150.9 129.8 1.4 1.5 Sell (12.6)

Note: * Calendar year ending.

Risks

Higher agricultural production and drop in prices of soft commodities

Higher than estimated production of agricultural crops which would reduce the prices of these soft

commodities will be a key upside risk to our assumptions. Moreover, drop in international prices of these

commodities will also lend upside risk.

Lower penetration and per capita consumption offers significant growth potential

A buoyant economy and rising disposable income are expected to aid robust growth momentum for

consumer products. Low penetration levels and low per capita consumption in moderately penetrated

categories provides immense growth opportunities for consumer companies in India. Continued strong

traction in consumer demand, despite high food inflation, would be a key upside risk.

Chart 29: Penetration level still low in many categories

Chart 30: Opportunity to increase per capita

consumption

Source: Company presentation Note: Per capita consumption data is for 2006. Source: Company presentation

Government support to aid higher demand, especially in rural markets

Rural markets in India have been gaining significance with rising disposable income driven by better yield

crops, increasing MSPs (minimum supply price), and the government’s thrust on the rural economy

through NREGA and infrastructure developments. Unprecedented increase in rural income through

continued government support and stimulus packages would also lend further upsides to the demand.

0

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19

FMCG Sector Report

January 07, 2011

Chart 31: NREGA allocation an uptrend

Chart 32: Rural penetration – Sufficient headroom

Source: GOI Source: Company presentation

Government intervention could restrict higher food inflation

With rising concerns on higher food inflation led by wheat, oil seeds, etc., any government intervention

through ban on exports or higher imports to control domestic prices would be an upside risks.

Changes in tax structure

Companies in the consumer sector have plants in tax-haven areas which exempt the production from

excise duties and income taxes for certain period. Any adverse changes in the current structure could

increase the tax-outflow restricting PAT growth.

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FY05 FY06 FY07 FY08 FY09 FY10 FY11BE

INR

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Mahatma Gandhi National Rural Employment Guarantee Scheme (NREGS)

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20

FMCG Sector Report

January 07, 2011

Company section

21

FMCG Sector Report

January 07, 2011

Strong brand equity aiding pricing power will help to offset normal input

cost inflation. We expect operating margin to expand by 144bp over FY10-

13.

Lower tax benefits at the company’s Baddi unit will increase the tax rate to

28% and restrict PAT growth to 9% over FY10-13E. However, we believe the

current stock price already factors this and hence, there is no further

downside from higher tax rates.

We upgrade the stock to Buy (Hold earlier), as we believe the company is

relatively better placed with a normal input cost inflation and moderate to

increasing competitive environment. We raise our target price to INR946,

based on an average of DCF and PER methods.

Company background

Colgate, with 53% share in toothpaste segment, is the leader in domestic oral care market.

Oral care contributes more than 90% of the company’s revenue; while the remaining comes

from personal care products like body wash, cold cream, etc. Increasing penetration and

higher conversion from toothpowder is aiding healthy growth for the company. We believe

that Colgate is the best play on domestic oral care segment with its strong brand equity and

increasing market dominance.

Key positives

Input cost pressure to be minimal

Sorbitol prices, the major raw material requirement for Colgate, are likely to witness normal

inflationary pressure, unlike other agri-commodities. Moreover, we expect Colgate’s strong

brand equity and a diversified portfolio will help the company to raise product prices to offset

higher input costs. We factor in marginal 40bp increase in gross margin over FY10-13E.

Presence in different price-points to insulate from competitive pressures

Colgate’s flagship brands, Colgate Dental Cream, Cibaca, Max Fresh and Active Salt, have

strong brand equity and collectively command 53% of the market. The company’s portfolio is

diversified across different price points, unlike competition. Strong brand equity and presence

across price points lend Colgate higher ability to maneuver pricing. While rising competition

will entail higher A&P spends, we expect other cost efficiencies will aid 144bp expansion in

operating margins till FY13.

Target Price : INR946

Upside : 10%

Nifty 6,080

Sensex 20,301

Stock Data

Sector FMCG

Reuters Code COLG.BO

Bloomberg Code CLGT IN

No. of shares (mn) 136

Market Cap (INR bn) 117

Market Cap (USD mn) 2,576

Avg 6m Vol. 132,686

Stock Performance (%)

52-week high/low INR1,004/632

1M 3M 12M

Absolute (%) (2) (3) 25

Relative (%) (4) (1) 9

Shareholding Pattern

Nifty and Stock Movement

Promoters51%FIIs

16%

DIIs8%

Public & others25%

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Colgate Palmolive (LHS) Nifty (RHS)

Colgate-Palmolive (India) Ltd.

FMCG l India Research

CMP: INR864 Reco: BUY

22

FMCG Sector Report

January 07, 2011

Valuation

Colgate is relatively better placed with a normal input cost inflation and moderate to increasing

competitive environment. Moreover, it remains a preferred play on the domestic oral care space with

strong market leadership aiding healthy growth in future. Hence, we upgrade the stock to Buy (Hold

earlier) and raise our target price to INR946, based on an average of DCF and PER methods.

PER method

When the company witnessed high competion from local and regional players, the stock had traded in a

low PER band of 15-20x. As the company benefitted from higher penetration and increasing conversions,

with its increased brand investments, it had witnessed robust double-digit volume growth combined with

strengthening market leadership position. The stock is currently trading at 25% premium to its historical

one-year forward PER multiple of 20x. While we expect competition to increase, we believe that Colgate

is relatively better placed with its different product range. Hence, we believe 22x to our FY12E EPS is

justified and accordingly, arrive at a fair price of INR766.

Chart 33: One-year forward PER bands

Chart 34: One-year forward mean PER

Source :Bloomberg, PUG Research Source :Bloomberg, PUG Research

Discounted cash flow method

For our DCF calculations, we have used a 9.3% cost of equity based on CAPM model. We arrive at the

terminal value using 3% terminal growth rate. Accordingly, we arrive at our fair price of INR1,127 per

share.

Table 8: Calculation based on DCF parameters Table 9: Sensitivity analysis

Risk free rate (%) 7.5

Beta 0.4

Equity risk premium (%) 5.0

Cost of equity (%) 9.3

Terminal growth rate (%) 3.0

Terminal Value (INR mn) 51,693

Fair value (INR mn) 94,926

Outstanding shares (mn) 84

Value per share (INR) 1,127

Terminal growth (%) 2.0 3.0 4.0

WACC (%)

8.5 1,167 1,290 1,468

9.3 1,038 1,127 1,250

10.0 950 1,020 1,112

11.0 846 896 960

Source: PUG Research Source: PUG Research

Key catalyst Impressive volume growth in healthy doule-digits and continuing market dominance with more than 50%

market share would drive robust revenue CAGR of 13% over FY10-13E.

Risk

Higher tax rates to impact PAT growth

Lower tax benefits for the Baddi unit and increasing production at locations without tax benefits would

increase the tax rate, thus restricting PAT CAGR to 9% over FY10-13E.

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23

FMCG Sector Report

January 07, 2011

Increase in competition could affect pricing power

Increasing competitive activity in the market — with existing players focusing more on oral care and new

entrants likely — could challenge the company’s pricing power and result in higher A&P spend, which would

impact its profitability.

Our view vs. consensus

Lower than consensus estimates

While our sales are 2-3% lower than consensus forecast, our earning expectations are 4-8% lower than

street forecasts as we have assumed a higher tax rate of 28% from FY12E.

FY11E FY12E FY13E

PUG Consensus Variance

(%) PUG Consensus

Variance (%)


(%)

Sales (INR mn) 22,395 22,652 (1.1) 25,374 25,959 (2.3) 28,493 29,423 (3.2)

EPS (INR) 32.3 33.1 (2.3) 34.8 37.9 (8.2) 40.2 41.9 (4.2)

Detailed financials

Colgate: Profit and loss statement

FY ending Mar, in INR mn FY10 FY11E FY12E FY13E

Net sales 19,625 22,395 25,374 28,493

Raw material consumed (7,768) (8,739) (9,913) (11,166)

Employee expenses (1,591) (1,782) (1,995) (2,195)

Selling, general & administrative exp (4,146) (4,827) (5,482) (6,108)

Other expenses (1,866) (1,969) (2,201) (2,438)

Total expenditure (15,370) (17,317) (19,591) (21,906)

EBITDA 4,254 5,078 5,782 6,586

EBITDA margin (%) 21.7 22.7 22.8 23.1

Depreciation (376) (406) (434) (449)

Other income/extraordinary items 985 1,084 1,241 1,465

EBIT 4,863 5,755 6,589 7,603

Interest (15) (15) (15) (15)

Profit before tax 4,848 5,740 6,574 7,588

Tax (615) (1,349) (1,841) (2,125)

Tax rate (%) 12.7 23.5 28.0 28.0

Net profit 4,233 4,391 4,733 5,463

Adjusted profit 4,233 4,391 4,733 5,463

Colgate: Key ratios

Particulars FY10 FY11E FY12E FY13E

EPS (INR) 31.1 32.3 34.8 40.2

P/E (x) 27.8 26.8 24.8 21.5

RoE (%) 156.1 118.9 106.8 107.5

RoCE (%) 165.5 146.6 141.3 143.0

Dividend yield (%) 2.3 2.7 3.0 3.5

P/BV (x) 36.0 28.5 24.8 21.6

EV/Sales (x) 5.8 5.0 4.4 3.8

EV/ EBIDTA (x) 26.8 22.1 19.1 16.6

24

FMCG Sector Report

January 07, 2011

Colgate: Balance sheet


Sources of funds

Share capital 136 136 136 136

Reserves total 3,125 3,992 4,597 5,298

Total shareholders’ funds 3,261 4,128 4,733 5,433

Loans 46 46 46 46

Other non-current liabilities 187 187 187 187

Total 3,494 4,360 4,966 5,666

Application of funds

Net block 2,531 2,390 2,265 2,180

Investments 14 14 14 14

Inventories 1,106 1,201 1,360 1,521

Sundry debtors 98 104 118 132

Cash and bank 3,672 5,534 6,951 8,283

Loan and advances 1,167 1,215 1,273 1,329

Other current assets 55 - - -

Total current assets 6,097 8,055 9,701 11,265

Sundry creditors 3,708 4,214 4,811 5,402

Provisions 1,807 2,251 2,570 2,756

Total current liabilities 5,515 6,465 7,380 8,159

Other non-current assets 366 366 366 366

Total 3,494 4,360 4,966 5,666

Colgate: Cash flow statement


PBT 4,848 5,740 6,574 7,588

Depreciation 362 304 326 333

Change in working capital 754 509 481 474

Taxes paid (769) (1,162) (1,715) (2,052)

Operating cash flow 5,195 5,392 5,665 6,342

Capital expenditure (1,108) (163) (200) (248)

Change in investments 20 - - -

Other investing cash flow 153 - - -

Investing cash flow (934) (163) (200) (248)

Free cash flow to firm 4,261 5,229 5,465 6,094

Issue of equity - - - -

Change in borrowings (1) - - -

Dividend paid (3,336) (3,493) (4,048) (4,763)

Other 40 126 0 -

Financing cash flow (3,297) (3,366) (4,048) (4,763)

Net cash generated during year 964 1,863 1,417 1,332

Cash at beginning of year 2,511 3,476 5,338 6,756

Cash at the end of year 3,475 5,338 6,756 8,087

25

FMCG Sector Report

January 07, 2011

Financial summary

Profit and loss statement (INR mn)

Year ending 31 March FY10 FY11E FY12E FY13E

Income from operations 19,625 22,395 25,374 28,493

Total operating expenses (15,370) (17,317) (19,591) (21,906)

EBITDA 4,254 5,078 5,782 6,586

Depreciation (376) (406) (434) (449)

EBIT 3,878 4,672 5,348 6,137

Interest expenses (15) (15) (15) (15)

Other income 985 1,084 1,241 1,465

Profit before tax and extraordinary items

4,848 5,740 6,574 7,588

Extraordinary income - - - -


Provision for tax (615) (1,349) (1,841) (2,125)

