Page 1
3QFY16 Consumer Sector – Summing It Up
TEJASH SHAH, [email protected] +91 22 4228 8155
GNANA SUNDAR [email protected] +91 44 4344 0062
MADHAV PVR [email protected] +91 44 4344 0061
Find Spark Research on Bloomberg (SPAK <go>),
Thomson First Call, Reuters Knowledge and Factset
“….Because that's what we storytellers do. We restore order with imagination. We instil hope again and again and
again” –Walt Disney (Tom Hanks) in movie ‘Saving Mr. Banks’
At some level, the above statement sums up the tone of the consumer sector results and earnings commentaries for 3QFY16. Revenue
growth is not coming as per our ‘imagination’ and corporate guidance. However, we are trying to ‘restore the order’ in our projections.
Thankfully, volume growth has remained healthy in pockets (paints, adhesives, some categories of hair oils, etc.) but deflationary
environment has muted the numbers at nominal levels. Volume growth continues to dwarf value growth across our coverage universe.
Spark’s consumer coverage universe (SCCU) had ~6.9% sales growth and ~8.4% PAT growth in 3QFY16. Average downgrade in
earnings in SCCU was -3% and -5% for FY16 and FY17 respectively. Going forward, we see the earnings downgrade cycle tapering off
in FMCG and retail stocks, while in Paints, earnings growth is highly susceptible to volatility in crude oil prices. Overall, growth revival
expectations are gradually accumulating around rural revival and hence a normal monsoon will be the much awaited trigger.
When life gives you lemons….. – As we have been highlighting for past many quarters that elusive demand growth and benign input
prices led GM (Gross Margins) expansion are the key resident features in the results. Interestingly, many consumer companies (Dabur,
Emami, Marico, Berger Paints, etc.) are reinvesting the GM bounty to strengthen future growth drivers (new geographies, new products,
brand extension, etc.) In our opinion; this is the best window of opportunity available to identify, experiment and invest behind potential
growth drivers. We believe that the companies which are shying away from experimenting in this cycle would find it very difficult to do the
same once the GM advantage starts shrinking.
Season of Disruption – ‘Disruption’ seems to be the parallel theme running across most of the consumption categories. Retail oriented
sectors were facing disruption with the increasing intensity of e-commerce for last 6-8 quarters; however, the intensity had a notable
reduction in this quarter. Interestingly, FMCG sector has started facing an unusual ‘disruption’– Patanjali FMCG products (slide 4).
Patanjali’s scale, speed of execution and more importantly ambitions has forced the incumbents to create strategies to combat the
challenge. Though expectedly, disruption is painful in the near term, but it is bringing back focus on the key value proposition of FMCG –
Product’s efficacy.
Overvalued or Undervalued? Hmm It’s ‘Cortisol free’ – At the outset, let us confess that there are no secular positive trends visible in
the sector yet and that with a very few pockets of inexpensive valuations, makes it difficult to spot absolute return ideas. Ceteris Paribus
on RM scenario, we see limited scope for massive earnings upgrades. SCCU is already expecting ~17% yoy growth in earnings in FY17.
However, valuation re-rating depends on whether market takes last 18 months, 3 years or 10 years average as mean valuations. BUT
(there’s always one), when we zoom out and understand the challenges faced by other sectors, then the challenges faced by consumer
sector look miniscule as they are restricted only to P&L and are cyclical in nature. Hence, in spite of slightly stretched valuations, we
remain relative outperform rating on the sector with the few bottom-up absolute rating ideas. Amidst the mayhem and volatility at macro
level, consumer sector continues to offer a 'cortisol free’ shelter.
“…….Time spent engaged in activities which reduce cortisol is paid back exponentially in terms of productivity” –
Anonymous
Upgrades/Downgrade: HUVR (TP: Rs.921) and ITC (TP: Rs.351) raised to BUY while Dabur has been downgraded to Reduce (TP:
Rs.252), Zydus Wellness downgraded to Sell (TP: Rs.621) and Akzo Nobel has been downgraded to Reduce (Rs. 1223). Marico
(Add, TP: Rs. 234), Jyothy Labs (Add, TP: Rs.301) & Berger paints (Reduce, TP: Rs. 256) have been downgraded on valuation
concerns.
Date Feb 19th, 2016
Stock Performance (%)
Company 1m 3m 12m
AKZO -3 -4 -16
APNT -1 1 0
ARVND -11 -10 -10
BATA 1 -1 -26
BJCOR 2 -9 -13
BRGR -4 10 9
CLGT -8 -12 -11
DABUR -2 -11 -9
HMN 0 2 2
HUVR 2 4 -9
ITC -3 -13 -22
ITFL -9 -12 -14
JYL -1 -9 -8
KEKC -12 -12 1
KNPL -1 6 10
LOG 7 8 49
MRCO 3 10 31
PAG -18 -21 -11
PIDI 15 16 7
RLXF -6 -21 18
SKB -6 -5 -3
TTAN -2 -10 -23
VIP 3 3 -8
WONH -3 -9 25
ZYWL -15 -21 -24
Consumer Sector 3QFY16 - Zero Dark Thirty
Page 2
3QFY16 Consumer Sector – Summing It Up
FMCG (y-o-y )
14% 18% -1%
Paints & Chemicals (y-o-y) Discretionary/Retail (y-o-y)
Emami (C)
Sales*
76% 234% N.A
3% 5% 13%
3% 4% 1%
3% 7% 6%
Manpasand
Beverages(SA)
Zydus
Wellness (C)
ITC (SA)
Hindustan
Unilever (SA)
Bajaj Corp (C) 4% 15% 15%
2% 7% 13%
7% 24% 18%
7% 40% 7%
Dabur India (C)
Marico (C)
Jyothy Labs
(C)
EBITDA PAT**
Asian Paints
(C) 14% 37% 35%
10% 32% 38%
9% 6% 11%
9% 26% 29%
11% 53% 48%
Sales*
Berger Paints
(SA)
Akzo Nobel
(SA)
Kansai Nerolac
(SA)
Pidilite (C)
EBITDA PAT**
17% 27% 23%
15% 35% 83%
15% 105% 162%
Relaxo
Footwear (SA)
Indian Terrain
Fashions (SA)
VIP Industries
(SA)
Page
Industries (SA) 15% 19% 30%
9% 4% 2%
17% 12% 18%
15% 30% 28%
27% 44% 53%
Kewal Kiran
Clothing (SA)
Titan (C)
Bata India (C)
La Opala RG
(SA)
Sales* EBITDA PAT**
Source: Company filings, Spark Capital Research; Sales refers to operating income and PAT is adjusted; SA refers to standalone operations & C refers to Consolidated operations
Lifestyle retail & Paint companies delivered superior earnings growth
6% -13% -4% Wonderla (C)
Revenue growth across FMCG companies
remains muted as offtakes were under stress,
lack of inflationary pricing environment
further pressurised value growth. Paints and
lifestyle retail companies reported optically
better revenue growth due to late festive
season this year and earlier commencement
of End Of Season Sale by few players. Gross
margin drivers continue to be favourable
enabling superior profit growth across
consumption universe.
4% -2% -5% Arvind (C)
15% 16%
11.9% 35.6%
3.5% 3.3%
Page 3
3QFY16 Consumer Sector – Summing It Up
Source: Company commentary, Spark Capital Research
Popular themes that were witnessed across consumption portfolio in 3QFY16
FMCG Subdued RM
basket
Price
deflation
Slowdown in
Nepal A&P outlay
Delayed
Winter
Advent of
Patanjali
Paints &
Chemicals Auto demand
Subdued RM
cycle
Increasing
contribution
of mass end
offerings
Innovative
initiatives
Selective
price cuts
Festive
season sales
Discretionary/
Retail
Lower
impact of
e-commerce
Rains in
South India
Expansion
slow down
Western
brands comp
intensity
Advanced
‘End Of
Season Sale’
Festive
season
offtakes
Macro-economic weakness led lower growth in rural/smaller towns and failure of upticks in urban were common theme
across consumption universe.
