indian consumer sector want it all - nirmal bang sector - 29... · indian consumer goods spending...

INDIAN CONSUMER SECTORWANT IT ALL

Institutional Equities

This page has been intentionally left blank


FMCG Sector

Initi

atin

g C

over

age

WANT IT ALL Indian consumer goods spending pattern has witnessed a significant change in the past few years. Preferences, in a decisive manner, have swung significantly towards natural/green products - those that have a high health quotient attached to it - and finally the digital influence on decision making is pervasive. Considering that consumer wants it all, only companies which can address all these strategic priorities in an efficient and profitable manner will eventually turn out to be the winners. FMCG business has been extremely challenging in the past few years and has barely managed to stay positive in the past couple of quarters on account of several macro disruptions starting with rural distress, demonetisation and eventually ending with Goods and Services Tax or GST. Considering the fact that economy has largely managed to navigate these challenges successfully, we expect consumer spending in Home and Personal Care segments to show a multi-year revival. Accordingly, we have initiated coverage on these sub-segments of the Indian FMCG space with a positive view.

Growth at inflection point: Tailwinds of higher discretionary spending, health and wellness, higher per capita consumption of natural products and premiumisation (36% of Indians willing to stretch their wallet versus 14% globally, as per Nielsen Survey) in our opinion should drive growth of 10%-12% for US$20bn home and personal care segments which currently contribute about 33% to the overall Indian FMCG pie. Per capita spending on beauty and grooming in India are nearly 1/10th of the global average and the sub-segments that we believe can deliver high-teen growth in value terms are face and skin care, men’s grooming and hair care.

Innovation edge: Fast-changing consumer spending influenced by product innovation, disruptive competitor models and digital landscape are likely to keep companies on their toes. Companies that manage to consistently deliver a winning consumer offer (20% of sales contribution in about five years) through innovation in products and distribution side are most likely to retain and expand their market share.

Modern Trade to outpace the growth in traditional channels: Modem trade and e-commerce, in our opinion, are likely to remain the fastest-growing channel in the medium term and forecasted to grow in double digits. Rural markets that have witnessed maximum deceleration on account of macro challenges could potentially see an improvement aided by increase in food inflation and higher rural outlay. Our extensive visits to some of these markets indicated that South India had normalised fairly quickly whereas North India, which was weak, is slowly limping back to normalcy.

Margin expansion to continue: Considering that the inflation trend is somewhat benign, we expect premiumisation to get significant push in a few categories which alongwith savings in supply chain and marketing should give a significant boost to operating margin in the medium term. We expect operating margin to witness improvement by 150bps-200bps during FY17-FY20E.

Paying premium for multiple growth drivers: Valuations are at premium to the historical average on both absolute and relative basis, but could sustain considering the fact that there are multiple drivers of growth and aggregate growth of the sector (15% in FY17-20E period) is largely expected to match that of Nifty. Our key preferred ideas in the sector are Gillette India and Hindustan Unilever on whom we initiate coverage with Buy rating; we also initiate on Dabur India and Colgate India with accumulate and recommend a sell on Emami.

View: Positive

Vijay Chugh Research Analyst [email protected] +91-22-3926 8064 Abhishek Navalgund Research Associate [email protected] +91-22-3926 8013

Company Rating Market cap CMP

(Rs) Target

price (Rs) Up/

Down (%)

EPS (Rs) P/E (x) RoE (%)

Rsbn US$bn FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E

HUL Buy 2,603 39.7 1,170 1,425 21.8 24.4 28.0 31.6 49.3 42.9 38.1 80.0 88.5 98.5

Gillette Buy 181 2.8 5,640 7,000 24.1 92.8 106.6 129.9 59.8 52.1 42.7 53.9 50.3 50.1

Colgate Accumulate 293 4.5 1,055 1,100 4.3 23.2 25.4 28.0 46.4 42.3 38.4 46.4 45.5 45.9

Dabur Accumulate 548 8.4 305 305 (0.1) 7.4 8.3 9.2 42.1 37.6 33.7 24.8 24.1 23.6

Emami Sell 249 3.8 1,090 1,000 (8.3) 28.2 31.1 34.7 38.9 35.2 31.5 33.5 31.7 30.6

Source: Nirmal Bang Institutional Equities Research

29 September 2017

mailto:[email protected]



4 FMCG Sector

Table of Content

Investment summary…………………………………………………………….…………05

Innovation is the new battle ground, companies constantly need a winning consumer offer….………………………………………………………………………………….……06

Modern trade to outpace growth in other distribution channels………….……………07

Premiumisation and cost savings to drive margin expansion……………………….…08

Competitive intensity led by Patanjali to remain high in India across categories……10

Digitial influence is all pervasive………………………………………………….………11

Supply chain management importance to increase substantially………….…….……12

Asian consumer market to remain centre stage……………………………...…………13

Sector financials……………………………………………………………………….……14

Valuation and recommendation……………………………………………………..……18

Companies

Hindustan Unilever…………………………………………………………………………27

Gillette India…………………………………………………………………………………41

Colgate-Palmolive (India)……..…………………………………………………….…..…55

Dabur India…………………………………………………………….……………………69

Emami……………………………………………………………………………….………83


5 FMCG Sector

Investment summary

Home and personal care (HPC) is a two-speed growth market

The past three years have been fairly challenging for HPC sub-segments of the FMCG Industry in India, but we expect this to change fairly significantly from 2HFY18. In our opinion, Indian consumers’ per capita spending on beauty and personal care products is fairly low (US$7 as compared to global average of US$54) and as the consumers have successfully managed to navigate most of the key economic challenges, increasingly the growth should be re aligned to per capita income and aggregate national income growth of 8%-12%, as has been the case in the past. Steady growth in discretionary demand (6%-8% in volume terms and about 10%-12% in value terms for passenger vehicles and consumer durables led by urban demand during the period FY14-FY17) also augurs well for revival of demand for non-discretionary goods such as home and personal care which had witnessed a meagre growth of 5% in the same period. Although our overall view of growth is not very different from consensus expectation, it is in the nature and shape of recovery on which we differ with consensus. Categories like oral care and body wash, in our opinion, could remain in mid single-digit whereas men’s grooming, skin and hair care are likely to find their mojo back again and deliver growth in double digits. Our positive view on these categories also stems from the fact that both penetration and per capita spending in these categories are fairly low, product suite in these categories are increasingly aligned with consumer preferences and importantly, consumer intent and willingness to premiumise driven by multiple reasons is fairly high. Also from a category-perspective, globally per capita spending on skin care itself is north of US$15 per annum and per capita spending by men, is estimated to be about 1/10th of what is spent by women in India similar to overseas countries.

Exhibit 1: Per capita spending (USD) on beauty and personal care products

Source: AT Kearney Report, Nirmal Bang Institutional Equities Research

7

33

237

54

India China USA World


6 FMCG Sector

Exhibit 2: India’s BPC market size by category (%)

Category Growth (14-16)

Sub category and growth

Evolution

Hand Care 16% - Newly emerging category consisting of nail, cuticle care and moisturising creams.

Colour Cosmetics

12% - Shift in usage of colour cosmetics- from only special occasions to everyday use.

Face care 9%

Fairness 7%

Consumers moving towards integration of health and wellness and skin care products.

Male shaving 9%

Cleansing 15%

Lip care 20%

Foundation 20%

Other creams 9%

Hair care 5%

Oil 5% Consumers are warming up to more evolved, western style hair care regimes.

Shampoo 5%

Conditioner 10%

Body care 4%

Toilet soaps 2%

Non-traditional product categories such as Derma, body wash, sunscr een are growing.

Deodorants 3%

Creams/Lotions 8%

Derma 32%

Sunscreen 9%

Body wash 9%


Innovation is the new battle ground, companies constantly need a winning consumer offer

Considering that distribution and customer outreach to a large extent has played its role, it will become increasingly imperative for companies to drive innovation not just in products but also in their whole organisational approach. Consumer behaviour in India is changing fairly fast and organisations which are able to respond to the fast-changing landscape in a more nimble-footed manner will really hold the key to retaining and winning the consumer mindset. Besides being sensitive to pricing, increasingly most consumers have gone natural/green in their preference across categories. The long-held belief that natural products do not have any side effects coupled with high-intensity marketing from naturals-focused players such as Dabur India, Himalaya and finally Patanjali has also accelerated the trend. Besides naturals, a slew of products such as organic, anti-pollution, anti-fatigue and anti-ageing products - which focus on inner well being and health – also witnessed a major fillip. Companies will also have to manage the digital and technology paradox which is both an opportunity and technology paradox. In order to maintain sector growth rate, we envisage companies will have to deliver about 3%-5% growth per annum from innovative products and about 20% in the five-year period from innovative and renovated products to maintain market share and/or leadership in their respective categories. Companies such as Hindustan Unilever and Gillette India which have consistently raised the bar on marketing and innovation, in our opinion, should emerge as winners on this front. Both have strong linkage with their respective parents who currently commit about 2%-3% of their sales towards research and development of new products.

1%

10%

18%

31%

40% 38% 36%

31% 30%

19% 21%

11% 12%

1% 1%

2014 2016 2021E

100%

Hand care

Colour

cosmetics

Face

care

Hair

care

Body

care


7 FMCG Sector

Exhibit 3: Innovation and research strategy of Indian HPC companies

Company Innovation and research strategy Key innovation and renovation

Hindustan Unilever

Focus largely on home and personal care products. Direct expenditure of about Rs300mn and the rest comes from technical collaboration with parent for which it currently pays a royalty of about 3%. Unilever spends about GBP1bn or around 2% of turnover. It employs about 6,000 people, and the Bengaluru centre is the largest with about 1,400 people.

Lever Ayush, Citra, Baby Dove, Surf Liquid, Lakme Absolute Scuplt

Dabur India Contemporary ayurveda in personal and healthcare products. Employs about 126 scientists and incurs direct expenditure of Rs340 mn.

Honitus Hot Sip, Dabur Red Gel, Madhurakshak Activ, Dabur Baby Massage Oil with Olive

Colgate Palmolive (India) Benefit segments of oral care market and direct expenditure is about Rs203mn and pays royalty of about 5% to the parent for technical collaboration. Parent has R&D spending in the range of US$300mn.

Cibaca Vedshakti, Colgate Sensitive Clove

Emami Next generation ayurvedic and personal care products with direct R&D spending of Rs230mn, which is about 1% of turnover.

Boroplus Perfect Touch, Navratna I Cool Talc, He Range of Perfumes and Deos

Gillette India No expenditure on R&D. Entirely dependent on parent for technical and branding support, ,paying about 1.5% as royalty. P&G annually spends about US$2bn on R&D, which is about 3% of sales.

Gillette Body Razor, Gillette Fusion Pro Glide, Gillette Fusion Hydra Gel

Source: Company, Nirmal Bang Institutional Equities Research

Modern trade to outpace growth in other distribution channels

In the past decade, companies invested substantially in strengthening their distribution infrastructure and improving their reach through several distribution and customer outreach programmes. Our extensive interaction with trade and market visit indicates that growth in modern trade and e-commerce will substantially outpace growth through other channels in the medium term. Rural markets, which have witnessed significant deceleration in recent years, will also see improvement, but the pace could be somewhat slow as the wholesale channel - which contributes substantially currently - will continue to remain in an adjustment phase. Our extensive visit to some of these markets in the past revealed a fair bit of divergence with South India performing extremely well, but conditions in North India were tough. Colgate- Palmolive (India), Dabur India and Emami, which rely significantly on rural markets, will face the challenge of somewhat sluggish pace of recovery in these markets.

Exhibit 4: Distribution network of Indian HPC companies

Company Distribution reach Distribution programmes Rural

contribution

Hindustan Unilever

Widest reach, with 9 out of 10 households buying a HUL product. Estimated reach of 8mn outlets and direct reach of 3mn outlets and about 200,000 villages.

Project Shakti and WIMI 35%

Dabur India Reach of about 6mn outlets through 3,000 plus distributors with direct reach in about 16%-17%.

Project Buniyad, Project Lead and Project Double

45%-50%

Colgate Palmolive (India) Reach in about 6mn outlets and direct reach estimated at about 1.5mn-2.0mn outlets.

- 45%-50%

Emami Total reach estimated at about 4.5mn outlets supported by about 3,000 distributors and 7,000 stockists.

Project Race and Dhanush 50%

Gillette India Reach estimated at about 2mn outlets led by Gillette Guard.

- 20%



8 FMCG Sector

Exhibit 5: BPC sales in rural versus urban market terms (2016)


Exhibit 6: FMCG growth trend in urban and rural markets

Source: Nielsen, Nirmal Bang Institutional Equities Research

Premiumisation and cost savings to drive margin expansion

Although pricing will be somewhat sluggish on account of benign inflation, we expect product innovation, fast growth in modern channels and importantly productivity gains to continue to support margin expansion by most HPC players. The share of affluent and elite households, which currently stands at about 24%, is expected to double to about 50% within a decade. The recent trend witnessed in categories like deodorants and skin cream, which has seen the share of premium category nearly double, is also another point to support our argument. Our expectation is that Hindustan Unilever and Gillette India will outpace their peers in margin expansion supported by strong premiumisation trend and high penetration in modern trade and e-commerce channels. For both these companies we envisage annual margin gains in excess of 100bps whereas for Dabur India and Colgate-Palmolive (India), we expect this to be modest as category growth rates are somewhat sluggish and competitive challenges are also higher.

33%

18%

17%

32%

7.4

6.5

6.2

5.6

2016

Rural

Rest of Urban

Town class

Metros

Growth 14-16

100%

8

22

11

19

22

19

15

18

12

79

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

YoY % Value Growth Rates

U + R Urban Rural

(%)


9 FMCG Sector

Exhibit 7: Trends in operating margins of HPC players

Improvement in margins

EBITDA margin (%) FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY14-FY17 FY17-FY20E

Dabur India 16.4 16.8 19.3 19.6 19.8 20.1 20.7 3.2 1.1

Colgate-Palmolive 18.6 20.6 24.3 23.7 24.0 24.5 24.7 5.2 1.0

HUL 16.0 16.9 18.5 19.0 21.8 23.3 24.3 3.0 5.3

Gillette India* 4.4 9.4 17.4 22.0 23.3 24.0 25.3 8.8* 3.3

Emami 23.8 24.4 29.1 30.4 28.0 28.4 28.9 6.6 -1.5

Note: In case of Gillette India, we have considered average of EBITDA margins as base because in FY14, the margins were down due to strategic move by the company to offer more mass offerings compared to premium products to penetrate the market. Hence, comparing the actual margin of 4.4% while calculating the improvement in the margin does not serve the purpose.

Source: Nielsen, Nirmal Bang Institutional Equities Research

Exhibit 8: Strong premiumisation across categories

Source: BCG CII Report, Nirmal Bang Institutional Equities Research

Exhibit 9: As the share of consumption of elite/affluent household grows, it will result in break-out growth in some categories

Average household consumption

Category Aspirer Elites/

Affluent

Discretionary categories (e.g. breakfast cereals, noodles, vitamin supplements)

x 3-4x

Basic categories (e.g. hair oil, biscuits, oil)

x 1.5-2.5x


5% 3%12%

5%18%

11%4% 3%

24% 27%

49%52%

40%45%

25% 28%

60%46%

18%19%

26%17%

57%40%

11%24% 21% 24%

16%27%

14%

29%

0%

20%

40%

60%

80%

100%

2009 2014 2009 2014 2009 2014 2009 2014

Unbranded Economy Regular Premium

Laundry care Salty snacks Moisturising creamDeodorants

0

50

100

150

200

250

2015 2020 2025

Struggler ( < 1.5 lac) Next Billion (1.5 to 5 lac) Aspirers (5 to 10 lac) Affluent (10 - 20 lac) Elite (> 20 lacs)

110-125 bn

220-240 bn

FMCG market size split by income tiers

19%

32%

26%

13%

22%

28%

12%

32%

16%

25%

20%

7%26%

16%8%


10 FMCG Sector

Competitive intensity led by Patanjali to remain high in India across categories

Considering the fact that India holds significant market potential in HPC categories, both MNC and Indian companies are expected to slug it out significantly to capture a larger share of the overall pie. FMCG remains the highest spender with a contribution of about 32% to traditional media i.e. television, print and radio. Hindustan Unilever remains the highest spender with a share of nearly 25% of overall spending. In recent years, Patanjali has emerged as a large spender and ranks No.7 in the FMCG space and No.15 on overall basis. The disruptive challenges by Patanjali need to be watched closely. Currently, it has a very wide portfolio of products to offer and as it expands production capabilities it may follow a more vertical or depth strategy by offering more SKUs or segmentation within the category itself. This certainly will be a challenge to most players looking to defend their turf by launching green/ayurvedic products. The brand, which originally was termed as a fad, now reaches nearly 53% households in personal care and 26% in food products, up nearly 100% from a year ago. Even in rural households it has built a good reach by achieving nearly 24% market share in personal care and 7% in food and beverages. Importantly, the brand has a very good retention rate and is certainly a challenge for most personal product manufacturers.

