On the road - PhillipCapitalbackoffice.phillipcapital.in/Backoffice/Researchfiles/PC... · 2013-08-05 · On the road Discovering India FMCG: Sector Update 8 November 2012 PhillipCapital

On the road Discovering India

FMCG: Sector Update 8 November 2012

PhillipCapital (India) Pvt. Ltd.

We undertook a retailer survey covering 10 states, 26 cities meeting 45 distributors and more than 200 retailers across the country to gauge the consumption trends and category changes. Our key findings are as follows:

Long‐term growth trends intact; Near term sluggishness not very pronounced: Most retailers in UP, Bihar, Western Maharashtra and Northern Karnataka indicated that the market had been sluggish in Q2FY13 but we also witnessed that the primary long‐term trends of rising consumerism, uptrading and rise of modern trade have continued to remain robust.

Cigarettes seeing a massive overhaul‐ Big time volume strategy in the making: We witnessed 13 new product launches in the 64mm segment which included 6 new products by ITC, 5 new products by Godfrey Philips India (GPI) and one each by VST Industries and Golden Tobacco Company. We also noted that Godfrey Philips India (GPI) has taken an aggressive stance in the 64mm category with extensive launches across states and advertising at Point of Sales.

Festival season seeing positive traction: The FMCG retailers and distributors in our survey indicated that the month of October has seen pickup in trade activity and the trend is likely to sustain with the improving market sentiment.

Limited impact of the deficient monsoon: The monsoon season for the year started off in an erratic manner and has been deficient in certain parts of the country. We visited retailers and distributors in monsoon deficient parts of Maharashtra and Karnataka. The channel partners in these regions indicated that volumes have declined by 10% YoY on account of deficient monsoons. The other parts of India in our survey did not indicate any significant impact of late or deficient monsoons.

Stock Specifics:

ITC: Volume growth has largely been flat but volumes are severely affected in UP after the government raised VAT to 50%. Introduction of 64mm products in select markets continues to see traction while competitive intensity for the segment is rising. We maintain our Sell recommendation on the stock.

HUL: We saw strong traction for Hindustan Unilever in the detergents business while the company continues to witness rising competitive intensity in personal care. The distribution model of HUL with Zero Day Inventory is receiving strong positive reviews. We believe HUL will continue to outperform on the operational front but considering the expensive valuations we maintain our Neutral stance.

Nestle: We have received strong positive vibes about Nestle and believe that the volume growth is likely to see positive traction on account of lower base and improving market sentiment. With the recent stock run up, we estimate that these positives are being priced in, we maintain our NEUTRAL recommendation.

Marico: We have noted that the on‐road response for the acquired Paras Deodorants has not been particularly inspiring. We also note the space is crowded but continues to grow at rapid pace. We await Marico’s strategy to gather traction in the personal care space.

Companies Covered ITC CMP Rs289Reco SellTarget Price Rs260 Hindustan Unilever CMP Rs532Reco NeutralTarget Price Rs500 Nestle CMP Rs4883Reco NeutralTarget Price Rs4815 Godrej Consumer CMP Rs695Reco NeutralTarget Price Rs655 Colgate CMP Rs1308Reco NeutralTarget Price Rs1215 Marico CMP Rs206Reco NeutralTarget Price Rs191 GSK Consumer CMP Rs3040Reco BuyTarget Price Rs3430 Agrotech Foods CMP Rs421Reco BuyTarget Price Rs510 Naveen Kulkarni (+ 9122 6667 9947) [email protected] Ennette Fernandes (+ 9122 6667 9764) [email protected]

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8 November 2012 / INDIA EQUITY RESEARCH / FMCG SECTOR UPDATE

Table of Contents

10 states, 2500km – What a Journey! .............................................................................................................................................. 3

Long‐term trend intact; near term sluggishness not very pronounced............................................................................................ 4

Signs of rising consumerism evidently witnessed in Tier 2 cities ..................................................................................................... 6

Star in the making – Starbucks opens its first outlet in Mumbai as crowds queue up for a cup of coffee ...................................... 10

Synopsis of findings state‐wise......................................................................................................................................................... 11

Channel Partner Interviews .............................................................................................................................................................. 13

Retailers feeling the heat from Modern Trade in Kerala and TN...................................................................................................... 28

Paint Sector – Dealers distressed over competition and lower margins offered by Asian Paints.................................................... 31

Deodorants category is spraying up, but where are Set Wet and Zatak? ........................................................................................ 33

India waking up: Breakfast cereals provide new growth avenues for the persistent....................................................................... 35

Certain regional brands found to be competitive in the FMCG sector............................................................................................. 36

Cigarettes category lighting up......................................................................................................................................................... 37

ITC exhibits clear focus on Cigarette volume with 64 mm launch under all the mainstay brands................................................... 38

Godfrey Phillips takes an aggressive stance in 64 mm cigarette segment to corner higher shelf space ......................................... 51

VST Industries 64 mm non filter pricing the most aggressive amongst the product launches in the 64 mm category ................... 57

Golden Tobacco launches 64 mm in the Panama brand to remain competitive ............................................................................. 58

Smoke‐less Tobacco category chewing into Cigarettes.................................................................................................................... 59

64 mm can dent the Contraband cigarette market: But growth will be protracted ........................................................................ 62

Key Conclusions ................................................................................................................................................................................ 64

COMPANIES COVERED

ITC ..................................................................................................................................................................................................... 65

Hindustan Unilever ........................................................................................................................................................................... 67

Nestle................................................................................................................................................................................................ 69

Godrej Consumer.............................................................................................................................................................................. 71

Colgate.............................................................................................................................................................................................. 73

Marico............................................................................................................................................................................................... 75

GSK Consumer .................................................................................................................................................................................. 77

Agrotech Foods................................................................................................................................................................................. 79

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10 states, 2500km – What a Journey!

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Long‐term trend intact; near term sluggishness not very pronounced In our survey with more than 200 retailers, Wholesalers and distributors we witnessed certain key short term trends and long term trrends.

Short term trends Most retailers in the northern part of India, Maharashtra and northern Karnataka indicated that the market had been sluggish in the June to September quarter but did not sound concerned about the future growth prospects. Hence, we believe that the slow down to certain extent is seasonal and not very pronounced. Volume de‐growth in Western Maharashtra and Northen Karnataka was pronounced on account of deficient rains. Demand revival was being witnessed from the first week of October in Northern India.

Long term trends While the retailers indicated that they were witnessing some slowdown on account of seasonality and certain macro‐economic headwinds like deficient rains in certain areas; we generally observed that the long‐term growth trends continue to be robust. We gauge this by the increasing penetration of personal care and branded foods in tier 2 and tier 3 cities which are seeing sharp uptake of products. We find the larger themes and trends continued to be resilient. The key trends were: Rising consumerism: We observed that consumer basket has significantly expanded over the years. We noted the increasing penetration of certain products which clearly indicate the trends of rising consumerism. Breakfast cereal: We saw significant penetration of branded breakfast cereals in Tier 2 and Tier 3 cities. We noted the penetration of oats has significantly increased with brands like Quaker, Kelloggs and Saffola enjoying high levels of penetration. Snacks: Snacking as a category is seeing sharp ascendance with more shelves being created for snacking products. Personal care: Distributors reported sharp growth in certain personal care products like face wash. Consumers are consistently trying out new products in personal care which included conditioner shampoos, Male grooming products and new variants in deodorants. Up‐trading trends continue: The retailers and distributors in our survey indicated strong up‐trading trends. Some of the key up‐trading trends indicated by the retailers were:

Market in North India, Maharashtra and North Karnataks has been sluggish in the last three months but not guided to be pronounced in the near term

Identified three long terms trends for the Indian FMCG sector – Uptrading, Consumerism and Rise in Modern Trade.

Rising consumerism driving expansion of consumer’s purchase basket. Identifiable categories of interest – Breakfast Cereals, Snacks, Personal Care with conditioners and Men’s grooming.

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Upgrade from detergent bars to detergent powders: Retailers and distributors in our survey indicated that detergent powders were growing significantly faster than detergent bars and detergent cakes. Further to this retailers also indicated that premium detergents by multinational companies were growing significantly faster than regional detergent brands. Sharp growth in premium soaps and shampoos: The retailers and distributors in our survey indicated that the premium range of soaps and Shampoos and in particular Dove soaps and shampoos have continued to grow at sharp pace. Up‐trade to Ponds from Fair and Lovely: A significant number of retailers in our survey indicated that he was noticing consumers up‐trading to Ponds range of products from Fair and Lovely. Rise of Modern trade: The ascendance of consumerism is forcing retailers to align their stores along the lines of modern trade with a higher number of SKUs. In our survey of south India it was particularly noted that retailers are resorting to an asset light model or aligning on the lines of modern trade to combat the rising consumerism and the preference for modern trade.

Traction in the detergent segment driven by uptrading in deteregent bars to powders and from local detergent powders to branded products of HUL and P&G

Traction observed in premium Personal Wash and personal Product categories – Shampoo, Skin Cream, Sensitive toothpaste

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Signs of rising consumerism evidently witnessed in Tier 2 cities

Mc Donald’s outlet in Kolhapur is said to be the company’s largest outlet in Asia.

Source: PhillipCapital India Research

Frequent footfalls by the locals primarily the youth were observed.


We visited the 24x7 highway McDonald’s of Kolhapur which was touted by the locals as the largest McDonald’s outlet in Asia. We were really surprised by the number of local walk‐ins in the outlet even though the outlet is located on the outskirts of the city. We witnessed a significant number of customers were local youths at the outlet. Our interactions with the locals indicated that the outlet consistently sees high number of walk‐ins with local population being a significant proportion.

Mc Donald’s outlet in Kolhapur has a drive thru facility and play area. It is open 24 hours as highlighted on the signage.

The interiors are well designed with ample floor space for sit in’s. Special focus on advertisements directed on the youth was observed.

Outlet is located on the outskirts of the city. However footfalls from local population are significant.

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Dominos Pizza outlet in Kolhapur


We visited Domino’s Pizza’s single outlet in Kolhapur city. We visited the store during the lunch hours and observed healthy footfalls for sit in. Sales under the main delivery format also came across as healthy. Currently competitor Yum brands’ Pizza Hut does not have presence in Kolhapur city Outdoor Advertisement of Gold Gym’s in the Tier 2 city of Kolhapur


We observed a large outdoor advertisement of the premium fitness and health player Gold Gym in Kolhapur. Gold Gym’s presence is indicative of rising consumerism in Tier 2 cities primarily led by the target consumer base of youth. The promotional offer illustrates that the industry is aggressively competitive even in the smaller cities.

Advertisement of the newly launched taco range at Domino’s alone outlet in Kolhapur

Healthy footfalls observed during lunch hours for dine in and delivery format.

Presence of the premium Gold Gym facility in Kolhapur is sign of rising consumerism with high aspirational values noticeable among the youth

Promotional offer indicates the degree of competitive intensity among players even in smaller cities

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OOH of HUL’s product innovation in Fair & Lovely in Kolhapur OOH of Santoor soap brand in Karnataka


We observed a large outdoor advertisement of HUL’s product innovation in the Fair & Lovely brand which is the launch of the future tube. Rs. 10 price point being one of the fastest selling in the consumer sector, the promotional offer will generate consumer trials for the product. The clear focus is on leveraging on the uptrading cycle in smaller cities and drive volume growth.

On our road trip in Karnataka, we noticed large OOH of Wipro’s Santoor brand. We estimate that media intensity in the Personal wash category is increasing. Focus on increase in market share or maintenance of market share is gaining prominence for the incumbents.

Olive oil and imported chocolates available in a local supermarket in the Tier 2 city of Coimbatore In our visit to a local supermarket in the Tier 2 city of Coimbatore we were surprised to find the occupancy of shelf space by olive oil and imported chocolates. The retailer stated that because consumers walk in at certain times enquiring for such products he decided to store the same. This is a clear indication of uptrading and rising consumer awareness


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Premium priced Choco pie products find shelf space across states

Coimbatore – Tamil Nadu Hubli – Karnataka During our road trip the market presence of the brand Lotte Choco Pie was a revelation. Across states and irrespective of the size of the town the brand has managed to gather shelf space. The brand is premium priced and is said to be popular among children. The combination of chocolate + biscuit + marshmallow is the main USP of the product.

Faizabad ‐ Uttar Pradesh Vadodara ‐ Gujarat


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Star in the making – Starbucks opens its first outlet in Mumbai as crowds queue up for a cup of coffee

Significant footfalls at Starbucks outlet (Fort) observed in the Consumers willing to wait 30 minutes just to place the order noon

Resplendent interiors with specific emphasis on Starbucks’ USP Second floor of the outlet has ample seating space of Coffee. Below is the coffee station to collect the order from

Starbucks signature logo


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Synopsis of state‐wise findings Synopsis of the route of UP east and Bihar We visited the markets of Lucknow, Faizabad, Gorakhpur, Hajipur and Patna. We note that Lucknow and Gorakhpur are feeder towns having wholesale mandis (markets) catering to the rural markets in the nearby region. Our key findings and observations were: • Most retailers indicated that they had observed a slowdown in the last three

months. • Distributors indicated that certain discretionary products were seeing slowdown. • In eastern UP retailers also indicated that they were seeing revival in demand from

the 1st week of October. • HUL’s detergents are outperforming the market and local detergents. • Colgate’s initiatives in modern trade are seeing robust revenue growth. • Nestle’s products continue to see strong traction. • Poor shelf space occupation by Marico’s deodorants SetWet and Zatak. • Demand for premium undergarments (women) is significant but supply of the

products was poor.

Synopsis of the route of Paschim Maharashtra and North Karnataka We visited the towns of Satara, Karad, Kolhapur in Paschim Maharashtra and Belgaum, Dharwad and Hubli in North Karnataka. We note that Karad and Kolhapur are feeder towns of Paschim Maharashtra and Hubli is the feeder town in North Karnataka. Our key findings and observations were: • Distributors in these rain deficient regions indicated that volumes had de‐grown by

~10% YoY. • HUL’s detergents have outperformed both regional and P&G products by a

significant margin. • Market in Northern Karnataka seemed more sluggish than Paschim Maharashtra. • Penetration of Modern trade in North Karnataka has increased manifold in the last 3

years. Synopsis of the route of Kerala to Tamil Nadu We visited the towns of Cochin, Thrissur and Palakkad in Kerala and Coimbatore, Salem and Chennai in Tamil Nadu. Our key findings and observations are: • Observed significant number of kirana stores reporting negative impact on business

by increase in Modern Trade market presence. • Channel partners across FMCG companies indicated sales growth is largely intact. • Organised chained pharmacy ‐ Med Plus, Apollo Pharma emerging as important

distribution channels for FMCG Health based food products – Infant Food, MFD and Personal Care categories.

• South Indian women visibly emulating consumption habits of North Indian women by significantly increasing spends on branded Personal Care products

• Typical product stickiness trait prevalent among South Indian consumers is found to be diluted among the generation X, as the youth is ready to experiment with new products.

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Synopsis of the route of Gujarat We visited the markets of Dahod, Jhalot (rural Dahod), Anand and Vadodara. We note that the Dahod and Jhalot are rural centric markets while Anand and Vadodara are urban. Our key findings and observations were: • Most retailers indicated that market trends are positive. • The market is seeing acceptance of premium products (Livon) and new categories

(Pet food) • In Jhalot (rural market), weaker brands such as Dyna (Anchor) are losing out Synopsis of the route of Rajasthan We visited the markets of Alwar, Dausa and Jaipur. We note that the Dausa is a rural centric market while Alwar and Jaipur are urban markets. Our key findings and observations were: • Consumption growth remains strong, however, inflation has resulted in certain local

products viz. Oswal Soap, ViJohn etc becoming more popular. Retailers too are happy promoting local brands as commissions are higher

• However, distributor feedback indicates that RIN Supreme continues to do well • Bajaj Almond is growing at the cost of Dabur Amla, which is losing out shelf space

Synopsis of the route of Delhi‐Haryana We visited the markets of Delhi, Faridabad and Ballabgarh. Faridabad and Ballabgarh is located in Haryana near the NCR region. Our key findings and observations were: • There is some lull in consumption in the market leading to a decline in volumes.

Price increases have however offset the volume decline. • Here too retailer feedback indicated that Bajaj Almond is growing at the cost of

Dabur Amla. • P&G and HUL brands are doing well.

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Channel Partner Interviews

Retailer in Faizabad market – Uttar Pradesh


Retailer name: Shree Ram Location: Faizabad Key retailer comments and Observations: • Sales have been slower in the last 2 months. • HUL detergents performing very well. Regional brand Ghari also performing well. • Colgate sensitive getting push from the company and the product continues to gain

market traction. • Promotional schemes on Maggi witnessed good traction. • Outlet with very limited shelf space has inventory of conditioners and breakfast

cereals like oats.

Sales has been slower in the last 2 months Detergents category growth is robust led by HUL brands and RSPL’s Ghari detergent

Sensitive segment in toothpaste category continues to gain traction. Improvement in Maggi brand growth enabled by promotional schemes

Dedicated shelf space to Personal Care products in small towns. Visiblity of products is prominent in the store layout. For picture on the right: Large display counter placed by P&G for the men’s shaving brand Gillette. Even premium variants of Gillette part of the display.

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Retailer in Faizabad – Uttar Pradesh


Retailer name: New Saraswati Provision stores Location: Faizabad Key comments and Observations: • Market has been dull but the market has also become more volatile in the recent

past. • HUL detergents see significant demand growth. • Dove shampoos see significant growth. • Quaker and Kelloggs oats both brands available at the store but not Saffola oats. • Deodorants occupy significant shelf space. Park Avenue and Kama Sutra deodorants

sell by pull based factors.

Market has been dull but market volatility has also increased in the recent past. Significant growth reported in HUL’s detergent brands and Dove Shampoo

Kama Sutra and Park Avenue deodorants sales driven by pull based demand factors

Large display for Snack Foods observed in Uttar Pradesh primarily for Frito Lay products – Kurkure, Lays and Uncle Chips. Uncle Chips brand found to be popular. For picture on the left: Kinder Joy chocolate expands distribution network to small towns (Tier 4) like Faizabad and finds sufficient shelf space.

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Retail outlet in Gorakhpur (UP) ‐ Aggressive in store Significant shelf space occupied by Pampers brand Advertisements by various brands


Colgate (below) and relaunched Dabur Vatika shampoo ads


Retailer name: Milan Provision stores Location: Gorakhpur Key retailer comments and Observations: • Market has been sluggish in the recent months. Consumers seem to be holding back

their spending. • HUL detergents are doing very well. • Marico products are perceived to be expensive on a relative basis. • Branded cornflakes sales growth has been robust • Significant shelf space dedicated for deodorants. • Sunsilk and Pantene are top selling shampoos but Head and Shoulders has slowed

down.

Head & Shoulders sale has slowed down. Pantene is a top selling shampoo.

Consumers are holding back on spends. Market is sluggish in recent months.

Robust growth reported in branded cornflakes.

Marico products perceived to be expensive on relative basis

For picture above: Premium green tea under the brand Organic India found in Tier 3 city – Gorakhpur. For picture on right: Branded Walnut kernels under the brand Ambrosia (250 gm SKU for Rs. 250) finds store presence. Krafts brand Tang gathers shelf space enabled by Cadbury’s domestic distribution presence.

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Dedicated Personal care outlet in Gorakhpur (Uttar Pradesh)


Retailer name: Real Shringar Palace Location: Gorakhpur Key retailer comments and observation • Sales has been stable • Lakme, Garnier, L’Oreal and Shahnaz Hussain products are the top selling products. • Dove is seeing good traction but Head and Shoulders has been slow. • Deodorants are fast moving. Denver and Fogg are gaining traction. • Himalaya, Garnier and Lakme facewash are seeing robust growth. Retailer name: Suhag Bhavan Location: Gorakhpur Key retailer comments and observation • Market has been slow • Lakme’s colour cosmetic products have significant brand pull. • HUL is doing better than P&G in personal care products • Demand for high quality under garments is very high. Distribution reach of these

products is very inadequate. • L’Oreal outperforming Godrej hair colour products.