Page 4
3QFY16 Consumer Sector – Summing It Up
“All that we are keen to get on is a solid intervention that could work across
platforms. There are multiple models in which Naturals get moved, do you
go one category deep, do you go one brand across categories, what are the
various offerings which we are inconsistent to, what can you claim, because
it's also an important point that we will need to be in a position to actually
prove whatever that we claim. So there is a lot of work that happens on the
Naturals space, which are, what I would call as fundamental work, what is
the psyche of Naturals we need to create. So that is the space it is. And we
are focused on the consumer looking at Naturals in a positive way, and
that's what we react to.”
- P. B. Balaji, CFO, Hindustan Unilever
“ He's got a presence in practically every category, and a majority of our categories he
has got some offering. Now, quite frankly, how the Patanjali initiative will play out, I really
don't know, because there has been no – there is really no precedence for this. Our faith
based product offerings which caters to obviously a significant number of consumers,
and it's something which – whether it's going to be of enduring nature, whether it's going
to be a passing thing, it's very hard to say. So I won't even go down that path of just
trying to predict what Patanjali will become. But having said that, there is overlap in terms
of categories. So Honey and Chyawanprash are the most evident ones, but we'll have
even in others. So I think the way forward is to really strengthen our own value
proposition, cater to the more premium end of the market. And what good can Patanjali
do actually over a long period of a time, is to really enhance the whole market for herbal
and natural products.”
- Sunil Duggal , CEO, Dabur India
Comments from FMCG companies on Patanjali Ayurveda in 3QFY16
Minimal competitive intensity, high margins and need for minimal brand investments make Ayurveda categories lucrative
Ayurveda Vs Western products
Impact due to advent of Patanjali Ayurveda was keenly discussed across FMCG earnings calls…
Page 5
3QFY16 Consumer Sector – Summing It Up
Source: Company filings, Spark Capital Research
Despite being a nascent player in the Indian FMCG sector, Patanjali poses a significant threat to players across our coverage
HUL Dabur Emami Colgate GSK
Consumer GCPL
Zydus
Wellness Marico
Jyothy
Labs Bajaj Corp Manpasand
FMCG
Skincare 14% 4% 23% 5% 30% 5% 5%
Soaps 21% 17% 5%
Haircare 8% 14% 21% 35% 95%
Cosmetics 1%
Oral Care 6% 9% 95%
Mens grooming 1% 10%
Homecare 1% 4% 10%
Foods
Milk
Ghee 30%
Edible Oil 14%
Atta 0%
Staples
Juice & Fruit Drinks 7% 100%
Confectionaries
Snacks (Includes Biscuits) 6%
Sauces, Pickles
6% Sweets
Noodles 4%
Healthcare
Health drinks 90%
Chavanprash 8%
Digestives 4%
Nutrition & Honey 11% 8%
Balms 21%
…with few companies already witnessing revenue pressure due to the fast expanding Patanjali Ayurveda
Page 6
3QFY16 Consumer Sector – Summing It Up
Festive season demand, lower discounts from E-Commerce and Rainfall in Chennai were the key themes in discretionary
Rain in days
leading to
Diwali certainly
have been a
dampener to
retail offtakes.
June…….....….August..............……..October…..…...…….……November…...……….....December………….......…January
Marriage
Season
2015
August
28 -
Onam
June 15 – August 15 Aug 15 –
Sep 15 Sep 15 – Oct 15 Oct 15 – Dec 15 Dec 15 – Jan 16
September
17- Ganesh
Chathurthi
October 21, 22
Ayudha Pooja,
Saraswati Pooja
& Vijaya
Dasami
November
2-5 - Diwali
December 25-
January 1 –
Christmas and
English New Year
January
14,15–
Pongal
October
24-
Muharram
Festive
Season
2015
July 18-
Ramzan
Flipkart: Big Billion Days
Snapdeal: Diwali Sale, Preview monday
Amazon: Great Indian Festive Sale, Diwali sale
17-21 October & 26-28th October
Flipkart: Freedom Sale
Snapdeal: Freedom Week
Amazon: Great Indian Freedom sale
August 10-16
July 15 –
August 15
End Of Season
Sale (EOSS)
0
10
20
30
40
50
60
01-O
ct
05-O
ct
09-O
ct
13-O
ct
17-O
ct
21-O
ct
25-O
ct
29-O
ct
02-N
ov
06-N
ov
10-N
ov
14-N
ov
18-N
ov
22-N
ov
26-N
ov
30-N
ov
04-D
ec
08-D
ec
12-D
ec
16-D
ec
20-D
ec
24-D
ec
28-D
ec
Actual Normal
0
1020
30
40
50
60
70
80
01-J
un
06-J
un
11-J
un
16-J
un
21-J
un
26-J
un
01-J
ul
06-J
ul
11-J
ul
16-J
ul
21-J
ul
26-J
ul
31-J
ul
05-A
ug
10-A
ug
15-A
ug
20-A
ug
25-A
ug
30-A
ug
04-S
ep
09-S
ep
14-S
ep
19-S
ep
24-S
ep
29-S
ep
Actual Normal
Kerala Rainfall pattern from South West Monsoon Tamil Nadu Rainfall pattern from North East Monsoon
December 15
– January 16
End Of Season
Sale (EOSS)
Page 7
3QFY16 Consumer Sector – Summing It Up
Revenue growth across FMCG categories – 3QFY16
Category Bajaj
Corp.
Godrej
Consumer Dabur Marico Jyothy Labs Colgate
GSK
Consumer HUL Emami
Tata
Global
Beverages
Gillette
Hair Oil 6% - High teens 21% - - - - -6% - -
Refined Oil - - - 15% - - - - - - -
Detergents - - - - 4% - - Double digit
volume growth - - -
Soaps - 2% - - 12% - - Strong volume
growth - - -
Dishwashing - - - - 9% - - - - - -
Skincare -25% - 10% - - - - 5% 8% - 9%
Homecare - - 8% - - - - - - - -
Toothpaste/Oral care - - 16% - - 7% - Subdued
performance - - 6%
Hair care - -1% - - - - - Volume led double
digit growth - - -
Health Supplements - - -7% - - - - - 25% - -
Insecticides - 15% - - 25% - - - - - -
Dairy - - - - - - - - - - -
Packaged Foods - - - - - - - 12% - - -
Beverages - - -24% - - - 7% 7% - 1% -
Page 8
3QFY16 Consumer Sector – Summing It Up
Trends and Near term triggers/pressures from the C-Suite
“So for us the urban growth has been slightly
higher because led by mostly Kesh King in this
quarter and because you know because the
winter has been pretty poor and BoroPlus
sachets and some of the brands, small sachets
sell very well in the rural markets, so and also
Navratna. So the urban growth is slightly
higher compared to the rural growth in this
quarter.”