Exhibit 10: Patanjali reach rises sharply across India

Urban Household Reach Rural Household Reach

Source: Brandz, Nirmal Bang Institutional Equities Research

Exhibit11: FMCG is the leader in media spends

Rank in 2016 Rank in 2015 Name of the companies Approx, spending in Rsmn

1 1 Hindustan Unilever 25,000-28,000

3 3 Procter & Gamble 6,500-7,500

4 10 Reckitt Benckiser 5,000-6,000

7 8 ITC 4,500-5,500

9 6 Mondelez 4,500-5,500

10 7 Godrej Consumer products 4000-5000

15 New Patanjali Ayurveda 3000-4000

16 16 Glaxo SmithKline 3000-4000

19 14 Colgate Palmolive India 2500-3000

20 15 Marico 2500-3500

21 29 Emami 2500-3500

23 27 Coca Cola India 2500-3500

27 17 Nestle India 2000-3000

28 21 L'Oreal India 2000-3000

31 22 Dabur India 1500-2500

32 28 Vini Cosmetics 1500-2500

34 18 PepsiCo 1500-2500

37 20 Johnson and Johnson 1500-2500

45 48 Britannia 1000-1500

Source: Pitch Madison Advertising Report, 2017, Nirmal Bang Institutional Equities Research

9%

14%

24%

17%

26%

45%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Household care Food & Beverages Personal care

2016 2017 2016 20172016 2017

2%3%

11%

5%7%

24%

0%

5%

10%

15%

20%

25%

30%

Household care Food & Beverages Personal care

2016 2017 2016 20172016 2017


11 FMCG Sector

Digitial influence is all pervasive

Similar to other businesses, the impact of digital and e-commerce on FMCG business is expected to be substantial. Most businesses need to answer questions such as how to build a successful presence in the online market and also leverage it for consumer feedback in a more direct manner, as opposed to traditional tools such as consumer surveys for views on loyalty, spending, competition and other insights. According to AC Nielsen, globally more than one quarter of respondents order grocery and importantly more than half (55%) are willing to do so in the future. Online grocery shopping is very popular in China where nearly 50% of respondents to a survey reported that they use online ordering and delivery service. It is not difficult to envisage considering the fast-growing penetration of internet and ubiquitous presence of mobile phones that this number will grow substantially. According to a BCG CII report, the number of digitally-influenced buyers will see nearly a four-fold increase from 55mn in 2015 to about 200mn in 2020. Considering the significant expansion of digitally-influenced FMCG buyers, a strong internet, e-commerce and social media strategy is critical for success. Hindustan Unilever, in association with its parent Unilever, has several first-mover and significant competitive advantages when it comes to executing a digital strategy. It was among the first to leverage CPG marketing platforms of Facebook, Instagram etc. Unilever Foundry has tied up with several technology start-ups for more efficient marketing. It has leveraged mobile technologies to drive personalisation at scale and has people data centres in markets like India which provide real-time insights to questions.

Exhibit 12: Digitally- influenced purchases in FMCG space projected to rise exponentially


Exhibit 13: Digitally-influenced consumers are expected to spend US$40bn-US$45bn on FMCG by 2020


6

33

170

0 50 100 150 200

FMCG buyers purchasing online

Digitally influenced FMCG buyers

Internet users

2013

Population (mn)

12

55

260

0 100 200 300

2015

90

200

650

0 200 400 600 800

2020E

Digitally influenced consumers 2015 Digitally influenced consumers 2020

Affluent

Aspirers

Next billion

Strugglers

55-60

150-90

FMCG spend by

income tier in 2020

35 % of total

FMCG spend(40-45 bn USD)


12 FMCG Sector

Supply chain management importance to increase substantially

Short product life cycle, disruptive competition and volatility in input prices because of supplier consolidation increases the need for an efficient supply chain manifold. Environmental regulations continue to get tightened and companies will have to manage increased compliance without a corresponding increase in costs. In 2016-17, the government of India had notified several new regulations relating to ground water, e-waste management and effluent discharge. Although raw material prices have been somewhat benign supported by a strong Indian rupee and moderation in crude oil prices, this scenario can change fairly swiftly. So far the impact of GST on logistics has been limited, but it can potentially change significantly in the future. Most supply chains will have to become responsive and be prepared for these changes. Several companies such as Hindustan Unilever are now giving significant importance to supply chain management and we expect 100bps of savings through efficient management of inputs and costs to boost profitability by about 3%-4%.

Exhibit 14: Efficient manufacturing could drive the profitability

Company Employee base and plant locations Other points

Impact on profitability as a result of 100 bps savings in Raw materials & overheads

EBITDA PAT

Colgate-Palmolive (India) Operates five plants and one research centre.

Plants located close to raw material suppliers. Advancing payments to suppliers during downturn.

3.2% 3.5%

Dabur India Employee base of 7243. Manufacturing units spread across 13 locations with main units at Baddi, Pantnagar and Tezpur, Assam.

One of the longest supply chains in the FMCG industry. Awarded Greentech Safety Award in 2016. Complies with ISO 9000, 14000 etc.

4.1% 3.9%

Emami India Employee base of 3,097. Manufacturing units spread across eight locations in India.

SAP deployed to support efficient manufacturing practices.

2.6% 2.6%

Hindustan Unilever Employee base of 18,000. Operates nearly 30 plants across India.

Focus on sustainability. Increased share of renewable energy to 28% and achieved 6% savings in costs.

3.6% 3.5%

Gillette India Employee base of 646. Operates two plants –one cash at Bhiwadi and Baddi.

Focus on sustainability. 3.3% 3.2%



13 FMCG Sector

Asian consumer market to remain centre stage

Global personal and beauty care market is estimated to be in the range of US$450bn with Asia Pacific led by China and India contributing nearly 33% followed by Europe at about 25% and the US contributing about 20%. From a category perspective, the contribution is led by skin care, hair care and colour cosmetics with these categories contributing to nearly 55% of the overall. The overall growth in the market is expected to be led by skin, colour cosmetics and men’s grooming. In case of home care, the global market is estimated in the range of US$140bn and expected to grow in the range of 5%. A large part of the home and personal care market is led by relentless innovation with the total SKU base expanding anywhere between 50%-100% over a period of five years, depending on the size and maturity of the market. From a market perspective, the importance of emerging markets such as China, India and Indonesia will only continue to witness an increase as these markets will contribute the maximum towards the addition of new middle class consumers. The green and digital consumer is also an important theme globally. Most CPG companies face questions of building a successful online business, building categories and brands in networked world and how to exploit technology to connect with consumers more effectively aka as “mass customisation.” However, unlike emerging markets, in developed markets ageing is the key and most companies will have to find new innovative ways to address it. Unilever had launched Dove Pro-Age ,a line of deodorants, hair-care and skin care products for female consumers aged between 54 and 63.

Exhibit 15: Beauty market growth Exhibit 16: Total value sales by category

Source: L’oreal presentation, Nirmal Bang Institutional Equities Research Source: Euromonitor presentation, Nirmal Bang Institutional Equities Research

0

1

2

3

4

5

6

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

E

(%)

0

20,000

40,000

60,000

80,000

100,000

120,000

Ski

n c

are

Ha

ir ca

re

Co

lou

r Co

sme

tics

Me

n's

gro

om

ing

Fra

gra

nce

s

Ora

l ca

re

Ba

th a

nd

Sh

ow

er

De

od

ora

nts

Ba

by

an

d C

hild

(US$mn)

3

23 3 3 2 2 3 3

2016 % CAGR 2016-21


14 FMCG Sector

Sector financials

Volume, potentially at inflection point, to get a boost from natural/ayurveda products

Volume growth trend of HPC companies has clearly mirrored the trends of economic slowdown and poor consumption sentiment, especially in rural areas. Median volume growth has fallen sharply from 7.4% in FY14 to 2.7% in FY17. Tailwinds of steady discretionary consumption trends and stable to improving rural outlook do augur well for recovery and we believe volume growth could be at an inflection point after nearly four years. Pricing action has been fairly moderate and increasingly consumers are looking to green/natural products and both these trends also have ability to lift per capita consumption level from the current level which is fairly low,even when compared to countries like Indonesia. The comfort factor attached to consuming a green/natural product liberally should be significantly higher than that attached to a chemical- based product. As discussed earlier, volume trend will not be similar across categories and the categories expected to lead this growth include skin, hair and men’s grooming. Oral care, a fairly large category, is likely to face somewhat sluggish growth as significant marketing investments are required to boost per capita level as penetration/reach story has largely played out. The recent cut in prices on account of GST could prove to be a short-term boost for this category. Some niche categories which enjoyed fairly high growth in the past supported by wholesale channel could also take some time to find a footing. On overall basis, our expectation is that volume growth for the sector can potentially improve to a range of 4%-6% supported by above factors.

Exhibit 17: Annual volume trend of HPC companies Exhibit 18: Median of volume trend of HPC companies

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 19: Volume and value growth trends

Volume growth (%) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18

Colgate-Palmolive (India) 2.0 3.0 1.0 6.0 6.0 4.0 (12.0) (3.0) (5.0)

Dabur India 8.1 5.0 (2.5) 7.0 4.1 4.5 (5.2) 2.4 (4.4)

Emami 15.0 13.5 9.3 18.0 17.0 11.0 0.2 (1.5) (18.0)

HUL 6.0 7.0 6.0 4.0 4.0 (1.0) (4.0) 4.0 -


Value growth (%) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18

Colgate-Palmolive (India) (4.0) (5.9) (4.1) (7.3) 2.0 4.8 2.6 5.2 1.5

Dabur India (6.6) (8.0) (8.1) (6.9) (4.3) (3.5) 0.6 0.3 (0.6)

Emami 8.0 6.0 4.7 5.0 4.0 3.0 2.8 4.5 2.0

HUL (4.3) (5.8) (6.1) (3.4) (0.4) 2.4 3.3 2.4 4.9


(5)

0

5

10

15

20

FY14 FY15 FY16 FY17

Dabur Emami Colgate HUL Marico Jyothy Lab

(%)

7.47.1

6.5

2.7

2.0

3.0

4.0

5.0

6.0

7.0

8.0

FY14 FY15 FY16 FY17

(%)


15 FMCG Sector

Innovation and rural uptick to boost sales and earnings

In line with volume trend, top-line growth of FMCG sector also witnessed moderation in both food and HPC segments .As consumption sentiment was weak, most companies also curtailed innovation activities and this also impacted overall growth which witnessed a decline from early mid-teen to about mid single-digit growth. During the slowdown, HPC companies marginally outperformed food, beverage (F&B) and tobacco companies. However, we believe the dust is settling down slowly over matters like GST and growth could pick up in the consumer sector. Within HPC, the most buzzing segment is that of naturals/ayurveda so much so that there is no possibly a mini media war to own this space. Nevertheless, the continued innovation and marketing spend augurs well for per capita and overall growth.

Similar to sales growth, EBITDA also saw moderation from FY14 and trended from mid-teen into single- digit growth in FY17. Relatively, HPC category outperformed F&B and tobacco categories. Similarly, net income growth was also higher in case of HPC category. We believe that with the pick-up in demand, margins will also ramp up but because of the competitive intensity being high, players will not be able to enjoy substantial pricing premium and hence overall profitability for the sector will grow in the range of low-mid double-digits.

Exhibit 20: FMCG sales growth trend Exhibit 21: FMCG EBITDA growth trend

Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 22: FMCG net income growth trend

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Note: Companies included for above analysis are HPC (Dabur, Colgate, HUL, Emami, P&G Hygiene & Healthcare, Gillette India, Marico, Godrej Consumer, Jyothy Lab) and F&B and Tobacco (Nestle India, Britannia, ITC, GSK Consumer, United Spirits)

-5%

0%

5%

10%

15%

20%

25%

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18E

FY

19E

FY

20E

Healthcare/Personalcare/Homecare F&B and tobacco Total FMCG

0%

5%

10%

15%

20%

25%

30%

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18E

FY

19E

FY

20E


-10%

0%

10%

20%

30%

40%

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18E

FY

19E

FY

20E



16 FMCG Sector

Growth trajectories differ significantly

Key HPC players namely, HUL, Dabur India, Colgate-Palmolive (India), Gillette India and Emami witnessed low single-digit or negative growth in the past two years mainly because of macro factors discussed earlier. In our opinion, HUL and Gillette India will deliver better growth going forward. We expect HUL to be the largest beneficiary of the premiumisation trend, considering the strong brand equity enjoyed by its mid and premium segment brands. We expect 5% growth for HUL in FY18 and further improvement in the coming years. When it comes to men’s grooming, particularly the shaving segment, Gillette India has been leading from the front. Looking at the growth prospects in that segment and the ability of Gillette India to leverage its experience and technological expertise, we believe it will grow at least in low-mid single digits. First-half of FY18 will be slightly tough for all companies because of GST implementation and hence we have assumed conservative growth estimates for the full year. In our opinion, Dabur India, Colgate-Palmolive (India) (CPIL) and Emami have been struggling in the past two years, despite being very small in size compared to HUL. Due to competition from Patanjali and lack of substantial innovation, growth could be tough going forward. Hence, we expect these three companies to grow in high single-digits in the medium term. Consensus estimates are above our expectations in terms of top-line growth, but we believe that although the growth in consumer sector will pick up, the growth rate going forward will not be similar to that before FY14. We assume that growth going forward will be largely led by volume, which is missing currently. Hence, on a conservative basis, we have assumed a lower growth rate compared to consensus estimate.

Following weakness in the top-line in past couple of years, profitability of these companies was also impacted. Companies had to spend more and more on advertising and distribution networks to grow. We believe that HUL and Gillette India in this list will outperform in terms of margins also. HUL’s parent Unilever has recently redrafted its strategy with key focus on profitability. In our opinion, HUL is expected to deliver profitable growth in the coming years by leveraging its brands and focus on cost optimisation strategy. Gillette India will continue to maintain its margin profile because of relatively low competition and the quality of its offerings. Dabur India, in our opinion, is not in a position to take aggressive price hikes and so it will have to spend on advertising and innovation to support growth. CPIL has been facing a lot of competition after the entry of Patanjali. Hence, in our opinion, key focus of the company will be to prevent the fall in its market share by keeping margins at the existing level, if not lower. Emami will continue to spend higher on advertising and increase its direct reach network as well as overall distribution network and also margins in this case have topped out, in our opinion. Hence, we expect the growth rate to be on the lower side compared to historical numbers in good times in case of these three companies. Similar to top-line growth, our EBITDA and PAT growth estimates are on the lower side compared to consensus estimates, mainly because of lower top-line growth assumption.