Net profit 4,233 4,391 4,733 5,463

Reported PAT 4,233 4,391 4,733 5,463

Adjusted profit 4,233 4,391 4,733 5,463

Balance sheet (INR mn)


Liabilities

Equity capital 136 136 136 136

Reserves and surplus 3,125 3,992 4,597 5,298

Shareholders’ funds 3,261 4,128 4,733 5,433

Borrowings 46 46 46 46

Others non-current liabilities 187 187 187 187

Total liabilities 3,494 4,360 4,966 5,666

Assets

Gross block 5,345 5,470 5,670 5,918

Depreciation (2,876) (3,180) (3,506) (3,838)

Net block 2,469 2,290 2,165 2,080

Capital WIP 62 100 100 100

Total fixed assets 2,531 2,390 2,265 2,180



Inventories 1,106 1,201 1,360 1,521


Cash equivalents 3,672 5,534 6,951 8,283

Other current assets 1,222 1,215 1,273 1,329



Other current liabilities 1,807 2,251 2,570 2,756


Net current assets 582 1,590 2,321 3,107

Total assets 3,494 4,360 4,966 5,666

Cash flow statement (INR mn)



Depreciation, Amortisation etc. 362 304 326 333

Less: Changes in W.C. 754 509 481 474

Tax (769) (1,162) (1,715) (2,052)

Net operating cash flow 5,195 5,392 5,665 6,342

Capex (1,108) (163) (200) (248)

Investments 173 - - -

Investing cash flow (934) (163) (200) (248)

Increase in equity - - - -

Debt raised/ (repaid) (1) - - -

Dividends (3,336) (3,493) (4,048) (4,763)

Others 40 126 0 -


Net change in cash 964 1,863 1,417 1,332

Closing cash balance 3,475 5,338 6,756 8,087

Key ratios (%)


Diluted EPS (INR) 31.1 32.3 34.8 40.2

Dividend per share (INR) 20.0 23.0 26.0 30.0

Book value per share (INR) 24.0 30.4 34.8 40.0

ROE 156.1 118.9 106.8 107.5

ROCE 165.5 146.6 141.3 143.0

Net debt/Equity (111.2) (133.0) (145.9) (151.6)

Dividend payout 75.0 83.1 87.2 87.2

Growth

Revenues 15.8 14.1 13.3 12.3

EBITDA 54.4 19.4 13.9 13.9

EBIT 38.4 18.4 14.5 15.4

Net profit 43.4 3.8 7.8 15.4

Diluted EPS 43.4 3.8 7.8 15.4

Margins

EBITDA 21.7 22.7 22.8 23.1

EBIT 24.8 25.7 26.0 26.7

Adjusted Profit 21.6 19.6 18.7 19.2

Valuation ratios


Diluted P/E (x) 27.8 26.8 24.8 21.5

Price/BV(x) 36.0 28.5 24.8 21.6

Market cap/sales (x) 6.0 5.2 4.6 4.1

EV/sales (x) 5.8 5.0 4.4 3.8

EV/EBITDA (x) 26.8 22.1 19.1 16.6

Dividend yield (%) 2.3 2.7 3.0 3.5

26

FMCG Sector Report

January 07, 2011

Dabur’s differential product postioning on herbal and ayurveda platform

helps insulate the company, against intensive competition.

Moreover, low dependence on any single input augurs well for the company

as it reduces cost sensitivity to earnings. We forecast EBITDA margins to

remain stable owing to operating cost effeciencies.

At 25x FY12E EPS, the stock is trading at a 8% premium to its historical

average and offers negligible upside in the near term, in our opinion. Hence

we initiate with a Hold recommendation.

Company background

Dabur is the fourth-largest FMCG company in India with strong presence in ayurveda and

herbal-based products. It has a diversified product portfolio including hair oils, shampoos, oral

care, home care, skin care, foods, and healthcare. The company’s flagship brands, Dabur,

Vatika, Hajmola, Anmol and Real, command strong brand equity in the domestic FMCG

space.

Key positives

Niche category products to support robust growth

Dabur’s diversified portfolio, with presence in herbal and ayurveda category, will help it

capitalise on increasing consumerism in the domestic market and in our opinion, will help

insulate it from the rising competition. We expect the consumer care division (CCD) to record

a 14% revenue CAGR, driven by healthy growth in skin care, oral care and health

supplements.

Fem Care to place skin care vertical on a strong footing

Fem Care, which leads in fairness bleaches and has a strong position in the hair removal

category, enabled Dabur to enter the high-growth mainstream skin care and fairness cream

market with an established brand, FEM. We expect Fem to further strengthen Dabur’s skin

care portfolio and add c3-4% to the company’s growth.

International business to see healthy growth

Dabur’s international business should growt at 42% CAGR, led by new acquisitions of Hobi

Kosmetic and Namaste and continuing healthy growth momentum in the MENA region. Hobi

Kosmetic and Namaste, together, are expected to contribute 40% to the international

business and are expected to be earnings accretive from year one.


Downside : 0.6%

Nifty 6,080

Sensex 20,301

Stock Data

Sector FMCG

Reuters Code DABU.BO

Bloomberg Code DABUR IN

No. of shares (mn) 1,743



Avg 6m Vol. 1,464,495


52-week high/low INR118/90

1M 3M 12M

Absolute (%) 5 (5) 28

Relative (%) 3 (4) 12



Promoters69%

FIIs14%

DIIs10%

Public & others

7%

4000

4500

5000

5500

6000

6500

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120

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c-10

(IN

R)

Dabur (LHS) Nifty (RHS)

Dabur India Ltd.


CMP: INR103 Reco: HOLD

27

FMCG Sector Report

January 07, 2011

Business analysis

Niche positioning to aid healthy 14% growth in CCD

Dabur has a diversified product portfolio with presence in the niche herbal and ayurveda category, which

will assist it in capitalising on increasing consumerism in the domestic market. With low MNC interest in

the herbal and ayurveda space and scattered domestic competition, we expect Dabur to record healthy

14% revenue CAGR, driven by robust growth in health supplements, skin care and foods.

Chart 35: Consumer care division forms c71% of total

revenue (FY10 – INR34bn)

Chart 36: Revenue break-up – CCD (FY10 INR24bn)

Source: Company, PUG Research Source: Company, PUG Research

Skin care, a key growth driver; FEM to further strengthen this category

Fem Care is expected to help Dabur report a 37% revenue CAGR in its skin care vertical (6% revenue

contribution) until FY13. This segment, growing at healthy double-digit levels, presents a cINR30-35bn+

market opportunity. We believe Fem, which leads in fairness bleaches and has a strong position in the

hair removal market, will drive strong growth in the skin care segment.

Acquisitions to aid international growth; earnings accretive

Dabur’s international business has been one of its key growth drivers with strong volumes supporting

19% revenue growth in FY10. This business should grow strongly by 42% until FY13E. This would be

driven by consolidation of Dabur’s new acquisition, Hobi Kosmetics and Namaste Laboratories, which

are growing at c15-20% and are expected to add revenue of cINR6bn in FY12. We expect these

acquisitions to EPS accretive from year one.

Chart 37: International business to register strong 42% revenue CAGR

Source: Company, PUG Research

71%

8%

18%

3%

Consumer Care Division Consumer Health Division

International Business Division Others

30%

18%

14%

5%

6%

8%

19%

Hair care Oral care Foods

Home care Skin Digestives

Health supplements

10

20

30

40

50

60

70

0

200

400

600

800

1000

1200

1400

1600

1800

2000

FY07 FY08 FY09 FY10 FY11E FY12E FY13E

%

INR

mn

Revenue (LHS) YoY Growth (RHS)

High growth led by consolidation of acquired businesses

28

FMCG Sector Report

January 07, 2011

Low dependence on single commodity augurs well

While Dabur saw sharp increases in prices of sugar (10% of total cost) and herbs in FY10, vegetable oils

and other chemicals (44% of total cost) witnessed some correction. Judicious price increases, a

favourable sales mix and an efficient cost management helped the company to expand margins by

180bp. We expect that, while higher vegetable oil prices and packaging cost will keep gross margins

under pressure, Dabur is relatively better placed with its diversified raw material requirement.

Chart 38: A diversified raw material mix

Chart 39: Indexed price movement

Source: Company Source: Company, PUG Research

Financial outlook

Revenue to register 21% CAGR over FY10-13E

Dabur has consistently recorded robust volume growth across major categories, led by increasing

penetration and new product variants; this, along with judicious price increases, enabled the company to

record strong 20% revenue growth over the past five years. This robust growth momentum is expected to

continue with revenue CAGR of 21% over FY10-13E, driven by strong traction across its segments.

Chart 40: Revenue growth expected to remain robust


Higher input costs to restrict margin expansion

Higher vegetable oil prices and packaging cost will keep gross margins under pressure; we expect gross

margins to contract c220bp until FY13. Nevertheless, we believe that increasing efficient cost

management and relatively stable A&P spend will help maintain operating margins at 18.4%. Although

increase in MAT rates in this fiscal will partially restrict PAT margin expansion, we expect PAT CAGR of

18% over FY10-13.

10%

19%

28%

25%

19%

Sugar & Molasses

Vegetable Oils

Herbs, Jari Booti & Raw Madhu

Chemicals & Perfumery Compounds

Other Raw Materials

0

100

200

300

400

FY05 FY06 FY07 FY08 FY09 FY10

Sugar & Molasses

Vegetable Oils

Herbs, Jari Booti & Raw Madhu

Chemicals & Perfumery Compounds

12

14

16

18

20

22

24

26

28

20

25

30

35

40

45

50

55

60

65

FY08 FY09 FY10 FY11E FY12E FY13E

%

INR

bn

Sales (LHS) YoY Growth (RHS)

Higher growth due to consolidation

29

FMCG Sector Report

January 07, 2011

Chart 41: EBITDA margins to remain stable

Chart 42: Profitability to increase 18%


Valuation

We have used an average of DCF and PER valuation methodologies to value Dabur and arrive at our

target price of INR102, providing negligible upside from the current levels. Since the current price

captures near-term positives, we initiate coverage on Dabur with a Hold recommendation.

PER method

Dabur is the fourth-largest FMCG company in India with strong presence in ayurveda and herbal-based

products. Dabur achieved strong 22% earnings CAGR since FY06, driven by increasing consumerism,

healthy volume growth and efficacious price increases. While the stock traded at lower band during a

2002-05, improving performance from 2006 resulted in an healthy price appreciation. Currently, the stock

is trading at 7% premium to its historical one-year forward mean PER and 19% discount to HUL. While

we expect volume growth to remain steady, rising input costs and competition are expected to keep

margins under pressure. On a relative valuation matrix, we value the company at 25x its FY12E EPS to

arrive at a fair price of INR104.





We also calculate a fair price of INR101 based on our DCF calculations. We have asssumed 9.8% cost

of equity based on the CAPM model and a terminal growth of 3% to arrive at a fair value of INR176bn.

0

2

4

6

8

10

12


INR

bn

EBITDA (LHS)

13.0

13.2

13.4

13.6

13.8

14.0

14.2

14.4

14.6

14.8

15.0

0

1

2

3

4

5

6

7

8

9


%

INR

bn

PAT (LHS) PAT margin (RHS)

10

30

50

70

90

110

130

Ap

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Price 15X 20X 25X 30X 35X

10.0

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45.0

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PER Mean + 1 stddev

-1 std dev +2 std dev + 3 std dev

30

FMCG Sector Report

January 07, 2011



Beta 0.5






Outstanding shares (mn) 1,741

Value per share (INR) 101


WACC (%)

9.5 97 107 120

9.8 92 101 113

10.0 89 98 109

10.5 83 90 99


Key catalyst

Inorganic growth opportunities, to support the healthy growth momentum, could provide surprise to our

estimates.

Risks

Increase in input costs to restrict margin expansion

Vegetable oils and chemical compounds, together, constitute c44% of total raw material cost and 9% of

standalone sales. While we estimate c200bp contraction in gross margins, higher-than-estimated

increase in input costs could provide downside to our estimates.