- Mohan Goenka - Emami
“I think the volume growth outlook near-term
doesn't really offer much promise. We don't
see any tailwinds happening in terms of rival
of growth. A couple of triggers could happen
one is the budget and perhaps the time
around the budget could see a significant
acceleration in rural stimuli, no I'm not saying
that'll necessarily happen, but there is every
possibility that it will...... So there is every
possibility that the demand improving from
the first probably more likely the second
quarter of next year, but even in the first, but I
don't think much anything significant
happening in the current quarter and perhaps
the early part of next quarter, but its again like
I said a very hypothetical. So, definitely the
volumes have moderated”
- Sunil Duggal, CEO, Dabur
Source: 2QFY16 Earnings Calls
“So we have maintained this last quarter
and we continue to see -- this demand
continues to be soft. And in my mind, at
least expected to remain so for at least
three to four more quarters. Price
competition, we do think it will stabilize in
laundry and dishwash. I don't think it can
go any worse that's my personal opinion.
We are already at a competitive level and I
don't see further price competition
happening, wherever we are on laundry
and dishwash.”
- Raghunandan, MD, Jyothy Labs
“We believe that the urban consumption
will gradually pick up in India. We have
already seen some marginal improvement
in modern trade this quarter. The situation
in rural continues to be a little soft,
especially in the states which have
experienced two consecutive years of
drought. Therefore affordability using the
pricing strategy lever will be the key driver
to maintain growth in a sluggish
environment.”
- Saugata Gupta, MD & CEO, Marico
“I don't think what we are calling
it as a slowdown even, if you
look at the market that we are
talking about, we definitely would
love to see some of the more
growth coming through in rural,
for instance. And that is
something which is now called
out across the board. Most
players are calling it out, we see
that as well and not just FMCG
players, other players as well.
And hence that is something, and
you all know that there's real
threat there, and that's probably
the only call out that we have
done. And other than that I think,
compared to last year's volume,
this year's volume growth in the
market has really gone up, has
definitely gone up. And so, I don't
think there is maybe a price
growth challenge and not
necessarily an outpace challenge
on volumes.”
- P.B Balaji, CFO, Hindustan
Unilever
Page 9
3QFY16 Consumer Sector – Summing It Up
Weak volumes along with persisting price deflationary environment…
Source: Company Filings, Spark Capital Research
Delayed winter and increase in competitive intensity coupled with…
Source: Company Filings, Spark Capital Research; ITC volumes refers to cigarettes only
…led to revenue growth being lower than 1HFY16
Source: Company Filings, Spark Capital Research;
…slowdown in rural offtakes limited volume growth
Source: Company Filings, Spark Capital Research
FMCG – Muted volume led growth across categories
4% 2% 7% 7%
3% 3% 3%
14%
76%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Ba
jaj C
orp
Dabur
Ma
rico
Jyoth
y L
ab
Zydus W
ell
ITC
HU
L
Em
am
i
Ma
npasand
Be
vera
ges
3QFY16 Revenue value growth
3%
-2%
10% 9%
-5%
6%
-6%-4%-2%0%2%4%6%8%
10%12%
Ba
jaj C
orp
Dabur
Ma
rico
Jyoth
y L
ab
ITC
HU
L
3QFY16 Volume growth
-7% -9%
6%
2%
11%
-1%
-15%
-10%
-5%
0%
5%
10%
15%
Ba
jaj C
orp
Dabur
Ma
rico
Jyoth
y L
ab
ITC
HU
L
Volume growth delta in percentage points (3QFY16 Vs 1HFY16)
Adjusting for Kesh King revenues, Emami
organic revenue growth was also in low single
digits (~4%) in 3QFY16
4% 2% 7% 7%
3% 3% 3%
14% 13% 10%
7% 8%
3%
-4%
5%
20%
26%
-10%-5%0%5%
10%15%20%25%30%35%40%
Ba
jaj C
orp
Dabur
Ma
rico
Jyoth
y L
ab
Zydus W
ell
ITC
HU
L
Em
am
i
Ma
npasand
Beve
rages
3QFY16 Revenue value growth 1HFY16 Revenue value growth
Page 10
3QFY16 Consumer Sector – Summing It Up
Despite price cuts, trade promotions and increasing LUP prominence…
Source: Company Filings, Spark Capital Research
EBITDA margins were robust despite higher A&P with several…
Source: Company Filings, Spark Capital Research
…gross margin expanded in 3QFY16 led by lower RM prices
Source: Company Filings, Spark Capital Research;
…companies reporting highest ever margins in as many quarters
Source: Company Filings, Spark Capital Research
FMCG – Margin expansion continues to be the saving grace in a deflationary environment
66%
57% 52% 52%
71% 64%
53%
71%
43%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Ba
jaj C
orp
Dabur
Ma
rico
Jyoth
y L
ab
Zydus W
ell
ITC
HU
L
Em
am
i
Ma
npasand
Be
vera
ges
3QFY16 Gross Margin
110
215
420
72
-116
17
169
260
20
-200
-100
0
100
200
300
400
500
Ba
jaj C
orp
Dabur
Ma
rico
Jyoth
y L
ab
Zydus W
ell
ITC
HU
L
Em
am
i
Ma
npasand
Be
vera
ges
In b
ps
Gross Margin delta (bps) (3QFY16 Vs 1HFY16)
31%
18% 19%
13%
22%
39%
18%
32%
20%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Ba
jaj C
orp
Dabur
Ma
rico
Jyoth
y L
ab
Zydus W
ell
ITC
HU
L
Em
am
i
Ma
npasand
Be
vera
ges
3QFY16 EBITDA Margin
17 35
199
19 83
-42
29
1,000
-133 -200.00
0.00
200.00
400.00
600.00
800.00
1000.00
1200.00
Ba
jaj C
orp
Dabur
Ma
rico
Jyoth
y L
ab
Zydus W
ell
ITC
HU
L
Em
am
i
Ma
npasand
Be
vera
ges
In b
ps
EBITDA Margin delta (bps) (3QFY16 Vs 1HFY16)
Seasonality
impact
Page 11
3QFY16 Consumer Sector – Summing It Up
A&P outlay behind brand investments remained high…
Source: Company Filings, Spark Capital Research
Other expenses growth was marginally above revenue growth…
Source: Company Filings, Spark Capital Research
…leading to many companies witnessing peak A&P as a % of sales
Source: Company Filings, Spark Capital Research;
…and was broadly in line with historical levels
Source: Company Filings, Spark Capital Research
FMCG – Gross margin cushion aided higher brand investments to revive growth and maintain market share
-5%
10%
23%
15%
22%
16%
26%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Ba
jaj C
orp
Dabur
Ma
rico
Jyoth
y L
ab
Zydus W
ell
HU
L
Em
am
i
3QFY16 A&P growth y-o-y
18% 16%
12% 13%
22%
14%
19%
0%
5%
10%
15%
20%
25%
Ba
jaj C
orp
Dabur
Ma
rico
Jyoth
y L
ab
Zydus W
ell
HU
L
Em
am
i
3QFY16 A&P as a % of Sales
13% 13%
21%
7%
-11%
13%
8%
14% 12%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Ba
jaj C
orp
Dabur
Ma
rico
Jyoth
y L
ab
Zydus W
ell
ITC
HU
L
Em
am
i
Ma
npasand
Be
vera
ges
3QFY16 Other expenses growth y-o-y
11% 13%
15% 15%
18% 19%
16%
13%
20%
0%
5%
10%
15%
20%
25%
Ba
jaj C
orp
Dabur
Marico
Jyoth
y L
ab
Zydus W
ell
ITC
HU
L
Em
am
i
Ma
npasand
Be
vera
ges
3QFY16 Other expenses as a % of Sales
Page 12
3QFY16 Consumer Sector – Summing It Up
Earnings growth though lackluster was higher than revenue growth on the back of margin expansion
Company Depreciation
(y-o-y growth)
Other Income
(y-o-y growth)
Interest
(y-o-y growth)
PBT
(y-o-y growth)
Reported
PAT
(y-o-y growth)
Adjusted
PAT
(y-o-y growth)
Adjusted
EPS
(y-o-y growth)
Bajaj Corp 4% 22% 62% 19% 19% 15% 15%
Dabur India 5% 57% 14% 13% 13% 13% 12%
Marico 5% 68% 8% 28% 24% 18% 18%
Jyothy Labs -3% 70% -79% 71% 47% 7% 7%
Zydus Wellness -12% 28% 33% -38% -39% 13% 13%
ITC 10% 16% 92% 5% 1% 1% 0%
Hindustan Unilever 12% 16% -99% -20% -22% 6% 6%
Emami 0% -85% 758% -28% -27% -1% -1%
Manpasand Beverages 226% 1174% -89% NA NA NA NA
Source: Company Filings, Spark Capital Research
Page 13
3QFY16 Consumer Sector – Summing It Up
FMCG – Downward revision post 3QFY16 miss and weak near term outlook
Source: Bloomberg, Spark Capital Research
We have lowered our revenue numbers to factor the impact of
ADHO’s subdued growth in near term and the impending weakness
in Nomarks revenues. Margins to remain steady
Earnings miss this quarter on account of delayed winter, lower than
anticipated have led to sales estimates being downgraded, interest
cost & lower other operating income have led to higher EPS revision.