Exhibit 23: Growth trends and our forecasts for HPC companies

Sales (%) FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Dabur India 16 15 11 1 (2) 4 8 7

Colgate-Palmolive (India) 17 13 11 (3) 3 4 8 8

Emami 17 7 22 6 6 9 10 10

HUL 17 9 10 1 3 5 7 8

Gillette India 17 16 19 (11) (1) 8 12 13

Total 17 10 11 0 2 5 7 8

EBITDA (%) FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Dabur India 15 17 13 15 (1) 5 10 11

Colgate-Palmolive (India) 14 1 24 14 1 6 10 9

Emami 16 -2 25 27 10 0 12 12

HUL 22 12 16 10 5 21 14 12

Gillette India 25 -45 154 65 25 15 15 19

Total 19 9 19 14 5 15 13 12

PAT (%) FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Dabur India 18 20 17 17 2 2 12 11

Colgate-Palmolive (India) 11 9 4 4 (1) 9 10 10

Emami 22 28 21 19 5 6 11 12

HUL 41 2 11 (5) 9 18 15 13

Gillette India 15 (41) 208 34 19 19 15 22

Total 21 13 8 12 2 17 14 12



17 FMCG Sector

Better corporate earnings is a good sign for consumer companies

Although it is difficult to find a correlation between the earnings growth of the two companies because of volatility in earnings of other sectors over the years, positive growth in Nifty earnings is a good indicator for big sectors like consumer, automobile, banking etc. As per consensus estimates, Nifty earnings will grow in mid high-teen digits in the next three years and FMCG to grow in low mid single-digits. Considering the current scenario, we expect HUL and Gillette India to post mid high-teen earnings growth and other companies in the range of 10%-12%.

Exhibit 24: Nifty index sector-wise net income YoY growth (%)

Sector FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Auto and auto ancillary 4 (78) 716 75 18 (9) 24 1 45 (25) 16 29 18

Banking 33 34 17 12 50 4 16 4 (24) 8 37 28 33

Cement (5) (8) 9 (12) 54 5 (11) (24) 22 19 13 36 25

FMCG 9 15 9 16 24 26 12 9 - 6 12 15 13

Infra 15 98 33 12 (3) (17) (29) 2 (7) 25 3 18 18

IT - 17 17 18 25 33 22 3 13 2 - 9 8

Metals and mining 26 (28) 2 58 (48) (64) 235 (202) 523 28 545 16 9

Oil & gas 27 (11) 28 29 17 7 6 (20) 14 18 1 16 7

Others N.A. N.A. N.A. N.A. N.A. 2 108 12 16 51 (13) 20 17

Pharma (58) 133 40 (75) 588 8 13 21 21 12 (19) 32 18

Power 32 4 18 10 (19) 40 (7) (3) 12 11 17 18 14

Real estate 192 (40) (70) (5) (27) (41) (100) N.A. N.A. N.A. N.A. N.A. N.A.

Telecom 36 16 (30) (47) (54) (16) 233 15 (15) (13) (13) 43 35

Nifty 24 (1) 17 19 13 4 16 (15) 12 6 13 20 17


Dividend yield pattern of FMCG companies witnessed a downturn, but shareholders of HUL enjoy a decent dividend yield of close to 2%. For all other players it is in the range of 1.0%-1.5%. On relative basis, dividend yield of Gillette India has been low in previous years, but in FY17 the dividend yield for the company was as high as 3.7% because of special dividend declared by the P&G group. Comparison of five-year CAGR in Dividend per share (DPS) suggests that Dabur India, HUL and Gillette India have increased payouts in the past five years. We expect debt-free companies like HUL, Gillette and CPIL to accelerate dividend payout, which is considered positive by large investors.

Exhibit 25: Trend in dividend yield (%) Exhibit 26: DPS growth (five-year CAGR band)


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Dabur Colgate Emami HUL Gillette

8%

27%

40%

5% 5%

12%

-4%

6%

18%

64%

-10%

0%

10%

20%

30%

40%

50%

60%

70%


FY07-FY12 FY13-FY17


18 FMCG Sector

Valuation and recommendation

Price performance clearly reflects slowdown in sector growth

Looking at the price performance of HPC players over the past few years, the returns were in single digits in CY16; reflecting the sharp slowdown witnessed in earnings. In the HPC space, Marico and Godrej Consumer Products have consistently delivered in the past five to six years. In CY16, HUL, Dabur India, Emami, CPIL and Gillette India posted negative returns, out of which HUL and Gillette India gained 51% and 27%, respectively, YTD. HUL and Gillette India have consistently outperformed their parent companies except in last calendar year. If we consider relative performance (compared to Nifty) YTD, only HUL has outperformed Nifty index while all other HPC players barring Dabur India are in line with index returns. Dabur India, in fact, has underperformed to the extent of 9% despite poor returns even in last calendar year, reflecting the increased competitive challenges in the natural space

Exhibit 27: Absolute price performance of Indian FMCG players

Absolute performance (%) CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 YTDCY17*

Home and personal care

Dabur India 39 17 (26) 89 26 (1) 30 32 37 18 - 12

Colgate Palmolive (India) 44 5 - 62 32 14 58 (14) 32 9 (7) 26

Hindustan Unilever 10 (1) 17 6 18 30 29 9 33 14 (4) 51

Emami India 104 23 (30) 120 64 (15) 76 19 66 27 (5) 20

Proctor & Gamble Hygiene % Healthcare . - (9) (2) 127 7 1 46 10 91 (3) 26 19

Gillette India 17 58 (47) 81 44 6 26 (17) 60 42 (8) 27

Marico 47 27 (19) 86 16 21 50 2 50 39 15 26

Godrej Consumer Products 14 (9) 3 90 47 - 87 19 13 36 14 24

Jyothy Laboratories N.A. N.A. (57) 132 55 (40) 102 17 37 21 8 24

F&B and Tobacco

Nestle India 21 32 (3) 75 50 7 22 6 21 (9) 3 22

Britannia Industries (20) 35 (10) 27 23 8 11 85 100 61 (3) 51

ITC 24 19 (18) 46 39 15 42 12 15 (11) 11 11

GlaxoSmithKline Consumer Healthcare 2 31 (23) 130 80 9 50 17 32 9 (22) 2

United Spirits 74 131 (56) 42 16 (66) 286 37 7 7 (35) 36

Heritage Foods 9 93 (80) 204 14 (36) 237 (18) 85 52 55 25

Parag Milk Foods N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. (17)

VST Industries (19) (5) (44) 152 19 72 80 (11) 9 (11) 42 48

United Breweries 136 85 (76) 116 200 (24) 142 (17) 8 13 (18) -

Others

Titan Co 6 82 (41) 54 153 (5) 66 (19) 66 (9) (6) 60

Jubilant Foodworks N.A. N.A. N.A. N.A. N.A. 21 71 (1) 8 8 (42) 11

Westlife Development 50 67 40 4,429 12 14 800 918 (17) (23) (30) 33

Asian Paints 27 49 (19) 101 60 (10) 71 11 54 17 1 24

NIFTY FMCG INDEX 17 22 (20) 42 31 9 49 12 18 - 3 23

Nifty 50 40 55 (52) 76 18 (25) 28 7 31 (4) 3 23

*YTD returns have been calculated based on closing share price of 15th Sept 2017.



19 FMCG Sector

Exhibit 28: Relative (Nifty) price performance of Indian FMCG players

Relative performance (%) CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 YTDCY17*


Dabur India - (25) 53 8 7 32 2 24 4 23 (3) (9)

Colgate Palmolive (India) 3 (32) 107 (8) 12 51 24 (19) - 14 (10) 2

Hindustan Unilever (22) (36) 143 (40) - 73 1 2 1 18 (7) 22

Emami India 46 (20) 45 25 39 12 38 11 26 32 (8) (2)

Proctor & Gamble Hygiene& Healthcare. (28) (41) 104 29 (9) 34 15 3 45 1 22 (3)

Gillette India (16) 2 9 3 22 41 (2) (22) 21 48 (10) 3

Marico 5 (18) 68 6 (2) 61 17 (5) 14 45 12 2

Godrej Consumer Products (18) (41) 114 8 24 32 47 11 (14) 41 11 1

Jyothy Laboratories N.A. N.A. (10) 32 31 (21) 58 9 4 26 5 -

F&B and tobacco

Nestle India (13) (15) 101 - 27 42 (5) (1) (8) (5) - (1)

Britannia Industries (42) (13) 86 (28) 4 44 (13) 73 52 68 (6) 23

ITC (11) (23) 70 (17) 18 53 12 5 (13) (7) 7 (10)

GlaxoSmithKline Consumer Healthcare (27) (16) 59 31 52 44 17 9 1 14 (24) (17)

United Spirits 25 49 (8) (19) (2) (55) 202 29 (19) 12 (37) 11

Heritage Foods (22) 25 (59) 73 (3) (16) 164 (23) 41 58 50 32

Parag Milk Foods N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. (23)

VST Industries (42) (39) 16 43 1 128 41 (17) (17) (7) 37 (5)

United Breweries (22) 25 (59) 73 (3) (16) 164 (23) 41 58 50 32

Others

Titan Co (24) 17 23 (13) 114 26 30 (24) 27 (5) (9) 57

Jubilant Foodworks N.A. N.A. N.A. N.A. N.A. 60 34 (8) (18) 12 (44) 29

Westlife Development 7 8 190 2,477 (5) 52 605 853 (37) (20) (32) 12

Asian Paints (9) (4) 69 14 36 19 34 4 17 22 (2) 13

NIFTY FMCG INDEX (16) (21) 67 (19) 11 44 16 5 (10) 5 - -



Exhibit 29: Absolute price performance of global FMCG players

Absolute performance (%) CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 YTDCY17*


Unilever PLC (London) 11 32 (16) 26 (2) 10 9 5 6 11 13 36

Reckitt Benckiser Group PLC (UK) 22 25 (12) 30 5 (10) 22 24 11 21 10 7

Loreal 21 29 (36) 25 7 (3) 30 22 9 11 12 3

Procter & Gamble Co. (US) 11 14 (16) (2) 6 4 2 20 12 (13) 6 7

Beiersdorf AG (Germany) 42 7 (20) 9 (9) 4 41 19 (8) 25 (4) 14

F&B and Tobacco

Nestle SA (Swiss) 10 20 (20) 21 9 (1) 10 10 12 2 (2) 11

Mondelez International US 27 (9) (18) 1 16 19 4 39 3 23 (1) (1)

Brirish American Tobacco PLC (UK) 10 38 (8) 12 22 24 2 4 8 8 23 4

Diageo PLC UK 19 8 (11) 13 9 19 27 12 (8) - 14 23

Pepsico Inc 6 21 (28) 11 7 2 3 21 14 6 5 11

The Coca Cola Company 20 27 (26) 26 15 6 4 14 2 2 (3) 11

Penord Ricard SA (France) 18 9 (33) 23 17 2 22 (5) 11 14 (2) 10

Index

MSCI World Index 18 7 (42) 27 10 (8) 13 24 3 (3) 5 12




20 FMCG Sector

Exhibit 30: Relative (MSCI World Index) price performance of global FMCG players Relative performance (%) CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 YTDCY17*


Unilever PLC (London) (5) 24 44 (1) (10) 19 (3) (15) 3 14 7 22

Reckitt Benckiser Group PLC (UK) 3 17 53 3 (4) (2) 8 - 8 24 4 (4)

Loreal 2 21 10 (1) (3) 5 15 (2) 6 15 6 (8)

Procter & Gamble Co. (US) (6) 7 45 (23) (3) 12 (10) (3) 9 (10) 1 (4)

Beiersdorf AG (Germany) 21 - 37 (14) (17) 13 25 (4) (11) 28 (9) 2

F&B and tobacco

Nestle SA (Swiss) (7) 12 38 (5) - 7 (2) (12) 9 5 (7) (1)

Mondelez International US 7 (15) 42 (20) 6 28 (8) 12 - 27 (6) (11)

Brirish American Tobacco PLC (UK) (7) 28 58 (12) 12 34 (10) (16) 5 11 16 (7)

Diageo PLC UK 1 1 54 (11) - 28 12 (10) (10) 3 8 10

Pepsico Inc (10) 13 25 (13) (2) 10 (9) (2) 11 9 (1) -

The Coca Cola Company 1 19 27 (1) 5 15 (8) (8) (1) 5 (8) (1)

Penord Ricard SA (France) - 2 16 (3) 6 10 8 (24) 8 17 (7) (2)

*YTD returns have been calculated based on closing share price of 15th Sept 2017. Source: Bloomberg, Nirmal Bang Institutional Equities Research


21 FMCG Sector

Valuation of select HPC players supported by improved future earnings outlook

Indian consumer and consumer discretionary stocks have consistently traded at a significant premium to their peers and this has been evident not just in a bear market, but also in a bull market. As discussed above, we are expecting a recovery in HPC segment on account of a favourable base and pick-up in growth slowly. To understand the sustainability of current price multiples, we compared the PEG of consumer companies and arrived at the conclusion that HPC players like Dabur India, Emami and CPIL are trading at five times PEG; much higher than PEGs of HUL and Gillette India. We understand that, currently in the bull phase, all stocks are trading at a premium but looking at the earnings outlook of the companies, we believe that price multiples in case of Dabur India, CPIL and Emami are not supported by adequate future earnings growth. HUL and Gillette India have always been trading at a substantial premium and we expect it to continue in the same manner as both are poised for profitable growth going forward. HUL is trading at almost twice the P/E (FY18E) of Unilever UK whereas Gillette India is trading at almost thrice the P/E of P&G US (FY18E). We believe the valuations for these Indian companies are sustainable, looking at future growth rate compared to parent companies. Three-year sales CAGR (FY17-FY20E) growth expectation in case of HUL is 1.8 times more than Unilever and in case of Gillette India, three-year sales CAGR (FY17-FY20E) estimates are 3.5 times more than that of P&G US.

Exhibit 31: Nifty versus Nifty FMCG P/E Exhibit 32: NIFTY FMCG relative P/E

Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research Exhibit 33: Relative P/E (Nifty) Exhibit 34: Relative P/E (Nifty FMCG)

Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

10

12

14

16

18

20

10

15

20

25

30

35

40

45

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Ap

r-1

2

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

De

c-1

4

Ap

r-1

5

Au

g-1

5

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

Nifty FMCG Forward PE NIFTY 50 Forward PE

1.4

1.6

1.8

2

2.2

2.4

2.6

2.8A

pr-

09

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Ap

r-1

2

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

De

c-1

4

Ap

r-1

5

Au

g-1

5

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

(x)

0

2

4

6

8

10

12

0.5

1.5

2.5

3.5

4.5

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Ap

r-1

2

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

De

c-1

4

Ap

r-1

5

Au

g-1

5

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7


(x) (x)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.4

0.8

1.2

1.6

2.0

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Ap

r-1

2

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

De

c-1

4

Ap

r-1

5

Au

g-1

5

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7


(x) (x)


22 FMCG Sector

Exhibit 35: Valuation of Indian FMCG players

Company CMP*

(Rs) Mkt cap

(USD mn)

P/Sales (x) EV/EBITDA (x) P/E (x) Sales CAGR

%^

EBITDA CAGR

%^

EPS CAGR

%^

PEG (x) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E

Healthcare/personal/homecare

Dabur India 311 8,356 6.8 6.3 5.9 34.2 30.9 27.6 42.1 37.6 33.7 6.5 8.5 8.2 5.1

Colgate Palmolive (India) 1,076 4,466 7.0 6.5 6.0 28.8 26.0 23.8 46.4 42.3 38.4 6.8 8.2 9.6 4.8

Hindustan Unilever 1,203 39,734 7.2 6.7 6.3 34.9 30.4 27.1 49.3 42.9 38.1 6.6 15.8 15.0 3.3

Emami 1,095 3,793 9.2 8.3 7.5 32.5 28.7 25.1 38.9 35.2 31.5 9.8 7.9 9.4 4.1

Procter & Gamble Hygiene & Healthcare 8,366 4,145 9.9 8.7 N.A. 33.8 30.4 N.A. 53.9 46.6 N.A. N.A. N.A. N.A. N.A.