Store Sales have been stable. Lakme, Garnier, L’oreal and Shahnaz Hussain are the top selling brands.

Denver and Fogg deodorants are witnessing robust growth.

Robust growth reported in Dove shampoo. Head & Shoulders growth has slowed down.

Market has been slow.

In Personal Care category, HUL products are performing better than P&G.

Lakme’s Colour cosmetics have significant demand pull.

For picture on right: Sanitary napkins witness robust consumer demand in Tier 3 cities, visible signs of uptrading. For picture below: Found Premium ayurvedic based Personal Care products under the Aromaz brand.

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Retailer in Kolhapur (Maharashtra) ‐ Noticeably fine interiors for a retail shop


Retailer in Kolhapur


Retailer name: Jaganath Super Market Location: Kolhapur

Key retailer comments and observation • Shampoos continue to get a push by the companies with retailer and consumer

schemes • HUL detergents registering robust growth. • Dove shampoos and soaps registering healthy growth. • Set Wet not doing well. • Godrej No. 1 performing strongly • Oats sales slow but stable.

In‐store shelf space promotion observed for ITC’s Dark Fantasy brand and HUL’s Brooke Bond Red Label Tea brand.

Godrej No. 1 soap brand is performing well. Oats category growth is slow but stable

Shampoo brands continue to receive push by companies with retailer and consumer schemes.

Dove brand – Shampoo and soap is registering robust growth.

Set Wet brand deodorant performance is sluggish.

Dr. Salt – premium priced low sodium salt brand popular in Kolhapur.

Interiors provide ample space to stock branded goods and staples.

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Retailer in Cochin (Kerala) – Rs. 10 brands – Vivel, Godrej No. 1 Promotional scheme on Colgate’s main variant Strong Teeth find enquiries from price conscious consumers driving healthy volume growth

ITC’s Dark Fantasy captures shelf space Sun Plus brand resembling HUL’s popular Sunlight detergent brand


Name of retailer: Kerala State Civil Supplies Corporation Location: Cochin Key takeaways: • Volume growth in H1FY13 is lower on a YoY basis. Probability of downtrading in the

near term as consumer’s get price conscious • Certain companies have filled the shelf space with 6 months worth of stock namely

Hindustan Unilever and ITC. • Robust growth in Branded Foods namely GSKConsumer’s MFD brand ‐ Horlicks • Colgate’s sales growth has been healthy. Growth supported by promotional offers

on the main variant Colgate Strong Teeth. • In Soaps; Pears and Medimix are the top selling brands. Vivel and Godrej No. 1

demand primarily due to Rs. 10 price point and promotional offers such as Buy 3 get 1 free

• The retailer had increased the size of the shop to increase availability of brands and increase number of categories. For ex: Sunfeast Dark Fantasy was the only biscuit brand available. Marico Oats is a recent addition.

Volume growth has decelerated on YoY basis. Consumers are getting price conscious.

HUL and ITC, have filled shelf space with 6 months worth stock.

Retailer has added new categories like Oats and premium biscuits recently.

Robust growth trends in Colgate toothpaste led by promotional schemes and main variant Strong Teeth.

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Retailer in Thrissur (Kerala)


Location: Thrissur Key takeaways: • Business growth has decreased by 10 % on a YoY basis. Hike in product prices has

contributed to the slowdown in consumption. • In soaps Pears and Lux are the popular brands. Sunlight brand leads in detergent

category. Detergent bar sales continue to outperform the detergent powder sales. • GCPL has captured adequate shelf space for Household Insecticide portfolio with

healthy brand performance. Although in Q2FY13 Hit aerosol brand sales were slow due to unfavourable monsoon season of lower rains.

• In sachets – Ariel brand outperforms in detergent category. The retailer stored only Clinic Plus sachets in the shampoo category.

• The fastest selling brand in hair oil is Parachute Rs. 6 SKU. • Hair Colour category in the town is dominated by powder format. Godrej Expert

powder hair dye has reported good growth. • In toothpaste – Colgate brand growth continues to outperform peers. • In liquid dish wash category, HUL’s Vim brand growth is higher than that of Jyothy’s

Pril brand. Overall too the Pril brand growth rate is average. • We observed shelf space for dairy whitener brands ‐ Amulya (Amul) and Nestle,

Henko Matic detergent washing powder and women sanitary napkins under Whisper brand in this small retail outlet.

Dairy whitener brands from Amul and Nestle present

Stocked only Clinic Plus sachets in the shampoo category.

GCPL’s Household Insecticide product portfolio maintains strong growth momentum.

Hair Colour powder is the main format of usage. Godrej Expert powder brand growth is robust.

Retailer had to adopt an asset light business model due to pressure on sales from Modern Trade.

In liquid dishwash, HUL’s Vim brand sales exceed Jyothy’s Pril brand.

Advertisement for new packaging in Wills Navy Cut – 74 mm

Business growth has decreased by 10% on a YoY basis. Product price hikes is impacting consumer sentiment.

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Retailer in Palakkad (Kerala) – 75% of store sales from sachet Low shelf space for branded snack foods in Kerala due to strong preference for local snacks – ex: banana chips


Location: Palakkad Key takeaways: • Business growth has not particularly slowed down, however sales in the past few

weeks are getting slower. Consumers are turning price conscious • The retailer purchases his stock for Biscuit and Soap category from Modern Trade on

account of better product schemes relative to what is offered by the distributor. • In Toilet soaps, HUL brand growth healthy led by Pears. ITC’s Fiama Di Wills (men)

and Vivel (Luxury Crème) have acquired shelf space but demand has been muted. • In Detergents, HUL’s Sunlight is the dominant brand in powder and bar. P&G is

creating presence with Ariel and Tide sachets which are being well received. • Horlicks sachets sales continue to be higher than bottled SKU’s. • In Skin Care, Fair & Lovely brand dominance has sustained although competitive

intensity has been on an increase from Loreal’s Garnier and ITC’s Vivel • In Mosquito coil GCPL’s Good Knight brand growth has been healthy. Jyothy’s Maxo

coil brand sales have been poor. • In Noodles Nestle continues to lead category growth. Consumer demand for ITC’s

Sunfeast Yippee has been good. HUL’s Knorr Soupy noodles growth has stagnated. • In Shampoo, Clinic Plus is the main brand. P&G’s Head and Shoulders sales has

overtaken HUL’s Clear shampoo brand. Dove shampoo sachet sales growth has been robust.

• We found that Snack Foods occupies lower shelf space in retail outlets in relative to North and West India. Retailers and channel partners indicated that dominant demand for snacks is for local products like banana chips and brands promoted as international flavors ex; Spanish tomato, Cream and Onion find less favor.

Purchases stock for Toilet soap and Biscuit category from Modern Trade (Big Bazaar) on account of relatively better product schemes.

ITC’s Personal Wash brands have acquired shelf space but growth is muted.

In Mosquito coils, GCPL’s GoodKnight brand sales is faster than market leader Jyothy’s Maxo brand.

Head & Shoulders shampoo has overtaken HUL’s Clear shampoo brand sales. Clinic Plus is the market leader

Ariel and Tide detergent sachets are being received well by consumers.

Fair & Lovely has not lost market share to Garnier and Vivel.

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Name of retailer: M/S TA Ibrahim Location: Cochin Key takeaways: • Sales growth has slowed down in the past 3 months. The slowdown has been across

categories. 70% of sales for the store is from sachet • HUL soap brands gaining from consumer conversion of local brand users. Several

outdated local brands in Toilet Soap category available in the outlet namely Carbolic (Rs. 10 SKU), Dio Rose (Rs. 10 SKU ‐ packaging similar to Breeze), Lisa beauty soap (Rs. 10), Ayurvedamix (75 gm SKU for Rs. 17 – glycerin soap).

• Business growth has been impacted by presence of hypermarket in the vicinity, as they present better product offers to consumers.

• In Biscuits category, brand loyalty for Britannia and Parle brand is high while Sunfeast brand sales is slow.

• In coils, GCPL’s Good Knight brand sale is higher than Jyothy’s Maxo brand in coils. Name of retailer: Mr Rahman Location: Salem Key takeaways: • Sales growth at 5% YoY, largely led by pricing. Growth trend is estimated to sustain. • In Toilet soaps HUL’s Hamam, GCPL’s Cinthol Red are top performing brands • High growth in men’s grooming market with strong performance in Park Avenue

soaps • In Detergents, growth has been strong in HUL’s Surf Excel and Rin brands followed

by P&G’s Tide brand. • In Toothpaste, Colgate growth is strong whereas HUL’s Pepsodent has been slow

moving. Sensitive toothpaste segment growth is robust led by Indoco Remedies Sensodent ‐ K

• Retailer states that HUL brands do not witness slow growth because of the high brand investments undertaken across brands. HUL is pushing Dove brand by offering margins of ~12% against the company‘s average of ~8%.

• Breakfast cereals sales growth is robust. Youth have preference for Corn flake based products and adults favour Oats.

• In Shampoo, growth is led by bottled SKU’s than sachets indicating uptrading. Growth is being led by P&G brands Pantene and Head & Shoulder and HUL’s Clinic Plus

• In Skin Care, apart from HUL’s Fair & Lovely and Ponds White Beauty, P&G’s Olay and L’oreal’s Garnier Light are also witnessing good growth

Sales have slowed down in the past 3 months. Sluggishness is broad based. Business impacted by Modern Trade.

HUL Toilet soaps brand gaining from conversion of local soap brand consumers.

Brand loyalty to Parle and Britannia biscuit brand is high. Sunfeast sales are slow.

Sales growth is 5% YoY, largely led by Pricing.

Sustenance of traction in Men’s Grooming category led by robust growth in Park Avenue soaps.

Strong growth observed in Breakfast cereals category. Demand for Oats led by adults and Cereals led by youth.

Growth in shampoo bottled SKU’s is faster than sachets. Visible signs of consumer uptrading.

“HUL brands do not see slow growth due to the high brand investments undertaken by the company”

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Organised Pharmacy chains emerging vital trade channel for FMCG companies In our road trip in South India we observed that organized pharmacy chains namely Apollo Pharma and Med Plus have aggressively expanded their distribution networks by 2x – 3x during CY10 – 12. FMCG companies based on the Health & Wellness platform in the listed space (GSKConsumer, Nestle) and Personal Care (HUL, Colgate, Marico) are leveraging on pharmacy chains to expand distribution network. We believe that Pharmacy is emerging as a critical trade channel for FMCG companies to drive volume. Name of retailer: Vidhyethil Medicals Location: Cochin Key takeaways: • Sales growth has slowed down in the past quarter, however growth in Health &

Wellness categories like Baby Foods – Nestle brands, MFD’s ‐ GSKConsumer’s Horlicks, Baby Pampers – Nestle brand and Women Sanitary napkins – Nestle’s Whisper brand are reporting good growth.

• Strong uptrading trend are visible driven by increase in brand awareness. Consumers are ready to spend on expensive personal care products like Indulekha brand of hair oil priced at Rs. 425 for 100 ml and skin care oil priced at Rs. 189 for 100 ml.

• Robust performance in Sensitive toothpaste category led by GSK’s Sensodyne toothpaste

• Marico’s Parachute Ayurvedic oil growth is extremely strong with average sale of 12 bottles in 1 week.

• In Household Insecticide, GCPL’s products across aerosol, liquid and coils are reporting strong growth.

• Retailer plans to increase size of the shop in the near term and increase stock of products

• Consumers have preference from Mehendi products for hair colour. GCPL’s Nupur is the leading brand followed by Black Rose

Location: Salem Key takeaways: • Sales growth has increased on a YoY basis and is broad based across categories. • For deodorants, the consumer does not hold particular preference of a brand.

Product choice is based on whichever product is easily visible and this is at the retailers discretion.

• Higher sales in bottled SKU’s than sachets for categories like Shampoos, MFD’s • In Shampoo, P&G brands Pantene and Head & Shoulders are leading growth. The

brands are converting users of HUL brands Sunsilk and Clinic Plus. • In MFD, Horlicks growth is strong while Krafts’s Bourvita is slow moving. • In toothpaste, Colgate brand leads growth. Growth in sensitive toothpaste segment

is strong led by Indoco Remedies Sensodent – K. • Baby Foods, Cerelac brand sales growth healthy enabled by doctor’s prescription. • In toothbrush, Colgate is leading growth over P&G’s Oral B brand • In Men’s Grooming Emami’s Fair & Handsome continues to report robust growth. • Crème is the preferred mode of Hair Colour led by strong growth in Garnier brand. • Face Wash category growth is strong led by L’oreal’s Garnier brand and Zydus

Wellness’ Everyuth brand

Aggressive expansion witnessed by organized pharmacy chains. Med plus and Apollo Pharma have increased network by 3x and 2x respectively in Tamil Nadu in the past 2 years.

Significant shelf space captured by Health & Wellness Food products and Personal Care products – Hair Care, Skin Care, Oral Care, Deodorants, Baby Care and Women Hygiene.

Growth in Nestlé’s Infant food segment is strong as consumer demand is robust unaffected by pricing.

Consumer is ready to spend Rs. 425 for 100 ml hair oil (Indulekha brand) – Signs of uptrading and brand awareness.

Parachute’s Ayurvedic hair oil sharp demand trends sustain, average 12 bottles sold in a week.

Consumer not particularly brand conscious about deodorants.

Strong traction reported in the Sensitive toothpaste segment.

P&G shampoo brands outsell HUL brands.

Volume growth in Nestle’s Infant Foods segment is strong.

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Key input from other channel partners in Tamil Nadu Britannia Industries Ltd. • Sales growth has reduced significantly from 25% YoY in CY11 to the present growth

rate of ~12% YoY. Volume growth has reduced at 4 – 5% YoY. • Britannia’s brand of Nutrichoice has been reporting strong growth. Good Day biscuit

brand growth is healthy at ~20% YoY with volume growth of 8 – 9% YoY. • Growth has slowed down in the salted biscuit brand of TimePass and the new

product launches namely Oats and Snackuits. • Britannia Cakes growth is at ~10% YoY. The company has increased schemes for the

brand. • Britannia is increasing focus on Modern trade. Company’s market share is estimated

at 40 – 45% in Modern Trade Heinz Ltd. • Complan growth from ~25% YoY in CY11 has decreased to 18% YoY. Complan brand

has increased market share on a YoY basis. • Glucon D brand reported growth of ~25% YoY. The brand continues to grow on a

MoM basis. In the present CY12 summer season the brand reported the highest absolute sales.

• New product launches of Fruit Shot and Muesli were largely unsuccessful. • Heinz Ketchup growth has decelerated sharply from 30% YoY in CY11 to flat growth.

The brand has lost market share contributed also by lack of product promotions. Johnson & Johnson • Sales growth of 22% YoY. Growth is led by pricing at 10 – 12% YoY. On an average

J&J tends to take a price hike of ~8% YoY. • Demand for J&J products continues unabated, because of strong brand equity • Recent introduction of Baby wipes is witnessing strong growth.

Britannia sales growth is down from 25% in CY11 to 12% YoY. Volume growth is in low single digits. Focus on Modern Trade yielding benefits.

Robust growth observed in Nutrichoice and GoodDay brand. Growth in Timepass and new product launches including Snackuits is uninspiring.

Robust growth observed in Nutrichoice and GoodDay brand. Growth in Timepass and new product launches including Snackuits is uninspiring.

Complan growth is down from 25% in CY11 to 18% YoY. Glucon D brand reported best performance to date enabled by strong summer season.

Heinz ketchup growth sharply down from 30% in CY11 to flat growth. Brand has lost market share.

Robust sales growth at ~22% YoY led by pricing at 10 – 12% YoY. Annual average price hike is ~8%.

New launch of Baby Wipes is seeing tremendous growth.

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Retailer in Jhalot (Gujarat)


Name of retailer: Vitthal stores Location: Jhalot (Gujarat) Key Takeaways: • Strong growth in consumers across categories • Volume growth of around ~10% and value growth of 10% • Clear trend of premiumisation eg. In soaps Dyna (Anchor) is losing ground to Godrej

No. 1, Lux variants. • Premium niche products receive good consumer response, ex: Livon brand is

gaining shelf space. • Among Shampoos he specifically mentioned that there are certain variants of Sunsilk

that aren’t doing well. Otherwise, there’s a lot of stickiness of customer preferences especially among premium brands.

Marico’s Livon finds shelf space and good consumer response

Branded products are on display for consumers. Stock of the displayed products and staples kept at the back of the store

Strong business growth o/w 10% is volume and 10% is pricing growth

Regional brands losing market share to branded players in Toilet Soaps category.

High product stickyness observed for premium shampoo brands.

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Retailer in Vadodara (Gujarat)


Name of retailer: Mahavir Provisions Location: Vadodara Key Takeaways: • Inflation hasn’t yet impacted consumption. Downtrading if any is happening at a

very small scale and isn’t worrying yet. • The Kirana store has expanded his shop and made it look more organized. The store

has also started keeping pet food – indicating an improvement in affluence in the area.

• FMCG companies have become extremely stringent in credit terms • Retailer has improvised on display of products. • Business growth however has been affected by the growth of malls and organized

retail. The retailer was very concerned about FDI in retail.

Observed high aggression from Parle for the snack food brand Hippo. Significant shelf space and in store advertisement.

Stocking Pedigree pet foods products, sign of rising consumerism

Downtrading is not visibly evident. Consumer demand has not been impacted by inflation

Retailer has improvised on store size and store display.

Business growth has been impacted by rise in modern trade in the vicinity.

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Retailer in Jaipur (Rajasthan)


Name of retailer: Rajesh Kirana Location: Jaipur Key Takeaways: • The area that the retailer caters to is predominantly middle to upper income suburb.

Growth is robust across categories. There is some cannibalization to organized retail for select products. However, the retailer feels that this is more to do with selective promotional discounts at malls.

• There are some categories where local/regional brands are giving strong competition to national players – in washing soap, Oswal soap is performing better than national brands as it has managed to restrict price hikes.

• He says that he is also happier with local brands due to higher commissions 8‐10% vs. 5% odd in national brands.

• He feels that when malls give promotional offers, they sell products below purchase price. Also, he added that malls are able to get branded products at rates lower than those offered to local retailers.

• In personal care and food products uptrading is continuing. However, with brands launching more variants, customers are getting confused.

• In laggard products, specifically he mentioned that Gillette isn’t doing great and SuperMax is gaining at its expense. Among other products he said that ViJohn too is doing well.

Growth is robust across categories. Limited adverse impact of Modern Trade on business in certain categories wherein higher discounts are offered.

Distribution gains in North India for GSKConsumer MFD brands visible. Shelf space captured by Horlicks Chocolate and Boost brand sachets.

Brand performance by certain regional brands like Oswal (detergent category) is faster than national brands. Relatively low pricing is the differentiator.

Consumers are getting confused with the onslaught of product launches in the Personal Care and Food categories.

Underperformance reported in Gillette brand with loss of market share to SuperMax.

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Retailer in Dausa (Rajasthan)

Name of retailer: J&K Enterprises Location: Dausa (Rajasthan) Key Takeaways: • Broadly growth is robust at 20% YoY Value growth o/w 10% is Volume and 10% is

pricing growth • In soaps and shampoos – P&G is gaining ground at the cost of Clinic Plus. However,

there is no decline in HUL’s sales. • In hair oil, Bajaj Almond is gaining ground at the cost of Dabur Amla. Retailer in Ballabgarh (Faridabad ‐Delhi)


Location: Faridabad Key Takeaways: • Business has not reported increase in sales. Price increase has been offset by

declining volume ‐> cannibalization to other stores and malls • In hair oil, Bajaj Almond is gaining ground at the cost of Dabur Amla. • In Tea, Tata is getting aggressive, the company is offering 15 – 18% margins on Tata

Tea brand against the competitor HUL’s margins of 6 – 8% on Red Label brand • In Shampoo P&G and HUL brands are performing well. Dabur ‘s Vatika shampoo

brand continues to underperform.