Retail business to be a drag on profitability

Dabur, with 21 newU stores, plans to scale up to 40-45 stores by FY11. This division recorded revenue

of INR92mn in FY10 with losses of INR86mn. While the management remains hopeful of an improved

performance, aggressive expansion can continue to be a drag on overall profitability.


Earnings in line with street

While our sales forecast is higher by 6-9%, our earning estimates are in line with consensus view.

FY11E FY12E FY13E


(%) PUG Consensus

Variance (%)


(%)

Sales (INR mn) 42,071 40,223 4.6 52,698 48,343 9.0 59,960 56,600 5.9

EPS (INR) 3.3 3.4 (3.5) 4.1 4.2 (1.1) 4.8 4.9 (2.2)

31

FMCG Sector Report

January 07, 2011

Detailed financials

Dabur : Consolidated profit and loss statement


Net sales 33,914 42,071 52,698 59,960




Other expenses (709) (749) (862) (964)


EBITDA 6,241 7,617 9,632 11,033

EBITDA margin (%) 18.4 18.1 18.3 18.4

Depreciation (503) (695) (933) (1,051)

Other income/extraordinary items 394 466 512 568

EBIT 6,133 7,387 9,211 10,550

Interest (123) (174) (205) (164)


Tax (1,005) (1,443) (1,801) (2,077)

Tax rate (%) 16.7 20.0 20.0 20.0

Net profit 5,005 5,770 7,205 8,309

Adjusted profit 5,013 5,780 7,217 8,323

Dabur : Key ratios


EPS (INR) 2.9 3.3 4.1 4.8

P/E (x) 35.8 31.0 24.9 21.6

RoE (%) 57.3 52.6 49.5 44.3

RoCE (%) 55.1 50.4 48.5 48.6

Dividend yield (%) 1.0 1.2 1.6 1.8

P/BV (x) 19.2 14.2 10.8 8.5

EV/Sales (x) 5.2 4.3 3.4 2.9

EV/ EBIDTA (x) 28.3 23.8 18.5 15.9

32

FMCG Sector Report

January 07, 2011

Dabur: Consolidated balance sheet

FY Ending Mar, in INR mn FY10 FY11E FY12E FY13E

Sources of funds

Share capital 869 1,741 1,741 1,741

Reserves total 8,458 10,817 14,775 19,229


Loans 1,793 4,793 3,293 1,793


Total 11,527 17,758 20,217 23,170


Net block 6,767 14,296 14,947 15,810


Inventories 4,262 5,471 6,869 7,795

Sundry debtors 1,198 1,510 1,891 2,152

Cash and bank 4,430 3,082 4,230 5,755




Provisions 4,582 5,107 5,915 6,598



Total 11,527 17,758 20,217 23,170

Dabur : Consolidated cash flow statement

Particulars (in INR mn) FY10 FY11E FY12E FY13E

PBT 6,009 7,213 9,007 10,386


Change in working capital (988) (490) (1,375) (1,147)

Taxes paid (199) (1,005) (1,443) (1,801)


Capital expenditure (1,573) (8,099) (1,400) (1,700)

Change in investments 2,100 0 - -

Other investing cash flow (1,271) - - -

Investing cash flow (744) (8,099) (1,400) (1,700)

Free cash flow to firm 4,494 (1,810) 5,538 6,575

Issue of equity (76) 881 12 14

Change in borrowings (507) 3,000 (1,500) (1,500)

Dividend paid (1,772) (2,544) (2,902) (3,564)

Other (1,700) (875) - -

Financing cash flow (4,056) 463 (4,390) (5,050)

Net cash generated during year 439 (1,348) 1,148 1,525

Cash at beginning of year 1,484 1,923 576 1,723

Cash at the end of year 1,923 576 1,723 3,249

33

FMCG Sector Report

January 07, 2011

Financial summary





EBITDA 6,241 7,617 9,632 11,033

Depreciation (503) (695) (933) (1,051)

EBIT 5,738 6,921 8,700 9,982


Other income 394 466 512 568

Profit before tax and extraordinary 6,009 7,213 9,007 10,386



Provision for tax (1,005) (1,443) (1,801) (2,077)

Net profit 5,005 5,770 7,205 8,309

Minority Interest 8 10 12 14

Reported PAT 5,013 5,780 7,217 8,323

Adjusted profit 5,013 5,780 7,217 8,323



Liabilities

Equity capital 869 1,741 1,741 1,741



Minorities 38 38 38 38

Borrowings 1,793 4,793 3,293 1,793



Assets

Gross block 9,857 17,957 19,357 21,057

Depreciation (3,391) (3,962) (4,710) (5,548)

Net block 6,466 13,996 14,647 15,510

Capital WIP 301 300 300 300




Inventories 4,262 5,471 6,869 7,795

Sundry debtors 1,198 1,510 1,891 2,152







Net current assets 4,362 3,065 4,872 6,963

Total assets 11,527 17,758 20,217 23,170





Less: Changes in W.C. (988) (490) (1,375) (1,147)

Tax (199) (1,005) (1,443) (1,801)


Capex (1,573) (8,099) (1,400) (1,700)

Investments 829 0 - -

Investing cash flows (744) (8,099) (1,400) (1,700)

Increase in equity (76) 881 12 14

Debt raised/ (repaid) (507) 3,000 (1,500) (1,500)

Dividends (1,772) (2,544) (2,902) (3,564)

Others (1,700) (875) - -

Financing cash flow (4,056) 463 (4,390) (5,050)

Net change in cash 439 (1,348) 1,148 1,525

Closing cash balance 1,923 576 1,723 3,249

Key ratios (%)


Diluted EPS (INR) 2.9 3.3 4.1 4.8



ROE 57.3 52.6 49.5 44.3

ROCE 55.1 50.4 48.5 48.6

Net debt/Equity (28.2) 13.6 (5.7) (18.9)


Growth

Revenues 20.9 24.1 25.3 13.8

EBITDA 33.9 22.0 26.5 14.5

EBIT 31.0 20.5 24.7 14.5

Net profit 28.1 15.3 24.9 15.3

Diluted EPS 28.1 15.3 24.9 15.3

Margins

EBITDA 18.4 18.1 18.3 18.4

EBIT 18.1 17.6 17.5 17.6


Valuation ratios


Diluted P/E (x) 35.8 31.0 24.9 21.6

Price/BV(x) 19.2 14.2 10.8 8.5


EV/sales (x) 5.2 4.3 3.4 2.9

EV/EBITDA (x) 28.3 23.8 18.5 15.9

Dividend yield (%) 1.0 1.2 1.6 1.8

34

FMCG Sector Report

January 07, 2011

The international business would grow 37%, led by consolidation and

healthy growth in Africa and Indonesia. Integration of recently-acquired

businesses remains GCPL’s focus.

Rising input cost is expected to put pressure on margins.We expect EBITDA

margins to contract 80bp during FY10-13.

We continue to maintain our Hold rating with a revised target price of

INR414 (revised from INR402), based on an average of DCF and PER

valuation methodologies.

Company background

Godrej Consumer (GCPL) is one of the fastest growing FMCG companies that has a strong

presence in personal care, hair care and home care products. It commands 10.4% market

share in the domestic soaps segment and is the leader in hair colours segment with a 34%

share. With 100% acquisition of Godrej Sara Lee (now GHPL), GCPL is the leader in

household insecticide business as well, with 33.1% share in the domestic market. With recent

acquisitions, GCPL has increased its footprint in the South African markets and has forayed

in the fast growing South-East Asian and LatAm markets.

Key positives

HI segment to aid robust growth; dependence on soaps to reduce

Continued strong performance of the HI segment (c45% of consolidated sales) and effective

consolidation of the acquired businesses would result in 36% revenue growth and 28%

earnings growth over FY10-13E for GCPL. Moreover, increasing contribution from these

businesses will reduce the company’s dependence on soaps to 21%.

Increasing visibility on international businesses seems a re-rating trigger

Increasing visibility on performance of the international business along with successful

integration of recent acquisitions should reinforce investor confidence on GCPL, engendering

a re-rating.


Upside : 6%

Nifty 6,080

Sensex 20,301

Stock Data

Sector FMCG

Reuters Code GOCP.BO

Bloomberg Code GCPL IN




Avg 6m Vol. 198,395



1M 3M 12M

Absolute (%) (3) (2) 45

Relative (%) (5) (1) 28



Promoters68%

FIIs20%

DIIs1%

Public & others11%

4000

4500

5000

5500

6000

6500

200

250

300

350

400

450

500

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)

Godrej Consumers (RHS) Nifty (RHS)

Godrej Consumer Products Ltd.


CMP: INR392 Reco: HOLD

35

FMCG Sector Report

January 07, 2011

Valuation We expect GCPL will witness rising concerns from increasing palm oil prices and increasing competition.

Hence, we continue to maintain our Hold rating on the stock with a revised target price of INR414 based

on an average of DCF and PER multiple.

PER method

Recent acquisitions has resulted in significant change in product profile of the company. We believe a

shift from soaps and hair colours to household insecticide segment augurs well for the company and

hence, the stock should command a premium to its historical one-year forward mean PER of 16.5x.

Strong revenue CAGR of 36% and earnings CAGR of 28% over FY10-13E, driven by consolidation of

recently acquired businesses, should support the premium valuations. Hence, we apply 21x to our

FY12E EPS and arrive at a fair value of INR397 per share.



Source :Bloomberg, PUG Research Source :Bloomberg, PUG Research


For our DCF calculations, we have assumed 10.5% cost of equity based on the CAPM model using 7.5%

Rfr and 3% terminal growth rate. We arrive at a fair price of INR431 per share.



Beta 0.6









WACC (%)

9.0 463 513 580

10.5 396 431 476

11.0 367 397 435

12.0 320 341 369


Key catalyst

Increasing visibility on the international business and successful integration of these business could re-

rate the stock.

Risks

Rising input costs could adversely impact margins

GCPL has forward covers for its raw material requirements and has increased prices of select products.

Nevertheless, higher-than-anticipated increase in cost of inputs, primarily vegetable oils, could adversely

affect the company’s profitability snd provide downside risks to our estimates.

Increasing competition could result in higher ad spend

High competitive intensity in the soaps segment and hair colours remains a key challenge for GCPL. It

managed to grab additional 60bp of share from competition recently, taking the total to 10.4%;

nevertheless, increasing marketing activities from HUL, cash-rich ITC and P&G (via a new launch, Wella)

imply that GCPL would have to undertake higher A&P spend, which would adversely affect its profits.

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36

FMCG Sector Report

January 07, 2011


Higher than consensus estimates

Our expectation of INR18.9 EPS for FY12 and INR22 EPS for FY13 is higher by 4-7% than consensus

forecasts as we expect sales growth to be higher than consensus estimates.