Gillette India 5,550 2,760 9.6 8.6 7.6 40.8 34.8 29.3 59.8 52.1 42.7 11.0 16.3 18.7 3.2

Marico 311 6,134 6.0 5.3 4.6 31.9 27.0 23.7 45.3 38.1 33.0 13.6 13.1 14.9 3.0

Godrej Consumer Products 900 9,363 5.9 5.2 4.6 29.7 25.5 22.3 41.6 35.2 30.1 13.3 13.9 16.0 2.6

Jyothy Laboratories 398 1,103 4.0 3.5 3.1 27.8 24.0 20.6 36.9 34.0 28.9 11.9 13.2 6.2 5.9

F&B and tobacco

Nestle India 7,138 10,503 6.7 5.9 5.3 32.8 28.2 24.8 56.5 48.0 41.7 12.5 16.3 21.4 2.7

Britannia Industries 4,340 7,952 5.1 4.5 3.9 34.6 28.8 23.7 50.5 41.9 34.2 14.7 19.7 19.8 2.6

ITC 262 48,621 6.9 6.1 5.5 18.2 15.9 14.2 27.5 24.2 21.7 10.9 11.7 12.3 2.2

GlaxoSmithKline Consumer Healthcare 4,909 3,151 4.8 4.3 3.9 20.9 18.4 16.6 29.1 25.7 23.2 9.8 8.1 10.6 2.7

United Spirits 2,402 5,328 3.8 3.4 3.1 34.6 27.1 23.4 67.7 46.8 36.7 8.5 18.7 111.9 0.6

United Breweries 848 3,423 4.2 3.7 3.4 30.8 26.1 22.9 75.1 58.3 48.1 13.5 15.6 27.3 2.8

Heritage Foods 1,447 512 1.3 1.1 1.0 19.8 15.7 13.0 42.5 31.8 22.6 9.6 23.7 30.6 1.4

Parag Milk Foods 233 299 1.0 0.9 0.7 14.5 11.7 9.6 35.2 25.2 18.7 15.0 26.4 81.5 0.4

VST Industries 2,835 668 2.2 1.9 N.A. 13.5 11.1 N.A. 21.5 17.6 N.A. N.A. N.A. N.A. N.A.

Others

Titan Co. 576 7,800 3.3 2.7 2.3 32.8 26.3 22.0 49.6 40.0 33.5 19.1 24.3 28.0 1.7

Avenue Supermarts 1,044 9,943 4.1 3.2 2.6 48.2 36.6 29.1 85.7 63.1 49.7 28.3 29.9 34.2 2.4

Jubilant Foodworks 1,376 1,386 3.2 2.8 2.4 28.0 22.6 18.3 80.8 56.6 43.9 13.6 26.6 52.9 1.5

Westlife Development 231 549 3.4 2.9 2.3 55.4 40.5 N.A. N.A. 216.7 79.7 19.6 N.A. N.A. N.A.

Asian Paints 1,130 16,542 6.1 5.2 4.6 32.2 27.1 23.2 50.3 42.3 36.4 16.3 15.1 15.3 3.3

*Last trading price of 28-Sep-2017 have been considered. ^3 year CAGR (FY17-FY20E)


Exhibit 36: Valuation of global FMCG players

Company CMP* Mkt cap

(USD mn)


%^

EBITDA CAGR

%^

EPS CAGR

%^



Unilever PLC 4,250 1,71,192 2.6 2.6 2.5 14.8 14.0 12.8 21.8 19.8 17.6 3.7 9.5 14.8 1.5

Reckitt Benckiser Group PLC 6,755 63,756 4.0 3.5 3.4 17.9 15.5 14.5 20.2 17.9 16.4 12.7 18.7 16.8 1.2

L’Oreal SA 177 1,16,723 3.8 3.6 3.5 17.1 16.4 15.5 26.3 24.9 23.5 3.2 6.5 10.8 2.5

Procter & Gamble Co 91 2,31,720 3.5 3.4 3.2 14.0 13.5 12.9 21.8 20.4 19.0 3.2 5.0 (6.2) (3.6)

Beiersdorf AG 91 26,930 3.3 3.1 3.0 15.2 14.3 13.4 27.3 25.6 23.9 4.0 6.5 6.7 4.2

F&B and tobacco

Nestle SA 81 2,60,280 2.8 2.7 2.6 15.8 14.9 13.9 23.3 21.5 19.6 2.6 6.2 14.1 1.7

Mondelez International Inc 41 61,165 2.4 2.3 2.3 15.7 14.3 13.8 19.2 17.4 16.0 1.5 19.2 33.3 0.6

British American Tobacco PLC 4,650 1,43,079 5.3 4.2 4.0 14.6 10.8 10.1 16.6 14.9 13.6 21.6 33.4 11.0 1.5

Diageo PLC 2,430 81,927 4.9 4.7 4.5 16.4 15.3 14.5 20.9 19.1 17.7 4.5 7.6 9.0 2.4

PepsiCo Inc 111 1,58,374 2.5 2.4 2.3 13.8 13.0 12.4 21.5 20.0 18.5 2.8 6.2 10.9 2.0

Coca-Cola Co 45 1,90,403 5.4 6.2 5.9 19.1 18.2 17.4 23.7 22.6 20.8 (8.6) 5.5 12.3 2.0

Penord Ricard SA 116 36,366 3.4 3.3 3.1 14.4 13.6 13.0 20.4 19.0 17.4 3.0 8.1 8.8 2.3

* Respective currencies in which the companies operate. ^3 year CAGR (FY17-FY20E)



23 FMCG Sector

Hindustan Unilever – Leaner and meaner machine

We believe that HUL will be the largest beneficiary of the premiumisation trend considering the strong brand equity enjoyed by its mid and premium segment brands such as Dove, Surf , Brooke Bond and Ponds. Innovation index of the company also remains high and it is most geared among peers to face disruptive product, distribution and competitive challenges.

Modern trade and e-commerce, which are the fastest-growing distribution channels in the country, currently are strong forte of the company. It also enjoys good direct reach in urban general trade and rural channel through multiple distribution and customer initiatives such as Winning in Many Indias and Project Shakti.

Despite sluggish macro and increased competitive challenges, its margin delivery has been fairly good. There is still substantial scope for improvement, especially in home care and foods and we believe the company is well on course to achieve margin gains of nearly 300bps-350bps in the medium term.

We initiate coverage on HUL with a Buy rating and a target price of Rs1,425 by September 2018, implying an upside of 21.8% from the CMP. Our target price is based on P/E multiple of 47.9x (September 20 19E EPS) which is line with the current one-year forward P/E, but at 29% premium to five-year median P/E. We believe the FMCG major will continue to trade at a higher multiple as it is poised to grow better than its peers with key focus on improving profitability.

Gillette India – Sideways is indeed the new forward

Gillette India enjoys excellent suite of products for men’s grooming which is the fastest-growing sub- segment in home and personal care segments. Continued focus on superior technology and value propositions also helps it benefit from the strong underlying trend of premiumisation.

Besides innovation, the company’s efforts on marketing and customer outreach has been fairly good which has helped in maintaining leadership position and achieving high double-digit growth in the grooming category. We expect the trend to continue and envisage sector-leading growth of more than15% for the period FY17-FY20E.

Considering that the premiumisation trend is fairly strong and the company will maintain high focus on cost optimisation, we envisage margin gains for the company to continue. We forecast margin expansion by another 300bps which supports earnings growth of 19% for the period FY17-FY20E.

We initiate coverage on Gillette India with a Buy rating and a target price of Rs.7,000 by September 2018, implying an upside of 24.1% from the CMP. Our target price is based on P/E multiple of 60x (September 2019E EPS) which is line with the current one-year forward P/E as well as the five-year median P/E. We believe that there is lot of competition in the men’s grooming segment and Gillette India undoubtedly will be the key beneficiary and hence will continue to trade at the multiple considered by us.

Dabur India - Naturals space is crowded

Dabur India has a fairly diversified and strong brand portfolio which strongly resonates with the health and wellness mega trend, resulting in a nationwide footprint. It has leadership in nearly seven categories and in another four categories it ranks second.

Natural space has seen a slew of new product launches from domestic companies (Patanjali, Himalaya) and MNCs (Hindustan Unilever and L’Oreal) and Dabur India’s response as a naturals leader has not been adequate, resulting in growth lagging in this segment

Margins, which are currently around 20%, are unlikely to see any major improvement as the company will have to increase its branding and marketing investment which had witnessed a decline of 50bps-100bps in order to regain its topline

We initiate coverage on Dabur India with an Accumulate rating and a target price of Rs305 by September 2018, implying a downside of 0.1% from the CMP. Our target price is based on P/E multiple of 35x (September 2019E EPS) which is at a discount of 14% to the current one-year forward P/E (40.7x), but in line with the five-year median P/E. We believe that because of a lot of competition and lack of innovation, the growth and margin prospects are not bright – at least in the medium term - and hence have considered a 27% discount to the target multiple assigned to HUL while arriving at a multiple for Dabur India.


24 FMCG Sector

Colgate – Palmolive (India) - Category growth remains sluggish

Industry fundamentals such as high market penetration level in excess of 80%, fairly wide distribution reach even in rural areas and intent to premiumise fairly low partially because of pricing has resulted in sluggish category growth which remains a challenge for a market leader such as CPIL with a market share in excess of 55%.

After staying ahead of trend for several years, the company’s innovation agenda to some extent missed the bus in the naturals segment, which currently with about 25% share continues to remain the fastest-growing. Dabur India and Patanjali continue to pose stiff challenge to CPIL and we believe the company will have to make significant brand and marketing investment to build a strong presence in this category

We initiate coverage on CPIL with an Accumulate rating and a target price ofRs1,100 by September 2018, implying a upside of 4.3% from the CMP. Our target price is based on P/E multiple of 41.2x (September 2019E EPS) which is at a discount of 11% to the current one-year forward P/E (46.1x), but in line with the five-year median P/E. We believe that the oral care category has become extremely competitive and growth rates of the categories will not be as high as compared to personal care or home care and hence have considered a 14% discount to the target multiple assigned to HUL while arriving at a multiple for CPIL.

Emami – Challenges of a niche player

Emami has been struggling since the past two years - mainly on account of sluggish growth profile of its core brands. Also its wholesale dependence is as high as 52% at overall level with a brand like Keshking being 70% dependent on wholesale. Matters worsened after demonetisation as a result of disruption of wholesale channels which are still not back on track entirely. North India market, which is the major market for Emami, is still showing signs of stress.

Navratna, Zandu, Boro Plus and Fair & Handsome, which are its core brands, have delivered single-digit growth in the past two to three years. Keshking grew 48% in FY17, but growth going forward will be challenging because of trade channel woes and competition in the market.

The company enjoys highest operating margin in the industry. With rising competition and higher input costs (mentha), we don’t see any room for further improvement in the margin profile.

We also don’t see any substantial innovation which will drive the growth going forward.

We initiate coverage on Emami with a Sell rating and a target price of Rs1,000 by September 2018, implying a downside of 8.3% from the CMP. Our target price is based on P/E multiple of 30x (September 2019E EPS) which is at a discount of 19% to the current one-year forward P/E (37x), and 15% discount to the five-year median P/E. We believe that subdued performance of core brands and lack of innovation leaves less/no scope for margin expansion going forward and hence have considered a 37.3% discount to the target multiple assigned to HUL while arriving at a multiple for Emami.


25

Company Section


26



Initi

atin

g C

over

age

Reuters: HLL.BO; Bloomberg: HUVR IN

Hindustan Unilever

Leaner and Meaner Machine

Hindustan Unilever (HUL) is India’s largest consumer goods company having nearly 35 brands spanning 20 distinct categories. It also currently has the maximum reach with nearly 9 out of 10 households in India buying a HUL product. HUL significantly empowers its staff to create an organisation that is efficient and consumer-centric. We believe the company is well positioned strategically to reap the benefits of an improving consumption cycle.. We initiate coverage on HUL with a Buy rating and a target price of Rs1,425.

Strong competitive position: We believe that HUL will be the largest beneficiary of the premiumisation trend (current contribution of premium portfolio estimated in the range of 25%) considering the strong brand equity enjoyed by its mid and premium segment brands such as Dove, Ponds, Surf and Brooke Bond. Innovation Index rank of the company also remains high and it is most geared among peers to face disruptive product, distribution and competitive challenges of the consumer goods industry.

Partner of choice across multiple channels: Modern trade and e-commerce, which are the fastest-growing distribution channels in the country, currently are a strong forte of HUL. It also enjoys good direct reach to over 3mln outlets in urban general trade and rural channel through multiple distribution and customer initiatives such as ‘Winning in Many Indias’ and ‘Project Shakti’.

Margin delivery expected to sustain: Despite sluggish industry fundamentals and increased competitive challenges, HUL’s margin delivery has been fairly good (~300bps expansion) in the past five years. There is still substantial scope for improvement, especially in home care and food divisions, and we believe the company is well on course to achieve further margin gains of nearly 300bps-350bps in the medium term.

Valuation well supported by growth drivers: We initiate coverage on HUL with a BUY rating and target price of Rs1,425 by September 2018, implying an upside of 21.8% from the CMP. Our target price is based on P/E multiple of 47.9x (September 2019E EPS) which is line with the current one-year forward P/E, but at 29% premium to the five-year median P/E. We believe the FMCG major will continue to trade at a higher multiple as it is poised to grow better than its peers with key focus on improving profitability.

BUY

Sector: FMCG

CMP: Rs1,170

Target Price: Rs1,425

Upside: 21.8%


Key Data

Current Shares O/S (mn) 2,164.5

Mkt Cap (Rsbn/US$bn) 2,601.7/39.7

52 Wk H / L (Rs) 1,288/782

Daily Vol. (3M NSE Avg.) 1,250,272

One -Year Indexed Stock Performance

80

90

100

110

120

130

140

150

Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17

HINDUSTAN UNILEVER (HUL) Nifty 50

Price Performance (%)

1 M 6 M 1 Yr

HUL 0.2 33.1 35.5

Nifty Index (1.5) 7.3 11.7

Source: Bloomberg

Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E

Net revenues 310,610 318,899 335,835 358,310 386,806

EBITDA 57,491 60,470 73,140 83,537 93,889

PAT 41,365 44,904 52,826 60,647 68,320

EPS (Rs) 19.1 20.8 24.4 28.0 31.6

EPS growth (%) (4.6) 8.6 17.6 14.8 12.7

EBITDA margin (%) 18.5 19.0 21.8 23.3 24.3

P/E (x) 45.5 43.9 51.0 44.5 39.5

P/BV (x) 30.0 30.4 40.1 38.6 39.2

EV/EBITDA (x) 31.8 31.7 36.1 31.6 28.1

RoCE (%) 87.4 88.5 103.2 114.4 127.8

RoE (%) 66.6 70.3 80.0 88.5 98.5


29 September 2017




28 Hindustan Unilever

Investment Thesis:

Moving up the ladder

A myriad of factors such as changing lifestyles , rising disposable incomes and increased awareness is driving substantial changes in consumption spend. Across discretionary and non-discretionary categories the consumer has substantially upped the ante and in case of personal products too it is not very different. HUL, which has multiple brands like Surf, Rin, Dove, Ponds, Lakme, Tressme and Brooke Bond in the mid to premium segment, will remain a strong beneficiary of this trend. The trend of naturals and green products is also, to some extent, contributing towards the premiumisation undercurrent strongly being witnessed in the market. Premium portfolio, which currently contributes to about 24% of sales, could potentially witness an increase in the range of 500bps as the share of elite and affluent households expands from the current level of 24% to 39% in the next five years and nearly doubles within a decade to about 48% by 2025. Considering that premium portfolio is usually 20%-50% higher than popular categories, there can also be substantial boost to top-line and margins from this underlying trend (Source: CII FMCG report).

Exhibit 1: Positive Mid-long term outlook for FMCG

Source: Company presentation, Nirmal Bang Institutional Equities Research

Exhibit 2: Addressing the needs of all consumers


Innovation-led growth with high focus on Naturals

We believe that the HPC sector is in a recovery mode; however due to the intense competition across categories, only players focusing on innovation of product portfolio and adapting to modern trade channels to increase the distribution reach are likely to gain. HUL, in our opinion, is on the right track and working on innovation across different categories which give it an edge over the other smaller HPC peers. The company, which has technical collaboration with the parent has a three pronged innovation strategy ie Faster Global Rollouts ie likes of Tressme & Citra, Faster local launches like Lever Ayush and finally faster response to consumer and channel needs like Indulekha. In our opinion the company targets anywhere between 20%-40% growth from innovation and market development. HUL’s innovation agenda is fairly strong and it is now seeking to make more impact with faster rollout of products focused on naturals.



Exhibit 3: Strengthening Naturals


Exhibit 4: Innovation across the portfolio


Building categories of the future

Product portfolio of HUL has been dominated by personal care and home care. Both these categories together contribute 80% to the top-line. Both the categories have witnessed growth led by premiumisation in two to three years. We expect premium brands like Surf, Dove, Tressemme etc to continue their growth momentum.