P&G shampoo gaining market share from Clinic Plus. Bajaj Almond hair oil is gaining users from Dabur Amla hair oil.

Sales flat as volume degrowth is setting off pricing growth. Retailer is losing consumers to Modern Trade.

Tata Tea is offering margins 2x on its brands than competitor HUL’s margins of 6 – 8% on Red Label brand.

South based ‐ Cholayil Ltd. launches face wash under Medimix brand. Competition intense in face wash category.

Significant shelf space by Snack Foods namely Parle’s Hippo, ITC’s Tangles and DFM Foods’ Crax

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Retailers feeling the heat from Modern Trade in Kerala and TN During our road trip we observed that Modern Trade has established significant market presence in the South Indian states. Apart from the pan Indian players like Big Bazaar, Spencers, More etc there are several local retail chains operating namely Nilgiris etc. We also observed single location supermarkets retailing consumer products in cities like Cochin ‐ Ashish Supermarket (~5000 sq. ft.) Following are a few key takeaways: Kirana stores in the vicinity of supermarkets witness impact on sales. Footfalls and ticket size of purchase decrease We visited certain retail stores located within a radius of 200 m from hypermarkets. The sales for these general stores have evidently come under pressure on account of Modern Trade. Retailers mentioned that there has been a visible decrease in consumer footfalls. Also existing consumers are opting for Modern trade stores to make the first – bulk – purchase of the month, thereby decreasing the ticket size for retailers. Retailers shared that sales during the first 2 weeks of the month is strained, however a pickup is witnessed in the latter 2 weeks as consumers make replenishment purchase (for small ticket items like soaps, biscuits) from local stores. Consumers are increasingly getting price conscious, Modern trade has increased their demand for discounts Retailers stated the consumer’s demand for discounts is being fuelled by the frequent product promotions and pricing discounts offered by Modern Trade. Retailers very obviously are unable to compete with Modern Trade on promotions offered. Hence Modern Trade is emerging as the choice of preference for the increasing price conscious consumers. Retailer’s response to Modern Trade challenge is mixed – few have adopted asset light model…… We observed that certain retailers have submitted to competition from Modern Trade by adopting an asset light model by storing few SKU’s per brand. However they have increased the number of categories available ‐ enabled by the sachet revolution. This has enabled them in meeting the short term and varied demand of consumers.

Small retailers business has been adversely impacted by sharp increase in Modern Trade. Competition faced from local supermarkets also.

Consumers prefer Modern Trade to undertake bulk purchase at the start of the month. Retailers witness increase in sales in the last 2 weeks of the month on account of small ticket replenishment purchase.

Discounts and promotions offered by Modern Trade are major pull factors for consumer.

Certain retailers have been forced to adopt an asset light model due to impact of Modern Trade.

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Retailer in Thrissur – notice the few SKU’s stored


Retailer in Palakkad – notice the empty shelf spaces (picture on the right). Business impacted by presence of Big Bazaar in the vicinity


……Others have increased investment in the store by expanding store size and product availability Retailers that have been in operation for a long time period (thereby have generated strong consumer goodwill) and have the necessary resources, have increased the capex on their store. They have primarily increased the store size and have effectively created hypermarket experience for consumers. By enhancing the shopping experience, their existing consumer base has been intact. They have also been able to increase the ticket size of purchase on per consumer basis. These stores are capitalizing on market trends of premiumisation and uptrading, thereby increasing store realization growth.

Long standing retailers have increased investments and have adopted mini supermarket based business model

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Retailer in Coimbatore reinvents store as a Supermarket Increase in store size and introduces aisles similar to supermarket shopping experience


Shelf space labeled to provide consumer convenience Discounts offered on certain brands


FDI in Retail is expected to increase pressure on business Retailers are increasingly concerned on the recently announced FDI in Retail. General stores that are currently under pressure on account of domestic organized trade itself estimate that their operations may cease to exist with the onset of foreign retailers particularly Walmart.

FDI in Retail is the most common thread of discussion among retailers and distributors.

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Paint Sector – Dealers distressed over competition and lower margins offered by Asian Paints We have received mixed trends on paint industry volume growth in Kerala and Tamil Nadu. Undercutting at the dealers end has intensified. Repainting cycle has extended primarily on account of cost escalation. However Decorative paints growth maintains robust momentum in small towns. Also more importantly dealers were disappointed with low margins offered by Asian Paints, compelling them to promote competitors brand. Paint sector growth under pressure in cities but remains robust in small towns Paint sector volume growth has come under pressure in Cochin, with slowdown in Decorative paints led by Asian Paints. However in smaller towns namely Thrissur, the volume growth has been robust at 12 – 15% YoY with value growth of 20 – 25% YoY. Sharp increase in sales target is leading to undercutting by dealers primarily Asian Paints. Ambitious sales targets, for ex: 15% YoY in the slower Cochin market is leading to undercutting at the dealers end. Undercutting is being observed across companies; however severity is higher in Asian Paints. Also while smaller organized players like Berger Paints and Nerolac are offering rebates to dealers, the same is not being extended by Asian Paints. Increase in dealer competition is also forcing undercutting There has been a significant increase in the number of dealers servicing a single market. For Ex: In Thrissur, from 2010 to 2012, the number of dealers has increased 10x from 3 dealers to 30 dealers. Dealer in Cochin has also cited that unhealthy competition among the paint dealers is forcing undercutting. Repainting cycle has extended primarily due to escalation in wage costs Sharp wage inflationary pressures have impacted the repainting cycle in Kerala. Labour cost has increased from Rs. 275/8 hours in 2009 to Rs. 500/ 6.5 hours in 2012. Hence the increase in painting cost has led to postponement of house painting decision. As a result the repainting cycle from 1 to 1.5 years has extended to 3 years. Repainting Cycle (in years) 2007 2012

2009 1 ‐ 1.5 Paint cost 2 22012 3 Labour cost 1 3

Offer of higher margins by rival companies is leading to dealer push of competing brands over Asian Paints. Dealers in our interaction indicated that Asian Paints currently offers the lowest dealer margin in the paint sector while the other pan India organized and regional players are offering lucrative margins and schemes to the dealers. Hence dealers are converting footfalls in their outlet for Asian Paints’ brands to other competing products. • Dealer in Thrissur has been successfully converting 50% of consumers asking for

Asian Paints brands to Berger Paints. • Dealer in Cochin has been pushing the regional brand Ellora Paints in the past 6

months leading to 2x growth in Ellora’s brand sales. Company Dealer Margins

Asian Paints 3 ‐ 5% Berger Paints 10% + rebate Nerolac Paints 7% + rebate Ellora Paints* 30%

* Regional company (Cochin)

Repainting cycle delayed from the earlier 1 to 1.5 years to 3 years on account of sharp escalation in wage costs

High competitive intensity is visible even in small towns like Thrissur (Kerala). Dealer network has increased by 10x in the past 3 years

Paint Sector volume growth robust in small towns at 12 – 15% YoY leading value growth of 20 – 25% YoY.

Dealers are unhappy with lower margins offered by Asian Paints. Hence they are promoting the higher margin competitors brands over Asian Paints. Some of these dealers have reported very successful conversion rate.

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It is observed that Painters are also a medium of influencing the consumer preference for paint brands. The higher margins as aforementioned offered by competing brands are utilized by dealers to offer 2 ‐ 3% commission to the painters to promote the concerned brands. Dealers that we interacted with are also utilizing this channel to promote brands over Asian Paints. Consumer demand for Asian Paints’ brands is fuelled by brand awareness. Smaller players need to step up investments to gain scale. High consumer demand for Asian Paints is primarily led by brand awareness. Asian Paints has developed regional TVC’s for the Kerala and Tamil Nadu markets. Dealers have stated that in terms of product quality smaller organized players like Berger Paints brands are equivalent to Asian Paints, however as they are unable to match Asian Paints’s brand investments, they continue to have low consumer recall. Hence for market share gains, the mid size paint companies will have to step up brand investments, with focus on regional advertisements to have effective consumer cognizance.

Asian Paints successfully runs marketing campaigns in regional languages in Kerala and Tamil Nadu for interior and exterior paints

Source: Company, PhillipCapital India Research

Emulsions, Enamel (high gloss) and Exterior paints sustain robust growth momentum The Distemper segment has contracted sharply with revenue contribution to the paint sector reduced to ~10% as per dealers. Exterior paints and Interior Emulsions maintain robust pace of growth. In Enamels, strong growth is again observed in the high gloss variants. These growth trends are estimated to sustain in the medium to long term Conclusion We observe that demand and growth trends for the Paint sector continue to be robust. Market penetration and higher purchasing power mainly in smaller cities is evidently driving strong growth. However near term sluggishness is indicative on account of macroeconomic concerns. On company specific basis, Asian Paints market share is under threat as competiting brands get aggressive across markets primarily by providing lucrative high margins to paint dealers. Also sustained heightened competitive intensity can be a negative for the sector in the medium to long term.

Brand campaigns customized in regional languages is one of the critical factors in enabling competitors to gain market share over Asian Paints.

Dealer also promotes competing products to the painter by sharing the higher margins by offering 2 ‐3 % commissions.

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Deodorants category is spraying up, but where are Set Wet and Zatak?

Deodorant shelf space in mini supermarket in Coimbatore (TN) Deodorant shelf space in retail outlet at Faizabad (UP)


Hubli (Karnataka) Significant category presence in Gorakhpur (UP)


Deodorants category visibly gaining traction with sufficient shelf space In our retailer survey we observed the shelf space dedicated for Deodorants has increased significantly over the last 5 years. Deodorants penetration is not limited to Tier 1 cities but even Tier 2, Tier 3 cities and rural areas are witnessing rise in Deodorants consumption. We observed the most of the sizeable retail outlets in our survey had a dedicated shelf space for Deodorants.

Deodorant category penetration extends beyond Tier 1 cities to Tier2 and Tier 3 cities driven by robust consumer demand

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Marico’s acquired brands Set Wet and Zatak conspicuously absent While the category is seeing sharp growth we also noted that Marico’s recently acquired youth brands of SetWet and Zatak had a limited occupancy of shelf space in our surveyed sample of 200 retailers. We do not believe that our sample size is representative for the Indian FMCG market but considering our extensive visits across India we believe the absence of Marico’s products is rather conspicuous in the light of the acquisition cost paid by Marico for the portfolio. Certain Deodorants brands enjoy consumer pull ability. Retailers responded negatively to Marico brands We also noted that across India, Park Avenue, Fogg and KamaSutra were occupying significant amount of shelf space and retailers had very high regards for these brands. On quizzing the retailers on Marico’s deodorants portfolio, we found the responses to be mixed but generally negative. Conclusion Display and presence on shelf space is a very critical aspect for deodorants as consumer purchase decisions are based on trial from the shelf. Absence from shelf will generally result in loss of sales for the company. We conclude (although a little prematurely) that Marico will have to up the ante in the deodorants space to catch up with the market leaders.

Marico’s acquired brands Set Wet and Zatak were largely absent in terms of shelf space occupancy in markets surveyed.

Brands like Fogg, KamaSutra and Park Avenue enjoy high consumer demand exceeding even the largest player HUL’s brand Axe. Retailer feedback largely negative for Marico brands

Branding and distribution presence are critical for success in deodorant category. Marico will have to significantly step up investments.

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India waking up: Breakfast cereals provide new growth avenues for the persistent

Palakkad (Kerala) – Kellogs Oats Faizabad (Uttar Pradesh) – Kelloggs Ballabgarh (Faridabad – Delhi) ‐ Corn flakes Kelloggs Chocos


Gorakhpur (Uttar Pradesh) – Saffola Oats Faizabad (Uttar Pradesh) – local brand Faizabad (Uttar Pradesh) ‐ Quaker of Corn flakes Oats


Break Fast cereals is another fast growing category. Breakfast cereals are habit forming products which provide long‐term growth potential for the companies operating in the space. We noted Kelloggs (after years of perseverance) flakes (corn, wheat, choco etc) have reached the shelves of most tier 1, 2 and 3 city retailers. Oats is another category which is witnessing sharp ascendance in market share in the breakfast cereal category. Quaker oats was the most popular brand while Kelloggs and Saffola oats were also gaining acceptance. We believe there is a lot scope for innovation in the category and companies in the space including Marico are likely to see robust revenue growth.

Breakfast cereals significantly scaling up market presence in flakes and oats across cities and towns.

Incumbents holding ability of product innovation and distribution strength are likely to witness sharp traction in growth

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Certain regional brands found to be competitive in the FMCG sector

Oswal brand faster selling than MNC brands in the detergent Regional brands in detergent cakes continue to category in Jaipur (Rajasthan) receive strong consumer demand (TN & Kerala)

Dr. Wash antiseptic soap priced at 35% discount to Strong Brand equity of the ayurvedic soap has been HUL’s Lifebuoy brand (Kerala) maintained, priced at Rs. 15 for 75 gm. (Kerala)


Uptrading trend has been driving the conversion of regional, local brand users to organized brands. The trend has been prevalent across categories primarily those that are mature in nature with high market penetration ie Personal wash, Detergents etc. In our interactions with retailers we chanced upon certain brands that continue to find loyal market audience due to the perceived value for money proposition. The finds were specifically in the Personal wash and Detergent categories. However on a long term basis we believe that uptrading cycle will accelerate the pace of conversion of local users. Certain brands that do not possess the wherewithal to remain competitively relevant will give way to consolidation in the Personal wash and Detergent categories. Hence due to reduction in competition market leaders like HUL stand to gain in the future

Certain regional brands continue to remain competitive in the Personal wash and Detergent category.

Uptrading in the long term will accelerate pace of conversion of local brand users. Regional brands that are unable to compete effectively will lead to consolidation in the industry. Relatively lower competition positive for the market leader HUL.

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Cigarettes category lighting up The category has recently witnessed a flurry of new product innovations in the 64mm which are aimed at driving volume growth for the sector. In our survey we have witnessed 13 new product innovations in the 64mm category and one new product in the 69mm category. We have observed 7 new products by ITC, 5 by Godfrey Philips and one each by VST industries and Golden Tobacco Company. 64 mm Cigarettes – the most exciting product innovation in the Tobacco sector In the past decade the Cigarette Sector has largely been void of new product innovations including launch of new brands. The recent product innovations initiated in the Cigarette industry have been the launch of the 64 mm products. A quarter back we witnessed the few initial launches of the 64 mm cigarettes by the organized incumbents – ITC (under Gold Flake, Capstan), VST Industries and Godfrey Philips (Four Square). We observe that within a short duration of 3 months, ITC and Godfrey Phillips have significantly increased their focus on the 64 mm segment with launches across all the mainstay brands. The companies have strategically priced these products at Rs. 28 to Rs 15 for 10 sticks with a clear objective of increasing volume market share and expanding the volume size of the cigarette category by converting the current contraband cigarettes and bidi consumers. We estimate that majority of the 64 mm brand launches are margin dilutive for the cigarette companies including sharp decrease in Rs. EBIT/ stick. 64 mm product launches in the Cigarette sector

Note: ITC has also launched 64 mm under the Scissors brand which is not present in the above photo; GPI has

launched a 64 mm product under the Red and White brand which is not present in the picture above.

VST Industries – 64 mm launch under Charminar is the cheapest in the 64 mm category, priced at Rs. 1.5 per stick

Godfrey Phillips – has aggressively stepped up 64 mm product launches in 5 brands. The 64 mm products are competitively priced and introduced in GPI’s main markets in West and North India.

ITC‐ leading number of 64 mm launches with 6 brands. ITC prices 64 mm products aggressively to capture volume from contraband cigarette and bidi market.

VST Industries and Godfrey Phillips launch 64mm in the non filter segment under the brands Charminar and Cavendars respectively.

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ITC exhibits clear focus on Cigarette volume with 64 mm launch under all the mainstay brands ITC has launched the 64 mm size cigarette across 6 main brands namely Gold Flake, Capstan, Scissors, Flake, Wills and Bristol. The revenue contribution of these brands for ITC is estimated at 70 ‐75%. The company has also launched a new 64 mm brand under Wills called Wills Royal.

ITC’s 64 mm product launches across brands and price per pack

Note: ITC has also launched 64 mm under the Scissors brand which is not present in the above photo

Gross realisation comparison of 69 mm and 64 mm under ITC brands

Gold Flake Capstan Flake Bristol Scissors

69 mm MRP per stick 4.8 3 2 3.5 3.5

64 mm MRP per stick 2.8 2 2 1.9 2

64 mm launch focused on driving volume from conversion of users in contraband cigarette and smokeless tobacco markets ITC has largely had to exit the < Rs. 2 per stick price point in the past few years on account of the steep increase in the tax structure (excise+VAT). Hence the gap in the product portfolio on account of low product affordability has contributed to loss of consumers to the contraband and smokeless tobacco markets. The lower excise duty tax structure in 64 mm has enabled ITC to launch cigarettes at affordable price points. Hence with 64 mm, ITC is primarily targeting increase in volume share by converting users in the contraband cigarettes, bidis and smokeless tobacco markets.

ITC has undertaken a massive volume driven strategy with the 64 mm launch. Company targets volume growth from contraband cigarette and smokeless tobacco market.

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Channel partners indicate 64 mm can contribute in managing risks of downtrading to competing brands: Downtrading risk for ITC holds by way of shift within ITC’s own brands ie. from premium to economic brands, or shift to cheaper competitor products. 64 mm launch being priced at a discount to 69 mm can enable to avert the latter mentioned downtrading risk, hence keeping intact ITC’s cigarette consumer base. Certain 64 mm brands being launched in strategic markets to gain volume market share ITC through 64 mm has also crafted a business strategy to gain market share from competitors in smaller towns and cities. Hence in accordance with that, we observe that ITC is rolling out a state wise – brand wise 64 mm launch with Scissors 64 mm in South India, Gold Flake and Capstan 64 mm in North India.

ITC 64 mm product launches found in our surveyed states of Maharashtra, Rajasthan, Bihar, Kerala, Tamil Nadu

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64mm strategy could be margin dilutive over the medium to long‐term ITC’s margin in the cigarettes segment is 61.5% (Q2FY13) driven by high margin products in the 69mm and 84mm. We estimate the EBIT margins in the 64mm products are significantly lower than the company average and even more critical is absolute margin in the 64mm segment is 1/3rd of the company average at Rs 0.3. The 69mm category for the company is a highly profitable segment with Goldflake 69mm being the most profitable product for the company with an EBIT margin of ~70%. It is also very important to note that GoldFlake 69mm per stick EBIT is also the highest with an EBIT contribution of 36% of total cigarette EBIT (FY13E). We estimate that Bristol, Scissors and Capstan contribute 9%, 9% and 6% of the total cigarettes EBIT respectively. We also find that introduction of 64mm in Flake is margin accretive on account of lower excise duty but Flake is relatively a small brand. Thus margin accretion will be limited.