FY11E FY12E FY13E

PUG Consensus Variance (%) PUG Consensus Variance (%) PUG Consensus Variance (%)

Sales (INR mn) 36,683 34,886 5.2 45,274 42,307 7.0 51,520 46,272 11.3

EPS (INR) 15.3 14.7 4.0 18.9 18.2 3.8 22.0 20.5 7.3

Detailed financials

GCPL: Consolidated profit and loss statement


Net sales 20,412 36,683 45,274 51,520

Raw material Consumed (9,463) (17,627) (21,925) (25,007)



Other expenses (1,829) (2,194) (2,508) (2,826)


EBITDA 4,078 6,965 8,667 9,900

EBITDA margin (%) 20.0 19.0 19.1 19.2

Depreciation (236) (431) (633) (690)


EBIT 4,310 7,181 8,316 9,520

Interest (111) (512) (575) (524)


Tax (803) (1,314) (1,626) (1,889)

Tax rate (%) 19.1 19.7 21.0 21.0

Net profit 3,396 5,355 6,116 7,107

Adjusted profit 3,396 4,944 6,116 7,107

GCPL: Key ratios


EPS (INR) 11.0 15.3 18.9 22.0

P/E (x) 35.5 25.6 20.7 17.8

RoE (%) 44.5 36.8 32.2 31.6

RoCE (%) 46.6 31.8 25.0 27.0

Dividend yield (%) 1.0 1.6 1.9 2.2

P/BV (x) 12.6 7.3 6.2 5.2

EV/Sales (x) 6.0 3.8 3.0 2.6

EV/ EBIDTA (x) 30.2 20.1 15.9 13.5

37

FMCG Sector Report

January 07, 2011

GCPL: Consolidated balance sheet


Sources of funds :


Reserves total 9,239 17,023 20,267 24,118

Total Shareholders’ funds 9,547 17,347 20,590 24,442

Loans 369 15,231 13,231 12,231


Total 9,982 32,642 33,885 36,737

Application of funds :

Net Block 5,744 30,000 30,337 30,499

Inventories 2,644 4,300 5,219 5,892

Sundry debtors 1,153 2,111 2,481 2,823

Cash and bank 3,722 1,709 2,452 5,052




Provisions 4,073 6,156 7,267 8,135


Total 9,982 32,642 33,885 36,737

GCPL: Consolidated cash flow statement


PBT 4,199 6,670 7,742 8,996


Change in working capital (260) (199) (184) (107)

Taxes paid (789) (1,283) (1,606) (1,872)


Capital expenditure (1,749) (24,687) (970) (851)

Change in investments 0 - - -

Other investing cash flow (595) - - -

Investing cash flow (2,344) (24,687) (970) (851)

Free cash flow to firm 1,240 (19,068) 5,615 6,856

Issue of equity 51 5,313 - -

Change in borrowings (2,407) 14,862 (2,000) (1,000)

Dividend paid (1,490) (2,644) (2,872) (3,255)

Other 1,874 (475) 0 -

Financing cash flow (1,971) 17,056 (4,872) (4,255)

Net cash generated during year (732) (2,012) 742 2,601



38

FMCG Sector Report

January 07, 2011

Financial summary





EBITDA 4,078 6,965 8,667 9,900

Depreciation (236) (431) (633) (690)

EBIT 3,842 6,533 8,034 9,210


Other income 468 237 282 310


Extraordinary income - 411 - -


Provision for tax (803) (1,314) (1,626) (1,889)

Net profit 3,396 5,355 6,116 7,107

Reported PAT 3,396 5,355 6,116 7,107

Adjusted Profit 3,396 4,944 6,116 7,107



Liabilities

Equity Capital 308 324 324 324



Borrowings 369 15,231 13,231 12,231


Total Liabilities 9,982 32,642 33,885 36,737

Assets

Gross block 7,267 31,913 32,883 33,734

Depreciation (1,531) (1,963) (2,596) (3,286)

Net block 5,736 29,950 30,287 30,449

Capital WIP 8 50 50 50


Investments - - - -

Inventories 2,644 4,300 5,219 5,892

Sundry debtors 1,153 2,111 2,481 2,823








Total Assets 9,982 32,642 33,885 36,737




Depreciation, amortisation etc. 434 431 633 690

Less: Changes in W.C. (260) (199) (184) (107)

Tax (789) (1,283) (1,606) (1,872)


Capex (1,749) (24,687) (970) (851)

Investments (595) - - -

Investing cash flows (2,344) (24,687) (970) (851)

Increase in equity 51 5,313 - -

Debt raised/ (repaid) (2,407) 14,862 (2,000) (1,000)

Dividends (1,490) (2,644) (2,872) (3,255)

Others 1,874 (475) - -

Financing cash flow (1,971) 17,056 (4,872) (4,255)

Net change in cash (732) (2,012) 742 2,601


Key ratios (%)


Diluted EPS (INR) 11.0 15.3 18.9 22.0



ROE 44.5 36.8 32.2 31.6

ROCE 46.6 31.8 25.0 27.0

Net debt/Equity (35.1) 77.9 52.4 29.4


Growth

Revenues 46.5 79.7 23.4 13.8

EBITDA 96.7 70.8 24.4 14.2

EBIT 89.0 57.1 22.8 14.5

Net profit 96.7 45.6 23.7 16.2

Diluted EPS 64.0 38.7 23.7 16.2

Margins

EBITDA 20.0 19.0 19.1 19.2

EBIT 21.1 18.5 18.4 18.5


Valuation ratios


Diluted P/E (x) 35.5 25.6 20.7 17.8

Price/BV(x) 12.6 7.3 6.2 5.2


EV/sales (x) 6.0 3.8 3.0 2.6

EV/EBITDA (x) 30.2 20.1 15.9 13.5

Dividend yield (%) 1.0 1.6 1.9 2.2

39

FMCG Sector Report

January 07, 2011

Absolute market leadership and lower sensitivity of earnings to raw material

costs will help GlaxoSmithKline Consumer (GSK Consumer) to maintain its

operating margins in future.

Earnings CAGR of 22% is one of the highest in our coverage universe. We

expect robust volumes, steady pace of new launches and low competition in

the MFD category will help attain this strong earnings growth over CY09-

12E.

Strong brand equity and lower sensitivity of earnings to commodity prices

justify GSK Consumer’s premium valuations. Hence, we initiate coverage

with a Buy and a target price of INR2,576, providing 12% upside from

current levels.

Company background

GlaxoSmithKline Consumer Healthcare (GSK Consumer) is an Indian group company of

GlaxoSmithKline plc UK, which holds 43% stake. GSK Consumer is the largest player in the

malted food drink (MFD) category, with its flagship brand, Horlicks, commanding a leading

position in the white MFD category (predominantly in south and east). To cater to the north

and east markets, the company introduced Boost in the brown MFD category. GSK

Consumer entered the non-MFD category with Foodles in instant noodles and Horlicks

Nutribar in multi-cereal bar categories.

Key positives

Strong brands and successful extensions provide healthy growth visibility

GSK Consumer continues to see robust double-digit volume growth, with its flagship brand,

Horlicks, recording c13% growth in 9MCY10. With low competitive intensity in the MFD

category, the company’s strong brand equity, continued pace of new launches/extensions,

and increasing penetration through recruiter packs provide significant growth visibility.

Low input cost sensitivity and higher pricing power to support healthy margins

Despite milk and barley prices being up 27% and 18% YoY respectively during M9CY10,

GSK Consumer was able to restrict contraction of margins to a minimal 10bp due to

efficacious price increases and low input cost sensitivity. We believe that the company is

relatively better placed with significant pricing power to pass on increasing input costs easily,

owing to lower competition and absolute market leadership.

New launches provide incremental growth triggers

GSK Consumer diversified into the non-MFD category recently and gained reasonable

success in instant noodles with Foodles commanding 5% market share in south and 3.5% in

east. Considering the company’s increasing focus on new food categories in the nutrition

space and robust growth in its flagship brands, we expect this segment to contribute c8% to

revenue by CY12.

Cash of INR9bn provides opportunities for inorganic growth

A strong balance sheet with steady cash flows provides flexibility to GSK Consumer to pursue

inorganic growth strategies and strengthen its product portfolio.

Target Price : INR2,576

Upside : 12%

Nifty 6,080

Sensex 20,301

Stock Data

Sector FMCG

Reuters Code GLSM.BO

Bloomberg Code SKB IN




Avg 6m Vol. 16,307


52-week high/low INR2,524/1,252

1M 3M 12M

Absolute (%) 2 15 71

Relative (%) 1 16 55



Promoters43%

FIIs10%

DIIs22%

Public & others25%

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GlaxoSmithKline Consumer Healthcare Ltd.


CMP: INR2,300 Reco: BUY

40

FMCG Sector Report

January 07, 2011

Business analysis

Strong brands lead less-competitive domestic MFD; GSK Consumer our preferred pick

GSK Consumer commands more than 60% of the MFD market with strong brands such as Horlicks,

Boost, Viva and Maltova. Volume growth has been healthy at c10-12%, despite new launches from

competitors and increase in product prices by the company. Successful brand extension and increasing

distribution reach have helped GSK Consumer achieve higher penetration, aiding its strong growth

momentum. Low competition with higher pricing power places the company favourably to increase its

market dominance.

Chart 47: Volume growth trend

Table 14: Competitive landscape remains low

Company Brand Remarks

GSK Consumer Horlicks No. 1 in white MFD category

GSK Consumer Boost Launched to cater to brown MFD category

Cadbury's Bournvita No. 1 in brown MFD category

Heinz Complan Operates in white MFD category


New products likely to provide upside

GSK Consumer launched several new products recently, to leverage its strong brand equity in the MFD

category. It ventured into the non-MFD category with biscuits, cereal bars and instant noodles. The

company also launched Lucozade in the energy drinks space. While biscuits garner less than 1% market

share, instant noodles have attained initial success with 5% share in the southern market. These new

categories are expected to reduce the company’s dependence on its MFD portfolio and provide new

growth avenues. Increasing focus on food categories in the nutritional space, continued pace of new

launches, and robust growth in its flagship brands would drive GSK Consumer’s growth momentum in

future.

Strong pricing power would help absorb high input inflation

Despite milk and barley prices being up 27% and 18% YoY respectively, GSK Consumer was able to

restrict margin contraction to just 10bp for M9CY10, due to efficacious price increases and efficient

procurement. While input cost pressure is likely to remain firm in the long term, we believe that GSK

Consumer, with strong pricing power, will be able to pass on inflationary price movement with greater

ease. Hence, we believe that GSK Consumer is favourably placed to maintain healthy margins, despite

high commodity inflation.

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41

FMCG Sector Report

January 07, 2011


Financial outlook

Expect revenue to grow 20% until CY12

Strong leadership position, with well-established brand equity and low competitive pressure, has helped

GSK Consumer achieve healthy 19% revenue CAGR over CY05-09. We expect this growth momentum

to continue, led by healthy volume growth of c12% and steady pace of successful launches/brand

extensions and judicious price increases by the company. This is expected to drive strong revenue

CAGR of 20% over CY09-12.

Chart 50: Revenue growth momentum to remain strong


Operating margins expected to remain stable

Input cost inflation should persist in the long term, but we expect GSK Consumer to pass it on to

customers with greater ease, considering its strong leadership position. Moreover, low competitive

intensity in the MFD category will not result in significant increase in A&P spend. Hence, we expect

operating margins to remain stable until CY12, thereby driving earnings CAGR of 22% over CY09-12E.

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Revenue (LHS) Growth (RHS)

Chart 48: Raw material composition

Chart 49: Indexed price movement for GSK Consumer

21%

22%

29%

8%

20%

Milk Powder Liquid Milk

Malt and Malt extract Flour (Wheat)

Others

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CY06 CY07 CY08 CY09

Milk Powder Liquid Milk

Malt and Malt extract Flour (Wheat)

42

FMCG Sector Report

January 07, 2011


Increasing profitability to aid healthy return ratios

Considering PAT CAGR of 22% over CY09-12E, driven by strong volume growth and margin expansion,

we expect return ratios to remain healthy (RoE at 30% and RoCE at 44%) until CY12. GSK Consumer

has a strong balance sheet with INR9bn of cash; this translates into cash per share of INR222. However,

dividend payout is expected to remain low at c37%.

Valuation

We initiate coverage with a Buy rating on the stock, valuing the company based on an average of DCF

and PER methodolody; arriving at our target price of INR2,576.

PER method

GSK Consumer is a leading player in the domestic malted health drink space with its flagship brand

Horlicks commanding 50%+ market share. The stock has historically traded in a lower PER band due to

its portfolio skewed towards a single product. As the company introduced new product variants and

brand extensions, the stock has been re-rated and is currently trading at a 75% premium to its one-year

forward mean PER. We believe that GSK Consumer, with a dominant position in the lesser-competitive

and under-penetrated MFD category, is well placed to attain strong volume growth and pass on input

cost inflation to consumers with greater ease. Further, successful brand extensions to non-MFD

categories and a healthy balance sheet, supporting inorganic growth opportunities, would engender

incremental growth triggers. Hence we believe this premium is justified. We apply 25x to our CY11E EPS

and arrive at fair price of INR2,100.




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Chart 52: PAT margin trend

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43

FMCG Sector Report

January 07, 2011


We also use DCF method to value the stock. For this, we assumed 10.3% cost of equity based on a

CAPM model. For terminal value of INR73bn, we have assumed a 3% terminal growth rate. Accordingly,

we arrive at a fair price of INR3,052.