Though earnings were in line with estimates, increase in competitive
intensity and weak winter offtakes have led to slight downgrade to
revenue estimates. Margins to improve slightly.
Hefty price cuts across categories to impact value growth, which has
led us to downgrading our revenue assumptions, margin estimates
though revised upwards to account for benign commodity cycle.
we have downgraded our assumption to factor in for the persisting
price deflationary environment and continuing subdued performance
of Ujala. Margins though to remain steady
Continuing disappointment in revenues and lack of any foreseeable
near term growth levers have led to massive revenue downgrade to
revenue estimates. Dwindling gross margin benefits to impact PAT.
Lower than anticipated growth across segments along with
impending weakness in the cigarette business have led to marginal
revenue and PAT downgrade this quarter.
Current quarter’s disappointing performance coupled with sustained
price deflationary environment have led to revenues being revised
downwards, increase in A&P leads to higher PAT revision.
-5%
-2%
-3%
-4%
-7%
-2%
-2%
-2%
-4%
-1%
1%
-4%
-10%
-2%
-3%
-4%
-12% -10% -8% -6% -4% -2% 0% 2%
Bajaj Corp
Dabur
Marico
Jyothy Lab
Zydus Well
ITC
HUL
Emami
EPS Sales
Page 14
3QFY16 Consumer Sector – Summing It Up
Company
Sales (Rs. mn) EBITDA (Rs. mn) Adj. PAT (Rs. mn) EPS (Rs.)
FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E
Bajaj Corp 8,195 8,755 10,140 2,391 2,743 3,135 2,104 2,389 2,702 14.3 16.2 18.3
Dabur India 78,064 84,180 93,993 13,164 15,141 17,600 10,658 12,406 14,298 6.1 7.1 8.1
Marico 57,203 61,224 67,561 8,701 10,598 12,550 5,735 7,235 8,638 4.4 5.6 6.7
Jyothy Labs 15,148 16,343 18,432 1,917 2,454 2,748 1,232 1,762 1,805 6.8 9.6 9.8
Zydus Wellness 4,208 4,267 4,589 998 874 1,059 1,090 987 1,155 27.9 25.3 29.6
ITC 3,65,074 3,60,835 4,01,617 1,34,736 1,38,473 1,58,023 96,077 98,768 1,12,482 12.0 12.3 14.0
Hindustan
Unilever 3,19,722 3,33,228 3,66,643 54,137 59,820 68,765 38,928 42,684 49,499 18.0 19.7 22.9
Emami 22,172 26,191 31,667 5,401 6,817 8,503 4,894 5,334 6,337 21.4 23.5 27.9
Manpasand
Beverages 3597 5434 7810 641 1053 1517 299 484 795 8.0 9.7 15.9
FMCG – Coverage companies earnings estimates
Source: Spark Capital Research
Page 15
3QFY16 Consumer Sector – Summing It Up
FMCG - Valuations though down from peak levels, in no way less than expensive
Company
P/E (x) EV/EBITDA (x) ROE(%) ROCE(%)
CMP
(Rs)
Mkt Cap
(Rs.
Mn)
Target
Rating
FY15 FY16E FY17E FY15 FY16 E FY17E FY15 FY16E FY15 FY16E P/E Price
Bajaj Corp 27.6 24.3 21.5 22.6 19.6 16.8 41.5% 48.7% 41.5% 48.7% 393 57,982 26x 484 Buy
Dabur India 41.2 35.4 30.7 32.4 27.8 23.6 35.5% 33.4% 28.6% 28.4% 250 4,40,313 31x 252 Reduce
Marico 50.5 40.0 33.5 32.9 26.6 22.1 36.0% 35.5% 29.2% 31.8% 225 2,89,643 34x 234 Add
Jyothy Labs 39.7 28.0 27.6 25.5 20.1 17.6 16.3% 21.5% 9.6% 13.0% 270 48,891 31x 301 Add
Zydus
Wellness 23.6 26.1 22.3 22.0 24.2 19.1 29.8% 22.4% 29.5% 22.2% 659 25,747 21x 621 Sell
ITC 25.2 24.6 21.6 17.0 16.8 14.7 33.7% 30.4% 32.0% 28.9% 302 24,26,348 25x 351 Buy
Hindustan
Unilever 44.8 40.9 35.3 31.1 28.0 24.2 103.0% 104.8% 77.3% 80.7% 807 17,45,486 40x 921 Buy
Emami 47.1 43.2 36.4 41.1 34.6 27.4 45.3% 40.9% 43.0% 31.5% 1,015 2,30,440 32x 893 Reduce
Manpasand
Beverages 54.0 44.5 27.1 34.7 18.9 13.1 20.9% 11.8% 17.4% 11.4% 430 21,533 30x 483 Buy
Source: Company Filings, Spark Capital Research
Page 16
3QFY16 Consumer Sector – Summing It Up
Source: Spark Capital Research & Concall transcripts
Company Key thoughts and management commentary
Bajaj
Corp
We remain sanguine on the prospects of BJCOR as we believe the company would certainly be one of the outperformers as rural
offtakes improve. Healthy dividend yield (~3%) & strong FCF yield (~2.8%) further adds to our comfort. We maintain our Buy rating.
“The primary cause for concern is that for the first time in 12 quarters, the growth of light hair oil in the rural sector has fallen below the growth
shown in the urban sector in the period October-November '15, we don't have the December figures, Nielsen figures as yet, the growth in the rural
sector is just 3.9% versus 6.4% volume growth registered in the urban areas.”
“In the current quarter, the revenue growths were adversely affected by, A, the high base in the third quarter of last year, the growth in turnover in
that quarter was 29%; B, slowdown in rural demand; C, disruption in sales in Nepal and Nepal is a significant portion of our international business;
and lastly, a major destocking that has been seen in the Canteen Stores depot stocks during the period November -- October and November of
this year.”
Dabur
India
Though we continue to remain positively biased towards the niche Ayurveda/herbal positioning of Dabur from a longer term
perspective, we note that there are minimal near term tailwinds. With near term macroeconomic triggers also not encouraging, we
believe the stock is fairly valued at current prices and downgrade our ratings to a REDUCE rating.