Economics of ITC Cigarette brands including recently introduced 64 mm (Estimated Margins at current market prices)

_______Gold Flake_______ _____Bristol_____ ____Scissors____ ____Capstan____ _____Flake_____ ____Navy Cut____

84 mm 69 mm 64 mm 69 mm 64 mm 69 mm 64 mm 69 mm 64 mm 69 mm 64 mm 74 mm 69 mm

Gross MRP 5.8 4.8 2.8 3.5 1.9 3.5 2.0 3.0 2.0 2.0 1.9 4.9 3.0

Excise duty 2.31 1.19 0.67 1.19 0.67 1.19 0.67 1.19 0.67 1.19 0.67 1.7 1.2

VAT 1.16 0.96 0.56 0.70 0.38 0.71 0.41 0.61 0.41 0.41 0.39 1.0 0.6

Dealer Margins 0.58 0.48 0.28 0.39 0.21 0.35 0.20 0.39 0.26 0.26 0.25 0.5 0.3

Net Realisations 1.75 2.17 1.29 1.22 0.64 1.24 0.72 0.80 0.66 0.14 0.60 1.7 0.9

RM 0.41 0.34 0.31 0.26 0.25 0.28 0.26 0.23 0.21 0.15 0.14 0.3 0.2

Manufacturing and Freight 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.3 0.3

EBIT per stick 1.04 1.53 0.68 0.66 0.10 0.66 0.16 0.28 0.15 ‐0.31 0.16 1.1 0.4

EBIT Margin % 59.35 70.57 52.34 53.93 14.93 53.30 22.20 34.70 22.92 67.1 39.6

Source: Company, PhillipCapital India Research Estimates

We estimate that even if only 10% of the 69mm consumers downtrade from the above mentioned brands to the 64 mm products, EBIT margins could decline by 100bps but more importantly absolute EBIT can decline by ~4%. We have not incorporated incremental volumes from contraband categories in our estimates as we believe down trading is a more significant risk. Analysis of impact on Revenue and EBIT of 10% downtrading in 69 mm to 64 mm Gold Flake Bristol Capstan Scissors

RSFT (69 mm) Revenue contribution 30.5 9.0 9.3 10.0 69 mm Brand revenue (Rs. Mn) 40,726 12,018 12,418 13,353 69 mm EBIT (Rs. Mn) 28,740 6,481 4,309 7,117 69 mm EBIT margins (%) 70.6 53.9 34.7 53.3 Brand revenue (69 mm + 64 mm) (Rs. Mn) 39,029 11,468 12,004 12,781 Brand EBIT (69 mm + 64 mm) (Rs. Mn) 27,109 5,930 4,068 6,575 Brand EBIT (69 mm + 64 mm) margins (%) 69.5 51.7 33.9 51.4 Brand EBIT degrowth due to 64 mm (%) ‐5.67 ‐8.50 ‐5.60 ‐7.62Brand EBIT margin contraction (%) (1.1) (2.2) (0.8) (1.9) ITC Cigarette Segment EBIT degrowth ‐3.9 ITC Cigarette Segment EBIT margin contraction 100

Source: PhillipCapital India Research Estimates

ITC has launched 64mm in brands which contribute 54% of revenues and 60% of operating profits. The key brands include Gold Flake, Bristol, Scissors and Capstan

10 % downtrading in ITC’s 69 mm to 64 mm estimated to result to decline in absolute EBIT by 4%

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Gold Flake 64 mm launch – Downtrading a major risk The GoldFlake franchise is the most profitable franchise for ITC. The revenue contribution of the GoldFlake franchise is ~45% (Euromonitor CY10) with 84mm contributing ~15% of the total revenues and 69mm contributing ~30%. The GoldFlake 69mm is the most profitable product for the company with an EBIT margin of ~70%. We believe the brand has reached a critical juncture where the company is severely exposed to down trading risks and margin dilution for the company. The EBIT contribution of the GoldFlake brand to the total cigarette EBIT is ~50% with the 69mm contributing 36% of EBIT and 84mm contributing 15% of cigarettes segment EBIT respectively. Gold Flake King Size (84 mm) – Regular Size (69 mm) – newly launched 64 mm


Gold Flake 64 mm point of sale advertisement at Hajipur‐ Bihar Gold Flake 64 mm point of sale advertisement at Karad‐ Maharashtra


We estimate that Gold Flake 69 mm is ITC’s most profitable brand with EBIT contribution of ~36% and highest revenue contributor at ~30%..

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Ad of Price points of Gold Flake brands including 64 mm displayed Gold Flake 64 mm captures significant shelf space. Retailer at point of sale (Khopoli ‐ Maharshtra ) indicates strong demand for the product

Per stick economics of Gold Flake brand Gold Flake

84 mm 69 mm 64 mm

Gross MRP 5.8 4.8 2.8

Excise duty 2.31 1.19 0.67

VAT 1.16 0.96 0.56

Dealer Margins 0.58 0.48 0.28

Net Realisations 1.75 2.17 1.29

RM 0.41 0.34 0.31

Manufacturing and Freight 0.30 0.30 0.30

EBIT per stick 1.04 1.53 0.68

EBIT Margin % 59.4 70.6 52.3


64 mm under ITC’s largest brand GoldFlake is launched in Rajasthan, Maharashtra and Bihar with strategic focus to increase market share ITC has launched 64 mm under its largest brand Gold Flake in the states of Rajasthan, Bihar and Maharashtra. Gold Flake brand’s revenue contribution to ITC is estimated at ~45%. The brand has been strategically launched in those markets wherein the competitor Godfrey Phillip’s brand Four Square is a formidable player. Hence considering the market location of the 64 mm launch we estimate that ITC is aiming to gain market share. Downtrading is an imminent risk: Focus Group Study The pricing growth in 69 mm Gold Flake has been steep at ~14% CAGR during FY08 – 13E with MRP per stick moving from Rs. 2.5 to Rs. 4.8. Hence on account of the high net realizations, the 69 mm Gold Flake is the most profitable brand for ITC with EBIT/stick of Rs. 1.53. We tested the various Gold Flake products on a focus group to ascertain the product differences and associated aspirational values. Our key findings are as follows: 84 mm v/s 69 mm • Superior product experience of 84 mm over 69 mm on account of filter length. • Blend and taste of product is very similar • Aspirational values of 84 mm is much higher Hence we conclude consumers more likely to uptrade to 84 mm in the medium to long term, but downtrading from 84 mm to 69 mm has lower probability.

64 mm under Gold Flake branded as Gold Flake “Super Star”. 64 mm is priced at Rs. 28/pack, whereas Gold Flake 69 mm is priced at Rs. 48/pack

Gold Flake 64 mm in comparison to 69 mm differs in size of packaging and cigarette filter. However Product taste is largely similar.

Extensive point of sale advertisements for Gold Flake 64 mm launch observed in certain markets.

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69mm v/s 64 mm • Marginally superior product experience of 69 mm over 64 mm, but consumer is

unable to make out the difference between the products in a blind test • Blend and taste of product is very similar • Consumer is largely indifferent to the length of the stick Hence we conclude that introduction of 64 mm Gold Flake in overlapping markets with 69 mm Gold Flake is more likely to trigger downtrading due to high difference in the MRP and largely insignificant differences in the size of the cigarette, blend of tobacco and taste of the product. Although the management has guided for probability of downtrading to be restricted to 1 to 2%, we estimate it to be much higher. ITC will have to have rigorous check and control measures to manage the guided probability of downtrading. Margins improved with price hike to Rs. 2.8 per stick……… ITC had launched the 64 mm at Rs. 2.5 per stick at which we estimate the EBIT margins to be ~43%. However with the latest round of price hikes in Gold Flake RSFT, ITC has also hiked the prices of 64 mm to Rs. 2.8 per stick. Post this price hike, the EBIT margins are estimated to improve to ~52%, but continue to be significantly lower than the 69 mm EBIT margins at 70%. ……But downtrading and incremental volumes from 64 mm brand to be margin dilutive and contribute to lower absolute earnings We estimate that downtrading and incremental volumes generated from 64 mm Gold Flake (that earlier would probably accrue to 69 mm Gold Flake) is estimated to dilute brand margins. 69 mm Gold Flake being the most profitable brand for ITC the dilution in brand margins is estimated to lead to contraction in company margins. Also EBIT per stick of 64 mm being ~45% of the 69 mm, any incremental volume generated from 64 mm will also impact absolute earnings for ITC.

Gold Flake 64 mm launched in markets where competitor Godfrey’s brand Four Square is strong. We estimate ITC to be targeting volume market share gains

Gold Flake 64 mm EBIT margins improve from 41% to 52% after recent price hike from Rs. 25 to Rs. 28/pack of 10 sticks, but continue to remain lower than the 70% margins of Gold Flake 69 mm.

Downtrading to the relatively lower margin 64 mm product will lead to contraction in brand margin and ITC Cigarette segment EBIT margin

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Bristol 64 mm sharply brand margin dilutive on account of lower realizations

Bristol newly launched 64 mm – Regular size (69 mm) Bristol 64 mm point of sale advertisement at Maharashtra


Per stick Economics of Bristol brand

Bristol

69 mm 64 mm

Gross MRP 3.5 1.9

Excise duty 1.19 0.67

VAT 0.70 0.38

Dealer Margins 0.39 0.21

Net Realisations 1.22 0.64

RM 0.26 0.25

Manufacturing and Freight 0.3 0.3

EBIT per stick 0.66 0.10

EBIT Margin % 53.93 14.93


Bristol 64 mm launched in West India at realizations sharply lower than the 69 mm. Relative pricing discount of 64 mm v/s 69 mm in Bristol brand lowest among the 64 mm product launches. ITC has launched 64 mm under the Bristol brand as Bristol Deluxe Filter in Maharashtra state as per our findings. Bristol brand revenue contribution is estimated at ~9%. The 64 mm is priced at Rs. 1.9 per stick sharply lower than that of the 69 mm Bristol at Rs. 3.5 per stick. We observe that the relative pricing of 64 mm against the 69 mm in the Bristol brand is the lowest in comparison to other ITC and competing brands.

64 mm under Bristol launched as Bristol “Deluxe Filter”. Sharp pricing differential between 69 mm and 64 mm with 64 mm priced at Rs. 19/ pack of 10 sticks and 69 mm priced at Rs. 35/pack of 10 sticks.

Bristol 64 mm launched in Maharashtra. Point of sale advertisements initiated.

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Bristol is the only brand in which ITC has differentiated packaging size but maintained filter size. In conjunction with low pricing it is indicative of strategy to recruit new consumers to drive volume. Bristol is the only brand under ITC’s 64 mm product launches wherein the size of the pack has been differentiated but the filter size has been maintained. Taking into context the low product pricing, we estimate that ITC’s business strategy for Bristol 64 mm is to offer a similar quality product as 69 mm at an affordable price point to consumers. ITC is clearly targeting recruit of new mass consumers to drive cigarette volume growth Incremental volumes to be margin dilutive with significantly lower EBIT/stick We believe the 64 mm will generate incremental volumes for the company but will primarily be margin dilutive with uneventful contribution to cigarette segment EBIT. On account of lower pricing, EBIT margins for Bristol 64 mm is estimated at ~15%, significantly lower than that of Bristol 69 mm and ITC’s Cigarette segment EBIT margins at 54% and ~57% respectively. Bristol 64 mm absolute EBIT contribution is also estimated to be uninspiring at Rs. 0.1 per stick against ITC’s Cigarette segment EBIT/ stick at Rs. 0.9.

Only 64 mm product under ITC where in size of filter is similar but size of pack is differentiated. Hence with steep low pricing under Bristol brand, ITC is targeting volume generation from mass contraband consumers by leveraging on 69 mm Bristol brand strength.

Bristol 64 mm launched in markets of 69 mm, hence sharp pricing difference can trigger downtrading. Bristol 64 mm EBIT margins at ~15% significantly lower than the 69 mm at ~54%, thereby being margin dilutive

Bristol 64 mm EBIT/stick at R.s 0.1, significantly lower than 69 mm EBIT/stick of Rs. 0.7. Hence earnings accretion from Bristol 64 mm is insignificant.

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Capstan 64 mm launch is generating consumer interest in Uttar Pradesh

Capstan newly introduced 64 mm ‐ Regular size (69 mm) Capstan 64 mm advertisement in Patna‐ Bihar


Per stick economics of Capstan brand Capstan 69 mm 64 mm

Gross MRP 3 2Excise duty 1.19 0.67VAT 0.61 0.41Dealer Margins 0.39 0.26Net Realisations 0.80 0.66RM 0.23 0.21Manufacturing and Freight 0.30 0.30EBIT per stick 0.28 0.15EBIT Margin % 34.70 22.92


Capstan 64 mm launched in the brands largest market of Uttar Pradesh and Bihar ITC has launched 64 mm under its economic brand Capstan priced at Rs. 2 per stick. Capstan brand’s revenue contribution to ITC stands at ~9%. The company has launched the 64 mm in Uttar Pradesh state, which is the largest market for the Capstan Brand and Bihar. Capstan is indicated to have a ~50%+ market share in UP. Packet size and cigarette filter non – differentiated between 69 mm and 64 mm ITC has maintained the same size of the pack for the 69 mm and 64 mm Capstan brand. The size of the filter is also similar and difference in the size of the stick being visible only in the length of the tobacco. We interpret this as: Cigarette users who have been unable to uptrade to 69 mm Capstan brand will find it easier to do so due to lower price point and marginal difference in product quality due to similar size of the filter.

Capstan 69 mm with revenue contribution of ~9% is a popular brand in UP and Bihar. 64 mm under Capstan has been introduced in the brand’s main states

64 mm pack and filter size is similar to 69 mm. With affordable pricing, 64 mm can drive uptrading and/or preemptively manage downtrading pressure within the Capstan brand.

Capstan 64 mm priced at Rs. 20/pack of 10 sticks, 69 mm is priced at Rs. 30/pack of 10 sticks. MRP differential between 69 mm and 64 mm is lowest among the other 64 mm launches under ITC brands.

64 mm under Capstan launched as Capstan “Deluxe Filter”.

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In case of any visible sign of downtrading, it can be limited within the Capstan brand, hence preemptively restricting loss of consumers to competing brands. 64 mm Capstan targets to convert contraband cigarette and smokeless tobacco users. However shift of smokeless tobacco consumers to be challenging Capstan 64 mm is being launched in markets ‐ UP and Bihar wherein the contraband cigarette and smokeless tobacco market is extremely strong. With lower pricing at Rs. 2 per stick, ITC is aiming at converting the Re. 1 contraband cigarette users by offering a better quality product. Guthka is effectively banned in Bihar, and the ban is also to be implemented in UP from 1st April 2013. ITC is targeting to capitalise on the ban by shifting guthka users (pack priced at Rs. 2) to smoking tobacco category with cigarettes. However as stated above we estimate that smokeless tobacco users will largely seek to find alternatives in smokeless tobacco rather than shift to cigarettes. With 64 mm finding initial acceptance with consumers, the launch is estimated to contribute to ITC’s volume growth Interactions with channel partners have indicated that the 64 mm Capstan is generating consumer interest. We also observed numerous point of sale advertisements of the Capstan 64 mm launch. Hence considering the high brand saliency in the UP markets and the attractive price point, the 64 mm Capstan is expected to contribute to ITC’s cigarette volume growth. 64 mm launch is margin dilutive although dilution is relatively lower than that for the Gold Flake brand Capstan similar to Gold Flake brand is estimated to be margin dilutive for ITC with estimated EBIT margins at 23% against ~35 % for the 69 mm Capstan brand. The difference in the Gross MRP for 69 mm and 64 mm being lower than that of Gold Flake brand the EBIT per stick for 64 mm is 54% of Capstan 69 mm. This is relatively higher than that of Gold Flake 64 mm. Downtrading holds imminent risk for the Capstan brand also.

Capstan 64 mm strategic launch in markets indicative of focus to drive volumes by converting contraband and smokeless tobacco users. However shift of smokeless tobacco users to be challenging.

Initial response to Capstan 64 mm has been encouraging as per channel checks. Launch to be volume additive for ITC.

Capstan 64 mm is margin dilutive but dilution lower than the Gold Flake brand. We estimate that impact of addition to cigarette volumes from Capstan to be lower in terms of earnings accretion.

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Wills Flake 64 mm to improve the Flake brand profitability for ITC Wills Flake Regular size (69 mm) – newly launched 64 mm


Per stick Economics of Wills Flake brand Flake

69 mm 64 mm

Gross MRP 2.0 1.9Excise duty 1.19 0.67VAT 0.41 0.39Dealer Margins 0.26 0.25Net Realisations 0.14 0.60RM 0.15 0.14Manufacturing and Freight 0.3 0.3EBIT per stick ‐0.31 0.16EBIT Margin % nmf 26.07


69 mm and 64 mm Flake brand priced equitably ITC’s Wills Flake Special Filter at 69 mm is priced at Rs. 2 per stick. The company has recently launched the 64 mm variant in Kerala as Wills Flake Gold Coast priced marginally lower at Rs. 1.9 per stick. However on a loose stick basis both the brands retail at Rs. 2 per stick. Also Pack and Cigarette filter size being similar; consumers will be unable to decipher the difference. As exhibited, there is no difference in the size of the pack of the 69 mm and the 64 mm Flake brands. More importantly the size of the filter on the stick is also similar, on account of which the difference in the product quality will be limited. With similar retail price of Rs. 2 per stick, we estimate that consumers will be unable to decipher the difference between a 69 mm and 64 mm Flake. Retailers have initiated push of 64 mm Flake over 69 mm. MRP being same, Excise duty savings will be value accretive for ITC In Tamil Nadu we observed that, on consumer’s request for Rs. 2 stick of Flake brand, the retailers are pushing the 64 mm over the 69 mm. The 64 mm Flake brand reverses the economics of 69 mm Flake brand for ITC, as MRP being similar, ITC will benefit from the Rs. 0.5 per stick of excise duty savings. Hence the net realizations under Flake 64 mm improve by 4x from Rs. 0.15 per stick in the 69 mm to Rs. 0.60 per stick. With conversion

The new 64 mm product under Flake brand is priced equitably to the 69 mm at Rs. 2 per stick. With excise duty savings for ITC on 64 mm, the new launch improves the existing low margin profile of the brand

On account of similar product pricing, retailers are able to initiate push of 64 mm over 69 mm.

Marginal differentiation between Flake 69 mm and 64 mm : With similar filter size product quality is same as 69 mm. Size of pack is identical to 69 mm.

64 mm under Wills Flake launched as Flake “Gold Crest”.

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of consumers from 69 mm to 64 mm being initiated, the strategy with introduction of Flake 64 mm is estimated to be value accretive for ITC.

New 64 mm brand being test marketed under Wills called Wills Royal. The product’s packaging largely resembles Godfrey Phillips’s MacroPolo brand ITC’s new 64 mm brand Wills called Wiils Royal. Similar in packaging to GPI’s 64 mm brand MacroPolo


ITC is test marketing new brand in 64 mm category under Wills ITC has initiated test marketing of new 64 mm brand in the Kerala market under Wills called Wills Royal. The brand has been launched recently in mid September 2012. The product is priced at Rs. 19 for 10 sticks, similar to the other 64 mm cigarette launches by ITC. Brand packaging resembles Godfrey Phillip’s Macro Polo brand but as yet has not been launched in Macro Polo brand’s market. With a cursory observation of the new Wills Royal brand we find that the product resembles Godfrey Phillip’s Macro Polo brand. Godfrey has also launched a 64 mm under the Macro Polo brand priced at Rs. 20 for 10 sticks. The Wills Royal brand has not yet been launched in markets wherein MacroPolo is present i.e namely North India states. Hence in the current preliminary stages it is yet early to ascertain whether the business strategy is to compete with Macro Polo under the Wills Royal brand. Prudent business strategy by ITC to launch a new 64 mm brand under Wills rather than dilute the Wills Navy Cut 74 mm brand. Wills Navy Cut 74 mm primarily known as Wills contributes ~10% to ITC’s revenues. Any 64 mm introduction under the Wills Navy Cut would have diluted the premium brand equity of Wills Navy Cut 74 mm. Hence we estimate that so as to capitalise on the Wills premium brand equity and offer an economic proposition to the consumer with 64 mm ITC has launched the new Wills Royal brand.

ITC launches new 64 mm brand under Wills called Wills Royale. It is currently in test market phase, priced at Rs 19/pack of 10 sticks

Packaging of Wills Royale resembles competitor Godfrey Phillip’s brand Macro Polo.

New 64 mm brand under Wills will enable ITC to recruit new consumers by capitalizing on Wills’ brand equity.

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Do not expect downtrading threat for the Wills brand with the 64 mm launch Taking into account the sharp difference in the MRP and the size of the products ie. 74 mm and 64 mm, we do not expect downtrading to be a visible risk for the Wills brand. The 64 mm launch is estimated to generate incremental volumes for ITC from contraband users who would be willing to overlook the marginal difference in size between 69 mm and 64 mm so as to uptrade to the Wills brand.