Beta 0.6









WACC (%)

10.0 2,937 3,183 3,512

10.3 2,829 3,052 3,347

11.0 2,583 2,760 2,987

11.5 2,436 2,587 2,779


Key catalyst

Strong volume growth to aid robust revenue CAGR of 20% over CY09-12E, which will drive strong

earnings CAGR of 22%, one of the highest in our coverage universe.

Risks

Although the MFD category is characterized by low competitive intensity, increasing competition could

limit GSK Consumer’s ability to raise product prices with ease. It would also imply higher A&P spend,

which could put margins under pressure.


In line with consensus

While our sales forecast is c4% higher than street expectations, our earnings estimates are more or less

in line with consensus expecations.

CY10E CY11E CY12E


(%) PUG Consensus

Variance (%)


(%)

Sales (INR mn) 23,201 22,951 1.1 28,074 27121 3.5 33,290 32,157 3.5

EPS (INR) 68.7 70.9 (3.1) 84.0 84.1 (0.1) 100.9 99.5 1.4

44

FMCG Sector Report

January 07, 2011

Detailed financials

GSK Consumer: Profit and loss statement

FY ending Dec, in INR mn CY09 CY10E CY11E CY12E

Net sales 19,215 23,201 28,074 33,290




Other expenses (1,129) (1,337) (1,618) (1,885)


EBITDA 3,108 3,659 4,540 5,440

EBITDA Margin (%) 16.2 15.8 16.2 16.3

Depreciation (420) (402) (476) (534)

Other income/extraordinary items 893 1,117 1,279 1,504

EBIT 3,581 4,374 5,343 6,411

Interest (43) (30) (30) (30)


Tax (1,211) (1,455) (1,780) (2,138)

Tax rate (%) 34.2 33.5 33.5 33.5

Net profit 2,328 2,889 3,533 4,243

Adjusted profit 2,328 2,889 3,533 4,243

GSK Consumer : Key ratios

Particulars CY09 CY10E CY11E CY12E

EPS (INR) 55.3 68.7 84.0 100.9

P/E (x) 41.6 33.5 27.4 22.8

RoE (%) 27.9 29.0 29.5 29.5

RoCE (%) 42.2 43.4 44.2 44.1

Dividend yield (%) 0.8 1.0 1.2 1.4

P/BV (x) 10.7 8.9 7.4 6.1

EV/Sales (x) 4.6 3.8 3.0 2.5

EV/ EBIDTA (x) 28.6 23.9 18.8 15.1

45

FMCG Sector Report

January 07, 2011

GSK Consumer : Balance sheet


Sources of funds


Reserves total 8,630 10,437 12,641 15,310

Total Shareholders’ funds 9,051 10,857 13,062 15,731

Loans - - - -


Total 9,179 10,986 13,190 15,859


Net block 2,323 3,343 3,786 3,983

Investments 0 0 0 0

Inventories 2,660 3,135 3,649 4,151

Sundry Debtors 314 380 459 545

Cash and Bank 8,198 9,342 11,657 14,727

Loan and Advances 338 399 476 559

Other current assets 220 235 251 269



Provisions 1,957 2,360 2,817 3,287



Total 9,179 10,986 13,190 15,859

GSK Consumer : Cash flow statement


PBT 3,538 4,344 5,313 6,381


Change in working capital 2,284 358 553 598

Other non-cash adjustments - - - -

Taxes paid (1,387) (1,455) (1,780) (2,138)


Capital expenditure (409) (1,322) (800) (650)

Change in investments - - - -

Investing cash flow (409) (1,322) (800) (650)



Change in borrowings - - - -

Dividend paid (886) (1,082) (1,328) (1,574)

Financing cash flow (886) (1,082) (1,328) (1,574)

Net cash generated during year 3,488 1,144 2,315 3,070



46

FMCG Sector Report

January 07, 2011

Financial summary


Year ending 31 December CY09 CY10E CY11E CY12E



EBITDA 3,108 3,659 4,540 5,440

Depreciation (420) (402) (476) (534)

EBIT 2,688 3,257 4,064 4,907


Other income 893 1,117 1,279 1,504





Net profit 2,328 2,889 3,533 4,243

Reported PAT 2,328 2,889 3,533 4,243

Adjusted profit 2,328 2,889 3,533 4,243



Liabilities




Borrowings - - - -



Assets

Gross block 5,585 6,985 7,885 8,535

Depreciation (3,640) (3,942) (4,299) (4,752)

Net block 1,945 3,043 3,586 3,783

Capital WIP 378 300 200 200


Investments 0 0 0 0


Inventories 2,660 3,135 3,649 4,151









Total Assets 9,179 10,986 13,190 15,859





Less: Changes in W.C. 2,284 358 553 598

Tax (1,387) (1,455) (1,780) (2,138)

Net Operating Cash Flow 4,783 3,549 4,443 5,295

Capex (409) (1,322) (800) (650)

Investments - - - -

Investing cash flows (409) (1,322) (800) (650)


Debt raised/ (repaid) - - - -

Dividends (886) (1,082) (1,328) (1,574)

Others - - - -

Financing cash flow (886) (1,082) (1,328) (1,574)

Net change in cash 3,488 1,144 2,315 3,070


Key ratios (%)


Diluted EPS (INR) 55.3 68.7 84.0 100.9



ROE 27.9 29.0 29.5 29.5

ROCE 42.2 43.4 44.2 44.1

Net debt/Equity (90.6) (86.0) (89.2) (93.6)


Growth

Revenues 24.6 20.7 21.0 18.6

EBITDA 30.9 17.7 24.1 19.8

EBIT 23.0 22.1 22.1 20.0

Net profit 23.6 24.1 22.3 20.1

Diluted EPS 23.6 24.1 22.3 20.1

Margins

EBITDA 16.2 15.8 16.2 16.3

EBIT 18.6 18.9 19.0 19.3


Valuation ratios


Diluted P/E (x) 41.6 33.5 27.4 22.8

Price/BV(x) 10.7 8.9 7.4 6.1


EV/sales (x) 4.6 3.8 3.0 2.5

EV/EBITDA (x) 28.6 23.9 18.8 15.1

Dividend yield (%) 0.8 1.0 1.2 1.4

47

FMCG Sector Report

January 07, 2011

Increasing raw material prices, especially crude-linked products, and

rising competition resulting in higher A&P spends will lead to 173bp

contraction in operating margins over FY10-13E.

Our FY12E EPS is 11% lower than consensus as we believe consensus is

underestimating margin pressure in future.

At 31x FY12E EPS, the stock is trading at 20% premium to its historical

average of 26x. We expect rising concern on commodity inflation will put

pressure on valuations and hence, we recommend Sell.

Company background

Hindustan Unilever (HUL) is a 52% subsidiary of Anglo Dutch Unilever Group. It is the

largest consumer company in India growing at 10-12%, with an annual turnover of

INR175bn. With a diversified portfolio, the company’s products are present across price

points and reach more than 6mn retail outlets directly.

Key negatives

Rising crude oil prices; high input cost inflation to result in margin contraction

Increasing crude oil prices, which are up 12% YoY, are increasing concern on input cost

inflation and its impact on operating margins. We estimate that higher commodity costs will

result in 173bp contraction in operating margins. Continuing uptrend in commodity prices

remains a key risk for the stock and we expect this will lead to an overhang on the stock

price in near term.

Headwinds expected from increasing competition in personal care

Although the HUL management is adopting various strategies including competitive pricing

and higher brand investments, increasing competition in the fast-growing personal care

segment should result in margin pressure. Moreover, the low-margin soaps and detergents

category would not provide enough cushion to the company’s profitability.

Ageing category still dominates revenue; unlikely to change in near future

The soaps and detergents category forms c43% of total revenue. With high penetration

levels, this segment is highly fragmented comprising a large number of regional and local

players. Although a rebound in volumes is a good sign, industry growth is at single digit

levels vis-à-vis other categories growing at a healthier pace. We believe that change in

product mix, with reducing dependence on soaps and detergents, will take time.


Downside : 28%

Nifty 6,080

Sensex 20,301

Stock Data

Sector FMCG

Reuters Code HLL.BO

Bloomberg Code HUVR IN




Avg 6m Vol. 2,006,276



1M 3M 12M

Absolute (%) 8 7 23

Relative (%) 7 8 7



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Hindustan Unilever Ltd.


CMP: 326 Reco: SELL

48

FMCG Sector Report

January 07, 2011

Business analysis

High dependence on mature categories and intensifying competition in personal care; difficult

to sustain robust growth

The soaps and detergents category, c43% of total revenue, is a highly penetrated category with industry

growth in single digits. While focus on higher growth categories like personal care and foods is

increasing, we believe that change in product mix will take time. Moreover, increasing input costs and

intensifying competition from P&G, L’Oreal and ITC in personal care combined with higher brand

investments for new launches and maintaining market share will likely put pressure on operating

margins, adversely affecting profitability.

Chart 55: High dependence on soaps and detergents to remain a drag on margins


Input cost pressure and increasing competition to restrict margin expansion

Crude-related inputs and vegetable oils form majority of raw materials for HUL. Increasing crude oil

prices, up 12% YoY, are raising concern on input cost inflation and its impact on operating margins.

Moreover, increasing competition would restrict HUL’s ability to undertake frequent price increases,

which would further stress margins.

Chart 56: High dependence on crude based inputs to

affect margins

Chart 57: Indexed raw material prices per tonne –

structurally up


21%

22%

29%

11%

3%1%

12%

Soaps detergents Personal Products Tea Coffee Frozen Desserts and Ice-creams Others

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Oils, fats and rasins Chemicals and PerfumesTea and Green Leaf Coffee Others

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Oils, fats and rasins Chemicals and Perfumes

Tea and Green Leaf Coffee

49

FMCG Sector Report

January 07, 2011

Financial outlook

Revenue to increase at 11% CAGR over FY10-13E

Modest volume growth, judicous price increases and new variants would drive revenue growth of 11%

over FY10-13E. While soaps and detergents should see a rebound on a low base, we expect HUL will

able to sustain c15% growth in personal care space backed by healthy offtake in the new launches,

product variants, etc. However, increasing competitive activiites in this segment could restrict future

growth.

Chart 58: Volume growth expected to remain modest

Chart 59: Sales to increase at 11% CAGR


Rising input costs and A&P spend to restrict margin growth

Increased input costs and competitive activities would put pressure on HUL’s margins. While we factor in

marginal price hikes, we expect it will only partially offset the rise in its costs and would result in 173bp

contraction in operating margins to 14%, resulting in modest 7% PAT CAGR until FY13E.

Chart 60: Higher costs to lead to EBITDA margin

contraction…

Chart 61: …Will also result in PAT margin contraction


Return ratios and dividend payout to remain healthy

With PAT CAGR estimated to be 7% over FY10-13, ROE and ROCE should decline to 79% and 96%,

respectively in FY13E. Further, healthy cash flows will help the company maintain dividend payout of

88% until FY13E.

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50

FMCG Sector Report

January 07, 2011

Valuation We value HUL based on an average of DCF and PER methodologies to arrive at our target price of

INR234, which implies 28% potential downside from the current level. Hence, we initiate coverage on the

stock with a Sell recommendation.

PER method

HUL is the largest FMCG company in the domestic market. When the company had witnessed lower

demand growth along with increased competition and higher cost pressures, the stock appears to have

traded at a high PER of 40x. As demand scenario witnessed an uptick along with an improvement in

profitability, it commanded 15% premium to its one-year forward PER multiple of 26x. However, going

forward we expect HUL to face headwinds from rising input cost, maturing soaps and detergent category

and increasing competition in personal care segment. These would put pressure on margins and

profitability. Hence we believe a 10% discount to its mean PER multiple is justified. On a PER basis, we

apply 23x to our FY12E EPS and arrive at a fair price of INR246.





For DCF calculations, we have considered cost of equity at 10.2% based on the CAPM model. We

forecast the terminal value of INR253bn using a terminal growth rate of 3%. Accordingly, we arrive a fair

price of INR221 per share.