“gross margin expansion would continue at a far more moderate pace, but and perhaps it will payout fully by the second quarter of the next year,
first or second quarter of next year. We would see some modern passion happening even this quarter on a Y-on-Y basis but the gap would narrow
in terms of increase in the gross margin...... Having said that, if you're able to even maintain the current margin profile, I think that's a very
satisfactory situation to be in, provided of course our top-line growth at a reasonable pace. Further margin, margin expansion we should take as a
bonus not as a given and we should really focus a lot more on the top-line”
Jyothy
Labs
Though results were in line with our estimates and we are excited about the prospects of several brands, we have marginally
downgraded our assumption to factor in for the persisting price deflationary environment and continuing subdued performance of
Ujala. Margins though have been slightly upgraded to account for benign raw material scenario. We maintain our optimistic stance on
JYL on the back of impending call options albeit with an ADD rating.
“what I mean by stabilizing competition is the current margins seem to be sustainable. So even if costs have dropped a little bit over the period in
March quarter, even if you spend a little bit more, your existing margins seem to be protected at the current level of inflation or deflation.”
Marico
Given the persisting weakness and pessimistic outlook indicated by several managements across the FMCG spectrum, we believe
MRCO provides us the relative comfort in comparison to other FMCG names. We upgrade our numbers marginally and retain our
positive stance albeit with an ‘ADD’ rating
“strongly believe that if we drive full potential of our execution as well as clawback substantial portion of our input cost savings into pricing and
innovation, we'll be able to maintain 8% to 10% volume growth in India and ride the wave of the anticipated urban recovery in the coming
quarters.”
FMCG - Key thoughts and management commentary
Page 17
3QFY16 Consumer Sector – Summing It Up
Source: Spark Capital Research & Concall transcripts
Company Key thoughts and management commentary
Zydus
Wellness
We note that ZYWL’s attempts to revive category growth over the past 12 quarters undertaking product/ pricing/ promotions/
distribution /personnel reinvigoration has yielded in little success despite sustaining and consolidating market share consistently,
leading us to ponder whether the growth potential in the current portfolio has played out. Though we acknowledge that consumption
weakness prolongs, we are worried with ZYWL unable to find a strategy for sustained profitable growth with the current portfolio. We
downgrade ZYWL to a Sell
ITC
Though incessant price hikes continue to impact volume growth, we believe higher incidence of illegal cigarettes (smuggled) is
impacting cigarette volume growth to a greater extent. FMCG and Hotels businesses are expected to witness better traction as
consumption economy recovers while lack of trading opportunity in key commodities and cheap imports from China could keep Agri
business and Paper & Packaging business respectively under pressure in near term. Given the recent price decline despite no new
negative triggers emerging, we revise our rating to a BUY
Hindustan
Unilever
With incessant product and marketing restructuring (WIMI), we believe HUVR is well positioned to take advantage of both the rural
and/or urban growth revival. Having performed in tough times and with macro triggers anticipated to improve in medium term, we
believe HUVR at current price provides an attractive medium term opportunity. Superior returns, attractive pay-outs (scheme of
arrangement proposing to pay out unused reserves back to share holders) and humongous cash on books should provide further
comfort. We upgrade to a BUY
“We can't be held hostage to what is happening in price growth in a market. Let's start by seeing that, volume growth is still 6% despite all these
corrections that we have done, and therefore, we are able to pull it off without creating too much havoc in the market. And the key thing that you
must notice is the reason why you see turnover growth coming in are for two reasons why they are lower, one is one segment of the portfolio
we've got a commodity deflation, and it's just provident to the fiscal impact that's happening at the same time.”
Emami
Growth revival in the power brands portfolio and improved revenues from CIS region to be the key near to medium term growth levers.
We retain our long term positive stance on HMN but maintain our near term neutral stance in the absence of any near term triggers. We
maintain our optimistic view on the business prospects however recommend accumulation at lower price points; maintain our reduce
rating
“I don't think there is any kind of risk on core business growth , I'm still very positive because in the last -- at least I can confidently say in the last
40, 45 days I have seen some kind of a spud”
“So there has been an gross margin expansion almost 350 basis points in this quarter and the prices are quite blind, yes. So it looks like it should
remain at these levels and if these remains at these levels then next year we would be able to do yes 68%, 69% gross margin looks visible.”
FMCG - Key thoughts and management commentary
Page 18
3QFY16 Consumer Sector – Summing It Up
High single digit to low double digit revenue growth…
Source: Company Filings, Spark Capital Research
… higher than 1HFY16 growth partly on account of festive demand
Source: Company Filings, Spark Capital Research
Superior volume growth as price deflationary environment persisted
Source: Company Filings, Spark Capital Research
Paints – Relatively better growth backed by festive season demand and price cuts
14%
10% 9% 9%
11%
0%
2%
4%
6%
8%
10%
12%
14%
16%A
sia
n P
ain
ts
Be
rger
Akzo N
obel
Ka
nsai N
ero
lac
Pid
lite
3QFY16 Revenue value growth
8%
3% 4%
2%
4%
0%1%2%3%4%5%6%7%8%9%
Asia
n P
ain
ts
Be
rger
Akzo N
obel
Ka
nsai N
ero
lac
Pid
lite
Revenue growth delta in percentage points (3QFY16 over 1HFY16)
15%
12% 11%
16%
10%
0%2%4%6%8%
10%12%14%16%18%
Asia
n P
ain
ts
Be
rger
Akzo N
obel
Ka
nsai N
ero
lac
Pid
lite
3QFY16 Volume growth
Page 19
3QFY16 Consumer Sector – Summing It Up
Backed by low crude oil prices gross margins remain robust…
Source: Company Filings, Spark Capital Research
Gross margin expansion largely seeped into operating margins…
Source: Company Filings, Spark Capital Research
…continuing to expand even sequentially
Source: Company Filings, Spark Capital Research
…with companies recording highest EBITDA margins in recent past
Source: Company Filings, Spark Capital Research
Paints – Benign crude oil prices aid robust margin expansion even sequentially
47% 45% 46% 39%
52%
0%
10%
20%
30%
40%
50%
60%A
sia
n P
ain
ts
Be
rger
Akzo N
obel
Ka
nsai N
ero
lac
Pid
lite
3QFY16 Gross Margin
85
248
45
172
127
0
50
100
150
200
250
300
Asia
n P
ain
ts
Be
rger
Akzo N
obel
Ka
nsai N
ero
lac
Pid
lite
In b
ps
Gross Margin delta (bps) (3QFY16 Vs 1HFY16)
19%
16%
11% 14%
22%
0%
5%
10%
15%
20%
25%
Asia
n P
ain
ts
Be
rger
Akzo N
obel
Ka
nsai
Nero
lac
Pid
lite
In b
ps
3QFY16 EBITDA Margin
163
251
129
-127 -108 -150
-100
-50
0
50
100
150
200
250
300
Asian Paints Berger Akzo Nobel Kansai Nerolac Pidlite
In b
ps
EBITDA Margin delta (bps) (3QFY16 Vs 1HFY16)
Page 20
3QFY16 Consumer Sector – Summing It Up
Other income growth was healthy in four of the five P&C companies
Source: Company Filings, Spark Capital Research
Other expenses growth though higher than revenue growth…
Source: Company Filings, Spark Capital Research
Interest costs decreased this quarter on back of interest rate cuts
Source: Company Filings, Spark Capital Research
…was in line with historical levels
Source: Company Filings, Spark Capital Research
Paints – Other expenses and other income
17%
-21%
26%
55% 57%
-30%-20%-10%
0%10%20%30%40%50%60%70%
Asia
n P
ain
ts
Be
rger
Akzo N
obel
Ka
nsai N
ero
lac
Pid
lite
Other Income (y-o-y growth)
-22%
-56%
-17%
0%
-44%
-60%
-50%
-40%
-30%
-20%
-10%
0%
Asia
n P
ain
ts
Be
rger
Akzo N
obel
Ka
nsai N
ero
lac
Pid
lite
Interest (y-o-y growth)
16% 13%
15%
30%
20%
0%
5%
10%
15%
20%
25%
30%
35%
Asia
n P
ain
ts
Be
rger
Akzo N
obel
Ka
nsai
Nero
lac
Pid
lite
3QFY16 Other expenses growth y-o-y
22% 24%
26%
20% 19%
0%
5%
10%
15%
20%
25%
30%
Asia
n P
ain
ts
Be
rger
Akzo N
obel
Ka
nsai
Nero
lac
Pid
lite
3QFY16 Other expenses as a % of Sales
Page 21
3QFY16 Consumer Sector – Summing It Up
Benign commodity costs and operating leverage led to ~30% plus net profit growth in the paints pack barring Akzo
Company – 3QFY16 PBT
(y-o-y growth)
Reported
PAT
(y-o-y growth)
Adjusted
PAT
(y-o-y growth)
Adjusted
EPS
(y-o-y growth)
Asian Paints 31% 26% 35% 35%
Berger Paints 41% 38% 38% 38%
Akzo Nobel India 22% 25% 11% 11%
Kansai Nerolac 32% 29% 29% 29%
Pidilite 66% 49% 48% 48%
Source: Company Filings, Spark Capital Research
Page 22
3QFY16 Consumer Sector – Summing It Up
Paints & Chemicals – Estimates change post 3QFY16 results
Though we note that no material change has occurred this
quarter, 3QFY16 superior earnings and PIDI’s ability to sustain
high gross margins makes us revise our earnings estimates.