Scissors Metro being test marketed in smaller towns targeting market share gains ITC has launched 64 mm under the Scissors brand as Scissors Metro. The product has been introduced in smaller towns in the state of Kerala. Scissors brand is the market leader in Kerala with an estimated market share of 50 – 55%. As indicated by ITC channel partners, the company is targeting gain in market share in strategic market locations wherein competing brands have considerable market presence. The channel partners shared that since the launch of Scissors Metro in the town of Nandapuram in August 2012, the volume of the main brand ‐ VST Industries’ Moments has halved from 4 mn sticks to 2 mn sticks. Presently ITC has not launched the 64 mm in the larger markets of 69 mm Scissors brand; hence threat of downtrading is limited in the near term.

Downtrading risk would have been amplified if ITC had introduced 64 mm under the current Wills brand. Hence the new 64 mm brand averts the threat.

Scissors 64 mm being test marketed in small towns in Kerala state. The product has achieved success in gaining volume market share from competing brands like VST’s Moments.

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Godfrey Phillips takes an aggressive stance in 64 mm cigarette segment to corner higher shelf space Godfrey Phillips had initiated the 64 mm product launch under the Four Square brand and the company has extended the 64 mm launch under the Tipper, Red & White and MacroPolo in the last 6 months. The company has also launched 64mm in non‐filter cigarette under the brand Cavenders.

Godfrey Phillips 64 mm product launches across brands and price per pack

Note: Godfrey has also launched 64 mm under the Red & White brand which is not present in the above picture


Aggressively meeting competitive pressure from ITC and increasing shelf space ITC has stepped up the introduction of 64 mm Gold Flake brand in Rajasthan; one of the main markets for Godfrey’s largest brand Four Square (contributes 58% to the company’s revenues). With ITC placing pressure on the company with a slew of 64 mm launches, Godfrey has also expanded the number of 64 mm launches under various brands and extended the market coverage with introduction in several West India states. Godfrey is also supporting the launches with extensive point of sale advertisements. With this strategy GPI is aiming to increase its product shelf space at retailer end so as to drive volume growth and mitigate competitive pressure. Economics of Godfrey’s 64 mm product launches relatively better than ITC Godfrey has priced its 64 mm launches competitively, similar to ITC however the difference in realizations between 69 mm and 64 mm are not as steep as observed in few of ITC’s main brands Gold Flake, Bristol, Scissors and Capstan. Hence the estimated impact of 64 mm launch on margin dilution and EBIT/ stick is relatively better for Godfrey than for ITC.

GPI has introduced 64 mm filter cigarette under 4 brands namely Four Square, Red & White, Tipper and MacroPolo. 64 mm non filter product is introduced under Cavendars brand.

The company has introduced the 64 mm products in several West India states and has initiated extensive point of sale advertisements.

Difference in net realization of GPI’s 69 mm and 64 mm is lower than ITC. Hence we estimate economics of GPI’s 64 mm product launches are relatively superior to ITC’s

Godfrey Phillips has significantly increased product activations in the newly developed 64 mm cigarette segment to meet competitive pressure from ITC.

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Four Square 64 mm competing with Gold Flake 64 mm on pricing

Four Square newly introduced 64 mm and Regular size (69 mm) 64 mm point of sale advertisement in Maharashtra


Per stick Economics of Four Square brand Four Square

69 mm 64 mm

Gross MRP 3.7 2.5Excise duty 1.19 0.67VAT 0.93 0.63Dealer Margins 0.41 0.28Net Realisations 1.17 0.93


Four Square 64 mm launched in 2 variants. Pack and filter size similar to Four Square 69 mm Godfrey has launched 64 mm in 2 variants under the Four Square brand. We found 64 mm Four Square (Red) launch in Maharashtra and Four Square (Green) launch in Rajasthan. The size of the pack and cigarette filter is similar to the Four Square 69 mm. This is against ITC introducing 64 mm Gold Flake in a smaller pack and filter relative to the 69 mm. The 64 mm is priced at Rs. 2.5 per stick against Rs. 3.7 per stick for 69 mm. 64 mm Four Square competes effectively with 64 mm Gold Flake with similar product pricing. Hence incremental volume for Gold Flake 64 mm brand estimated to be challenging. With Gold Flake 64 mm, ITC is targeting 69 mm Four Squares’ market. Hence product intervention with 64 mm under Four Square is imperative for Godfrey. We estimate that product quality between Four Square and Gold Flake is largely similar, hence product pricing is the critical point. Godfrey has priced the 64 mm Four Square at Rs. 2.5 per stick similar to the price point of Gold Flake 64 mm (at the time of its launch). Recently, ITC has hiked the 64 mm Gold Flake prices to Rs. 2.8 per stick however Four Square 64 mm price has been maintained. Both the competing 64 mm brands are also investing extensively in point of sale advertisements. We estimate that on account of the increase in competitiveness by Godfrey Phillips, Gold Flake 64 mm brand’s ability to generate incremental volumes from shift of Four Square brand users is to be challenging.

64 mm launched under Four Square brand launched as Four Square “Prime Blend”. Four Square 64 mm priced at Rs. 25/pack of 10 sticks, while 69 mm is priced at Rs. 37/pack of 10 sticks. Four Square Red 64 mm launched in Maharashtra. Four Square Green 64 mm launched in Rajasthan.

Four Square 64 mm pricing is equivalent to Gold Flake’s 64 mm pricing at time of its launch. GPI is also aggressively promoting 64 mm launch in markets wherein ITC’s Gold Flake 64 mm is present. Hence incremental volumes from Gold Flake 64 mm to be a challenge for ITC

64 mm pack and filter size is similar to 69 mm. Product quality is largely similar.

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Margin dilution impact on Four Square brand from 64 mm is marginal. Relative to Gold Flake 64 mm, the economics for Four Square brand is better. Net realization difference between Four Square 69 mm and 64 mm is marginal. 64 mm realizations are estimated at Rs. 0.93 which is lower than Rs. 1.17 for 69 mm. Hence the margin dilution between Four Square 69 mm and 64 mm is marginal. In comparison to its main competing brand Gold Flake, the 64 mm net realizations for Four Square is ~80% that of the 69 mm while that under the Gold Flake brand in ~60%. Hence the quantum of margin dilution and decrease in absolute EBIT per stick is estimated to be lower for the Four Square brand. Inspite of Godfrey pricing Four Square 64 mm competitively against ITC’s Gold Flake brand, prima facie the economics are estimated to be relatively better, a positive for Godfrey.

Aggressive brand investments undertaken for Four Square brand

Consumer promotion scheme advertisement for Four Square Kings (left picture) and Four Square brand (right pictire) at point of sale (Mumbai – Maharashtra)


We notice that along with aggressive launch of 64 mm cigarette under the Four Square brand, Godfrey has also stepped up competitiveness in the Kings (84 mm) and RSFT (69 mm) variants of the Four Square brand. The company is undertaking initiatives to step up presence in the Kings category and maintain/gain volume market share in the 69 mm category. We have noticed significant presence of point of sale advertisements promoting schemes for consumers across outlets in Mumbai. Mumbai is one of the main markets for the Four Square brand. Hence we estimate that Godfrey is also focusing on a massive volume strategy in its mainstay brand of Four Square.

Four Square 64 mm margins marginally lower than 69 mm as excise duty savings lowers impact of difference in realizations. Hence although GPI has priced Four Square competitively to Gold Flake 64 mm, the economics are relatively better

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64 mm launched in the non filter segment under Cavendars brand Cavanders newly launched 64 mm non filter – Regular size (69 mm)


Godfrey also launches 64 mm in the non filter segment. Company is clearly focused on defending its current cigarette volume market share. Godfrey has launched a 64 mm in the non filter cigarette segment in Gujarat under the Cavandars brand. The product is priced at Rs. 2 per stick against the 69 mm product price of Rs. 3.7 per stick. We observe that Godfrey is being broad based in its product launches under the 64 mm segment. Introductions in the non filter segment also indicate the clear focus of the company in defending its current volume market share across brands and segments.

GPI launches 64 mm non filter under the Cavandars brand in. The product is priced at Rs. 20/pack of 10 sticks at a discount to the 69 mm product price of Rs. 37/pack of 10 sticks. 64 mm launch found in the state of Gujarat.

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Godfrey’s pricing of MacroPolo 64 mm estimated to contribute to similar net realizations as 69 mm Macro Polo brand was launched by Godfrey Phillips as a flanking strategy for the main brand Four Square to manage downtrading consumers from Four Square within the Godfrey portfolio of brands. MacroPolo 69 mm was launched with an aggressive pricing of Rs. 28/pack of 10 sticks to compete effectively against ITC’s brands of Bristol and Flake. The product has a very attractive packaging, and the launch of the product was accompanied by consumer and retailer promotions.

MacroPolo Regular size (69 mm) – newly launched 64 mm MacroPolo 64 mm point of sale advertisement at Uttar Pradesh


MacroPolo 69 mm promotion ad in Mumbai

Per stick economics of MacroPolo brand Macro Polo 69 mm 64 mm

Gross MRP 2.8 2Excise duty 1.19 0.67VAT 0.70 0.50Dealer Margins 0.31 0.22Net Realisations 0.60 0.61



64 mm launched under MacroPolo in UP as Macro Polo Prince. Size of packaging similar to 69 mm but size of the filter is smaller Godfrey has launched 64 mm under Macro Polo brand as Macro Polo Prince. We came across the launch in the state of UP. We observe that similar to certain other 64 mm launches the size of the packaging is similar. However there is a visible difference in the size of the cigarette filter, on account of which there is a difference in the product quality between 69 mm and 64 mm.

GPI launches 64 mm under MacroPolo brand as MacroPolo “Prince”. 64 mm product priced at Rs. 20/pack of 10 sticks as against 69 mm product price of Rs. 28/pack of 10 sticks

64 mm pack size is similar; however size of cigarette filter differs. Hence there is a difference in the 69 mm and 64 mm product quality

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Godfrey’s pricing of the 64 mm product estimated to sustain absolute net realizations of the MacroPolo brand. Hence margins estimated to improve. The company has priced 64 mm MacroPolo Prince at Rs. 2 per stick as against the Rs. 2.8 per stick pricing of the 69 mm. After ITC’s pricing of the 64 mm Flake (Rs. 1.9 per stick nearly similar to the 69 mm at Rs. 2 per stick), it is Godfrey’s pricing for the Macro Polo 64 mm that is at a lower discount to the 69 mm. On account of the pricing and the Rs. 0.50 excise duty savings, we estimate Godfrey to generate similar absolute net realizations from the 64 mm as the 69 mm i.e Rs. 0.6. Hence margins for 64 mm are estimated to be higher than the 69 mm product. In a scenario of possible downtrading or recruitment of new consumers by the 64 mm variant, we estimate brand margins to improve and absolute EBIT to sustain, a positive for Godfrey Phillips.

Tipper 64 mm being launched aggressively in Maharashtra

Tipper newly launched 64 mm pack Point of sale advertisement in Maharashtra


Tipper 64 mm launched in Maharashtra. Expected to enable Godfrey to sustain growth in Tipper filter brand We observe that Godfrey has initiated an aggressive launch of 64 mm under Tipper brand in Maharashtra with product pricing of Rs. 2 per stick. Tipper brand revenue contribution is marginal at 2% to 3%. The pricing is in line with that observed for majority of the 64 mm product launches. Godfrey had launched 69 mm filter cigarette in Tipper brand after the steep hike in excise duty for non filter cigarette segment so as to migrate consumers to the filter segment. We view the 64 mm launch a step in the similar direction to maintain traction in the Tipper filter brand and prevent probable loss of consumers to competing 64 mm launches.

On account of excise duty savings under 64 mm, the absolute net realizations for the MacroPolo brand is estimated to be sustained at Rs. 0.6 per stick. Hence the 64 mm product EBIT margins estimated to be higher than 69 mm.

64 mm launched under Tipper brand in Maharashtra at Rs. 20/pack of 10 sticks. Aggressive point of sale advertisements observed of the 64 mm product.

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VST Industries 64 mm non filter pricing the most aggressive amongst the product launches in the 64 mm category Charminar regular size (69 mm) non filter and newly introduced 64 mm


VST Industries has launched 64 mm under the Charminar brand in non filter segment. Aggressive pricing estimated to impact margins. VST has launched 64 mm in the Charminar brand in Maharashtra as per our findings. The size of the packaging is distinctly smaller than the 69 mm. 69 mm non filter Charminar is priced at Rs. 2.9 per stick whereas the 64 mm is priced at Rs. 1.5 per stick. The product pricing of 64 mm by VST is the most aggressive in the 64 mm category, wherein Godfrey has also priced its introduction in the 64 mm non filter at Rs. 2 per stick. VST’s pricing being at a steep discount to the 69 mm, EBIT margins in 64 mm relative to 69 mm is estimated to be lower. As per our channel checks the company is yet to launch 64 mm in the filter segment. Hence the initial launch by VST in 64 mm is estimated to hold negative impact for the company.

VST launches 64 mm in the non filter segment under the Charminar brand. 64 mm product launched as Charminar “Regular”. Pricing post competitive in the 64 mm space at Rs. 15/pack of 10 sticks.

Currently VST and Golden Tobacco have launched 64 mm products under a single brand respectively.

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Golden Tobacco launches 64 mm in the Panama brand to remain competitive 64 mm launched under Panama brand

Golden Tobacco has also launched 64 mm filter cigarette under the company’s main brand Panama in the state of Kerala as per our observations. The product is priced at Rs. 19 for 10 sticks. Considering series of product launches in the 64 mm segment by ITC in Kerala state (under 3 brands – Scissors, Wills and Flake), Golden Tobacco’s 64 mm launch in this context is so as to remain competitive.


Golden Tobacco launches 64 mm filter cigarette in the Panama brand. Product priced at Rs. 19/pack of 10 sticks. 64 mm product launch observed in Kerala state.

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Smoke‐less Tobacco category chewing into Cigarettes In the past 5 years, growth in Cigarette category has primarily been driven by pricing with flat to marginal positive volume growth. However Tobacco industry volume growth has been robust primarily driven by strong volumes in the Smokeless tobacco industry. Our interactions with channel partners in Cigarette segment has indicated that perceived threat from smokeless tobacco has increased in the past few years, with loss of new consumers to smokeless tobacco and inability to shift alternative smoking tobacco product consumers like bidi users to cigarettes. While Smokeless tobacco has been the major tobacco industry in North and West Indian states, the market presence in South Indian states has increased significantly driven by migration patterns.

Premium smokeless tobacco products occupy significant shelf space Note the shelf space for paan masala and smokeless tobacco products

Note: 200 sq. ft tobacco products retail outlet in up‐market Rajarampuri ‐ Kolhapur Note: Paan bidi shop at Hajipur – Bihar (Gutkha has been banned in

the state)


Addition of new consumers in Tobacco industry is largely being observed in smokeless tobacco segment relative to smoking tobacco. Majority of new middle and lower class consumers in the age group of 15 – 18 years are opting for smokeless tobacco over smoking tobacco. Main drivers being adoption of peer consumer habit that continues to be dominated by smokeless tobacco and wide range of products at diverse price points including several that are affordably priced. Hence the Cigarette sector has been losing out on potential new consumers Labour class consumption habit continues to be predominated by smokeless tobacco. Migration from North and Central Indian states shifting habits in the smoking tobacco denominated states. Smokeless tobacco has been developing into a sizeable market in the Cigarette habit dominated South India states. The major contributor being migration of laborers from North and Central India based states. A brief survey by one of ITC’s channel partners in South India of his retailers startlingly revealed that absolute revenues generated from Cigarettes was equivalent to Smokeless tobacco. Hence the direct threat from the smokeless tobacco industry to Cigarettes has intensified in the recent few years.

Smokeless tobacco category volume growth continues to outperform the Cigarette volume growth. Intensity has increased in the past 5 years.

New mass consumers in age group of 15 – 18 years continue to opt for smokeless tobacco products as dominance of smokeless tobacco on peer consumption habit continues and wide product portfolio in terms of quality and pricing.

Competitive risk from Smokeless tobacco market for Cigarettes has increased.

Smokeless tobacco increasing market presence in cigarette dominated states in South India. Trend is being driven by migration pattern.

60 of 82


Smoking tobacco industry losing out to smokeless tobacco industry. Shift of Bidi consumers to smokeless tobacco being witnessed The Indian Bidi industry has severaly contracted in the last decade. Steep increase in product pricing is exerting pressure on bidi volumes. In the table below we have depicted broad indicators as provided by the distributor. However against the probable assumption that Cigarette being a direct substitute would have benefited from change in consumption habit of Bidi consumers, the shifting gain has largely accrued to Smokeless tobacco products. The main reasons for the shift being affordability and better product experience. Ratio of bidi : cigarette users

< CY2000 CY2011

Kerala Pan India Kerala Pan India

Bidi 8 25 1 8Cigarette 1 1 1 1

Source: ITC Channel partner in South India

Tobacco based toothpowder found Steep pricing of Bidi at Rs. 12/ pack of 25 sticks widely


Large consumer base exists for premium smokeless tobacco products that are of superior quality. Hence competitive pressure for cigarette category from smokeless tobacco not restricted to only affordable mass products In our findings we observed that apart from mass smokelesss tobacco products that are easily available, there is a large market for premium smokeless tobacco products. In certain high end outlets that retail tobacco products, the premium smokeless tobacco products occupy higher shelf space than King size and imported cigarette brands. Hence smokeless tobacco products offer wide choice in terms of pricing and product quality to users.

Bidi category has contracted sharply. Bidi product users are overlooking directproduct substitute ie. Cigarettes and opt for smokeless tobacco products. Hence Cigarette category’s ability to leverage on the opportunity is being limited.

Cigarette category faces competitive pressure also at the high end from premium smokeless tobacco products that are of superior product quality.

Premium Smokeless tobacco products occupy higher shelf space than importedand king size cigarette brands in high end retail tobacco outlets

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Ban on Guthka does not hold the perceived market opportunity for Cigarette segment as consumers most likely to shift to readily available alternatives in smokeless tobacco Plain tobacco easily available in states where guthka ban has been imposed

Note: Retail outlet in Karad ‐ Maharashtra


14 states in India have announced ban on sale of guthka products in CY12. Inspite of the ban media reports and interactions with channel partners indicate that black market is certainly present. Rs. 2 per packet Guthka is available at Rs. 8 per packet in the black market. Inspite of 4x increase in product price, consumer demand for guthka continues unabated. In the medium to long term as the ban is rigorously implemented, we believe that Guthka users will not easily shift to smoking tobacco namely Cigarettes against the prevailing perception. There are several smokeless tobacco products available to guthka users ‐ paan masala + tobacco, khaini, plain tobacco and paan. These products provide similar product experience as guthka and would largely be the preferred choice to shift mode of tobacco consumption. Hence ban on guthka does not hold high market potential for the Cigarette category.

Guthka users ready to pay 4x the price for products in the black market. Hence due to high level of stickyness – probability of guthka consumers shifting to alternative smokeless tobacco products is higher

Guthka users have several alternative options under smokeless tobacco category – paan masala+tobacco, khaini, plain tobacco and paan.

We estimate Cigarette category has limited ability to capitalise on the opportunity of ban on guthka.

Plain tobacco products can be utilized by guthka users in developing alternative products for consumption. Plain tobacco easily available in states wherein guthka ban has been imposed.