Refreshment division, which mainly includes tea, coffee and frozen desserts, has also been growing in double-digits with decent margins. Apart from the penetrated segments like soaps, detergent bars and shampoo etc, HUL has forayed into highly underpenetrated categories like hand wash, body wash, conditioners, detergents in liquid form, green tea etc. All these sub-categories have been growing in double digits at 2.5x company-level growth rate.

Exhibit 5: Building categories of the future




Miles ahead of peers in terms of branding and marketing investments

FMCG sector has been the largest contributor to revenues of the advertisement industry in India and HUL has been leading from the front. The FMCG giant spends around 12%-13% of its revenues on media. This huge investment (Rs34,693mn in FY17) on advertising is made in brands across all media platforms i.e. not just restricted to traditional media like TV, newspaper but also modern media platforms like social media, digital video, e-commerce etc. We compared the media spending done by HPC companies in absolute terms. HUL spent substantially more than the combined media spending of the companies considered for comparison in FY17. This gives an idea as to how much efforts are being taken to create awareness on all possible media platforms. Consumer awareness will drive demand for the product portfolio.

Exhibit 6: Media spends by HPC players in FY17 (Rs mn)

34,693

6,461 4,428

2,304

5,117

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

HUL Dabur Emami Gillette Colgate

(Rsmn)


HUL 2.0 growth led by expansion in margins

HUL’s parent company, Unilever PLC has recently redrafted its strategy with key focus on profitability. It is targeting expansion of margins by at least 400bps in the medium term from 16% to 20%. This applies to its Indian arm as well and we expect HUL to deliver well on the profitability front going forward. The focus on pricing and margin-accretive innovation will benefit overall profitability of the company. Initiatives like end-to-end cost focus and zero-based budgeting (ZBB) will bring down unnecessary costs and boost overall margin profile of the company. Also, talking about categories, we have witnessed the premiumisation trend in home care as well as in sub-categories of personal care like personal wash, hair care, skin care etc. Growth led by good performance of premium brands will boost profitability of the company. Hence, in our opinion, the company is in a position to growth premium brands by simultaneously keeping overall overheads under control which give it the twin benefit for improving the profitability going forward compared to companies like Dabur India, Colgate-Palmolive (India) and Emami wherein there is no clarity on growth of premium segments.

Exhibit 7: Supply chain efficiency




Exhibit 8: Profitable growth led by Zero Based Budgeting (ZBB)


Building a strong presence in e-commerce, modern trade

All consumer companies have been historically dependent on the wholesale channel as its main trade channel. HUL, which has total reach of 8mn outlets, has built its direct reach over the period and it stands at around 40%; much higher than other HPC players (Colgate-Palmolive (India) 25%, Emami and Dabur India 16%). This gives an edge over its peers, especially when the wholesale channel is under pressure. Proactively, HUL is increasing its presence in modern trade channels which is the top-growing channel. We checked the popularity of its brands on various social media platforms and have come to a conclusion that brands like Dove, Sunsilk, Pantene, Surf Excel are widely liked by consumers compared to that of other players. This shows the kind of awareness the company has been able to create in the minds of consumers. Urbanisation, higher share of youth, rising internet penetration etc are some of the levers that will drive growth in modern trade and e-commerce platforms.



Financial performance

The FMCG major in India has been growing in low single-digits in the past couple of years mainly because of overall tepid consumer sentiment, especially in rural India. However, looking at the size at which HUL operates, the performance is better than its smaller peers. The company reported sales/EBITDA/PAT five-year CAGR of 8%/13%/11%, respectively. Growth in premium category or discretionary spending has outperformed the staples category as urban growth rate is higher compared to rural growth.

Growth contribution skewed towards home and personal care categories

HUL’s product mix has been dominated by personal care and home care which together contribute around 80% to the top-line. Growth trend in home care - led by laundry segment - was pretty decent led by premiumisation trend. Personal care witnessed a volatile growth trend in the past because iof subdued performance of some of the sub-categories. This has overshadowed the premiumisation-led growth achieved in sub-segments like personal wash, shampoo etc. Poor rural trend and demonetisation has hit the personal care category as a large part of the portfolio like hair care, oral care etc is dependent on wholesale trade channels which are completely disrupted after demonetisation. Growth in refreshment has largely come from tea business which is growing in double-digits. Foods segment faces some competitive challenges, but size of the portfolio is very small. We believe that overall growth going forward will be driven by moderate growth in home care and personal care divisions. Refreshment business will continue to do well, in our opinion.

On margins front, we expect them to improve as the company has clearly given its guidance. Categories where HUL has managed to establish the premiumisation trend like home care and sub- categories of personal care will be margin-accretive. We are factoring in operating margin expansion of around 400bps over the medium term and around 300bps-350bps on PAT margin.

Exhibit 9: Category-wise growth rates on quarterly basis

Category (%) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18

Home care 12.1 9.4 10.0 12.2 8.0 3.2 1.0 7.4 5.9

Personal care 26.7 23.8 26.1 25.7 2.7 (0.3) (2.7) 8.1 3.5

Foods 8.4 6.1 12.8 13.5 5.0 2.4 0.5 2.4 4.3

Refreshments 15.8 13.9 15.1 16.9 5.6 8.4 8.1 10.6 10.8


Exhibit 10: Segment-wise sales proportion Exhibit 11: Category-wise expected growth rates

0

5

10

15

20

25

30

35

40

45

50

FY16 FY17 FY18 FY19E FY20E

Home care Personal care Foods Refreshments Others

(%)

4.9

6.2 6.27.0

1.8

4.4

5.86.5

2.5

5.3

7.3 7.28.2

7.7

10.29.8

0

2

4

6

8

10

12

FY17 FY18E FY19E FY20E

Home care Personal care Foods Refreshments

(%)


Exhibit 12: Strong brand profile




We believe HUL is well poised to grow led by core focus on innovation and improvement in profitability. We are expecting blended top-line growth of 5.3%, 6.7% and 8% in FY18, FY19 and FY20, respectively. On margins front, we are considering EBITDA margin of 21.8%, 23.3% and 24.3% for the next three years respectively. Return ratios also will improve with better earnings growth and dividend payouts going forward.

Exhibit 13: Sales growth to improve Exhibit 14: Margins to follow upward trend

16.7

8.6

9.9

0.82.7

5.3

6.78.0

0

2

4

6

8

10

12

14

16

18

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Sales Sales growth

(Rsmn) (%)

21.6

11.8

16.4

10.4

5.2

21.0

14.2

12.4

0

5

10

15

20

25

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000


EBITDA EBITDA Growth

(Rsmn) (%)


Exhibit 15: Premiumisation to drive margins Exhibit 16: Return ratios likely to improve

14.4 13.6 13.8 13.1 13.915.5

16.7 17.415.5 16.0

16.918.5 19.0

21.823.3

24.3

0

5

10

15

20

25

30

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000


Net Profit PAT margin EBITDA margin

(Rsmn) (%)

59.2 60.7 59.4

87.4

88.5

103.2

114.4

127.8

59.8 56.2 52.3

66.6 70.380.0

88.598.5

0

20

40

60

80

100

120

140

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000


Capital Employed RoCE RoE

(Rsmn) (%)


Exhibit 17: Comparison with consensus expectations:

Particulars

FY18E FY19E FY20E

Our estimate (Rsmn)

Consensus (Rsmn)

Variance (%) Our estimate

(Rsmn) Consensus

(Rsmn) Variance (%)

Our estimate (Rsmn)

Consensus (Rsmn)

Variance (%)

Sales 3,35,835 3,59,236 (7) 3,58,310 4,02,894 (11) 3,86,806 4,38,447 (12)

EBITDA 73,140 70,964 3 83,537 82,380 1 93,889 94,718 (1)

Net income 52,826 50,318 5 60,647 58,573 4 68,320 67,746 1




Comparative performance:

We compared financial performance of some of HPC companies. HUL, despite being such a large company, has grown almost in line with overall HPC industry in terms of sales in the recent past. However, in terms of profitability (PAT), other players performed better in the recent past. This could be because of acquisitions or capex as the growth in operating profit was steady. However, as discussed in investment thesis, margins will see continued improvement in case of HUL supported by tailwinds of strong brand equity, premiumisation trend and existence of clear strategy in place to cut costs.

Exhibit 18: Growth trend and forecast for companies under coverage vis-à-vis HPC space


Dabur 16 15 11 1 (2) 4 8 7

Colgate Palmolive (India) 17 13 11 (3) 3 4 8 8

Emami 17 7 22 6 6 9 10 10

HUL 17 9 10 1 3 5 7 8

Gillette 17 16 19 (11) (1) 8 12 13

Total 17 10 11 - 2 5 7 8


Dabur 15 17 13 15 (1) 5 10 11

Colgate Palmolive (India) 14 1 24 14 1 6 10 9

Emami 16 (2) 25 27 10 0 12 12

HUL 22 12 16 10 5 21 14 12

Gillette 25 (45) 154 65 25 15 15 19

Total 19 9 19 14 5 15 13 12


Dabur 18 20 17 17 2 2 12 11

Colgate Palmolive (India) 11 9 4 4 (1) 9 10 10

Emami 22 28 21 19 5 6 11 12

HUL 41 2 11 (5) 9 18 15 13

Gillette 15 (41) 208 34 19 19 15 22

Total 21 13 8 12 2 17 14 12


We have compared dividend growth and yield of HUL with other consumer companies. Out of the companies we compared, HUL has highest dividend yield, close to 2%. We compared the CAGR in DPS by forming two bands of five years each and witnessed that HUL’s DPS increased over the past five years compared to the earlier band. We believe the company will continue to maintain high dividend payout even in the future.

Exhibit 19: Dividend yield trend Exhibit 20: DPS growth in five-year CAGR band

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50



(%)

8.2

27.2

39.8

4.6 4.7

11.6

(4.4)

5.6

17.8

63.7

(10)

0

10

20

30

40

50

60

70


FY07-FY12 FY13-FY17

(%)





Overall, HUL has provided reasonable stock returns in the past. In previous calendar year, the stock posted negative return of 5% reflecting the impact of substantial slowdown in the consumer industry. Its relative underperformance was also of a similar order. However, in the current calendar year, the stock is up 51% and outperformed the index by 22% YTD. In the HPC space, Marico and Godrej Consumer Products are other companies that have delivered consistent returns in the past.

Exhibit 21: Absolute and relative price performance history

HPC companies CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 YTDCY17*

Absolute Performance (%)

Dabur India 39 17 (26) 89 26 (1) 30 32 37 18 - 12



Emami 104 23 (30) 120 64 (15) 76 19 66 27 (5) 20

Proctor & Gamble Hygiene % Healthcare - (9) (2) 127 7 1 46 10 91 (3) 26 19

Gillette India 17 58 (47) 81 44 6 26 (17) 60 42 (8) 27

Marico 47 27 (19) 86 16 21 50 2 50 39 15 26



Relative performance (%)

Dabur India - (25) 53 8 7 32 2 24 4 23 (3) (9)



Emami 46 (20) 45 25 39 12 38 11 26 32 (8) (2)

Proctor & Gamble Hygiene & Healthcare (28) (41) 104 29 (9) 34 15 3 45 1 22 (3)

Gillette India (16) 2 9 3 22 41 (2) (22) 21 48 (10) 3

Marico 5 (18) 68 6 (2) 61 17 (5) 14 45 12 2

Godrej Consumer Products. (18) (41) 114 8 24 32 47 11 (14) 41 11 1






HUL stock currently trading at 47.1x one-year forward earnings i.e. at premium of 27% to 5 year Median PE. Similarly, the stock is trading at premium of 21% and 45% to five-year median EV/EBITDA and P/sales respectively. We also compared forward P/E of the stock with the indices and it has been observed that HUL is trading at substantial premium to both Nifty (2.6x) and Nifty FMCG (1.3x) indices.

Exhibit 22: One-year forward P/E Exhibit 23: Relative P/E (Nifty)

15

20

25

30

35

40

45

50

55

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7Forward PE Median

(x)

1.5

1.8

2.0

2.3

2.5

2.8

3.0

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

De

c-1

4

Ap

r-1

5

Au

g-1

5

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

HUL Median

(x)

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 24: One-year forward EV/EBITDA Exhibit 25: One-year forward P/Sales

20

25

30

35

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7

Fwd EV/EBITDA Median

(x)

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7

Fwd P/Sales Median

(x)


Exhibit 26: HUL vis-à-vis Nifty and Nifty FMCG

10

15

20

25

30

35

40

45

50

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Ap

r-1

2

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

De

c-1

4

Ap

r-1

5

Au

g-1

5

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

NIFTY 50 Forward PE Nifty FMCG Forward PE HUL Forward PE

(x)

Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research



Earnings growth outlook supports current valuation multiple

Indian consumer and consumer discretionary stocks have consistently traded at a significant premium to their peers and this has been evident not just in bear market, but also in bull market. As discussed earlier, we are expecting a substantial recovery in HPC segment on account of improved economic fundamentals. To understand the sustainability of current price multiples, we compared the PEG of consumer companies. In our opinion, HUL is likely to outperform its HPC peers in terms of earnings growth .Therefore, we believe the current valuation multiple at which the stock trades is sustainable.

Exhibit 27: Valuation of Indian HPC players

Company CMP*

(Rs) Mkt cap

(USD mn)


%^

EBITDA CAGR

%^

EPS CAGR

%^


Health care/personal/home care

Dabur India 311 8,356 6.8 6.3 5.9 34.2 30.9 27.6 42.1 37.6 33.7 6.5 8.5 8.2 5.1



Emami India 1,095 3,793 9.2 8.3 7.5 32.5 28.7 25.1 38.9 35.2 31.5 9.8 7.9 9.4 4.1


Gillette India 5,550 2,760 9.6 8.6 7.6 40.8 34.8 29.3 59.8 52.1 42.7 11.0 16.3 18.7 3.2

Marico 311 6,134 6.0 5.3 4.6 31.9 27.0 23.7 45.3 38.1 33.0 13.6 13.1 14.9 3.0





We initiate coverage on HUL with a Buy rating and a target price of Rs1,425 by September 2018, implying a upside of 21.8% from the CMP. Our target price is based on P/E multiple of 47.9x (September 2019E EPS) which is in line with the current one-year forward P/E (47.1x), and 29% premium to the five-year median P/E, reflecting improved earnings growth outlook as compared to previous years and higher than peers.

Risks:

Consumers are fairly demanding of high quality standards and any adverse product related issues that emerge in the future could pose significant risk to growth and recommendations

Any macro-economic slowdown, disruption and/or policy announcements which substantially impacts consumer spending and the premiumisation trend in India.

We expect the rural economy to see gradual improvement after being weak substantially in the past three years. Any weather or policy-related issue that impacts this recovery could also pose risk to our earnings estimate and recommendation.

Pricing-related competitive challenges so far have been moderate, but if this scenario witnesses any major change it could have a substantial impact on our earnings estimate and recommendation.

Input cost trend has been volatile, but remained in a reasonable band and any sharp increase in costs or inability to manage supply chain efficiently can impact margin improvement as companies are likely to adopt a calibrated pricing approach that maintains their competitiveness and does not impact spending substantially.

Most companies have been moderating marketing and investment spending in the recent past and any substantial increase in spending does pose substantial risk to our estimate.

HUL is fairly dependent on its parent for technical and other expertise. Any adverse factors that affect its parent could also have an impact on HUL.