Revenue numbers have been downgraded to account for the
recent price cuts while margins have been slightly curtailed to
account for increase in trade promotions.
Though numbers were in line with expectations, revenues
have been marginally downgraded to account for weakness in
Nepal, gross margin should continue to fuel earnings growth.
Source: Bloomberg, Spark Capital Research
Revenues have been marginally revised downwards to account
for near term demand weakness, margins however have been
revised upwards expecting gross margin expansion -1%
-2%
-1%
-2%
3%
1%
2%
1%
-1%
-1%
-3% -2% -1% 0% 1% 2% 3% 4%
Asian Paints
Berger
Akzo Nobel
Kansai Nerolac
Pidlite
EPS Sales
Revenue growth to remain weak given the hefty price cuts
affected by AKZO towards the end of last quarter. Gross
margin led operating margin expansion to accrue
Page 23
3QFY16 Consumer Sector – Summing It Up
Company
Sales (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.)
FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E
Asian Paints 1,41,828 1,55,205 1,78,518 22,354 28,752 34,241 14,141 18,562 22,546 14.74 19.35 23.51
Berger Paints 43,221 46,994 53,609 5,107 6,970 8,156 2,647 3,981 4,871 3.8 5.7 7.0
Akzo Nobel 25,270 27,117 29,437 2,614 2,866 3,164 1,845 1,885 2,195 39.5 40.4 47.0
Kansai Nerolac 35,324 38,058 43,514 4,448 5,648 6,684 2,717 3,552 4,301 5.0 6.6 8.0
Pidilite 48,441 52,690 60,119 7,708 11,250 13,218 5,162 7,135 8,603 10.1 13.9 16.8
Company
P/E (x) EV/EBITDA (x) ROE(%) ROCE(%) CMP
(Rs)
Mkt Cap
(Rs. bn)
Target
Rating
FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY15 FY16E P/E Price
Asian Paints 57.4 43.7 36.0 35.6 27.6 23.0 32.2% 35.6% 27.9% 31.2% 846 8,11,913 38x 904 Add
Berger Paints 61.9 41.2 33.6 32.6 23.6 19.8 24.0% 28.5% 17.2% 21.0% 236 1,63,869 36x 256 Reduce
Akzo Nobel 31.9 31.2 26.8 21.0 18.9 16.9 20.9% 19.7% 19.0% 18.2% 1,260 60,430 26x 1223 Reduce
Kansai
Nerolac 52.3 40.0 33.0 31.3 24.7 20.8 18.0% 20.6% 16.4% 19.0% 263 1,41,951 35x 283 Add
Pidilite 58.2 42.1 34.9 38.3 25.9 21.8 24.4% 28.4% 23.3% 27.3% 586 3,00,556 32x 545 Reduce
Valuations expensive though marginally down from peak levels over past one year
Source: Spark Capital Research
Page 24
3QFY16 Consumer Sector – Summing It Up
Source: Spark Capital Research
Company Key thoughts and management commentary
Asian Paints
Decorative paint industry’s superior growth compared to other consumption categories across cycles and the pricing power
APNT commands given the oligopolistic nature of the industry adds to our long term comfort. Uptick in Industrial paints and
International operations (led by growth in Ethiopia and Middle East) should add momentum to growth. We retain our stance
with an ADD rating as we believe APNT would be a clear outperformer even at current levels with earnings growth expected to
bounce back to support valuations.
Berger Paints
Having established strong brand equity, we believe BRGR is undertaking the next leg of growth through distribution
expansion, establishing relationships with more painters and communication initiatives, which we believe should enable BRGR
to continue outgrowing decorative paint industry growth in near to medium term. Subsidiaries’ performance is expected to
improve with revival in Nepal operations and growth in Bolix. We believe BRGR could even outperform the market leader in
earnings growth given the underlying operating leverage opportunity arising from the Hindupur facility. We maintain our
neutral stance, however with a reduce rating given the current premium valuations.
Kansai Nerolac
Though price cuts affected towards the end of quarter (as per channel checks) could adversely impact decorative paints
revenue growth, we believe it could assist in KNPL recording better volumes in decorative paints. Influenced by better
spending, revival in auto segment volumes, industrial paints revenues should augur well in medium to long term. As witnessed
in FY04-08, operating leverage to kick in as revenue growth bounces back in the industrial segment. We maintain our positive
stance on KNPL, albeit with an Add
Akzo Nobel
With our industry sources indicating that royalty could further increase, our thesis of non-linear earnings growth opportunity in
AKZO by virtue of curtailing operating expenses becomes a challenging probability. We believe impending weakness in
earnings should limit AKZO’s stock price appreciation in comparison to other paint names. We downgrade AKZO to a reduce
Pidilite
PIDI has consolidated its market leadership despite minimal price pass through in a highly fragmented industry which makes
us believe that PIDI revenues should bounce back significantly as macro-economic spending climate improves. Though PIDI
remains competitively strong, absence of foreseeable revenue triggers, waning of gross margin benefits over medium term and
weakness in industrial and International divisions keeps us cautious on our near to medium term stance on PIDI. We remain
neutral on PIDI albeit with a reduce rating as we believe at current valuations does not justify the lack of revenue growth
triggers.