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64 mm can dent the Contraband cigarette market: But growth will be protracted The Contraband cigarette industry has scaled up significantly in the past few years. The segment currently represents ~15% of total Cigarette volumes. Generally contraband products retail for as cheap as Rs 5 for 10 sticks to Rs 25 per 10 sticks. Product affordability has been the key driver for expansion in the contraband category. The present organized incumbents like ITC have been unable to compete on pricing with the contraband segment. However now 64 mm has presented the opportunity to introduce products at a lower price point and tap the potential of converting contraband users. Contraband cigarette brands acquired across states during our road trip


69 mm cigarette segment has been facing threat from the contraband cigarette market. The 69mm cigarette segment volume growth has lagged that of the Cigarette category (including contraband) on account of steep price growth, new consumers opting for contraband and smokeless tobacco and possible downtrading. Contraband cigarettes in 69 mm are primarily available at Re. 1 per stick, this is against the majority of the product pricing at Rs. 3 to Rs.5 per stick in the organized filter cigarette segment. Hence Cigarette companies have been unable to counter the contraband market with their current product portfolio. Certain premium (Rs. 2 – Rs. 2.5 per stick) contraband cigarettes are enjoying good success. There are also certain contraband cigarettes priced at Rs. 2 to 2.5 per stick in the 69 mm on account of better product quality. Midland, Good Times are certain brand names available in the premium contraband market. The manufacturers of some of the contraband brands are said to be Ex – ITC Cigarette OEM’s. In Kerala state Midland brand has exhibited strong growth. The packaging and the brand name has been able to establish the impression of lower priced imported brand on mass consumers.

Contraband cigarette market has significantly increased market presence to ~15% of the total Cigarette market.

Contraband cigarettes priced largely at Re1/stick. However, good quality contraband cigarettes also available at Rs. 2 to 2.5/stick

Contraband cigarette brand Midland has achieved successful market presence in small towns in Kerala state

Decreasing affordability of RSFT (69 mm) brands has led to increase in consumer addition to contraband market.

Certain contraband cigarette manufacturers are ex – ITC OEM’s. Hence these products are also of good quality

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64 mm opportunely places cigarette companies to tap volume from contraband cigarettes. ITC relatively better placed to capitalise on generating volumes from contraband market. With 64 mm, cigarette companies now have the ability to price products competitively against contraband cigarettes. We estimate companies that are aggressive in their pricing and distribution strategy to gain most in volume terms from the contraband segment. With rising competitive intensity in the 64 mm market, We believe that ITC with launches in 6 brands, competitive pricing and largest market presence is better placed to capitalise on the contraband market opportunity.

Contraband cigarette market is an important market opportunity for 64 mm. 64 mm has enabled cigarette companies to launch products at lower price points to compete effectively with contraband cigarette

ITC with aggressive 64 mm product launches under 6 brands, distribution strength, market leadership is best placed to capitalise on incremental volumes from contraband cigarette market.

64 of 82


Key Conclusions We find the cigarettes category is now seeing dynamic changes with new product introductions and regulatory changes some positive and some negative for the sector. We believe the organized cigarettes sector has the potential to register volume growth over the medium‐term even as incidence of smoking has continued to fall. The key reasons which can contribute to rise in cigarette category growth are as follows: 1. Bidis price growth has been significant in the last 5 years with the current MRP of Rs

12 for 25 sticks. While the transition bidi consumers to smokeless tobacco are more frequent but cigarettes at right price points provide an attractive avenue to coax consumers.

2. The proliferation of 64mm products in these markets could help the cigarette companies to attract the consumers.

3. Contraband has continued to grow at fast pace and currently constitutes 15% of the cigarettes market. Contraband products are generally of poor quality (except a few) and attracting these consumers will help the cigarette companies to register volume growth.

4. Ban on Gutkha if implemented for a fairly long duration could attract the potential new consumers to cigarettes which can generate healthy volume growth.

Thus, we see certain positives for the sector and believe that the sector has the potential to register volume growth over the medium term but while volume growth could see traction we believe that ITC may not be able to meet the long‐term expectations as we continue to see strong headwinds for the sector. The key headwinds are as follows: 1. Pricing efficacy is declining as state VAT has continued to rise at rapid pace. State

VAT paid by ITC has grown at 25% CAGR over the last 5 years. 2. Ban of Gutkha by 14 states will lead the states to further hike VAT on cigarettes. 3. Considering the flattish to marginal volume growth in FY13E, excise duty hikes in

FY14 cannot be ruled out. 4. Competitive intensity in the category is rising with GPI taking an aggressive stance. 5. Down trading risks are more imminent now with the introduction of low priced

64mm cigarettes. 6. FCTC regulations including harsher pictorial warnings and plain packaging pose

severe long‐term risks for the sector. Hence, we believe the negatives outweigh the positives for the sector while the steep valuations leave little room for negative surprises which will reduce the defensive capabilities of the stock. We continue to remain negative on ITC on account of category changes, rising regulatory risks and steep valuations. We maintain our Sell recommendation on the stock.

ITC Massive volume strategy in the making

FMCG: Company Update 8 November 2012


Massive volume strategy in the making: In our survey we observed that ITC has launched 7 new products which include 6 new products in the 64mm category and one in 69mm (Will Navy Cut in South India) product. The pricing of 64mm products across the industry is very aggressive with the cheapest product at Rs 1.5/stick (VST’s Charminar) and most expensive at Rs 2.8/stick (ITC’s Gold Flake). We find the cigarettes industry is gearing up for a massive volume strategy as State VAT continues to rise reducing the pricing efficacy for cigarettes category. Thus, cigarette companies are looking to win more consumers and drive volume growth with attractive price points. Pan India launch of 64mm over the next 6‐12 months: Price points may not be materially different: Retailers in UP indicated that the Capstan 64 mm is witnessing reasonable off‐take and the product has gained market acceptance. In Kerala, Scissors Metro (64 mm variant in Scissors brand) has gained significant market share from VST’s Moments brand in the markets of launch. We believe cigarette companies are likely to accelerate the pan‐India launch of 64mm products over the next 6‐12 months, failing which, market share loss to competition is imminent. We also believe the price points are unlikely to be materially different as the current price points are attractive to upgrade Bidis and contraband cigarette consumers while the competitive intensity is likely to keep prices in check. But the strategy is margin dilutive: While volume growth is critical for consumer companies, we find the 64mm strategy is margin dilutive for ITC on account of down trading risks as the EBIT margins and absolute EBIT/stick for 64mm are significantly lower than the company average. The 69mm Goldflake is the most profitable product for ITC with current operating margins at ~70% with an EBIT contribution of 36% (of cigarettes EBIT FY13E) while the 64mm GoldFlake has EBIT margins at ~52% with an absolute EBIT of Rs 0.7 as compared to Rs 1.5 for 69mm. We believe the differences between product quality of 69mm and 64mm are not very significant and thus down trading will translate to margin dilution and sluggishness in EBIT growth. Smokeless tobacco continues to remain at epidemic levels: 14 states have banned Gutkha products but we found that smokeless tobacco continues to remain at epidemic levels in India. We also found that consumers more readily shift from bidis and cigarettes to smokeless tobacco than vice‐versa. We believe that ban of smokeless products is unlikely to have any significant impact on cigarette consumption as consumers continue to have a number of alternatives. Maintain Sell recommendation on ITC with price target of Rs 260: ITC’s cigarette business currently trades at PER of 28x on FY14E earnings, inline with consumer staples sector which is not sustainable in the long run. Thus considering the rising strategic risks, increasing state VAT (now a bigger risk than excise duty), regulatory risks (FCTC regulations) and stretched valuations we believe the risk to reward ratio is highly unfavorable for ITC. We maintain our Sell recommendation on the stock with a price objective of Rs 260 in‐line with our DCF valuation.

SELL ITC IN | CMP RS 289

TARGET RS 260 (‐10%) Company Data

O/S SHARES (MN) : 7863MARKET CAP (RSBN) : 2260MARKET CAP (USDBN) : 41.552 ‐ WK HI/LO (RS) : 299 / 189LIQUIDITY 3M (USDMN) : 31.8FACE VALUE (RS) : 1

Share Holding Pattern, %

FII / NRI : 49.4FI / MF : 34.1NON PROMOTER CORP. HOLDINGS : 5.7PUBLIC & OTHERS : 10.7

Price Performance, % 1mth 3mth 1yr

ABS 4.2 10.8 36.6REL TO BSE 5.3 1.8 29.9

Price Vs. Sensex (Rebased values)

70

100

130

160

190

220

250

Apr‐10 Dec‐10 Aug‐11 Apr‐12

ITC Rel. to BSE

Source: Bloomberg, Phillip Capital Research

Other Key Ratios

Rs mn FY12 FY13E FY14E

Net Sales 247,984 286,624 333,297Ebidta 88,486 104,102 121,954Net Profit 61,621 71,586 83,477EPS, Rs 8.0 9.2 10.7PER, X 36.3 31.6 27.1EV/EBIDTA, % 25.0 21.1 17.8EV/Net Sales, x 8.9 7.7 6.5ROE, % 35.5 35.4 35.5Source: PhillipCapital India Research Est.

– 66 of 82 –

8 November 2012 / INDIA EQUITY RESEARCH / ITC COMPANY UPDATE

Income Statement Y/E Mar, Rs mn FY11 FY12 FY13E FY14E

Net sales 211,676 247,984 286,624 333,297

Growth, % 16.6 17.2 15.6 16.3

Total income 214,590 251,738 290,003 337,097

Operating expenses ‐140,464 ‐163,252 ‐185,900 ‐215,143

EBITDA 74,126 88,486 104,102 121,954

Growth, % 22.1 19.4 17.6 17.1

Margin, % 35.0% 35.7% 36.3% 36.6%

Depreciation ‐6,559 ‐6,988 ‐8,030 ‐8,701

EBIT 67,567 81,499 96,072 113,253

Growth, % 22.1 19.4 17.6 17.1

Margin, % 35.0 35.7 36.3 36.6

Interest received/(paid) ‐684 ‐779 ‐806 ‐867

Other Income 5,798 8,253 8,860 10,374

Pre‐tax profit 72,682 88,973 104,125 122,760

Tax provided ‐22,806 ‐27,352 ‐32,539 ‐39,283

Profit after tax 49,876 61,621 71,586 83,477

Net profit 49,876 61,621 71,586 83,477

Growth 22.9 23.5 16.2 16.6

Unadj. shares (m) 7,713 7,738 7,818 7,818

Wtd avg shares (m) 7,541 7,541 7,818 7,818

Balance Sheet Y/E Mar, Rs mn FY11 FY12 FY13E FY14E

Cash & bank 22,432 28,189 61,891 87,959

Debtors 8,851 9,860 11,190 13,012

Inventory 52,692 56,378 64,524 72,296

Loans & advances 18,032 18,311 20,716 23,866

Total current assets 102,007 112,739 158,321 197,134

Investments 55,545 63,166 43,633 43,633

Gross fixed assets 127,770 141,519 159,019 174,019

Less: Depreciation 44,208 50,452 60,880 69,581

Add: Capital WIP 13,226 22,763 16,697 18,272

Net fixed assets 96,789 113,830 114,837 122,711

Non‐current assets 4,083 4,243 0 0

Total assets 258,424 293,978 318,278 364,965

Current liabilities and Provisions 44,735 48,087 54,176 59,953

Total current liabilities 44,735 48,087 54,176 59,953

Non‐current liabilities 13,094 13,861 891 891

Total liabilities 98,892 106,059 101,957 110,612

Paid‐up capital 7,738 7,818 7,818 7,818

Reserves & surplus 151,794 180,100 208,502 246,534

Shareholders’ equity 159,532 187,918 216,321 254,353

Total equity & liabilities 258,424 293,977 318,278 364,965


Cash Flow Y/E Mar, Rs mn FY11 FY12 FY13E FY14E

Pre‐tax profit 72,682 88,973 104,125 122,760

Depreciation 6,559 6,988 8,030 8,701

Chg in working capital ‐4,336 1,324 ‐4,500 ‐4,090

Total tax paid ‐22,637 ‐26,643 ‐41,266 ‐39,283

Cash flow from operating activities 52,268 70,642 66,389 88,088

Capital expenditure ‐11,834 ‐24,029 ‐9,037 ‐16,575

Chg in investments 1,724 ‐7,621 19,533 0

Cash flow from investing activities ‐10,110 ‐31,650 10,496 ‐16,575

Free cash flow 42,158 38,991 76,885 0

Equity raised/(repaid) 3,920 80 0 0

Dividend (incl. tax) ‐40,015 ‐40,890 ‐43,172 ‐45,444

Cash flow from financing activities ‐36,095 ‐40,810 ‐43,172 ‐45,444

Net chg in cash 6,063 ‐1,819 33,713 26,069

Valuation Ratios & Per Share Data FY11 FY12 FY13E FY14E

EPS, Rs 6.5 7.96 9.16 10.7

BVPS, Rs 21.2 24.9 27.7 32.5

DPS, Rs 4.6 4.7 4.8 5.0

Return on assets (%) 20.5 22.5 23.6 24.6

Return on equity (%) 33.2 35.5 35.4 35.5

Return on Invested capital (%) 39.7 43.8 46.8 50.7

RoIC/Cost of capital (x) 5.0 5.5 5.9 6.4

RoIC ‐ Cost of capital (%) 31.8 35.9 38.9 42.8

Return on capital employed (%) 24.4 27.0 28.3 29.5

Cost of capital (%) 7.9 7.9 7.9 7.9

RoCE ‐ Cost of capital (%) 14.5 16.5 19.1 20.4

Asset turnover (x) 1.7 1.8 1.9 2.0

Sales/Total assets (x) 0.9 0.9 0.9 1.0

Sales/Net FA (x) 2.2 2.4 2.5 2.8

Working capital/Sales (x) 0.2 0.1 0.1 0.1

Receivable days 15 15 14 14

Inventory days 91 83 82 79

Payable days 116 107 106 102

Current ratio (x) 2.3 2.3 2.9 3.3

Quick ratio (x) 1.1 1.2 1.7 2.1

Interest cover (x) 98.8 104.6 119.1 130.6

Dividend cover (x) 1.4 1.8 1.9 2.1

PER (x) 44.7 36.3 31.6 27.1

Price/Book (x) 13.7 11.6 10.4 8.9

EV/EBIT (x) 29.8 25.0 21.1 17.8

EV/NOPLAT (x) 43.4 36.0 30.7 26.2

EV/CE 10.3 9.0 8.3 7.1

EV/IC (x) 17.2 15.8 14.4 13.3

– 67 of 82 –

Hindustan Unilever Strong operational performance



We met several channel partners of Hindustan Unilever in our survey and we received a strong and a positive feedback for the company. Our key findings for the company are as follows: Zero Day Inventory distribution model garnering positive reviews: HUL has been rolling out the new Zero Day Inventory distribution model in Tier 1 and Tier 2 cities. The new distribution model reduces the investment requirements by the distributor on inventory and significantly curtails the storage space for inventory. As HUL has reduced the investment requirements the company is encouraging distributors to increase investment on quality manpower to improve the sales throughput and provide better quality of service to the retailers. We have noted that the model has been received very well by the distributors who are able to manage inventory more efficiently and earn a higher return on capital employed. Detergents continue to perform very well: We received a positive feedback across India for HUL’s detergents segment. The company’s retail as well consumer initiatives have yielded strong results and the company has managed to gain market share in the regions of our visit. Distributors indicated that HUL has successfully managed to ward off competition from new entrants and consolidate its leadership position. Skin care and Hair care see strong growth: The channel partners indicated that premiumisation trend continues to be strong in both Skin care and Hair care category. Dove continues to grow faster than the market growth rate. We also observed that facewash category is registering revenue growth of 60%‐70% at various distributor and retailer points with uptrading to premium products. Improvement in Toothpaste segment will remain protracted: In the recent months HUL has taken initiatives to drive growth in the oral category with the launch of new products in the Pepsodent. In our survey we noted that Pepsodent continues to remain sluggish, we believe that volume growth will be protracted in the wake of new media initiatives. Foods and Beverages have seen flattish trends: We generally observed flattish trends for the majority of foods portfolio with growth in Kissan sauces but tea has witnessed de‐growth. Coffee is witnessing growth but the indicative figures have not been inspiring. Operating metrics continue to be robust but steep valuations force us to take a Neutral stance: We have observed that the company has managed to step‐up its operating performance in most of the key categories and geographies we visited but considering the steep valuations, room for negative surprises is limited. We believe in the wake of slower economic growth and possibility of a slowdown in detergents category (base effect and mature category) we maintain our Neutral stance on the stock.

NEUTRAL HUVR IN | CMP RS 532




PROMOTERS : 52.5FII / NRI : 20.4FI / MF : 9.9NON PROMOTER CORP. HOLDINGS : 3.1PUBLIC & OTHERS : 14.2


ABS ‐4.1 15.9 42.9REL TO BSE ‐3.0 6.9 36.2


60

100

140

180

220

260


HUL BSE Sensex


Other Key Ratios



– 68 of 82 –

8 November 2012 / INDIA EQUITY RESEARCH / HINDUSTAN UNILEVER COMPANY UPDATE


Net sales 193,810 217,356 255,579 291,341

Growth, % 10.6 12.1 17.6 14.0

Other operating income 6,274 6,591 10,587 12,114

Total income 200,084 223,947 266,166 303,455


EBITDA 29,513 35,697 46,112 54,153

Growth, % 1.8 21.0 29.2 17.4

Margin, % 15.2 16.4 18.0 18.6

Depreciation ‐2,208 ‐2,183 ‐2,283 ‐2,458

EBIT 27,304 33,514 43,829 51,696

Growth, % 1.8 21.0 29.2 17.4

Margin, % 14.1 15.4 17.1 17.7


Pre‐tax profit 27,302 33,502 43,641 51,510

Tax provided ‐5,769 ‐7,384 ‐10,158 ‐13,122

Profit after tax 21,533 26,118 33,483 38,388

Growth, % 2.4 21.3 28.2 14.7

Extraordinary items: Gains/(Losses) 1527 1189 7109 0

Unadj. shares (m) 2,180 2,160 2,162 2,162

Wtd avg shares (m) 2,180 2,160 2,162 2,162


Cash & bank 16,285 18,300 27,888 35,349

Debtors 9,432 6,790 8,358 9,815

Inventory 28,113 25,167 27,986 30,215

Loans & advances 8,167 8,820 10,607 12,091

Other current assets 354 354 366 366


Investments 12,607 24,382 24,382 24,382



Add: Capital WIP 2,888 2,155 2,155 2,155

Net fixed assets 24,579 23,629 24,847 26,389

Other Non‐current assets 2,097 2,142 2,142 2,142

Total assets 101,631 109,584 127,183 141,357

Current liabilities 57,828 54,994 61,888 69,248

Provisions 20,300 16,850 17,733 20,593


Non‐current liabilities 4 2 176 346


Paid‐up capital 2,160 2,162 2,162 2,162






Pre‐tax profit 27,302 33,502 43,641 51,510

Depreciation 2,208 2,183 2,283 2,458

Chg in working capital ‐6,183 2,158 310 2,398

Total tax paid ‐2,723 ‐6,320 ‐10,876 ‐12,233



Chg in investments 34 ‐11,775 0 0

Cash flow from investing activities ‐2,392 ‐13,009 ‐3,499 ‐3,998

Free cash flow 18,212 18,513 31,858 40,135

Equity raised/(repaid) ‐11,597 ‐9,206 0 0



Net chg in cash ‐9,882 ‐8,446 2,482 7,469


EPS, Rs 9.9 12.1 15.5 17.8

BVPS, Rs 12.2 16.3 15.8 22.6

DPS, Rs 6.5 7.5 16.5 9.5

Return on assets (%) 22.1 24.7 28.4 28.7

Return on equity (%) 82.1 84.6 96.5 92.5





Cost of capital (%) 10.6 10.6 10.6 10.6


Asset turnover (x) 33.3 50.9 89.2 112.6


Sales/Net FA (x) 7.9 9.0 10.5 11.4

Working capital/Sales (x) ‐0.1 ‐0.2 ‐0.2 ‐0.1

Fixed capital/Sales (x) 0.2 0.2 0.2 0.2

Receivable days 17.8 11.4 11.9 12.3

Inventory days 52.9 42.3 40.0 37.9

Payable days 123.7 106.6 102.7 101.4

Current ratio (x) 0.8 0.8 0.8 1.0

Quick ratio (x) 0.5 0.5 0.5 0.6


PER (x) 53.9 44.0 34.3 30.0

Price/Book (x) 43.6 32.7 33.6 23.6

EV/EBIT (x) 38.8 31.7 24.3 20.6

EV/NOPLAT (x) 49.2 40.6 31.7 27.6

EV/CE 43.0 32.2 32.6 22.7

EV/IC (x) 196.5 264.9 391.6 430.8

Nestle Volume growth to surprise?