Exhibit 28: Management Committee

Name Designation/Department

Sanjiv Mehta MD & CEO

P.B. Balaji ED Finance & IT and CFO

Pradeep Banerjee ED, Supply Chain

Dev Bajpai ED, Legal & Corporate affairs and CS

Geetu Verma ED, Foods

B.P. Bidappa ED, Human Resources

Priya Nair ED, Home Care

Sandeep Kohli ED, Personal Care

Sudhir Sitapati ED, Refreshments

Srinandan Sundaram ED, Sales and Customer Development


Exhibit 29: Shareholding pattern (%)

67

13

6

14

Promoter FIIs DIIs Public and others


Exhibit 30: Top 20 public shareholders

Particulars % holding

LIFE INSURANCE CORP. OF INDIA 1.89

STANDARD LIFE ABERDEEN PLC 1.21

BLACKROCK 1.12

VANGUARD GROUP 1.12

FRANKLIN RESOURCES 0.45

SCHRODERS PLC 0.32

BIRLA SUN LIFE ASSET MANAGEMENT 0.32

VONTOBEL HOLDING AG 0.31

SBI FUNDS MANAGEMENT 0.3

ICICI PRUDENTIAL ASSET MGMT CO. 0.25

GOVMT PENSION INVST FUND JAPAN 0.23

DIMENSIONAL FUND ADVISORS LP 0.2

UTI ASSET MANAGEMENT CO. 0.15

TEMPLETON ASSET MGMT 0.14

HDFC LIFE INSURANCE CO. 0.14

LYXOR 0.13

DANSKE BANK A/S 0.13

BAJAJ ALLIANZ LIFE INSURANCE CO 0.12

VIRTUS INVESTMENT PARTNERS INC 0.12

GOLDMAN SACHS GROUP INC 0.12




Financials (standalone)

Exhibit 31: Income statement


Gross sales 334,913 344,870 363,080 387,362 415,920

Less: excise duty 24,303 25,972 27,244 29,052 29,114

Net sales 310,610 318,899 335,835 358,310 386,806

% Growth 0.8 2.7 5.3 6.7 8.0

COGS 153,053 156,842 159,885 165,816 176,176

Staff costs 15,728 16,198 16,298 17,557 18,567

Advertising costs 36,000 34,693 35,095 37,189 41,088

Other expenses 48,338 50,697 51,417 54,210 57,086

Total expenses 253,118 258,429 262,695 274,773 292,917

EBITDA 57,491 60,470 73,140 83,537 93,889

% growth 10.4 5.2 21.0 14.2 12.4

EBITDA margin (%) 18.5 19.0 21.8 23.3 24.3

Other income 5,638 5,259 5,363 5,808 6,270

Interest costs 153 215 60 - -

Depreciation 3,208 3,960 4,943 5,112 5,269

Profit before tax (before exceptional items)

59,769 61,554 73,500 84,232 94,889

Exceptional items (308) 2,411 (130) - -

Tax 18,096 19,060 20,544 23,585 26,569

PAT (before exceptional items) 41,673 42,494 52,956 60,647 68,320

PAT 41,365 44,904 52,826 60,647 68,320

PAT margin (%) 13.1 13.9 15.5 16.7 17.4

% Growth (4.6) 8.6 17.6 14.8 12.7


Exhibit 33: Balance sheet


Share capital 2,164 2,164 2,164 2,164 2,164

Reserves 60,630 62,740 65,064 67,733 66,657

Net worth 62,794 64,904 67,228 69,897 68,821

Total debt - - - - -

Deferred tax liability (1,680) (1,600) (1,600) (1,600) (1,600)

Total liabilities 71,004 73,894 74,705 77,981 77,619

Gross block 31,950 43,190 46,690 50,690 54,690

Depreciation 2,930 6,650 11,593 16,706 21,975

Net block 29,020 36,540 35,097 33,984 32,715

Capital work-in-progress 3,980 5,730 7,500 7,500 7,000

Investments 3,190 2,600 7,262 7,747 8,318

Inventories 25,280 23,620 23,688 24,466 24,766

Debtors 10,640 9,280 8,625 10,477 10,034

Cash 30,120 19,770 22,346 26,976 24,589

Loans & advances 2,940 3,120 3,268 3,486 3,743

Other current assets 4,870 6,250 5,446 5,810 8,318

Total current assets 95,524 94,114 90,968 100,656 105,140

Creditors 54,980 60,060 58,866 59,250 66,246

Other current liabilities & provisions

11,540 11,960 14,523 20,143 17,053

Total current liabilities 66,520 72,020 73,389 79,393 83,298

Net current assets 29,004 22,094 17,579 21,263 21,842

Total assets 71,004 73,894 74,705 77,981 77,619


Exhibit 32: Cash flow


PAT 41,365 44,904 52,826 60,647 68,320

Depreciation 3,208 3,960 4,943 5,112 5,269

Other income (5,638) (5,259) (5,363) (5,808) (6,270)

(Inc.)/dec. in working capital (786) 7,140 2,759 3,010 1,541

Cash flow from operations 43,787 56,004 60,529 68,769 75,131

Capital expenditure (-) (6,622) (13,230) (5,270) (4,000) (3,500)

Net cash after capex 37,165 42,774 55,259 64,769 71,631

Interest paid (-) - - - - -

Dividends paid (-) (41,395) (42,929) (50,502) (57,979) (69,396)

Inc./(dec.) in total borrowings - - - - -

Inc./(dec.) in investments 2,476 (9,990) (329) (2,550) (5,078)

Cash from financial activities (39,315) (42,149) (52,015) (57,372) (68,683)

Others - 1,400 - - -

Opening cash balance 28,610 30,120 19,770 22,346 26,976

Closing cash balance 30,120 19,770 22,346 26,976 24,589


Exhibit 34: Key ratios

Y/E March FY16 FY17 FY18E FY19E FY20E

Per share (Rs) EPS 19.1 20.8 24.4 28.0 31.6

Book value 29.0 30.0 31.1 32.3 31.8

DPS 16.0 16.6 19.5 22.4 26.8

Valuation (x)

P/Sales 5.6 5.7 7.4 7.0 6.5

EV/sales 5.5 5.6 7.3 6.8 6.3

EV/EBITDA 31.8 31.7 36.1 31.6 28.1

P/E 45.5 43.9 51.0 44.5 39.5

P/BV 30.0 30.4 40.1 38.6 39.2

Return ratios (%)

RoCE 87.4 88.5 103.2 114.4 127.8

RoE 66.6 70.3 80.0 88.5 98.5

Profitability ratios (%)

Gross margin 50.7 50.8 52.4 53.7 54.5

EBITDA margin 18.5 19.0 21.8 23.3 24.3

EBIT margin 17.5 17.7 20.3 21.9 22.9

PAT margin 13.1 13.9 15.5 16.7 17.4

Liquidity ratios (x) Current ratio 1.4 1.3 1.2 1.3 1.3

Quick ratio 1.1 1.0 0.9 1.0 1.0

Solvency ratio (x)

Debt to equity ratio - - - - -

Turnover ratios

Total asset turnover ratio (x) 2.4 2.4 2.5 2.5 2.6

Fixed asset turnover ratio (x) 10.1 8.2 8.5 9.3 10.5

Debtor days 10 11 9 9 9

Inventory days 129 128 130 130 130

Creditor days - - - - -



40



Initi

atin

g C

over

age

Reuters: GILE.BO; Bloomberg: GILL IN

Gillette India

Sideways Is Indeed The New Forward

Gillette India (GIL) is the market leader in men’s grooming category in India, similar to its parent Procter & Gamble (US). GIL has consistently focused on innovation and productivity to drive consistent growth over the past several years. It has a wide portfolio of products addressing customers across multiple price points which is the biggest strength. Through a combination of innovation (a major one once every four years) and renovation, advertising and sampling it is consistently engaged in driving market growth as well as its market share growth. We initiate coverage on the stock with a Buy rating and a target price of Rs 7,000.

Proxy to fast growing men’s grooming sector: GIL enjoys an excellent suite of products for men’s grooming which is the fast-growing sub-segment of home and personal care sector (10%-15%). Continued focus on superior technology and value propositions also help it benefit from the strong underlying trend of premiumisation.

Sustained market development efforts: Besides innovation, GIL’s efforts on marketing and customer outreach also have been fairly good which has helped in maintaining its leadership position and achieve high double-digit growth in the grooming category. We expect the trend to continue and envisage sector-leading growth of more than 15% for the period FY17-FY20E.

Consistent premiumisation and productivity focus: Considering the fact that the premiumisation trend is fairly strong and GIL will maintain high focus on cost optimisation, we envisage margin gains for the company to continue. We forecast margin expansion by another 300bps which supports earnings growth of 19% for the period FY17-FY20E.

Valuation and recommendation: We initiate coverage on GIL with a Buy rating and a target price of Rs 7,000 by September 2018, implying an upside of 24.1% from the CMP. Our target price is based on P/E multiple of 60x (September 2019E EPS), which is line with the current one-year forward P/E as well as the five-year median P/E. We believe there is a lot of competition in the men’s grooming segment and India and GIL, undoubtedly, will be the key beneficiaries and hence the stock will continue to trade at the multiple considered by us.

BUY

Sector: FMCG

CMP: Rs5,640


Upside: 24.1%


Key Data

Current Shares O/S (mn) 32.6

Mkt Cap (Rsbn/US$bn) 180.8/2.8

52 Wk H / L (Rs) 5,575/3,896

Daily Vol. (3M NSE Avg.) 5,039


80

90

100

110

120

130


GILLETTE INDIA Nif ty 50


1 M 6 M 1 Yr

Gillette India 5.4 39.8 32.0

Nifty Index (1.5) 7.3 11.7

Source: Bloomberg


Net revenues 17,552 17,336 18,744 20,936 23,683

EBITDA 3,051 3,816 4,373 5,033 6,004

PAT 2,123 2,531 3,023 3,475 4,233

EPS (Rs) 65.1 77.7 92.8 106.6 129.9

EPS growth (%) 34.3 19.2 19.4 15.0 21.8

EBITDA margin (%) 17.4 22.0 23.3 24.0 25.3

P/E (x) 68.1 65.8 58.9 51.2 42.1

P/BV (x) 15.4 33.3 28.6 23.4 19.1

EV/EBITDA (x) 45.7 43.3 40.2 34.3 28.8

RoCE (%) 32.7 47.8 70.7 66.3 65.1

RoE (%) 25.3 35.2 53.9 50.3 50.1


29 September 2017




42 Gillette India

Investment thesis

Men’s grooming is one of the fast-growing category globally in personal care segment

Men’s grooming category has been growing rapidly across the globe. P&G (which includes Gillette) has been a consistent leader in the under US$50bln men’s grooming segment followed by Unilever. Per capita spending in the category is estimated to be in the range of US$6, which is nearly 1/10th of what is spent by women on grooming and cosmetics. Similar to other categories, Asia Pacific holds the maximum potential considering under-penetration and low per capita consumption level. Shaving is one of the largest sub-segments in the men’s grooming category with an estimated size of US$20bln. P&G (which includes Gillette) globally holds a market share of more than 60% in the shaving segment. The steady growth of P&G in the shaving segment has been driven by innovation, advertising and sampling. We have witnessed substantial innovation/brand extension after every four to five years and hence after the launch of Fusion in 2012 we could witness a similar move next year. At global level, the company has been increasing its online sales by 40%-45% as a result of growth in modern trade and e-commerce.

Exhibit 1: Leading global companies offering male grooming products (sales by retail value US $bn)

Exhibit 2: Men’s grooming market size and growth potential

11.2

5.1

2.61.8 1.7 1.6

1.1 0.9 0.9 0.8

0

2

4

6

8

10

12

P&

G (i

ncl

Gill

ett

e)

Un

ileve

r

Lo

rea

l

Be

iers

do

rf

Ed

ge

we

ll P

ers

on

al C

are

B

ran

ds

Co

ty

Bo

tic C

om

me

rcia

l F

arm

ace

utic

a

Na

tura

Co

sme

tico

s

LV

MH

Pu

ig

(US$bn)

7.8

9.3

11.1

12.411.5 11.6

13.614.4

8.1%

4.5% 4.1%

3.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0

2

4

6

8

10

12

14

16

Asia Pacific North America Latin America Western Europe

2015 2020E 2015-2020E CAGR % (RHS)

(US$bn)

Source: Euromonitor, Nirmal Bang Institutional Equities Research Source: Euromonitor, Nirmal Bang Institutional Equities Research

Exhibit 3: Global leader in shave care products

Source: P&G Co. USA presentation, 2016


43 Gillette India

Rise of the metrosexual man in India

Similar to the trend in the West, men in India are also becoming increasingly discerning and indulgent. With a surge in disposable income, they are looking at innovative grooming products created specifically for them. Besides income, the influence of western culture, sports and the rise of Indian models are other factors which are driving growth of this industry. Rising exposure to men’s grooming-related products online has also helped to drive awareness and growth of these products. As per industry reports, the men’s grooming segment has the potential to clock revenues of around Rs14bn by 2020 i.e. almost double compared to 2015. Grooming perceptions are stronger in metro cities than in small towns, but it will not be long when this trend will become more widespread. According to Philips Annual Stylescape Survey, more than 79% of metropolitan men care about their skin. Visits to Salon and Reviewing Magazine, blogs and websites for hygiene has also witnessed a significant increase in recent times.

Exhibit 4: Huge growth opportunity in India

30,000

75,000

142,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2010 2015 2020E

(Rsmn)

Men's Groomming Market

8%

16%

18%

Others

Razors

Refill blades

Men's Shaving accounted for 42% of men's gromming sales in 2015

Source: Euromonitor, Nirmal Bang Institutional Equities Research

GIL driving market development in grooming and shaving categories in India

GIL has been at the heart of men’s grooming in India and is the market leader with more than 50% market share in shaving products and 22% on overall basis. Shaving segment constitutes around 40% of the men’s grooming segment, as per public information. Shaving segment has been clearly dominated by razors and refill blades. Similar to its parent, GIL’s growth story in India has been led by innovation, superior quality offerings with latest technology and marketing activities to penetrate the under-penetrated market. GIL caters to a variety of customers because of its wide range of product offerings in its portfolio at varying price points, from mass to more-premium offerings, including brands such as Wilkinson, Gillette Mach3, Gillette Vector Plus, Gillette Series, Gillette Foamy and Gillette Aftershave Splash. GIL has been continuously focusing on new technology and coming up with new products for enriching the shaving experience. The products for all classes are available right from simple disposable razors to trimmers and premium products like Proglide Razors, Fusion Razors, Mach3 Razors etc. GIL is also active on online platform as all these products are available online (from company website and also through famous e-commerce platforms).


44 Gillette India

Exhibit 5: Key milestones of GIL

Year Remarks

2010 Reached about 4,50,000 outlets with Vector blades.

Mach 3 increased distribution reach by about 60,000 outlets.

2011

Gillette Guard, the entry level razor, boosted sales quite significantly and exceeded the combined volume of Vector and Mach 3.


2012

Gillette Fusion was launched.

Gillette Guard volume market share stood at 60%.


Gillette India topped value market of share of 50% for the first time.

2013 Gillette Guard registers fastest-ever build-up of shares and established its presence at 1mn stores across the

country.

2014 Launch of Venus, Vector 3.

Good performance of Mach 3 and Fusion.

2015 Gillette Guard had the strongest year in terms of value, volume and market share growth.

2016 Gillette Guard continued the growth momentum and delivered well.

Company continued to add millions of new users.


Premiumisation an important tailwind

As discussed earlier, GIL has a wide variety of product offerings from mass to premium categories. Continued focus on superior technology and value propositions also helps it benefit from the strong underlying trend of premiumisation. There is paucity of data in this category, but similar to other FMCG categories we believe the premium category currently contributes about 18% to sales which is driven by the premium urban consumer. We expect this segment to witness a growth of nearly 20% driven by addition of new consumers at the rate of 10% yearly. On aggregate basis, this implies a growth of 12% per annum for grooming business in the medium term. We believe our estimates are conservative and could be potentially surprised by fast-changing lifestyles, healthy increase in disposable income and more importantly, continued innovation and market development efforts of the company. This increased contribution from premium products to overall sales is the key factor driving our margin improvement estimate of nearly 300bps in the medium term.

Exhibit 6: Premiumisation to drive margins

Particulars

Current scenario FY22E

Change (%) Reach (mn)

Per capita spending on blades (Rs)

Total (Rsmn)

Reach (mn)

Per capita spending on blades (Rs)

Total (Rsmn)

Premium urban 6.5 600 3,900 10.5 882 9,229 137

Regular urban 58.5 200 11,700 74.7 255 19,058 63

Total urban 65.0 - 15,600 85.1 - 28,287 81

Rural 60.0 100 6,000 73.0 128 9,317 55

Total 125.0 - 21,600 158.1 - 37,604 74

Urban reach (%) 50 - - 58 - - 8

Rural reach (%) 25 - - 28 - - 3

Overall reach (%) 34 - - 39 - - 5

Sales growth (%) - 12 -

Share of premium (%) 18 25 6

Source: Nirmal Bang Institutional Equities Research

Key assumptions

We have calculated GIL’s reach by assuming that out of total 370mn adult males, total 34% of the males (50% of urban adults and 25% of rural adults) use its products.