Paints & Chemicals
Page 25
3QFY16 Consumer Sector – Summing It Up
Robust double digit revenue growth in majority of companies…
Source: Company Filings, Spark Capital Research
Titan witnessed healthy volume growth on back of festive offtakes
Source: Company Filings, Spark Capital Research
…with growth being higher/broadly in line with 1HFY16 run rate
barring a few companies
Source: Company Filings, Spark Capital Research;
Sequential volume growth however mixed in discretionary pack
Source: Company Filings, Spark Capital Research
3QFY16 – Healthy revenue growth in discretionary pack barring few companies
15%
9%
17% 15%
27%
17% 15% 15%
-15%
6% 4%
-20%-15%-10%-5%0%5%
10%15%20%25%30%
Pa
ge
Industr
ies
KK
CL
Titan
Ba
ta
LA
Opala
RG
Rela
xo
Footw
ear
India
nT
err
ain
VIP
Industr
ies
Lib
ert
yS
hoes
Wonderla
Holid
ays
Arv
ind
3QFY16 Revenue value growth
-2% 0%
34%
8% 11%
-2%
17%
-3% -1% -6%
-2% -10%-5%0%5%
10%15%20%25%30%35%40%
Pa
ge
Industr
ies
KK
CL
Titan
Ba
ta
LA
Opala
RG
Rela
xo
Footw
ear
India
nT
err
ain
VIP
Industr
ies
Lib
ert
yS
hoes
Wonderla
Holid
ays
Arv
ind
Revenue growth delta in percentage points (3QFY16 over 1HFY16)
10%
6%
28%
0% 0%
5%
10%
15%
20%
25%
30%
Pa
ge
Industr
ies
KK
CL
Titan G
old
Titan W
atc
hes
3QFY16 Volume growth
-0.2% -4%
38%
2%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Pa
ge
Industr
ies
KK
CL
Titan G
old
Titan W
atc
hes
Volume growth delta in percentage points (3QFY16 over 1HFY16)
Page 26
3QFY16 Consumer Sector – Summing It Up
Gross margins broadly in line with historical levels, however…
Source: Company Filings, Spark Capital Research
EBITDA margins though…
Source: Company Filings, Spark Capital Research
… majority of companies witnessing margin contraction sequentially
Source: Company Filings, Spark Capital Research;
…witnessed sequential improvement in select companies
Source: Company Filings, Spark Capital Research
Margin profile of Discretionary pack remains status quo
238
-81
-242
163
411
-64
-204
-39
-263
-49 -80
-300
-200
-100
0
100
200
300
400
500
Pa
ge
Industr
ies
KK
CL
Titan
Ba
ta
LA
Opala
RG
Rela
xo
Footw
ear
India
nT
err
ain
VIP
Industr
ies
Lib
ert
yS
hoes
Wonderla
Holid
ays
Arv
ind
In b
ps
Gross Margin delta (bps) (3QFY16 Vs 1HFY16)
20% 18%
9% 13%
37%
14% 14%
7% 9%
36%
13%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Pa
ge
Industr
ies
KK
CL
Titan
Ba
ta
LA
Opala
RG
Rela
xo
Footw
ear
India
nT
err
ain
VIP
Industr
ies
Lib
ert
yS
hoes
Wonderla
Holid
ays
Arv
ind
3QFY16 EBITDA Margin
-136
-469
114 214
498
-31
221
-337 -109
-1370
71
-1500
-1000
-500
0
500
1000
Pa
ge
Industr
ies
KK
CL
Titan
Ba
ta
LA
Opala
RG
Rela
xo
Footw
ear
India
nT
err
ain
VIP
Industr
ies
Lib
ert
yS
hoes
Wonderla
Holid
ays
Arv
ind
In b
ps
EBITDA Margin delta (bps) (3QFY16 Vs 1HFY16)
55% 47%
25%
52%
75%
58% 54%
44% 50%
78%
56%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Pa
ge
Industr
ies
KK
CL
Titan
Ba
ta
LA
Opala
RG
Rela
xo
Footw
ear
India
nT
err
ain
VIP
Industr
ies
Lib
ert
yS
hoes
Wonderla
Holid
ays
Arv
ind
3QFY16 Gross Margin
Page 27
3QFY16 Consumer Sector – Summing It Up
No ‘out of the blue’ changes witnessed in discretionary pack
Source: Company Filings, Spark Capital Research
Other expenses growth barring few was below revenue growth
Source: Company Filings, Spark Capital Research
Other income growth largely outpaced earnings growth
Source: Company Filings, Spark Capital Research;
Other expenses broadly in line with historical trends
Source: Company Filings, Spark Capital Research
Other expenses, depreciation & other income
27%
1% 7% 6%
1%
24% 19%
-9%
7%
-30%
17%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Pa
ge
Industr
ies
KK
CL
Titan
Ba
ta
LA
Opala
RG
Rela
xo
Footw
ear
India
nT
err
ain
VIP
Industr
ies
Lib
ert
yS
hoes
Wonderla
Holid
ays
Arv
ind
Depreciation (y-o-y growth)
7%
-3%
19%
-5%
113%
28% 0%
-68%
26% 25%
-100%
-50%
0%
50%
100%
150%
200%
Pa
ge
Industr
ies
KK
CL
Titan
Ba
ta
LA
Opala
RG
Rela
xo
Footw
ear
India
nT
err
ain
VIP
Industr
ies
Lib
ert
yS
hoes
Wonderla
Holid
ays
Arv
ind
Other Income (y-o-y growth)
15% 14% 14% 6% 6% 15% 22%
4%
-7%
166%
11%
-20%0%
20%40%60%80%
100%120%140%160%180%
Pa
ge
Industr
ies
KK
CL
Titan
Ba
ta
LA
Opala
RG
Rela
xo
Footw
ear
India
nT
err
ain
VIP
Industr
ies
Lib
ert
yS
hoes
Wonderla
Holid
ays
Arv
ind
3QFY16 Other expenses growth y-o-y
18%
6%
11%
16%
7%
35% 33%
26% 28%
15%
21%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Pa
ge
Industr
ies
KK
CL
Titan
Ba
ta
LA
Opala
RG
Rela
xo
Footw
ear
India
nT
err
ain
VIP
Industr
ies
Lib
ert
yS
hoes
Wonderla
Holid
ays
Arv
ind
3QFY16 Other expenses as a % of Sales
Page 28
3QFY16 Consumer Sector – Summing It Up
Company
2QFY16
Interest
(y-o-y growth)
PBT
(y-o-y growth)
Reported
PAT
(y-o-y growth)
Adjusted
PAT
(y-o-y growth)
Adjusted
EPS
(y-o-y growth)
Page Industries -15% 6% 16% 30% 30%
KKCL 25% 3% 2% 2% 2%
Titan -46% 18% 18% 18% 18%
Bata -23% 34% 28% 28% 28%
LA Opala RG 20% 50% 53% 53% 53%
Relaxo Footwear 44% 25% 23% 23% 23%
Indian Terrain -11% 83% 83% 83% 47%
VIP Industries 0% 35% 33% 162% 162%
Wonderla
Industries -24% -4% -4% -4% -4%
Arvind -12% 0% -5% -5% -5%
Source: Company Filings, Spark Capital Research
Robust earnings growth led by healthy revenue growth across Discretionary pack sub-segments
Page 29
3QFY16 Consumer Sector – Summing It Up
Source: Bloomberg, Spark Capital Research
Discretionary – Change in FY17 consensus earnings post results
Though earnings were better than estimates, revenues being
downgraded to account for threat from e-commerce and
wholesale channel players. Higher rental to keep margins subdued
We believe near term growth in watches and studded jewellery
segment could be severely challenging on the back of persisting
consumption weakness & ‘End Of Season Sale Advancement’.
Earnings miss this quarter along with weakness in men’s
innerwear segment has led to revenues being downgraded, PAT
downgrade to mirror sales Downgrade
Impending weakness in the textile business have led to revenues
being revised. Increasing contribution from Brands & Retail to
impact margins.