In our interactions with channel partners of Nestle and retailers, the key takeaway is that volume growth in the core Baby Foods category maintains healthy momentum inspite of aggressive price hikes undertaken by the company in the past 2 years. The noodles brand Maggi is also posting recovery in volume. We believe that the present muted volume growth has the ability to surprise our estimates on the upside in CY13E. Healthy volume growth in the core Baby Foods brands sustains. Chained pharmacy is driving expansion in distribution reach: Channel partners indicated that volume growth in the Cerelac, Lactogen, Nan and Nestum brands in the main Baby Foods segment continue to report healthy trends inspite of the 30 – 35% YoY pricing growth. In South India the division’s distribution reach is also receiving a fillip from the sharp expansion in organized chained pharmacy stores ‐ Apollo Pharma, Med Plus. Recovery observed in Maggi’s volume growth. Sales push undertaken recently in Modern Trade channel. Our findings indicate that Maggi noodles value growth has been maintained, but volume has decelerated. However recent signs of recovery are visible driven by high brand investment. Nestle has also aggressively pushed the brand with promotional schemes in Modern Trade (MT) and retail stores. 900 gm SKU is the fastest selling in MT. Robust growth momentum in Maggi Pasta sustains. Growth in Chocolates and Beverages remains muted Channel partners stated that value growth in Coffee and Chocolate segment has been flat. Considering the sharp pricing growth in Coffee, volume is under pressure. Nestle has also exercised sales push drive for Coffee in the MT channel in August 2012 which received strong positive response. Nestle promotes the Chocolate segment at the retailer end by providing relatively higher margins. New product launches receive mixed consumer response Maggi Juicy Meals is well received in MT. Certain variants in Milkmaid Creations have received positive consumer response. Maggi Superroni has been reporting robust growth. Growth in Nestle Dark chocolate is uninspiring. Nescafe My First Cup is largely an unsuccessful launch. Recent stock appreciation captures the impending volume growth benefit, Maintain NEUTRAL recommendation: We estimate the current sluggishness in volume growth to abate in the near term and expect growth rates to revert to historical average levels by CY13E with Infant foods and Prepared dishes segment being the key growth drivers. However we believe that this improvement in volume and earnings growth is largely being captured in the stock price given the recent run up by 11% in the past 3 months. We maintain our NEUTRAL recommendation on the stock.

NEUTRAL NEST IN | CMP RS 4883


O/S SHARES (MN) : 96MARKET CAP (RSBN) : 465MARKET CAP (USDBN) : 952 ‐ WK HI/LO (RS) : 5024 / 3930LIQUIDITY 3M (USDMN) : 0.7FACE VALUE (RS) : 10




ABS 4.9 9.8 7.1REL TO BSE 5.9 0.8 0.4


50

80

110

140

170

200


Nestle BSE Sensex


Other Key Ratios

Rs mn CY11 CY12E CY13E


– 70 of 82 –

8 November 2012 / INDIA EQUITY RESEARCH / NESTLE COMPANY UPDATE

Income Statement Y/E Dec, Rs mn CY10 CY11 CY12E CY13E

Net sales 62,547 74,908 86,171 101,751

Growth, % 21.9 19.8 15.0 18.1

Total income 62,547 74,908 86,171 101,751


EBITDA 12,497 15,528 19,067 23,043

Growth, % 20.8 24.3 22.8 20.8

Margin, % 20.0 20.7 22.1 22.6

Depreciation ‐1,278 ‐1,637 ‐2,596 ‐2,852

EBIT 11,219 13,890 16,471 20,191

Growth, % 20.8 24.3 22.8 20.8

Margin, % 20.0 20.7 22.1 22.6


Other Income 427 509 643 818

Pre‐tax profit 11,451 13,879 16,078 19,776

Tax provided ‐3,264 ‐4,264 ‐5,032 ‐6,229

Profit after tax 8,187 9,615 11,045 13,546

Growth, % 25.0 17.5 14.9 22.6

Unadj. shares (m) 96 96 96 96

Wtd avg shares (m) 96 96 96 96

Balance Sheet Y/E Dec, Rs mn CY10 CY11 CY12E CY13E

Cash & bank 2,553 2,272 6,216 12,907

Debtors 633 1,154 923 1,167

Inventory 5,760 7,340 6,618 8,436

Loans & advances 1,514 1,964 2,231 2,577


Investments 1,507 1,344 1,344 1,344



Add: Capital WIP 3,489 14,186 12,275 7,967

Net fixed assets 13,616 29,944 33,981 30,821

Other Non‐current assets ‐333 ‐435 ‐280 ‐135

Total assets 25,250 43,583 51,032 57,117


Provisions 9,079 11,038 12,099 13,527


Non‐current liabilities 0 9,709 10,379 7,259


Paid‐up capital 964 964 964 964





Cash Flow Y/E Dec, Rs mn CY10 CY11 CY12E CY13E

Pre‐tax profit 11,451 13,879 16,078 19,776

Depreciation 1,278 1,637 2,596 2,852

Chg in working capital 1,575 1,887 1,801 ‐408

Total tax paid ‐3,252 ‐4,162 ‐5,032 ‐6,229


Capital expenditure ‐5,136 ‐17,965 ‐6,633 308

Chg in investments 526 163 0 0

Cash flow from investing activities ‐4,610 ‐17,802 ‐6,633 308

Free cash flow 6,442 ‐4,560 8,809 16,298

Equity raised/(repaid) 3 0 ‐8 0

Debt raised/(repaid) 0 9,709 671 ‐3,120


Cash flow from financing activities ‐5,445 4,279 ‐4,865 ‐9,606

Net chg in cash 997 ‐281 3,944 6,691

Valuation Ratios & Per Share Data CY10 CY11 CY12E CY13E

EPS, Rs 84.9 99.7 114.6 140.5

BVPS, Rs 88.7 132.1 189.3 262.5

DPS, Rs 48.5 48.5 49.0 57.5

Return on assets (%) 36.2 28.0 24.3 26.0

Return on equity (%) 114.0 90.3 71.3 62.2





Cost of capital (%) 10.6 10.6 10.6 10.6




Sales/Net FA (x) 5.4 3.4 2.7 3.1




Inventory days 33.6 35.8 28.0 30.3

Payable days 55.5 62.1 56.0 51.1

Current ratio (x) 0.6 0.6 0.7 1.0

Quick ratio (x) 0.3 0.3 0.4 0.7

Interest cover (x) 1044.1 271.9 24.4 26.0


PER (x) 57.5 49.0 42.6 34.8

Price/Book (x) 55.0 37.0 25.8 18.6

EV/EBIT (x) 37.5 30.8 24.9 20.2

EV/NOPLAT (x) 52.4 44.5 36.3 29.5

EV/CE 54.7 21.3 16.6 14.3

EV/IC (x) 127.0 39.7 23.4 23.4

Godrej Consumer All round outperformance by Household Insecticide



Our survey with channel partners conclusively indicates sustenance of outstanding business performance in GCPL’s domestic Household Insecticides segment. Godrej No. 1’s distribution expansion in South India is evident. Following are few of the key takeaways: GCPL’s Household Insecticide business outperforms across formats We received only positive feedback for GCPL’s domestic HI business. Robust growth is witnessed across formats including coil. Channel partners in Kerala indicated that GoodKnight coil growth is faster than the market leader Jyothy’s Maxo brand. The company’s market share gains in liquids and coils are evident. We also noticed that seasonality in HI sales in smaller cities persists. Godrej No. 1 has achieved distribution expansion in South India, but volume growth is uninspiring Godrej No. 1 brand growth in its mainstay market of North India is strong; however in South India sales growth is largely muted. We observed that the brand has managed to gain shelf space in South India as guided by the management but growth is driven largely by frequent promotional schemes. Also in newly launched markets the brand is known to being a Rs. 10 SKU which restricts ability to exercise pricing actions in the medium to long term. Cinthol relaunch can leverage on the strong brand equity in certain markets Cinthol Original brands robust growth in certain markets namely Tamil Nadu is driven by its strong brand equity. Scale of Cinthol’s brand relaunch will enable GCPL to capitalise on the brand strength in specific markets. We estimate the brand growth to gain significant traction in the near to medium term. Sluggishness in Hair Colour business persists. In markets wherein the main format of hair Colour product usage is Mehendi and Powders (certain towns in Kerala), GCPL’s business growth is healthy. However in value terms the growth continues to lag the Hair Colour industry due to underperformance in Crème. Channel partners indicated that the Rs. 8 SKU of Godrej Expert is the fastest selling for the company. The company has recently launched hair colour crème and colouring kit products in sachets under the Godrej Expert brand. We will have to closely watch the progress of the launch to gauge the potential in improving the company’s current muted growth trends. Triggers in domestic business limited, risks in International business persist. Maintain Neutral recommendation: We observe that an important trigger for the domestic business by way of distribution synergies has largely been captured. Secondly, the favourable impact of currency gains on International business is estimated to wane from Q3FY13E. With the company being in major investment mode, cost savings will largely be directed to fund new product launches. The stock is currently trading at expensive valuations considering limited triggers and high business risk. We maintain our Neutral recommendation.

NEUTRAL GCPL IN | CMP RS 695


O/S SHARES (MN) : 340MARKET CAP (RSBN) : 235MARKET CAP (USDBN) : 452 ‐ WK HI/LO (RS) : 760 / 368LIQUIDITY 3M (USDMN) : 3FACE VALUE (RS) : 1




ABS ‐0.8 8.4 62.8REL TO BSE 0.3 ‐0.5 56.1


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Net Sales 48,558 64,608 79,471Ebidta 8,602 11,168 13,674Net Profit 5,974 7,413 9,246EPS, Rs 18.4 21.8 27.2PER, X 37.8 31.9 25.6EV/EBIDTA, x 28.2 22.4 17.9EV/Net Sales, x 4.9 3.8 3.0ROE, % 25.9 24.0 25.6Source: PhillipCapital India Research Est.

– 72 of 82 –

8 November 2012 / INDIA EQUITY RESEARCH / GODREJ CONSUMER COMPANY UPDATE


Net sales 36,763 48,558 64,608 79,471

Growth, % 80 32 33 23

Other operating income 173 152 175 201

Total income 36,936 48,710 64,783 79,672


EBITDA 6,530 8,602 11,168 13,674

Growth, % 55 33 30 23

Margin, % 17.3 17.4 17 17

Depreciation ‐499 ‐645 ‐834 ‐893

EBIT 6,031 7,958 10,334 12,781

Growth, % 52 33 30 24

Margin, % 16 16 16 16


Other Income 522 520 381 884

Pre‐tax profit 6,117 7,819 9,872 12,768

Tax provided ‐1,223 ‐1,600 ‐1,919 ‐2,607

Profit after tax 4,894 6,219 7,952 10,161

Minorities 0 ‐245 ‐539 ‐915

Net profit 4,894 5,974 7,413 9,246

Growth, % 44 22 24 25

Extraordinary items: Gains/(Losses) 276 1,341 0 0

Unadj. shares (m) 319 325 340 340


Cash & bank 2,269 6,390 6,320 11,411

Debtors 3,840 4,725 5,951 7,117

Inventory 4,394 7,839 9,607 11,441

Loans & advances 3,418 3,786 4,523 5,364




Less: Depreciation ‐3,775 ‐4,940 ‐5,773 ‐6,666

Add: Capital WIP 80 376 379 401

Net fixed assets 30,857 37,293 37,712 38,091

Non‐current assets 72 116 0 0

Total assets 44,972 60,273 64,237 73,548



Non‐current liabilities 20,183 18,952 16,114 16,723








Pre‐tax profit 6,117 7,819 9,872 12,768

Depreciation 499 645 834 893

Chg in working capital ‐3,735 89 ‐969 ‐1,465

Total tax paid ‐1,266 ‐1,644 0 0



Chg in investments 670 0 0 0

Cash flow from investing activities ‐24,942 ‐7,080 ‐1,253 ‐1,272

Free cash flow ‐23,327 ‐171 8,483 10,924

Equity raised/(repaid) 4,976 6,567 0 0

Debt raised/(repaid) 19,731 ‐1,258 ‐2,728 609


Cash flow from financing activities 22,741 4,125 ‐6,448 ‐3,227

Net chg in cash ‐586 3,954 2,035 7,697


EPS, Rs 15.3 18.4 21.8 27.2

BVPS, Rs 54.0 89.1 96.9 115.4

DPS, Rs 5.1 4.8 5.8 7.4

Return on assets (%) 17.1 12.6 13.6 15.6

Return on equity (%) 36.5 25.9 24.0 25.6





Cost of capital (%) 11.6 12.0 12.1 12.2




Sales/Net FA (x) 2.0 1.4 1.7 2.1



Receivable days 38 36 34 33

Inventory days 44 59 54 53

Payable days 86 105 95 89

Current ratio (x) 1.9 1.9 1.7 2.0

Quick ratio (x) 1.3 1.2 1.1 1.4

Interest cover (x) 13.8 12.1 12.3 14.2


PER (x) 45.4 37.8 31.9 25.6

Price/Book (x) 12.9 7.8 7.2 6.0

EV/EBIT (x) 40.9 30.5 24.2 19.2

EV/NOPLAT (x) 51.2 38.4 30.1 24.2

EV/CE 6.4 5.0 5.0 4.3

EV/IC (x) 11.6 6.2 5.9 5.5

Colgate Sustenance of strong volume growth momentum



In our survey we observed that Colgate is able to maintain its undisputed leadership in the oral care market. Our key takeaways are as follows: Sensitive range of products registers robust growth: We gathered strong vibes for sensitive range of toothpastes both from the retailer as well as the distributor. The company is providing good promotional schemes to the retailers while backing it up with advertising campaigns on television. Focus on modern trade yielding good results: Our interaction with the distributors catering to modern trade indicated that modern trade is seeing robust growth in oral care category. The company has managed to reduce its investment in modern trade by appointing a dedicated distributor for modern trade. Competitive intensity for Colgate is not very severe: While there have been new product launches by Hindustan Unilever in the Pepsodent brand; the competitive intensity for Colgate is not very severe. Pricing in the category has remained largely stable and promotional schemes have also been largely stable.

Strong operating performance but expensive valuations; Maintain Neutral: Colgate is largely a single product company but trades at premium to the FMCG sector. We had upgraded the stock to Neutral post the business outperformance reported in Q2FY13 results. Although we find the operating performance to be robust we believe the premium valuation entail higher risks and leave little room for negative surprises.

NEUTRAL CLGT IN | CMP RS 1308






ABS 4.8 9.6 20.5REL TO BSE 5.9 0.6 13.8


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– 74 of 82 –

8 November 2012 / INDIA EQUITY RESEARCH / COLGATE COMPANY UPDATE


Net sales 22,206 26,239 31,189 36,499

Growth, % 13.2 18.2 18.9 17.0

Other operating income 656 694 796 893

Total income 22,861 26,932 31,985 37,392


EBITDA 5,147 5,785 7,109 8,612

Growth, % 25.3 12.4 22.9 21.1

Margin, % 23.2 22.0 22.8 23.6

Depreciation ‐342 ‐393 ‐436 ‐536

EBIT 4,804 5,392 6,673 8,076

Growth, % 25.3 12.4 22.9 21.1

Margin, % 23.2 22.0 22.8 23.6

Interest received/(paid) ‐17 ‐16 0 0

Other Income 412 507 577 537

Pre‐tax profit 5,200 5,883 7,250 8,612

Tax provided ‐1,174 ‐1,419 ‐1,767 ‐2,250

Profit after tax 4,026 4,464 5,483 6,362

Growth, % ‐1.5 10.9 22.8 16.0

Unadj. shares (m) 136 136 136 136

Wtd avg shares (m) 136 136 136 136


Cash & bank 3,951 3,098 4,380 5,130

Debtors 753 873 1,033 1,180

Inventory 1,537 2,177 2,362 2,527

Loans & advances 910 1,318 1,559 1,825


Investments 387 471 471 471




Net fixed assets 2,633 3,238 3,059 4,022

Other Non‐current assets 168 121 121 121

Total assets 10,340 11,296 13,531 15,823


Provisions 946 971 687 1,049









Pre‐tax profit 5,200 5,883 7,250 8,612


Chg in working capital 210 ‐725 62 711

Total tax paid ‐1,163 ‐1,372 ‐1,767 ‐2,250


Capital expenditure ‐444 ‐999 ‐256 ‐1,500

Chg in investments ‐177 ‐84 0 0

Cash flow from investing activities ‐621 ‐1,082 ‐256 ‐1,500

Free cash flow 3,968 3,097 5,724 6,110

Equity raised/(repaid) ‐501 ‐633 ‐700 ‐1,291

Debt raised/(repaid) ‐45 ‐1 0 0



Net chg in cash ‐67 ‐1,488 728 ‐541


EPS, Rs 29.6 32.8 40.3 46.8

BVPS, Rs 28.2 32.0 39.7 47.0

DPS, Rs 22.0 25.0 27.0 29.9

Return on assets (%) 42.1 41.4 44.2 43.3

Return on equity (%) 113.4 109.0 112.5 107.9

Return on Invested capital (%) ‐651.0 ‐693.3 ‐877.8 ‐960.4

RoIC/Cost of capital (x) ‐61.4 ‐65.4 ‐82.8 ‐90.6

RoIC ‐ Cost of capital (%) ‐661.6 ‐703.9 ‐888.4 ‐971.0


Cost of capital (%) 10.6 10.6 10.6 10.6


Asset turnover (x) ‐36.3 ‐41.4 ‐50.9 ‐55.1


Sales/Net FA (x) 8.6 8.9 9.9 10.3



Inventory days 25.3 30.3 27.6 25.3

Payable days 99.0 82.5 83.2 84.6

Current ratio (x) 1.1 1.1 1.1 1.1

Quick ratio (x) 0.9 0.8 0.9 0.9

Interest cover (x) 290.0 345.8 14128.1 16762.3


PER (x) 44.2 39.8 32.4 28.0

Price/Book (x) 46.3 40.9 33.0 27.8

EV/EBIT (x) 33.8 30.2 24.4 20.1

EV/NOPLAT (x) 43.6 39.8 32.3 27.2

EV/CE 45.3 40.1 32.2 27.0

Marico Why is the odour missing?



Our survey of channel partners of Marico indicates that Marico is seeing stable growth for its core portfolio but we have also found the performance of the newly acquired Paras’s deodorants portfolio has not been inspiring. The key takeaways and observations are as follows: Stable growth for core portfolio; however products perceived to be expensive: The core portfolio of Marico comprising of Saffola and Parachute brands continue to witness robust traction. Retailers and distributors alike indicated that Saffola’s positioning based on healthy heart is undisputed in the market while Parachute with its strong brand franchise continues to register stable volume growth. However, they also indicated that there is a rising consumer perception of Marico’s products being relatively premium priced namely for the Saffola brand in the edible oil category. Deodorants performance uninspiring; but category growth is robust: In our survey we noted that distribution of the recently acquired Paras’s deodorants has been particularly uninspiring. We noted that most decent sized retail outlets have dedicated shelf space for deodorants but we hardly found the SetWet and Zatak brands on the retailer shelves. The retailers indicated that the category is witnessing strong growth and uptrading. Brands like Park Avenue, Fogg and Kama Sutra are very aggressive with shelf space strategy and are even competing with HUL’s AXE brand. Earnings growth holds limited probability of surprising positively: While we closely watch the progress of Marico’s strategy for the recently acquired personal care brands; we believe that earnings growth for the core portfolio is unlikely to surprise us positively as the management has indicated implementation of price correction in the focus brands namely Parachute and Saffola. Considering the imminent risks and relatively higher valuations at 28x FY14E, we downgraded the stock to NEUTRAL post the Q2FY13 results.