We expect per capita spending to increase annually by 8%, 5% and 5% for premium urban males, regular urban males and rural adult males, respectively.


45 Gillette India

GIL enjoys significant innovation and distribution edge over local players

GIL does not spend on research and development or R&D as it is has technical collaboration with its parent P&G in the US and pays around 1.5% of its sales as royalty. P&G annually spends about US$2bn on R&D which is about 3% of its sales and we expect about 15%-20% to be dedicated to grooming. Innovative offerings like Body Razor, Fusion Pro Glide, Fusion Hydra Gel stem from the global level and are widely accepted by consumers. Hence, it becomes very difficult for local players to match up to its innovation and technology at such pricing. In the US, it is also engaged in significant market development and sampling (nearly 80% of young men on their 18th birthday are provided with samples) to maintain its leadership status in the category and continues to enjoy market share in excess of 60% in the US. Some local players like Bombay Shaving Company, Letsshave, Ustraa etc. in men’s grooming segment have been trying to tap the market by building a significant presence online. All these players have adopted online model and they are targeting the urban youth and it is very difficult to build the distribution channel. Some of them tried to replicate the Dollar Shave Club business model by offering subscription-based services online at a reasonable rate. However, all these players are relatively very small. In our opinion, growth of online subscription-based model is still at a nascent stage and will take much more time in India to grow and build scale. Brand loyalty towards Gillette is very high and hence local competition will not be able to make any significant dent. Besides innovation, the company’s efforts on marketing and customer outreach also has been fairly good which has helped in maintaining leadership position and achieve high double-digit growth in the grooming category. We expect the trend to continue and envisage sector-leading growth of more than 15% for the period FY17-FY20E.

Introduction of Gillette Guard has significantly propelled the growth for the company and we expect its reach is in excess of 2mln outlets .Although, this number looks on the lower side compared to distribution reach of other HPC players, the share of rural in case of GIL is very low compared to other players who have almost 40%-50% share of rural market in their business. Considering this aspect, in our opinion, the distribution reach seems fairly sufficient. Also, the company has a very good presence in modern trade including e-commerce platforms. The company is offering discounts on e-commerce platforms to induce more buyers to opt for online purchases. All the local players are largely selling their products online and so they don’t enjoy the benefit of being present in both brick and mortar stores as well as online platforms.

Exhibit 7: Better offerings by GIL backed by technology


Poor show by oral care segment

GIL had forayed into the oral care segment long back, but has not been able to pick up momentum. The company offers its products, mainly toothbrushes, under the brand called Oral B. In the current scenario, all players in the oral care segment are facing stiff competition. Colgate-Palmolive (India), which is the market leader in the segment, has been facing problems with its toothpaste portfolio, but it has been consistently gaining market share in the toothbrush segment at the cost of other players. The oral care segment forms around 20% of sales. A lot of promotional activity has been witnessed in oral care space. Also, margin profile in the oral segment has been quite volatile for GIL, even made losses at the operating level in past few years. We don’t expect major revival in the oral care segment, but because of reduced spending on promotional activity the margin profile improved over the past two years and we expect similar margins to continue in the oral care segment.


46 Gillette India


Grooming division drives growth; oral care business stagnates

GIL has delivered well in the past. It has posted five-year CAGR revenue, EBITDA and PAT growth of 8%, 29% and 28%, respectively. The market leader has taken steps in the past to cope up with competition and maintained its market share, resultantly witnessing a drop in profitability as the company focused on selling more of mass products than its premium offerings. Revenue growth has been led by growth in the grooming segment which contributes nearly 81% to the top-line. The category witnessed growth on a consistent basis till FY15. The company has been doing a lot of promotional activity across both segments and as a result of IND-AS implementation, growth for FY16 looks slightly lesser in the grooming category as the base year sales was inclusive of promotions. Demonetisation and Goods and Services Tax or GST-related problems resulted in low growth in FY17 across categories. However, we believe the company has reduced its promotional intensity and as a result reported very good operating margin. The company has completely exited the portable power division in FY16 itself. Oral care segment’s performance has been fairly weak, posting negative growth in seven out of past eight quarters. Clearly, the company has been losing out on market share to its competitors in the oral care segment.

On the margins front, grooming business is showing improvement on YoY basis. Oral care operating margin improved by 600bps in FY17 compared to the previous year which could be largely because of the cut on promotion spending as top-line growth has been disappointing. We expect the grooming segment’s growth to continue with better margins. Also, growth outlook for the oral care segment is weak, but due to cost savings and lesser promotional activity, margins in oral care may look better than the historical numbers. On overall basis, we forecast margin expansion by another 300bps which support earnings growth of 19% for the period FY17-FY20E. Return ratios have been decent over the years and will continue to improve. We expect three-year revenue, EBITDA and PAT CAGR at 11%, 16% and 19%, respectively.

Exhibit 8: Category-wise performance

Particulars (%) FY16 FY17E FY18E FY19E FY20E

Sales proportion

Grooming 76.3 80.6 81.9 83.3 84.7

Oral care 19.0 19.4 18.1 16.7 15.3

Portable power 4.7 NA NA NA NA

Growth profile

Grooming 2.6 1.4 14.4 13.6 15.0

Oral care (27.6) (1.9) 4.9 3.0 3.7

Portable power (11.6) NA NA NA NA


Exhibit 9: Grooming segment to drive sales Exhibit 10: Mid high-teen digit EBITDA growth likely

16.6 15.8 18.6

(11.1)

(1.2)

8.1

11.7 13.1

(15)

(10)

(5)

0

5

10

15

20

25

0

5,000

10,000

15,000

20,000

25,000


Sales Sales Growth

(Rsmn) (%)

25.1

(45.0)

154.4

64.7

25.1 14.6 15.1 19.3

(100)

(50)

0

50

100

150

200

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


EBITDA EBITDA growth

(Rsmn) (%)



47 Gillette India

Exhibit 11: Premiumisation to boost margin profile Exhibit 12: Healthy return ratios

5.93.0

7.6

11.9

14.315.7 16.2

17.3

9.2

4.4

9.4

17.4

22.023.3 24.0

25.3

0

5

10

15

20

25

30

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


Net Profit PAT margin % EBITDAmargin %

(Rsmn) (%)

15.9

6.2

21.1

32.7

47.8

70.7 66.3 65.1

13.7

8.0

22.8

25.3

35.2

53.9 50.3 50.1

0

10

20

30

40

50

60

70

80

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000


Capital Employed ROCE(%) ROE(%)

(Rsmn) (%)


Comparative performance in top quartile

We compared the financial performance of some HPC companies. GIL’s top-line performance has been superior to the total group of 5 HPC companies in the past, but in the past two years the growth has been below the overall HPC basket because of overall sluggishness across the sector and change in the accounting treatment under IND-AS. In terms of margin growth, GIL has clearly outperformed the HPC basket in the past except FY14 wherein company’s strategy to penetrate the market resulted in lower profitability for the year. We expect GIL to drive overall revenue and profitability of the HPC basket going forward.

Exhibit 13: Growth trend and forecast for companies under our coverage vis-à-vis HPC space


Dabur India 16 15 11 1 (2) 4 8 7


Emami 17 7 22 6 6 9 10 10

HUL 17 9 10 1 3 5 7 8

Gillette India 17 16 19 (11) (1) 8 12 13

Total 17 10 11 0 2 5 7 8


Dabur India 15 17 13 15 (1) 5 10 11


Emami 16 (2) 25 27 10 - 12 12

HUL 22 12 16 10 5 21 14 12

Gillette India 25 (45) 154 65 25 15 15 19

Total 19 9 19 14 5 15 13 12


Dabur India 18 20 17 17 2 2 12 11


Emami 22 28 21 19 5 6 11 12

HUL 41 2 11 (5) 9 18 15 13

Gillette India 15 (41) 208 34 19 19 15 22

Total 21 13 8 12 2 17 14 12


We have compared dividend growth and yield of GIL with that of other consumer companies. Out of the companies we compared, HUL has highest dividend yield, close to 2%.GIL’s dividend yield is on the lower side, close to 0.5% but because of special dividend declared in FY17, shareholders of GIL enjoyed dividend yield of 3.7%. DPS growth over the past five years outpaced the similar period in the past.


48 Gillette India


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50



(%)

8.2

27.2

39.8

4.6 4.7

11.6

(4.4)

5.6

17.8

63.7

(10)

0

10

20

30

40

50

60

70


FY07-FY12 FY13-FY17

(%)



49 Gillette India


GIL has delivered reasonable returns in absolute terms in the past with the exception of few calendar years. However, its relative price performance with Nifty Index has been quite volatile. In the current calendar year, the stock is up 27% thereby beating the index returns by 3%. In current calendar year, all the consumer stocks have rallied and at least delivered returns in line with the index whereas a player like HUL outperformed. Players like Marico and Godrej Consumer Products have delivered relatively well consistently over the past five years.



Absolute performance (%)

Dabur India 39 17 (26) 89 26 (1) 30 32 37 18 - 12



Emami 104 23 (30) 120 64 (15) 76 19 66 27 (5) 20

Proctor & Gamble Hygiene & Healthcare. - (9) (2) 127 7 1 46 10 91 (3) 26 19

Gillette India 17 58 (47) 81 44 6 26 (17) 60 42 (8) 27

Marico 47 27 (19) 86 16 21 50 2 50 39 15 26



Relative performance (%) CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 8.5MCY17

Dabur India - (25) 53 8 7 32 2 24 4 23 (3) (9)



Emami India 46 (20) 45 25 39 12 38 11 26 32 (8) (2)

Proctor & Gamble Hygiene & Healthcare (28) (41) 104 29 (9) 34 15 3 45 1 22 (3)

Gillette India (16) 2 9 3 22 41 (2) (22) 21 48 (10) 3

Marico 5 (18) 68 6 (2) 61 17 (5) 14 45 12 2





GIL is currently trading at 58.4x one-year forward earnings i.e. in line with the five-year median P/E. Similarly, the stock is trading at discount of 10% and a premium of 26% to five-year median EV/EBITDA and P/Sales, respectively. We also compared forward P/E of the stock with the indices and it has been observed that GIL has been trading at a substantial premium to both the indices, namely Nifty FMCG (1.62x) and Nifty (3.3x).

Exhibit 17:One-year forward P/E Exhibit 18: Relative P/E (Nifty) of GIL

30

40

50

60

70

80

90

100

110

120

130

140

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7

Forward PE Median

(x)

1

3

5

7

9

11

Aug

-12

Dec

-12

Apr

-13

Aug

-13

Dec

-13

Apr

-14

Aug

-14

Dec

-14

Apr

-15

Aug

-15

Dec

-15

Apr

-16

Aug

-16

Dec

-16

Apr

-17

Aug

-17

Gillette Median

(x)



50 Gillette India


25

35

45

55

65

75

85

95

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7

Forward EV/EBITDA Median

(x)

2.5

3.5

4.5

5.5

6.5

7.5

8.5

9.5

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7

Forward P/S Median

(x)


Exhibit 21: GIL versus Nifty index

10

30

50

70

90

110

130

Ma

r-0

9

Jul-0

9

No

v-0

9

Ma

r-1

0

Jul-1

0

No

v-1

0

Ma

r-1

1

Jul-1

1

No

v-1

1

Ma

r-1

2

Jul-1

2

No

v-1

2

Ma

r-1

3

Jul-1

3

No

v-1

3

Ma

r-1

4

Jul-1

4

No

v-1

4

Ma

r-1

5

Jul-1

5

No

v-1

5

Ma

r-1

6

Jul-1

6

No

v-1

6

Ma

r-1

7

Jul-1

7

NIFTY 50 Forward PE Nifty FMCG Forward PE Gillette Forward PE Source: Company, Nirmal Bang Institutional Equities Research

Future earnings outlook can support existing valuation multiple

Indian consumer and consumer discretionary stocks have consistently traded at a significant premium to their peers and this has been evident not just in a bear market, but also in a bull market. As discussed above, we are expecting a recovery in the HPC segment on account of a favourable base and pick-up of growth slowly. To understand the sustainability of current price multiples, we have compared the PEG of consumer companies. As per our estimates, GIL is likely to post better earnings growth in the HPC space and also we are very bullish on the growth of men’s grooming segment in India going forward. Hence, GIL enjoys one of the lowest PEGs in the HPC space. In our opinion, the current price multiple for GIL is sustainable considering the better earnings growth going forward.


Company CMP*

(Rs) Mkt cap

(USD mn)


%^

EBITDA CAGR

%^

EPS CAGR

%^



Dabur India 311 8,356 6.8 6.3 5.9 34.2 30.9 27.6 42.1 37.6 33.7 6.5 8.5 8.2 5.1



Emami India 1,095 3,793 9.2 8.3 7.5 32.5 28.7 25.1 38.9 35.2 31.5 9.8 7.9 9.4 4.1


Gillette India 5,550 2,760 9.6 8.6 7.6 40.8 34.8 29.3 59.8 52.1 42.7 11.0 16.3 18.7 3.2

Marico 311 6,134 6.0 5.3 4.6 31.9 27.0 23.7 45.3 38.1 33.0 13.6 13.1 14.9 3.0



Note: *Last trading price of 28-Sep-2017 have been considered. ^3 year CAGR (FY17-FY20E); Source: Bloomberg, Nirmal Bang Institutional Equities Research


51 Gillette India

We initiate coverage on GIL with a Buy rating and a target price of Rs 7,000 by September 2018, implying an upside of 24.1% from the CMP. Our target price is based on P/E multiple of 60x (September 2019E EPS) which is line with the current one-year forward P/E as well as the five-year median P/E. We believe that there is a lot of competition in the men’s grooming segment and India and GIL, undoubtedly, will be the key beneficiary and hence continue to trade at the multiple considered by us. Also, in our opinion, this category being highly underpenetrated one will witness higher growth compared to others with the rise in per capita consumption in the country.

Risks

Consumers are demanding high quality standards and any adverse product-related problem that emerges in future could pose significant risk to growth and recommendations.


We expect the rural economy to witness a gradual improvement after being weak substantially over the past three years. Any weather or policy-related problem that impacts this recovery could also pose risk to our earnings estimate and recommendation.


In our opinion, there are no M&A-related risks for GIL currently as there are no major competitors who can match its scale and pace. However, any company’s foreign collaboration or entry of a big new player in the segment could change the outlook for GIL.