Revenue and margins have been maintained as Relaxo footwear
continues to outperform industry growth. Margins to remain
steady in near to medium term.
Despite exceeding expectations this quarter, revenue growth
have been marginally revised to account for weak offtakes in
traditional channel. PAT revision to mirror sales revision
-5%
-1%
-2%
0%
-1%
-3%
-6%
-3%
-5%
7%
-1%
-8%
-10% -5% 0% 5% 10%
Page Industries
Titan
Bata
Relaxo Footwear
VIPIndustries
Arvind
EPS Sales
Page 30
3QFY16 Consumer Sector – Summing It Up
Company
Sales (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.)
FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E
Page Industries 15,140 18,050 22,185 2,899 3,727 4,690 1,960 2,507 3,145 175.7 224.8 282.0
KKCL 4,051 4,759 5,860 1,045 1,234 1,840 663 767 1,285 53.7 62.2 104.2
Titan 1,19,032 1,19,327 1,38,335 11,534 10,925 13,426 8,231 7,909 9,766 9.3 8.9 11.0
Bata 26,921 24,476 28,024 3,350 2,768 3,742 2,092 1,752 2,334 16.3 13.6 18.2
LA Opala RG 2,233 2,702 3,351 660 893 1,145 417 578 738 7.5 10.4 13.3
Relaxo Footwear 14,728 17,783 21,127 2,006 2,456 3,029 1,030 1,276 1,662 8.6 10.6 13.8
Indian Terrain 2,904 3,338 4,027 335 421 562 180 300 358 5 8.5 9.2
VIP Industries 10,443 12,175 13,814 775 985 1,235 435 588 753 3.1 4.2 5.3
Arvind 78,514 83,876 96,062 10,129 10,770 12,855 3,823 3,697 4,783 14.8 14.3 18.5
Discretionary - Valuation Matrix
Source: Spark Capital Research
Page 31
3QFY16 Consumer Sector – Summing It Up
Company
P/E (x) EV/EBITDA (x) ROE(%) ROCE(%)
CMP
(Rs)
Mkt Cap
(Rs.
Mn)
Target
Rating
FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY15 FY16E P/E Price
Titan 38.2 39.7 32.2 26.9 28.0 22.7 29.3% 23.6% 26.5% 23.6% 354 3,14,232 30x 330 Reduce
Bata 30.1 35.9 26.9 17.6 21.0 15.3 22.5% 16.7% 22.6% 16.9% 489 62,882 28x 509 Add
LA Opala RG 80.5 58.1 45.5 49.5 36.7 28.2 29.5% 27.6% 26.0% 26.1% 605 33,600 43x 577 Reduce
Indian Terrain 23.3 14.0 11.7 11.7 8.5 6.1 22.1% 21.2% 18.6% 18.1% 117 4190 17x 155 Buy
VIP Industries 30.9 22.9 17.9 17.3 13.7 10.8 14.7% 18.3% 13.8% 16.9% 95 13468 22x 117 Buy
Arvind 19.2 19.9 15.3 9.6 9.2 7.6 14.4% 12.9% 11.9% 10.4% 284 73393 18x 334 Buy
Discretionary - Valuation Matrix
Source: Spark Capital Research
Page 32
3QFY16 Consumer Sector – Summing It Up
Source: Spark Capital Research
Company Key thoughts and management commentary
Titan
We believe near term growth in watches and studded jewellery segment could be severely challenging on the back of persisting
consumption spending weakness and due to ‘End Of Season Sale Advancement’. Given the absence of any near term triggers to
indicate either growth or earnings momentum, we believe the stock at current valuations of ~33x FY17E does not offer a favourable
risk-reward ratio. Thereby we downgrade our growth assumptions with a revised target price and rating on TTAN to a reduce.
La Opala
Tracking back our thesis from our first note on LOG we continue to strongly believe that conversion from low value offerings,
increasing need for aesthetic appealing products and rise in penetration remain the key category growth drivers. LOG, as we
believed then has not only ridden on the category drivers but has also successfully driven the 3 ‘P’ growth strategies of
Premiumization, Penetration and Product Expansion and has enhanced our conviction recording ~20% and ~27% revenue and
EBITDA CAGR respectively from FY13-FY15. We remain confident that LOG is well geared up to continue this growth momentum
but our optimism on LOG as a near term investable idea is constrained given that valuations are currently at unchartered steep
territory and any minute negative triggers could impact stock price. With the stock witnessing minimal correction and rallying
~33% in the past 6 months, we believe LOG at current prices is trading at premium valuations. We maintain our reduce rating
Indian Terrain
We decipher that the fund raise has not only de-clogged growth opportunities but is also beginning to aid in bargaining for better
terms of trade from suppliers and distributors leading to better operating performance. Our numbers broadly remain unchanged.
Current quarter’s robust revenue performance despite macro headwinds and margin expansion keeps us sanguine on our thesis
that with better funding capabilities; ITFL has the ability to outgrow the market led by underlying product quality, distribution
expansion and brand extensions. We maintain our positive stance with a BUY rating.
Arvind Ltd
Despite the overall performance of Arvind being below our expectation during 9MFY16, we continue to retain our positive stance
on Arvind given the huge opportunity and growth potential of the apparel space coupled with the robust brand equity of Arvind’s
portfolio of brands. Though we have been very optimistic on the company’s performance since our initiation, we continue to
acknowledge that execution challenges remain and on account of the complexity of the business involved, the ride to success
would be bumpy and remains to be monitored closely. Numbers have been downgraded given this quarter’s miss and higher
interest outlay than expected; however we retain our BUY rating
VIP Industries
Though macroeconomic spending climate remains tepid and structural drivers for VIP haven’t materially changed as yet, we take
comfort from the fact that VIP IN is doing the right things to revive into growth path. With company’s operational performance
broadly in line with our expectations, our revenue assumptions and margins largely remain unchanged. With the next wave of
consumption spending expected to be focussed around discretionary offerings, we believe VIP IN stands at a favourable position
to benefit from this trend on a long term basis. Near term triggers concentrated upon air-passenger traffic growth, revival in CSD
channel offtakes and increasing contribution from new brands. Maintain our positive stance with a BUY.
Discretionary
Page 33
3QFY16 Consumer Sector – Summing It Up
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Absolute
Rating
Interpretation
BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year
horizon
ADD Stock expected to provide positive returns of >5% – <15% over a 1-year
horizon SELL Stock expected to fall >10% over a 1-year horizon
Page 34
3QFY16 Consumer Sector – Summing It Up
Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,
Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:
Disclosure of interest statement DABUR, BJCOR, MANB, HMN, HUVR, ITC, JYL, MRCO,
ZYWL, APNT, BRGR, KNPL, AKZO, PIDI, TTAN, BATA,
KEKC, LOG, ITFL, RLXF, PAG,ARVND,WONH
LBS ITFL
Analyst financial interest in the company No Yes No
Group/directors ownership of the subject company covered No No No
Investment banking relationship with the company covered No No Yes
Spark Capital’s ownership/any other financial interest in the company covered No No No
Associates of Spark Capital’s ownership more than 1% in the company covered No No No
Any other material conflict of interest at the time of publishing the research report No No No
Receipt of compensation by Spark Capital or its Associate Companies from the subject company
covered for in the last twelve months:
Managing/co-managing public offering of securities
Investment banking/merchant banking/brokerage services
products or services other than those above
in connection with research report
No
No No
Whether Research Analyst has served as an officer, director or employee of the subject company
covered No No No
Whether the Research Analyst or Research Entity has been engaged in market making activity of the
Subject Company; No No No
Cont’d
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