Beta 0.5






Outstanding shares (mn) 2,182



WACC (%)

9.5 225 244 270

10.2 206 221 242

11.0 186 198 213

11.5 176 186 199


Key catalyst

Rising crude prices could adversely affect the operating margins of the company, thereby restricing

earnings growth.

Risks

Increasing focus of the management on aggressive and competitive growth, resulting in market share gains

will be a key risk to our call.

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51

FMCG Sector Report

January 07, 2011


Lower than consensus

Our sales estimates are 1-3% lower while profit expectations are 11% lower than consensus, as we have

factored in higher cost pressures.

FY11E FY12E FY13E


(%) PUG Consensus

Variance

(%) PUG Consensus

Variance

(%)

Sales (INR mn) 190,767 193,831 (1.6) 214,196 216,782 (1.2) 239,438 245,515 (2.5)

EPS (INR) 9.6 10.3 (6.6) 10.5 11.8 (10.7) 11.9 13.5 (11.4)

Detailed financials

HUL: Profit and loss statement


Net sales 175,238 190,767 214,196 239,438

Other operating income 2,421 2,735 3,064 3,370




Other expenses (25,456) (27,271) (30,705) (34,229)


EBITDA 27,905 27,393 29,972 33,944

EBITDA margin (%) 15.7 14.2 13.8 14.0

Depreciation (1,840) (2,119) (2,272) (2,422)

Other income/extraordinary items 2,069 1,629 1,792 1,971

EBIT 28,134 26,903 29,492 33,493

Interest (70) (10) (10) (10)


Tax (6,044) (5,997) (6,574) (7,467)

Tax rate (%) 21.5 22.3 22.3 22.3

Net profit 22,020 20,896 22,907 26,017

Adjusted profit 21,027 20,896 22,907 26,017

HUL: Key ratios


EPS (INR) 9.6 9.6 10.5 11.9

P/E (x) 33.8 34.0 31.0 27.3

RoE (%) 90.5 76.4 76.1 79.2

RoCE (%) 99.5 91.6 91.8 96.0

Dividend yield (%) 2.0 2.1 2.5 2.8

P/BV (x) 27.5 24.6 22.7 20.7

EV/Sales (x) 3.9 3.6 3.1 2.8

EV/ EBIDTA (x) 24.5 24.8 22.5 19.6

52

FMCG Sector Report

January 07, 2011

HUL: Balance sheet


Sources of funds

Share capital 2,182 2,182 2,182 2,182

Reserves total 23,653 26,678 29,161 32,200


Loans - - - -

Other non-current liabilities 2,023 2,023 2,023 2,023

Total 27,858 30,883 33,366 36,405


Net block 24,361 25,016 25,453 25,787

Investments 4,913 4,913 4,913 4,913

Inventories 21,799 24,221 27,274 30,062

Sundry Debtors 6,784 6,677 7,497 8,380

Cash and bank 26,650 30,478 36,456 43,759





Provisions 14,934 16,165 17,455 18,780


Other non-current assets 4,511 4,511 4,511 4,511

Total 27,858 30,883 33,366 36,405

HUL: Cash flow statement


PBT 28,064 26,893 29,482 33,483

Depreciation 1,449 2,119 2,272 2,422

Change in working capital 13,443 277 2,699 3,333

Taxes paid (5,984) (5,997) (6,574) (7,467)



Change in investments (3,825) - - -

Other investing cash flow (5,499) - - -

Investing cash flow (14,345) (2,774) (2,709) (2,756)


Issue of equity 322 0 - -

Change in borrowings (4,219) - - -

Dividend paid (17,028) (16,691) (19,190) (21,713)

Other (553) 0 (0) -


Net cash generated during year 1,149 3,828 5,978 7,303



53

FMCG Sector Report

January 07, 2011

Financial summary





EBITDA 27,905 27,393 29,972 33,944

Depreciation (1,840) (2,119) (2,272) (2,422)

EBIT 26,065 25,274 27,700 31,522


Other income 1,076 1,629 1,792 1,971


Extraordinary income 994 - - -



Net profit 22,020 20,896 22,907 26,017

Reported PAT 22,020 20,896 22,907 26,017

Adjusted profit 21,027 20,896 22,907 26,017



Equity capital 2,182 2,182 2,182 2,182



Borrowings - - - -

Others non-current liabilities 2,023 2,023 2,023 2,023


Assets

Gross block 35,820 38,533 41,193 43,799

Depreciation (14,199) (16,318) (18,590) (21,012)

Net block 21,621 22,216 22,603 22,787

Capital WIP 2,740 2,800 2,850 3,000


Investments 4,913 4,913 4,913 4,913

Other non-current assets 4,511 4,511 4,511 4,511

Inventories 21,799 24,221 27,274 30,062

Sundry debtors 6,784 6,677 7,497 8,380







Net current assets (5,927) (3,557) (1,511) 1,194

Total Assets 27,858 30,883 33,366 36,405




Depreciation, Amortisation etc. 1,449 2,119 2,272 2,422

Less: Changes in W.C. 13,443 277 2,699 3,333

Tax (5,984) (5,997) (6,574) (7,467)

Net Operating Cash Flow 36,972 23,292 27,878 31,772

Capex (5,021) (2,774) (2,709) (2,756)

Investments (9,315) - - -

Investing cash flows (14,336) (2,774) (2,709) (2,756)

Increase in equity 322 0 - -

Debt raised/ (repaid) (4,219) - - -

Dividends (17,028) (16,691) (19,190) (21,713)

Others (553) 0 (0) -


Net change in cash 1,149 3,828 5,978 7,303


Key ratios (%)


Diluted EPS (INR) 9.6 9.6 10.5 11.9



ROE 91.5 76.4 76.1 79.2

ROCE 99.5 91.6 91.8 96.0

Net debt/Equity (103.2) (105.6) (116.3) (127.3)


Growth

Revenues 8.2 8.9 12.3 11.8

EBITDA 18.0 (1.8) 9.4 13.3

EBIT 11.2 (0.9) 9.6 13.6

Net profit 5.1 (0.6) 9.6 13.6

Diluted EPS 5.0 (0.6) 9.6 13.6

Margins

EBITDA 15.7 14.2 13.8 14.0

EBIT 15.3 13.9 13.6 13.8


Valuation ratios


Diluted P/E (x) 33.8 34.0 31.0 27.3

Price/BV(x) 27.5 24.6 22.7 20.7


EV/sales (x) 3.9 3.6 3.1 2.8

EV/EBITDA (x) 24.5 24.8 22.5 19.6

Dividend yield (%) 2.0 2.1 2.5 2.8

54

FMCG Sector Report

January 07, 2011

Rising raw material prices, especially copra, is a key concern and could

limit margin growth; we forecast c90bp margin contraction over FY10-13.

Our earning expectations are 10-11% lower than consensus as we expect

higher input costs will lead to sharp margin contraction in future.

Valuations at 24x FY12E EPS appear rich and hence we recommend Sell on

the stock with our target price of INR112.

Business analysis

Marico, incorporated in 1988, is one of the fastest-growing FMCG companies in our

coverage universe, with presence in the beauty and wellness space. It has strong and

established brands in hair care, healthcare and skin care segments. Parachute, which

contributes 33% to revenue, is a market leader in hair care and enjoys strong brand equity.

Saffola leads in edible oils (53% market share), which are aimed at health-conscious

consumers.

Key negatives

Increasing copra prices could limit margins

Copra prices, which forms 40% of total raw material cost, is up 67% YoY and would remain

a key concern for the company’s profitbaility. While the company has undertaken price hikes

of c12% since August, we believe it would only partially offset input costs pressure and

result in 240bp decline in gross margins during FY10-13.

Rising cost pressure could lead to consensus downgrade

Increasing input costs are posing rising concerns on company’s profitability. We have built in

higher than consensus cost pressure and consequently our earning estimates are 10-11%

lower than street expecations. Continuing input cost pressure will lead to consensuss

downgrade in future.

Lower SSS growth in Kaya Skin Care business to remain downside risk

Although the management has redesigned the strategy for Kaya Skin Care and remains

hopeful about a pick-up, continuing decline in domestic same-store-sales growth (SSG)

entails downside risks for the business, which would be a drag on overall profit.


Downside : 10%

Nifty 6,080

Sensex 20,301

Stock Data

Sector FMCG

Reuters Code MRCO.BO

Bloomberg Code MRCO IN




Avg 6m Vol. 414,769



1M 3M 12M

Absolute (%) (3) (7) 22

Relative (%) (5) (6) 5



Promoters63%

FIIs22%

DIIs7% Public &

others8%

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Marico (LHS) Nifty (RHS)

Marico Ltd.


CMP: INR124 Reco: SELL

55

FMCG Sector Report

January 07, 2011

Business analysis

Rising input costs to lend margin pressure

Copra constitutes c40% of cost of raw material, which also includes kardi oil, ricebran oil, and liquid

paraffin. Raw material prices continue to remain on an uptrend with copra prices increasing 67% YoY.

While the company has undertaken c12% price increase, we expect this will only partially offset the input

cost pressure, thus resulting in margin contraction in future.

Chart 64: Gross margins versus copra prices Chart 65: Increase in copra prices

Source: Company, Bloomberg Source: Company, Bloomberg

Redesigning business model for Kaya; expected turnaround still away

The company is revamping its business strategy for Kaya Skin Care (97 clinics- 81 in India, 14 in Middle

East and 2 in Bangladesh) and remains hopeful about improvement in SSS growth. It acquired Derma

Rx, (revenue of INR500mn) a Singapore-based skin care company, with an aim to ramp-up Kaya’s

product revenue contribution from 13%; Derma Rx has 55% revenue contribution from products. We

believe the new strategies will take time to turnaround this model, which posted loss of INR123mn in

FY10 and expect this business to remain a drag on company’s profitability over the next 2 years.

Rising food inflation could reduce demand

Continued high food inflation could adversely affect demand for company’s products, especially Saffola,

and could see down-trading to other loose packs of oils. This could provide downside to company’s

sales, which are estimated to increase at a modest 14%CAGR until FY13.

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56

FMCG Sector Report

January 07, 2011

Financial outlook

Revenue to increase at 14 % CAGR until FY13E

Revenue grew at 21% CAGR over FY05-10, driven by strong volume growth, judicious price increases,

new product launches and acquisitions. We expect this growth momentum to sustain in the domestic

market, on the back of healthy volume growth in key brands, Parachute and Saffola. Moreover, the

international business is expected to grow c21%, supporting overall revenue CAGR of 14% over FY10-

13E.

Chart 66: Revenue growth to remain healthy


However, higher input costs will restrict margin expansion

We expect sharp increase in raw material prices, especially copra and liquid paraffin, to result in 90bp

contraction in operating margins until FY13. Moreover, increase in tax provisions to c20% (from c16% in

FY11E) would restrict PAT growth to 15% over FY10-13E.

Chart 67: EBITDA margins to contract 90bp

Chart 68: Profitability to increase 15%


Return ratios to decline

We expect return ratios to decline due to lower growth in profits going ahead. We forecast RoE to decline

to 29% in FY13 from 44% in FY10 and RoCE to decline to 30% till FY13 from 34% in FY10.

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57

FMCG Sector Report

January 07, 2011

Valuation

We value the stock based on an average of DCF and PER methodology, arriving at our target price of

INR112. Our target price provides a downside of 8% from the current levels and hence, we recommend a

Sell on the stock.

PER method

Marico is the leader in the hair oils segment with Parachute commanding 31% market share and edible

oil segment with Saffola commanding a leadership position. High dependence on two brands in the

domestic market led the stock to trade in lower band till 2005. As the company adopted an inorganic

growth path, the stock has seen a re-rating. While the stock is currently trading at c33% premium to its

historical one-year forward PER multiple, we believe this premium is not justified due to rising concerns

on increasing copra prices. While we expect the company to record earnings CAGR of 15% over FY10-

13, it will be lower than the company’s earning CAGR of 28% achieved over FY05-10. Moreover, rising

input costs will continue to put pressure on its profitability. Hence, we believe the premium shoud reduce

and the valuation should revert to its mean in future. We apply 21x to its FY12E EPS and arrive a fair

price of INR110 per share.