NEUTRAL MRCO IN | CMP RS 206






ABS 3.5 11.4 40.7REL TO BSE 4.5 2.5 34.0


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– 76 of 82 –

8 November 2012 / INDIA EQUITY RESEARCH / MARICO COMPANY UPDATE


Net sales 29,940 37,647 45,206 53,305

Growth, % 19.8 25.7 20.1 17.9

Other operating income 1,412 2,284 3,023 3,547

Total income 31,352 39,931 48,229 56,851


EBITDA 4,183 4,697 6,627 7,781

Growth, % 11.5 12.3 41.1 17.4

Margin, % 14.0 12.5 14.7 14.6

Depreciation ‐708 ‐725 ‐880 ‐1,012

EBIT 3,475 3,972 5,747 6,768

Growth, % 11.5 12.3 41.1 17.4

Margin, % 14.0 12.5 14.7 14.6


Other Income 212 326 322 452

Pre‐tax profit 3,277 3,874 5,436 6,480

Tax provided ‐850 ‐783 ‐1,311 ‐1,604

Profit after tax 2,428 3,092 4,125 4,876

PC Net profit 2,378 3,042 4,026 4,757

Growth, % ‐1.5 27.9 32.3 18.2

Extraordinary items: Gains/(Losses) 489 ‐18 0 0

Unadj. shares (m) 614 615 644 644

Wtd avg shares (m) 614 615 644 644


Cash & bank 2,206 1,588 2,001 4,283

Debtors 1,779 1,816 2,240 2,640

Inventory 6,011 7,202 8,230 9,568

Loans & advances 2,608 3,415 4,005 4,574


Investments 889 2,956 2,956 2,956




Net fixed assets 4,576 5,018 6,747 7,106

Total assets 22,345 26,174 38,014 43,109



Non‐current liabilities 7,759 7,912 10,348 10,348








Pre‐tax profit 3,277 3,874 5,436 6,480

Depreciation 708 725 880 1,012

Chg in working capital ‐4,258 ‐522 ‐9,210 ‐1,425

Total tax paid ‐850 ‐783 ‐1,311 ‐1,604

Other operating activities 552 ‐398 ‐500 0

Cash flow from operating activities ‐571 2,896 ‐4,705 4,463

Capital expenditure ‐875 ‐1,058 ‐1,770 ‐634

Chg in investments ‐62 ‐2,067 0 0

Cash flow from investing activities ‐937 ‐3,125 ‐1,770 ‐634

Free cash flow ‐1,508 ‐228 ‐6,474 3,830

Equity raised/(repaid) 287 31 5,000 0

Debt raised/(repaid) 3,283 107 2,500 0

Dividend (incl. tax) ‐472 ‐500 ‐515 ‐608

Cash flow from financing activities 3,142 ‐382 6,886 ‐976

Net chg in cash 1,633 ‐610 412 2,854


EPS, Rs 3.9 4.95 6.2 7.4

BVPS, Rs 15.3 19.0 31.9 38.1

DPS, Rs 0.7 0.7 0.7 0.9

Return on assets (%) 14.3 13.9 14.1 13.2

Return on equity (%) 29.6 28.9 25.0 21.1





Cost of capital (%) 10.6 10.6 10.6 10.6




Sales/Net FA (x) 7.0 7.8 7.7 7.7




Inventory days 73.3 69.8 66.5 65.5

Payable days 53.7 56.4 52.0 50.9

Current ratio (x) 3.2 2.6 2.8 3.1

Quick ratio (x) 1.6 1.3 1.4 1.7

Interest cover (x) 8.5 9.4 9.1 9.1


PER (x) 53.2 41.6 33.0 27.9

Price/Book (x) 13.5 10.8 6.5 5.4

Yield (%) 0.3 0.3 0.4 0.4

EV/EBIT (x) 31.6 28.3 21.3 17.8

EV/NOPLAT (x) 42.6 35.5 28.1 23.7

EV/CE 7.2 6.4 4.4 3.8

GSK Consumer Core portfolio is Boosting growth



Our interactions with channel partners of GSKConsumer indicate that strong growth momentum in the core MFD portfolio sustains. Traction in the non MFD portfolio is estimated in the near to medium term. Robust growth in Malted Food Drinks business segment sustains. Distribution gains evident in North India Channel partners in Tamil Nadu stated that volume growth in the MFD segment is strong at ~10% YoY with strong growth of 15% YoY in Horlicks brand and 30% YoY robust growth in Boost brand The company has significantly scaled up the revenue contribution of LUP’s in the MFD business. The LUP’s are said to be the fastest selling product in the MFD segment. The indicated growth for Rs. 5 sachet in Horlicks in Tamil Nadu is sharp at ~30% YoY. We noticed the presence of Horlicks chocolate and Boost sachets at retail outlets in North India. The products are gathering healthy consumer response. Non MFD business growth is led by Biscuits and expected to maintain traction. Horlicks biscuit business growth continues to outperform at 50 – 60% YoY as per channel partners in South India. With the new product launch of Horlicks Nutribic, biscuit segment growth is expected to gain traction. The noodles business growth is estimated to recover post the revision in strategy. New product innovations are being well received and aiding volume growth Channel partners in South India indicated that GSK’s product innovations under the Horlicks – Women’s, Junior, and Mother’s have been well received and aid volume growth in the MFD segment. The latest introduction in the Eno brand – launch of Cola variant, has supported strong growth at~30% YoY in. Increasing Competition risk in South India; GSK well placed to meet pressure Heinz’s Complan brand has been reporting strong sales performance and is said to have increased market share in past few years. Kraft’s Bournvita has stepped up distribution presence in South Indian markets, however business growth has been uninspiring. GSK’s lack of presence in the super premium segment currently defined by the Pediasure brand has led to marginal market share pressure. GSK is expected to undertake a new product launch in this segment in the near term. Hence with strong distribution network in main geography of South India especially in bakery’s, high brand equity and product innovations, GSK holds ability to manage market share leadership. Relative cheap valuations, recovery in volume to aid robust earnings growth: Maintain BUY: The company has displayed strong pricing power in the past few quarters by sustaining the average value growth in the MFD segment. Volume growth is estimated to recover to the double digit trajectory as laggards namely CSD and Export sales improve in the near term. We believe that the company has an interesting pipeline of products that hold potential to be the future legs of growth. We maintain our Buy recommendation on the stock.

BUY SKB IN | CMP RS 3040

TARGET RS 3430 (+13%) Company Data





ABS 3.1 12.2 22.5REL TO BSE 4.1 3.2 15.8


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Rs mn CY11 CY12E CY13E


– 78 of 82 –

8 November 2012 / INDIA EQUITY RESEARCH / GSK CONSUMER COMPANY UPDATE

Income Statement Y/E Dec, Rs mn CY10 CY11 CY12E CY13E

Net sales 23,061 26,855 30,785 35,694

Growth, % 20.0 16.5 14.6 15.9

Total income 23,061 26,855 30,785 35,694


EBITDA 3,767 4,253 4,881 5,789

Growth, % 21.3 12.9 14.8 18.6

Margin, % 16.3 15.8 15.9 16.2

Depreciation ‐397 ‐464 ‐367 ‐529

EBIT 3,369 3,789 4,514 5,260

Growth, % 21.3 12.9 14.8 18.6

Margin, % 16.3 15.8 15.9 16.2


Other Income 1,174 1,648 2,223 2,722

Pre‐tax profit 4,517 5,402 6,710 7,946

Tax provided ‐1,520 ‐1,851 ‐2,207 ‐2,622

Profit after tax 2,998 3,551 4,502 5,324

Growth, % 28.8 18.5 26.8 18.3



Balance Sheet Y/E Dec, Rs mn CY10 CY11 CY12E CY13E

Cash & bank 9,761 10,796 13,358 13,997

Debtors 505 992 695 1,065

Inventory 3,120 3,700 3,954 4,719

Loans & advances 501 721 693 803





Add: Capital WIP 1,083 1,711 1,468 1,763

Net fixed assets 3,106 3,717 2,857 5,323

Other Non‐current assets 383 478 478 478

Total assets 17,720 20,895 23,772 28,202


Provisions 0 99 111 203


Non‐current liabilities 115 79 0 0







Cash Flow Y/E Dec, Rs mn CY10 CY11 CY12E CY13E

Pre‐tax profit 4,517 5,402 6,710 7,946


Chg in working capital 1,953 ‐61 ‐458 522

Total tax paid ‐1,677 ‐1,982 ‐2,286 ‐2,622

Other operating activities 0 1,637 3,179 5,071


Capital expenditure ‐1,181 ‐1,075 493 ‐2,995

Cash flow from investing activities ‐1,181 ‐1,075 493 ‐2,995

Free cash flow 4,010 4,384 8,004 8,451

Equity raised/(repaid) ‐910 ‐1,104 ‐2,644 ‐4,531



Net chg in cash 1,390 1,015 2,619 153

Valuation Ratios & Per Share Data CY10 CY11 CY12E CY13E

EPS, Rs 71.3 84.4 107.1 126.6BVPS, Rs 228.3 272.0 325.2 386.7DPS, Rs 35.0 46.0 54.5 76.3Return on assets (%) 18.8 18.5 20.2 20.6

Return on equity (%) 32.1 33.8 35.8 35.6

Return on Invested capital (%) 1582.4 ‐3078.7 ‐539.7 ‐913.8

RoIC/Cost of capital (x) 149.3 ‐290.4 ‐50.9 ‐86.2

RoIC ‐ Cost of capital (%) 1571.8 ‐3089.3 ‐550.3 ‐924.4


Cost of capital (%) 10.6 10.6 10.6 10.6


Asset turnover (x) 146.0 ‐295.7 ‐50.7 ‐84.1


Sales/Net FA (x) 8.5 7.9 9.4 8.7




Inventory days 49.4 50.3 46.9 48.3

Payable days 89.0 107.6 94.8 97.3

Current ratio (x) 1.8 1.8 1.9 1.8

Quick ratio (x) 1.4 1.4 1.5 1.4

Interest cover (x) 129.5 109.3 162.9 147.4


PER (x) 42.6 36.0 28.4 24.0

Price/Book (x) 13.3 11.2 9.3 7.9

EV/EBIT (x) 31.3 27.5 23.5 19.7

EV/NOPLAT (x) 47.2 41.9 35.0 29.4

EV/CE 12.2 10.2 8.4 7.0

EV/IC (x) 747.5 ‐1289.0 ‐188.7 ‐268.2

Agrotech Foods Sundrop oil gets slippery



Channel partners for AgroTech Foods have indicated mixed trends in volume growth for the major brand Sundrop oil. However robust growth trend for Act – II popcorn brand sustains. Volume growth visibility in South India markets for Sundrop oil brand but outweighed by pressure in North India Channel partners in South India indicated volume growth of 5% YoY for the Sundrop oil with value growth of 10 ‐ 15% YoY. Volume growth in the high margin Sundrop Heart variant is robust. Conversely volume has degrown in North Indian states namely UP. Volume degrowth for Sundrop on a pan India basis, implies volume decline to be meaningful in North India Channel partners cautious regarding company’s focus on driving higher realizations in Sundrop brand In our findings we observed that ATFL has exercised frequent price hikes in Sundrop oil. The pricing driven strategy is weighing on the brand’s volume. On account of the relatively premium realizations, new consumer recruitment by the brand has slowed down. Competition in the edible oil sector is said to have increased significantly including Sundrop brand’s main competitor Saffola. Hence pricing strategy may not be conducive for the brand in the medium to long term. Act – II popcorn brand growth continues to be robust Growth in Act – II popcorn brand is strong at 15 – 20% YoY. The Rs. 5 Ready to eat SKU launched last year is gaining meaningful traction. However growth in the newly introduced Rs. 15 SKU has been slow moving. On account of seasonality, traction in Act – II brand sales is significant at 30 – 40% YoY during Oct – Dec period and off season (rest of the year) growth is indicated at 10 ‐ 20% YoY. Skepticism on future success of Sundrop Peanut butter brand Channel partners in South India have indicated that consumers are largely unaware of the peanut butter category as ATFL currently does not undertake any amount of brand investments. Hence they hold a skeptical view on the scope of the Sundrop peanut butter brand. We understand that the channel partners are not informed of ATFL’s strategy to introduce innovative product formats under peanut butter such as sachets at affordable price points and undertake necessary brand investments as was done to develop the Act – II popcorn brand. Robust earnings growth potential remains intact. Maintain Buy rating: We remain believers of ATFL’s strategy in developing future revenue growth drivers by way of product innovations in the nascent rapidly growing Branded Foods category. Subsequently the earnings traction is estimated to be higher as the company focuses on improving margins in the mainstay Sundrop edibe oil brand and increasing contribution from the relatively higher margin Snack Foods business. We maintain our BUY rating.

BUY ATFL IN | CMP RS 421

TARGET RS 510 (+21%) Company Data

O/S SHARES (MN) : 24MARKET CAP (RSBN) : 10MARKET CAP (USDMN) : 19652 ‐ WK HI/LO (RS) : 517 / 340LIQUIDITY 3M (USDMN) : 0.2FACE VALUE (RS) : 10




ABS 2.9 ‐13.2 4.1REL TO BSE 4.0 ‐22.2 ‐2.6


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100

150

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Agro Tech Foods BSE Sensex


Other Key Ratios


Net Sales 7,021 7,519 8,630Ebidta 515 579 673Net Profit 362 408 467EPS, Rs 14.8 16.7 19.2PER, X 28.4 25.2 22.0EV/EBIDTA, % 19.1 16.7 14.1EV/Net Sales, x 1.4 1.3 1.1ROE, % 18.7 18.0 17.7Source: PhillipCapital India Research Est.

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8 November 2012 / INDIA EQUITY RESEARCH / AGROTECH FOODS COMPANY UPDATE


Net sales 7,187 7,021 7,519 8,630

Growth, % 11 ‐2 7 15

Total income 7,187 7,021 7,519 8,630


EBITDA (Core) 275 515 579 673

Growth, % 6.7 87.3 12.4 16.2

Margin, % 3.8 7.3 7.7 7.8

Depreciation ‐46 ‐57 ‐68 ‐83

EBIT 229 458 511 589

Growth, % 0.8 99.8 11.5 15.3

Margin, % 3.2 6.5 6.8 6.8

Interest paid ‐1 ‐1 ‐1 ‐1

Other Non‐Operating Income 69 49 56 74

Pre‐tax profit 297 506 567 662

Tax provided ‐153 ‐145 ‐159 ‐195

Profit after tax 144 362 408 467

Net Profit 144 362 408 467

Growth, % (42.8) 150.8 12.7 14.5

Net Profit (adjusted) 144 362 408 467




Cash & bank 447 408 612 796

Debtors 351 346 350 378

Inventory 674 645 668 730

Loans & advances 504 485 451 475



Investments 14 14 14 14

Gross fixed assets 698 839 1,114 1,389

Less: Depreciation ‐202 ‐249 ‐312 ‐395


Net fixed assets 674 874 802 994

Non‐current assets 0 0 306 306

Total assets 2,708 2,810 3,218 3,707

Current liabilities 934 724 784 878

Total current liabilities 934 724 784 878

Total liabilities 934 724 784 878







Pre‐tax profit 297 506 567 662


Chg in working capital ‐554 ‐159 ‐239 ‐20

Total tax paid ‐171 ‐136 ‐135 ‐195

Cash flow from operating activities ‐382 268 261 531

Capital expenditure ‐185 ‐257 4 ‐275

Cash flow from investing activities ‐185 ‐257 4 ‐275

Free cash flow ‐567 11 265 256

Equity raised/(repaid) 24 27 38 49

Dividend (incl. tax) ‐50 ‐50 ‐62 ‐71

Cash flow from financing activities ‐26 ‐22 ‐24 ‐22

Net chg in cash ‐593 ‐12 241 234


EPS, Rs 5.9 14.8 16.7 19.2

BVPS, Rs 72.8 85.6 99.9 116.2

DPS, Rs 1.8 1.8 2.1 2.4

Return on assets (%) 5.6 13.1 13.5 13.5

Return on equity (%) 8.8 18.7 18.0 17.7







Sales/Net FA (x) 11.9 9.1 9.0 9.6



Inventory days 34.2 33.5 32.4 30.9

Payable days 45.7 36.5 36.7 35.7

Current ratio (x) 2.1 2.6 2.7 2.7

Quick ratio (x) 1.4 1.7 1.8 1.9

Interest cover (x) 171.1 705.0 786.1 906.7


PER (x) 71.1 28.4 25.2 22.0

PEG (x) ‐ y‐o‐y growth (1.7) 0.2 2.0 1.5

Price/Book (x) 5.8 4.9 4.2 3.6

Yield (%) 0.4 0.4 0.5 0.6

EV/Net sales (x) 1.4 1.4 1.3 1.1

EV/EBITDA (x) 35.7 19.1 16.7 14.1

EV/EBIT (x) 42.8 21.5 18.9 16.1

EV/NOPLAT (x) 80.6 26.6 23.0 19.8

EV/CE 5.5 4.7 4.0 3.3

EV/IC (x) 10.5 6.7 6.1 5.9

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Management Vineet Bhatnagar (Managing Director) (91 22) 2300 2999 Sajid Khalid (Head – Institutional Equities) (91 22) 6667 9972 Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735

Research Automobiles, IT Services Deepak Jain (9122) 6667 9758 Neha Garg (9122) 6667 9996 Varun Vijayan (9122) 6667 9992 Banking, NBFCs Manish Agarwalla (9122) 6667 9962 Sachit Motwani, FRM (9122) 6667 9953 Consumer, Media, Telecom Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Ennette Fernandes (9122) 6667 9764 Vivekanand Subbaraman (9122) 6667 9766 Cement Vaibhav Agarwal (9122) 6667 9967

Economics Anjali Verma (9122) 6667 9969 Engineering, Capital Goods Ankur Sharma (9122) 6667 9759 Jishar Thoombath (9122) 6667 9986 Metals Dhawal Doshi (9122) 6667 9769 Dharmesh Shah (9122) 6667 9974 Infrastructure Vibhor Singhal (9122) 6667 9949 Raheel Arathodi (9122) 6667 9768 Oil&Gas, Fertiliser Gauri Anand (9122) 6667 9943 Saurabh Rathi (9122) 6667 9951

Retail, Real Estate Abhishek Ranganathan, CFA (9122) 6667 9952 Neha Garg (9122) 6667 9996 Mid‐caps Kapil Bagaria (9122) 6667 9965 Raheel Arathodi (9122) 6667 9768 Technicals & Quant Neppolian Pillai (9122) 6667 9989 Shikha Khurana (9122) 6667 9948 Sr. Manager – Equities Support Rosie Ferns (9122) 6667 9971

Sales & Distribution Sudhir Padiyar (9122) 6667 9991 Kinshuk Tiwari (9122) 6667 9946 Pawan Kakumanu (9122) 6667 9934 Shubhangi Agrawal (9122) 6667 9964 Dipesh Sohani (9122) 6667 9756

Sunil Kamath (Sales Trader) (9122) 6667 9747 Chetan Savla (Sales Trader) (9122) 6667 9745 Rajesh Ashar (Sales Trader) (9122) 6667 9746

Mayur Shah (Execution) (9122) 6667 9945 Gurudatt Uchil (Execution) (9122) 6667 9750

Contact Information (Regional Member Companies)

SINGAPORE

Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd

4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com

UNITED STATES Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, C‐Block, 2nd Floor, Modern Center , Jacob Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

– 82 of 82 –


Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd does not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice.Furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital (India) Pvt. Ltd. 2nd Floor, C‐Block, Modern Centre, Mahalaxmi, Mumbai ‐ 400011

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