For our DCF calculations, we have factored in a cost of equity of 9.6% based on the CAPM model. For

terminal value, we assume a 3% terminal growth rate and arrive at a fair price of INR114.



Beta 0.4









WACC (%)

9.0 114 126 144

9.6 103 114 128

10.5 97 106 117

11.5 90 97 107


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58

FMCG Sector Report

January 07, 2011

Key catalyst

Continuing rise in copra prices will result in margin pressure and consensus downgrade. We estimate

every 10% increase in copra prices could result in 160bp decline in operating margins.

Risks

Higher international growth could provide upside risk

Marico’s international business is expected to register robust 20% growth, driven by broad-based traction

across Bangladesh, MENA, and South Africa. Higher than anticipated growth (estimated at 21% revenue

CAGR over FY10-13) in these regions will provide upsides to our estimates. Moreover, the company’s

strong cash flows provide sufficient room for inorganic growth opportunities, which could provide upside

surprise to our forecasts.

Excise duty dispute settlement could provide upside

In FY10, Marico provided INR294mn for excise duty on Parachute packs of less than 200 ml, as per the

CBEC circular on excise on hair oils packs up to 200 ml. Settlement of this dispute in Marico’s favour

could provide c10% upside to our earnings estimates.Our view vs. consensus

Our View versus cosnensus

Lower than consensus estimates

Our earnings estimates are 10-11% lower than consensus, as we expect sharp increase in input costs to

restrict margin expansion in future.

FY11E FY12E FY13E


(%) PUG Consensus

Variance (%)


(%)

Sales (INR mn) 31,361 30,934 1.4 35,554 35,809 (0.7) 39,860 40,875 (2.5)

EPS (INR) 4.7 4.8 (1.8) 5.2 5.8 (10.1) 6.1 6.8 (10.6)

59

FMCG Sector Report

January 07, 2011

Detailed financials

Marico: Consolidated profit and loss statement


Net sales 26,608 31,361 35,554 39,860




Other expenses (1,876) (2,113) (2,355) (2,606)


EBITDA 3,752 4,073 4,625 5,260

EBITDA margin (%) 14.1 13.0 13.0 13.2

Depreciation (601) (554) (638) (704)


EBIT 3,236 3,771 4,300 4,945

Interest (257) (357) (349) (332)


Tax (643) (540) (781) (911)

Tax rate (%) 21.6 15.8 19.8 19.8

Net profit 2,335 2,875 3,170 3,702

Adjusted profit 2,452 2,914 3,217 3,759

Marico: Key ratios


EPS (INR) 4.0 4.7 5.2 6.1

P/E (x) 30.8 26.1 23.7 20.3

RoE (%) 43.8 37.3 31.5 29.2

RoCE (%) 34.4 30.8 30.0 30.0

Dividend yield (%) 0.5 0.6 0.8 1.0

P/BV (x) 11.3 8.5 6.7 5.3

EV/Sales (x) 3.0 2.5 2.2 1.9

EV/ EBIDTA (x) 21.0 19.2 16.6 14.2

60

FMCG Sector Report

January 07, 2011

Marico: Consolidated balance sheet


Sources of Funds :


Reserves total 5,930 8,195 10,605 13,396


Loans 4,459 4,359 3,859 3,359

Total 11,124 13,333 15,291 17,638


Net block 4,847 5,809 5,919 6,205


Inventories 4,448 5,411 6,113 6,837

Sundry debtors 1,507 1,725 1,955 2,192

Cash and bank 1,831 2,196 3,317 4,633


Other current assets - - - -



Provisions 1,041 1,228 1,320 1,412



Total 11,124 13,333 15,291 17,638

Marico: Consolidated cash flow statement


PBT 2,979 3,415 3,951 4,613


Change in working capital (1,070) (911) (727) (744)

Taxes paid (619) (540) (781) (911)


Capital expenditure (1,275) (1,456) (728) (971)

Change in investments (110) - - -

Other investing cash flow (596) - - -

Investing cash flow (1,981) (1,456) (728) (971)

Free cash flow to firm (301) 1,002 2,333 2,671

Issue of equity 322 84 95 114

Change in borrowings 716 (100) (500) (500)

Dividend paid (467) (542) (712) (855)

Other (58) (79) (95) (114)

Financing cash flow 514 (637) (1,212) (1,355)

Net cash generated during year 213 365 1,121 1,316

Cash at beginning of year 902 1,115 1,479 2,600


61

FMCG Sector Report

January 07, 2011

Financial summary





EBITDA 3,752 4,073 4,625 5,260

Depreciation (601) (554) (638) (704)

EBIT 3,151 3,520 3,987 4,556


Other income 183 252 313 389


Extraordinary income (98) - - -


Provision for tax (643) (540) (781) (911)

Net profit 2,335 2,875 3,170 3,702

Minority Interest 19 39 47 57

Reported PAT 2,354 2,914 3,217 3,759

Adjusted profit 2,452 2,914 3,217 3,759



Liabilities

Equity Capital 609 614 614 614



Minorities 125 165 212 269

Borrowings 4,459 4,359 3,859 3,359


Assets

Gross block 6,142 7,342 7,942 8,742

Depreciation (2,424) (2,918) (3,537) (4,221)

Net block 3,718 4,424 4,406 4,521

Capital WIP 1,129 1,385 1,513 1,684




Inventories 4,448 5,411 6,113 6,837

Sundry debtors 1,507 1,725 1,955 2,192








Total Assets 11,124 13,333 15,291 17,638





Less: Changes in W.C. (1,070) (911) (727) (744)

Tax (619) (540) (781) (911)


Capex (1,275) (1,456) (728) (971)

Investments (706) - - -

Investing cash flows (1,981) (1,456) (728) (971)

Increase in equity 322 84 95 114

Debt raised/ (repaid) 716 (100) (500) (500)

Dividends (467) (542) (712) (855)

Others (58) (79) (95) (114)

Financing cash flow 514 (637) (1,212) (1,355)

Net change in cash 213 365 1,121 1,316


Key ratios (%)


Diluted EPS (INR) 4.0 4.7 5.2 6.1



ROE 43.8 37.3 31.5 29.2

ROCE 34.4 30.8 30.0 30.0

Net debt/Equity 39.4 24.1 4.7 (8.9)


Growth

Revenues 11.4 17.9 13.4 12.1

EBITDA 23.4 8.6 13.6 13.7

EBIT 18.9 13.1 14.0 15.0

Net profit 20.4 18.9 10.4 16.8

Diluted EPS 20.4 17.9 10.4 16.8

Margins

EBITDA 14.1 13.0 13.0 13.2

EBIT 12.5 12.0 12.1 12.4


Valuation ratios


Diluted P/E (x) 30.8 26.1 23.7 20.3

Price/BV(x) 11.3 8.5 6.7 5.3


EV/sales (x) 3.0 2.5 2.2 1.9

EV/EBITDA (x) 21.0 19.2 16.6 14.2

Dividend yield (%) 0.5 0.6 0.8 1.0

62

FMCG Sector Report

January 07, 2011

Volume growth expected to be healthy; increase in planned capex by 1.8x

its combined capex of INR9.2bn in last 5 years indicates management’s

focus and optimism about strong growth potential in future.

Strong brand equity and leading market position will help Nestle to sustain

its profitability; we expect PAT to grow at 17% CAGR over CY09-12E.

However, at the current price, valuations at 39x CY11E EPS capture all the

aforementioned positives and doesnot offer potential upside. Hence, we

recommend Sell on the stock.

Company background

Nestle India (Nestle), incorporated in 1959, is a 61.8% subsidiary of Switzerland-based

Nestle S.A. With strong brands and a dominant position in the domestic F&B category, the

company is one of the fastest-growing in the Indian consumer space.

Key positives

Increase in production capacities indicate positive volume outlook

Nestle has increased its planned capex to fund its future growth in the domestic markets. It

will spend cINR17bn for increasing its production capacities across 4 plants, besides

undertaking greenfield expansions. This increase in capex (1.8x its combined capex of

INR9.2bn in last 5 years) indicates management’s confidence and optimism about the strong

growth potential in India. We expect volume growth to remain in robust double-digits in

future.

Strong and leading brands to entail higher pricing power

Nestle enjoys a dominant position across various categories such as dairy whiteners, infant

nutrition and instant noodles. Despite steep price increases implemented to offset increasing

raw material prices, Nestlé’s products continued to witness robust volume growth across

categories. We believe that Nestle, with its strong brand equity, will be able to increase

product prices, despite increasing competition, to offset increasing input costs pressure.

Hence, we expect operating margins to remain stable at c20% until CY12.

Sustained strong growth on innovative launches

Nestle has consistently focused on achieving strong growth through innovative product

launches such as Maggi Cuppa Mania and multigrain noodles and new affordable SKUs

such as Nescafe Mild Sachet at INR1 and Munch Chocolate at INR2. Nestle’s initiatives to

reach customers and provide differentiated products would strengthen its positioning and

enable it to sustain the strong growth momentum.

Target Price : INR3,405

Downside : 13%

Nifty 6,080

Sensex 20,301

Stock Data

Sector FMCG

Reuters Code NEST.BO

Bloomberg Code NEST IN




Avg 6m Vol. 34,145


52-week high/low INR4,224/2,295

1M 3M 12M

Absolute (%) 4 19 53

Relative (%) 3 20 37



Promoters62%

FIIs10%

DIIs10%

Public & others18%

4000

4500

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2750

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R)

Nestle (LHS) Nifty (RHS)

Nestle India Ltd.


CMP: INR3,898 Reco: SELL

63

FMCG Sector Report

January 07, 2011

Business analysis

Enjoys dominant position in many categories with higher pricing power

Milk products and nutrition (43% of revenue)

Nestle commands a leadership position in dairy whitener and condensed milk products and has various

strong brands across packaged milk, curd, and ghee. It is also the top player in infant foods with well-

established brands such as Lactogen and Cerelac. Increased focus on exports, innovative launches, and

new variants should drive strong growth of c19% for this segment.

Prepared dishes and cooking aids (28% of revenue)

Maggi, (Nestle’s flagship brand) with presence in instant noodles, soups, ketchups and pasta, commands

more than 80% share in the cINR12bn instant noodles market. Competition is increasing in instant

noodles with new players looking at increasing market share. Nevertheless, Maggi, with strong brand

equity and innovative launches, should continue to dominate this category with strong revenue CAGR of

24% over CY09-12E.

Beverages (14% of revenue)

Nestle leads the domestic instant coffee market with Nescafe Classic and Nescafe Sunrise. Growth in

this category has been disappointing (8% CAGR over CY05-09) due to low volume growth in the

domestic coffee market and c5% decline in the export market, especially Russia (44% contribution to

export revenue). With increasing focus on low-priced SKUs and rising presence in Asia and Europe, we

expect the performance of this division to improve.

Chocolate and confectionary (15% of revenue)

With strong brands such as Milky Bar, KitKat, and Munch, Nestle leads in the milk chocolates and wafers

segment. Increasing presence in low-priced SKUs and recent launches like Nestle BarOne and dark

premium chocolates will aid robust c17% revenue growth until CY12E.

Chart 21: Strong product profile with leading brands

Categories Brands Relative market position Competitor brands

Milk products EveryDay, Milkmaid, Nesvita

No. 1 in diary whitener and sweetened condensed milk

Amulya, Amul Light, etc.

Nutrition Lactogen, Cerelac, Nido, Nan

No. 1 in baby foods and infant formula

Farex, Amulspray

Prepared dishes and cooking aids

Maggi noodles, sauces and soups

No. 1 in instant noodles and sauces Knorr, Kissan, Foodles

Beverages Nescafe, Nestea No. 1 in instant coffee Tata Coffee, Tata Tea, Bru, Brooke Bond, Amul Kool Café

Chocolates Kitkat, Milkybar, Bar One, Munch

No. 1 in Wafers and Whites Perk, 5 Star, Amul Milk Chocolate

Confectionary Polo, Eclairs Leading presence in Eclairs Mint-o , Cadbury's Eclairs


High dependence on milk; likely price increases to offset impact on operating margin

Fresh and skimmed milk comprise c45% of total raw material cost for Nestle. Although the company has

established a strong model for sourcing milk directly from farmers, to ensure regular supply economically,

continuing increase in milk prices could put pressure on the company’s operating margins. Nevertheless,

despite increasing competition, we believe that Nestle, with strong and well-established brands, has

strong pricing power and will be able to partially offset any adverse movement in input prices. The

64

FMCG Sector Report

January 07, 2011

company appears well-placed to maintain margins and profitability with sustained brand innovations and

higher pricing interventions.

Chart 71: Milk forms c45% of total input costs

Chart 72: Green coffee has witnessed highest inflation

Source: Company Source: Company, PUG Research

Management confident of future growth; Increasing production capacities

Nestle’s manufacturing plants are operating at optimum capacities and it has stepped up its planned

capex to fund its future growth. It will spend cINR17bn for increasing its production capacities across its

existing plants at Samalkha (INR6.5bn), Ponda (INR5bn), Bicholim (INR1.5bn) and Nanjangud (INR4bn),

besides undertaking greenfield unit establishments. This increase in capex (1.8x its combined capex of

INR9.2bn in last 5 years) indicates management’s confidence and optimism about the strong growth

potential in the domestic market.

Low price point strategy driving robust growth at bottom of the pyramid

Nestle’s low price point (LPP) strategy is aimed at making products affordable, drawing new users, and

increasing reach for bottom of the pyramid (BoP) consumers. While LPP products up to INR10 form 40%

of the total domestic consumer market, Nestle earns c27% of revenue (CY07) from products priced at

INR0.5 to INR10. Increasing presence at these price points will enable the company to grab more market

share, which would sustain its strong growth momentum.

Chart 73: INR10 SKU forms the majority of LPPs

Chart 74: Strong presence of LPPs across segments

Source: Company Source: Company

35%

11%

7%8%

8%

10%

21%

Fresh milk and milk concentrateGreen coffeeSugarVegetable oilSkimmed milk powder

-

50

100

150

200

250

CY06 CY07 CY08 CY09

Inde

xed

Fresh milk and milk concentrateGreen coffeeSugarVegetable oilSkimmed milk powderWheat flour

16%

10%

17%

53%

4%

INR0.5 1INR INR2 INR5 INR10

7%

17%10%

66%

Milk products and nutrition Prepared dishes and cooking aids

Beverages Chocolate and Confectionary

65

FMCG Sector Report

January 07, 2011

Financial outlook

Healthy volume growth to drive revenue CAGR of 19%

Low penetration and per-capita consumption, combined with increasing young population and rising

urbanisation, are expected to engender healthy growth in the processed food and beverages industry.

Nestle, the largest company in this space, would achieve a robust revenue CAGR of 19% during CY09-

12E, driven by strong growth in its leading brands and innovative product launches across its portfolio.

Chart 75: Revenue growth to remain healthy

Chart 76: Prepared dishes and cooking aid to lead the

growth…

Source: Company, PUG Research Source: Company

Healthy sales to underpin earnings CAGR of 17%

Food inflation was the key reason for 200bp fall in operating margins over M9CY10. However, strong

brand equity engendering price increases and efficient cost management would help Nestle maintain its

operating margin. But, increase in debt to fund higher capex and higher depreciation would result in

c50bp decline in PAT margins. Nevertheless, we believe robust volume growth will drive 17% earnings

CAGR over CY09-12E.


Chart 78: Higher capex to contract PAT margins by 50bp


Higher capex to lower return ratios

With increasing capex plans and possible debt-funding, return ratios are expected to decline; we expect

ROE and ROCE at 93% and 112%, respectively, in CY12. Moreover, management has indicated that

increase in capex will also result in lower dividend payout. We expect dividend payout to reduce to 70%

(from c80% in CY09) until CY12. While increase in capex planned over the next 3-4 years will restrict

healthy expansion in return ratios, we expect strong volume growth will offset this impact over a long

term.

12

14

16

18

20

22

24

26

25

35

45

55

65

75

85

95

CY

06

CY

07

CY

08

CY

09

CY

10E

CY

11E

CY

12E

%

INR

bn


44%

26%

15%

15%

Milk Products and Nutrition Prepared Dishes and cooking aids

Beverages Chocolate and confectionery

18.4

18.8

19.2

19.6

20.0

20.4

0

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%

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11

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%

INR

mn


66

FMCG Sector Report

January 07, 2011

Valuation

We value the company based on an average of DCF and PER multiple arriving at our target price of

INR3,405, which imples 13% potential downside from the current level. As current valuations of 39x

CY11E EPS capture all the aforementioned positives and do not offer any upside, we initiate coverage

on Nestle with a Sell rating.

PER method

Nestle is one of the fastest-growing FMCG companies with a focus on food and beverage segment.

During low growth period during 2004-06, the stock has traded at the lower end of PER band. However,

as the growth momentum picked up, post the management’s increased focus on bottom of pyramid, the

stock price increased, taking valuations at c50% premium to its one-year forward mean PER. Nestle’s

brands continue to grow robustly and the emerging packaged food industry offers healthy long-term

growth prospects. Hence, we believe 32x PER multiple, a 60% premium ot its historical average, is

justified. We arrive at a fair price of INR3,171 per share implying 32x CY11E EPS.





For our DCF valuations, we have factored in a 9.3% cost of equity based on the CAPM model and

assumed a terminal growth rate of 3% to arrive at a terminal value of INR238bn. Accordingly, we arrive at

a fair price of INR3,639 per share.



Beta 0.4




Terminal value (INR mn) 238,984





WACC (%)

9.0 3,439 3,841 4,405

9.3 3,278 3,639 4,137

10.0 2,919 3,197 3,568

11.0 2,520 2,719 2,975


0

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3,000

3,500

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4,500

Ap

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Oct-0

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10.0

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PER Mean + 1 stddev-1 std dev +2 std dev + 3 std dev

67

FMCG Sector Report

January 07, 2011

Key catalyst

Intensifying competition could hamper pricing power; New players, especially in instant noodles category

(c20% of sales), including Horlicks’ Foodles and ITC’s Sunfeast Yippee!, could restrict Nestle’s ability to

increase prices.

Risks

While we have built-in rising input cost scenario, unprecendented increase in milk and skimmed milk,

which constitute c45% of total raw material cost, could provide downside risk to our estimates.


In line with consensus

Our earnings estimates are more or less in line with consensus expectations.

Difference from consensus

CY10E CY11E CY12E


(%) PUG Consensus

Variance (%)


(%)

Sales (INR mn) 62,127 61,417 1.2 73,391 73,050 0.5 85,899 85,885 0.0

EPS (INR) 84.6 84.0 0.7 99.1 100.4 (1.3) 116.8 115.9 0.8

68

FMCG Sector Report

January 07, 2011

Detailed financials

Nestle: Profit and loss statement


Net sales 51,294 62,127 73,391 85,899




Other expenses (2,455) (2,926) (3,346) (3,889)


EBITDA 10,345 12,239 14,629 17,376

EBITDA Margin (%) 20.2 19.7 19.9 20.2

Depreciation (1,113) (1,299) (1,664) (2,009)

Other income/extraordinary items (48) 406 439 476

EBIT 9,184 11,346 13,405 15,843

Interest (14) (12) (18) (44)


Tax (2,620) (3,181) (3,834) (4,533)

Tax rate (%) 28.6 28.1 28.6 28.7

Net profit 6,550 8,153 9,554 11,266

Adjusted profit 6,976 8,154 9,554 11,266

Nestle: Key ratios


EPS (INR) 72.4 84.6 99.1 116.8

P/E (x) 53.9 46.1 39.3 33.4

RoE (%) 132.3 121.1 105.7 93.0

RoCE (%) 159.0 150.9 129.8 111.9

Dividend yield (%) 1.2 1.4 1.5 1.8

P/BV (x) 64.6 49.1 36.0 27.2

EV/Sales (x) 7.3 6.0 5.1 4.4

EV/ EBIDTA (x) 36.2 30.7 25.7 21.6

69

FMCG Sector Report

January 07, 2011

Nestle: Balance sheet


Sources of funds


Reserves total 4,849 6,684 9,470 12,840


Loans - - 1,000 1,500


Total 6,601 8,436 12,222 16,092


Net block 9,758 12,963 16,599 20,390

Investments 2,033 2,033 2,033 2,033

Inventories 4,987 6,132 7,127 8,297

Sundry debtors 642 808 954 1,117

Cash and bank 1,556 496 1,122 1,433




Provisions 8,423 8,955 9,568 10,149



Total 6,601 8,436 12,222 16,092

Nestle: Cash flow statement


PBT 9,170 11,334 13,387 15,799

Depreciation 927 1,299 1,664 2,009

Change in working capital 1,409 309 476 231

Other non-cash adjustments 7 - - -

Taxes paid (2,676) (3,181) (3,834) (4,533)



Change in investments (1,684) - - -

Other investing cash flow - - - -




Change in borrowings - - 1,000 500

Dividend paid (5,471) (6,317) (6,768) (7,896)


Net cash generated during year (381) (1,060) 626 311

Cash at beginning of year 1,936 1,556 496 1,122

Cash at the end of year 1,555 496 1,122 1,433

70

FMCG Sector Report

January 07, 2011

Financial summary





EBITDA 10,345 12,239 14,629 17,376

Depreciation (1,113) (1,299) (1,664) (2,009)

EBIT 9,232 10,940 12,966 15,367


Other income 378 407 439 476


Extraordinary income (426) (1) 0 0



Net profit 6,550 8,153 9,554 11,266

Reported PAT 6,550 8,153 9,554 11,266

Adjusted profit 6,976 8,154 9,554 11,266



Liabilities




Borrowings 0 0 1,000 1,500



Assets

Gross block 16,408 20,708 25,508 30,308

Depreciation (7,446) (8,745) (10,409) (12,418)

Net block 8,962 11,963 15,099 17,890

Capital WIP 796 1,000 1,500 2,500


Investments 2,033 2,033 2,033 2,033


Inventories 4,987 6,132 7,127 8,297

Sundry debtors 642 808 954 1,117

Cash equivalents 1,556 496 1,122 1,433






Net current assets (5,658) (7,027) (6,878) (6,798)

Total assets 6,601 8,436 12,222 16,092




Depreciation, Amortisation etc. 927 1,299 1,664 2,009

Less: Changes in W.C. 1,416 309 476 231

Tax (2,676) (3,181) (3,834) (4,533)


Capex (2,064) (4,504) (5,300) (5,800)

Investments (1,684) - - -



Debt raised/ (repaid) - - 1,000 500

Dividends (5,471) (6,317) (6,768) (7,896)


Net change in cash (381) (1,060) 626 311

Closing cash balance 1,555 496 1,122 1,433

Key ratios (%)


Diluted EPS (INR) 72.4 84.6 99.1 116.8



ROE 132.3 121.1 105.7 93.0

ROCE 159.0 150.9 129.8 111.9

Net debt/Equity (26.8) (6.5) (1.2) 0.5


Growth

Revenues 18.6 21.1 18.1 17.0

EBITDA 19.8 18.3 19.5 18.8

EBIT 19.3 18.1 18.1 18.2

Net profit 23.5 16.9 17.2 17.9

Diluted EPS 23.5 16.9 17.2 17.9

Margins

EBITDA 20.2 19.7 19.9 20.2

EBIT 18.7 18.3 18.3 18.4


Valuation ratios


Diluted P/E (x) 53.9 46.1 39.3 33.4

Price/BV(x) 64.6 49.1 36.0 27.2


EV/sales (x) 7.3 6.0 5.1 4.4

EV/EBITDA (x) 36.2 30.7 25.7 21.6

Dividend yield (%) 1.2 1.4 1.5 1.8

71

FMCG Sector Report

January 07, 2011

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Rating System (In Absolute Terms)

BUY = Expected to give a return of 10% or more over a 12 months' time frame. HOLD = Expected to give a return of -10% to +10% over a 12 months' time frame. SELL = Expected to give a return of -10% or lower over a 12 months' time frame

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Documents

FMCG Sector Report[1]