52 Gillette India

Exhibit 23: Board of directors

Name Designation

Bansidhar Mehta Chairman

Al Rajwani Managing director

Chittranjan Dua Director

Gurucharan Das Director

Anil Kumar Gupta Director

Narendra Sarda Director

Pramod Agarwal Director

Sonali Dhawan Director

Karthik Natarajan CFO



75

5

5

15





ADVENTZ FINANCE 3.4


GLOBALWARE TRADING & HLDGS 1.58

JUPITER INV MGMT GROUP 1.55

MERRILL LYNCH MKT SGP 1.45


VANGUARD GROUP 0.67

UTI ASSET MANAGEMENT CO 0.16


GAM HOLDING AG 0.11



53 Gillette India

Financials



Gross sales 17,757 17,882 20,133 22,487 25,438

Less: excise duty 205 546 1,389 1,552 1,755

Net Sales 17,552 17,336 18,744 20,936 23,683

% Growth (11.1) (1.2) 8.1 11.7 13.1

COGS 8,542 7,860 8,463 9,426 10,395

Staff costs 1,068 1,097 1,242 1,371 1,547


Other expenses 2,504 2,259 2,384 2,585 2,896

Total expenses 14,501 13,520 14,372 15,903 17,679

EBITDA 3,051 3,816 4,373 5,033 6,004

% growth 64.7 25.1 14.6 15.1 19.3

EBITDA margin (%) 17.4 22.0 23.3 24.0 25.3

Other income 358 378 503 562 763

Interest costs 53 67 - - -

Depreciation 303 384 404 455 505


3,052 3,743 4,472 5,140 6,262

Exceptional items - - - - -

Tax 1,062 1,212 1,449 1,665 2,029


PAT 2,123 2,531 3,023 3,475 4,233

PAT margin (%) 11.9 14.3 15.7 16.2 17.3

% Growth 34.3 19.2 19.4 15.0 21.8




Share capital 326 326 326 326 326

Reserves 9,040 4,680 5,889 7,279 8,972

Net worth 9,366 5,006 6,215 7,605 9,298


Deferred tax liability (150) (190) (190) (190) (190)


Gross block 4,909 5,659 6,409 7,159 7,909

Depreciation 3,051 3,435 3,839 4,294 4,798

Net block 1,858 2,224 2,570 2,865 3,110

Capital work-in-progress 882 633 750 750 750

Investments - - - - -

Inventories 2,446 2,224 2,413 2,442 2,685

Debtors 1,098 1,303 1,060 1,005 1,201

Cash 5,372 1,157 2,280 5,554 5,265

Loans & advances 703 299 2,352 599 2,728

Other current assets 396 260 260 260 260


Creditors 3,211 3,227 3,728 3,864 4,338


1,632 1,704 1,895 2,160 2,516


Net current assets 4,890 53 431 3,278 2,597

Total assets 9,252 4,863 6,061 7,451 9,144




PAT 2,123 2,531 3,023 3,475 4,233

Depreciation 303 384 404 455 505

Other income (358) (378) (503) (562) (763)

(Inc.)/dec. in working capital 2,398 622 745 427 392


Capital expenditure (-) (849) (501) (867) (750) (750)


Dividends paid (-) (976) (6,890) (1,814) (2,085) (2,540)


Inc./(dec.) in investments - - - - -


Others - - - - -



Change in cash balance 3,559 (4,215) 1,124 3,274 (289)




Per share (Rs)

EPS 65.1 77.7 92.8 106.6 129.9

Book value 287.4 153.6 190.7 233.4 285.3

DPS 24.9 176.2 46.4 53.3 64.9

Valuation (x)

P/Sales 8.2 9.6 9.5 8.5 7.5

EV/sales 7.9 9.5 9.4 8.2 7.3

EV/EBITDA 45.7 43.3 40.2 34.3 28.8

P/E 68.1 65.8 58.9 51.2 42.1

P/BV 15.4 33.3 28.6 23.4 19.1

Return ratios (%)

RoCE 32.7 47.8 70.7 66.3 65.1

RoE 25.3 35.2 53.9 50.3 50.1


Gross margin 51.3 54.7 54.9 55.0 56.1

EBITDA margin 17.4 22.0 23.3 24.0 25.3

EBIT margin 15.7 19.8 21.2 21.9 23.2

PAT margin 17.0 21.1 23.2 23.9 25.6

Liquidity ratios (x)

Current ratio 2.0 1.0 1.1 1.5 1.4

Quick ratio 1.5 0.6 0.6 1.1 1.0

Solvency ratio (x)

Debt to Equity ratio - - - - -

Turnover ratios



Debtor days 24 25 23 18 17

Inventory days 95 108 100 94 90

Creditor days 126 149 150 147 144



54



Initi

atin

g C

over

age

Reuters: COLG.BO; Bloomberg: CLGT IN

Colgate-Palmolive India

Category Growth Rates Remain Sluggish

Colgate-Palmolive (India) or CPIL is the market leader in oral care category and has been ranked as the most trusted brand for past several years in a consumer survey done by marketing consultancy firm AC Nielsen. CPIL has been the leader in innovation in its category, but in recent years it has lost ground to players offering naturals. The company has a technical collaboration agreement with its parent which it seeks to leverage for achieving profitable growth. Colgate is also among the most widely distributed brand in India with a reach of more than 5mn outlets. Considering somewhat moderate oral care industry outlook and heightened competitive intensity in the category, we initiate coverage on CPIL with an Accumulate rating and a target price of Rs1,100.

Oral care category growth rate below industry average: Industry fundamentals such as high market penetration level in excess of 80%, fairly wide distribution reach even in rural areas and intent to premiumise fairly low partially because of pricing resulted in sluggish category which remains a challenge for even a market leader such as CPIL with a market share in excess of 55%.

Innovation agenda needs significant improvement: After staying ahead of trends for several years, the company’s innovation agenda, to some extent, missed the bus on naturals segment, which currently with about 25% share continues to remain the fastest-growing. Dabur India and Patanjali continue to pose stiff challenge to the company and we believe it will have to make significant brand and marketing investments to build a strong a presence in this category.

Valuation and recommendation: We initiate coverage on CPIL with Accumulate rating and a target price of Rs1,100 by September 2018, implying a upside of 4.3% from the CMP. Our target price is based on P/E multiple of 41x (September 2019E EPS) which is at a discount of 11% to the current one-year forward P/E (46.1x), but in line with five-year median P/E. We believe the oral care category has become extremely competitive and the growth rate in the category will not be as high as compared to personal care or home care category and hence we have considered a 13% discount to the target multiple assigned to HUL while arriving at a multiple for CPIL.

ACCUMULATE

Sector: FMCG

CMP: Rs1,055


Upside: 4.3%


Key Data



52 Wk H / L (Rs) 1,178/861



80

90

100

110

120


COLGATE-PALMOLIVE Nif ty 50


1 M 6 M 1 Yr

Colgate-Palmolive (2.3) 8.9 10.3

Nifty Index (1.5) 7.3 11.7

Source: Bloomberg


Net revenues 38,682 39,819 41,560 44,880 48,470

EBITDA 9,382 9,444 9,991 10,991 11,972

PAT 5,820 5,775 6,303 6,920 7,613

EPS (Rs) 21.4 21.2 23.2 25.4 28.0

EPS growth (%) 4.1 (0.8) 9.1 9.8 10.0

EBITDA margin (%) 24.3 23.7 24.0 24.5 24.7

P/E (x) 38.8 47.0 49.1 44.7 40.7

P/BV (x) 22.2 21.3 21.4 19.4 18.0

EV/EBITDA (x) 23.8 28.4 30.5 27.6 25.2

RoCE (%) 65.4 54.8 49.1 46.8 46.2

RoE (%) 52.9 50.1 46.4 45.5 45.9


29 September 2017




56 Colgate-Palmolive (India)

Investment Thesis

Rural market will see only a gradual recovery

Rural sentiment over the past two to three years has been fairly weak as a result of two consecutive years of drought. Rural sentiment was further hit because of demonetisation announced by the government of India in November 2016. Urban market is growing at a faster rate than rural, but it has a limitation to grow beyond a certain point as penetration level in urban market is as high as 94%. The headroom to grow is in rural market which has penetration level of around 74%. Government’s continuous thrust on rural income and an average monsoon are key drivers for growth going forward. A quick look at the past few quarters of CPIL tells us that growth led by pricing and volume has disappointed big time. We expect a modest recovery going forward in rural market, but trade channel woes continue and with a strong competitor in oral care, it is not going to be a cakewalk for CPIL.

Exhibit 1: Volume vis-à-vis value growth

2.0

3.0 1.0

6.0

6.0 4.0

(12.0)

(3.0) (5.0)

6.0 7.0

8.0

1.0

6.0 5.0

3.0

5.3

1.5

(15)

(10)

(5)

0

5

10

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

Volume growth Sales growth

(%)


Toothpaste is still not considered as an essential item entirely in rural area. This provides a huge opportunity for oral care players in India. CPIL has been the market leader in oral care segment in India. Despite maintaining the leadership position for so long, the company has been struggling to cope up with the competition in the past two to three years and also weak rural trend further led to a drag on the growth story. Uptick in rural demand and innovation are crucial factors for the success of the company.

Exhibit 2: Immense growth opportunity, but competitive challenges are very high

Source: Colgate-Palmolive Company (USA) presentation, Nirmal Bang Institutional Equities Research



Patanjali is a significant challenge with high single-digit/mid-teen shares in the category

As mentioned above, even if demand really picks up in rural India because of strong levers like favourable monsoon, government spending etc, looking at the pace at which Patanjali is growing it remains a question as to how much of this incremental demand will be shared by other FMCG companies including CPIL. Disruptive entry of Patanjali has hurt CPIL and other players in oral care really badly. This is evident from the loss of market share over a period of two to three years. Based on the available public information, share of Patanjali in oral care roughly works out to be 14%.CPIL has still not managed to create an image of herbal/ayurvedic brand which is the wave in the market currently. People largely perceive it as a normal toothpaste brand with lack of herbal/ayurvedic quotient. CPIL, however, is working on new launches in herbal/ayurvedic segment, but in our opinion there is no early-mover advantage in this category now.

Exhibit 3: Volume market share movement

57.9 57.6

57.3

55.3 55.9 55.7

55.4 55.1

5442.7 43.3

43.8

45.8

46.8 46.6 47.0

47.4

45

40

41

42

43

44

45

46

47

48

52

53

54

55

56

57

58

59

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

Toothpaste Toothbrush

(%) (%)


Headroom for growth in distribution network is marginal

We have compared the total distribution networks of some HPC companies and also checked the dependence on channels vis-à-vis direct reach. Companies like CPIL and HUL have a fairly high distribution network considering their size and also percentage of direct reach is also much higher compared to smaller players like Dabur India, Emami etc. Hence, in our opinion, there is a limitation on growth coming from expansion of distribution networks in case of CPIL. Hence, the important growth driver for CPIL will be its product profile and it will have to work relatively more on innovation.

Exhibit 4: Distribution reach of HPC companies (mn outlets)

5.8 6

4.3

5.6

8

4.6

2.8

0

1

2

3

4

5

6

7

8

9

Colgate Dabur Emami Godrej Consumer

HUL Marico Jyothy




Brand investments and market development efforts should be balanced

CPIL used to enjoy premium pricing on relative basis compared to Dabur India and Patanjali as it has many offerings in the toothpaste category in premium segment. However, after GST implementation, CPIL has gone for price cuts in the range of 8%-9% on overall basis. We believe the focus on rebranding and innovation is lacking in the sense that the consumers are just stuck to toothpaste and its variants which are also facing the pinch because of Patanjali and not keen on shifting to other related product offerings. Toothpaste category witnessed loss of market share of about 200bps over the past couple of years. Apart from toothpaste, we believe that in case of CPIL, the inclination of people to shift to a more premium product like mouthwash is very minimum. This could be due to lesser brand awareness and strong marketing activity by peers. The leader in oral care could have made a mark in other categories like mouthwash, hand wash, shave preps etc which have high growth prospects because of being the underpenetrated categories, but so far has not been able to do so.

Exhibit 5: Product profile of CPIL


Investments in market building and underpenetrated categories is below expectation

Although, the company is gaining market share in toothbrush segment, the size of the segment is very small. Same is the case with the mouthwash, dental cream etc which together (i.e. non-toothpaste portfolio) constitutes less than 20% of the turnover. We don’t see major focus on the part of the company to drive segments like mouthwash, body wash etc which are highly underpenetrated. Comparison of consumption of products with Indonesia suggests that personal wash and toothpaste have lesser scope for growth compared to other categories such as body wash, hand wash etc in India.

Exhibit 6: Headroom for growth across categories and segments

Source: HUL presentation, Nirmal Bang Institutional Equities Research



Innovation agenda has trailed consumption behaviour and trends

Similar to other oral care companies, we see new launches by CPIL as well. Despite this, the company has been losing out on market share. This is mainly because of lack of innovation in the sense that new products do not fit to consumers’ preference/expectations. Also, CPIL has been slow in adapting to naturals/ayurveda trend and has no early-mover advantage in that category. It has come up with Vedshakti which is much cheaper product than that of Patanjali, but was earlier affected by demonetisation.

CPIL is now looking to adopt a dual brand strategy in naturals with Cibaca Vedshakti targeting mass consumers, especially in northern/eastern regions while Colgate Swarna Vedshakti, latest brand extension, will target more affluent consumers with particular focus in southern/western regions. CPIL’s strengthened naturals play has been aiming the prevention of market share loss going forward. Naturals segment accounts for ~25% of overall toothpaste market and CPIL currently has a market share of more than 25% in naturals through Active Salt, Herbal and Vedshakti.

Exhibit 7: Premium brands

Ayurvedic Variants and Kids segment


No fiscal benefits; price declines post GST

CPIL is the top indirect tax-paying company in the FMCG space after its eligibility for excise duty exemption got over in 2015. Hence, effective indirect tax rate of CPIL will be higher than other consumer companies which have opened factories in the states enjoying tax-haven status. Tax rate on toothpaste has fallen under the GST regime. Lower product prices under GST may increase the demand, although to a small extent. We believe the additional demand for CPIL products is not going to come by just price cut, but through product differentiation and innovation.




Deteriorating financial performance in the past few years, modest recovery expected going forward

In the current challenging environment, even the market leader in oral care has been facing stiff competition and losing out on market share on yearly basis in the toothpaste category which forms almost around 80% of the revenues. Over a longer term, CPIL has registered five-year CAGR of 8%, 10% and 5% in sales, EBITDA and PAT, respectively. We expect modest recovery in top-line in FY18 and have factored in top-line growth of 4.4%, 8% and 8% for FY18, FY19 and FY20, respectively, as we believe that growth rate in oral care will not be as high as personal care or home care as the category continues to face a lot of competition.

Margin improvement will be muted

On margins front, growth was somewhat stagnant over the past two to three years. With increased competition and competitive intensity, we believe the margins will not improve exponentially going forward. However, because of softening of input costs and cost rationalisation, we are factoring in operating margin expansion of around 50bps-100bps in the medium term. Efficiencies in supply chain after GST implementation could further support margins to some extent. As a result, we are expecting EBITDA margin at 24.0%,24.5% and 24.7% for FY18, FY19 and FY20, respectively, and PAT margins at 15.0%, 15.3% and 15.6% for FY18, FY19 and FY20, respectively. We believe that in the absence of top-line growth both return ratios namely, RoCE and RoE, will remain flat in FY18 and show some upward trend in FY19 once the growth starts picking up. We expect sales, EBITDA and PAT to post two-year CAGR of 8.7%, 8.4% and 10.5%, respectively.

Exhibit 8: Poor top-line growth in the past Exhibit 9: EBITDA to witness modest improvement

17.5

13.1 11.3

(2.9)

2.9 4.4

8.0 8.0

(5)

0

5

10

15

20

-

10,000

20,000

30,000

40,000

50,000

60,000


Gross Sales Sales growth

(Rsmn) (%)

13.5

1.1

23.8

14.1

0.7

5.8

10.0 8.9

0

5

10

15

20

25

30

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000


EBITDA EBITDA Growth

(Rsmn) (%)


Exhibit 10: Margin improvement not likely Exhibit 11: Return ratios to remain flat

20.818.6

20.6

24.3 23.7 24.0 24.5 24.7

15.5 14.913.9

14.9 14.4 15.0 15.3 15.6

0

5

10

15

20

25

30

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


Net Profit EBITDA margin Net profit margin

(Rsmn) (%)

69.6

62.568.0

65.4

54.849.1 46.8 46.2

56.4 55.050.9 52.9

50.146.4 45.5 45.9

0

10

20

30

40

50

60

70

80

-

5,000

10,000

15,000

20,000

25,000


Capital Employed RoCE RoE

(Rsmn) (%)




Exhibit 12: Comparison with the consensus expectations:

Particulars

FY18E FY19E FY20E

Our estimate (Rsmn)

Consensus (Rsmn)


(Rsmn) Consensus

(Rsmn) Variance (%)

Our estimate (Rsmn)

Consensus (Rsmn)

Variance (%)

Sales 41,560 44,064 (6) 44,880 51,150 (12) 48,470 57,397 (16)

EBITDA 9,991 10,700 (7) 10,991 12,435 (12) 11,972 14,576 (18)

Net income 6,303 6,591 (4) 6,920 7,718 (10) 7,613 9,158 (17)


Comparative performance

We have compared financial performance of some HPC companies. CPIL’s performance in the past couple of years has been subdued because of overall weakness in demand and the rising competitive challenges in the oral care category. This trend was witnessed across the entire HPC space. However, we if compare the larger series of data, CPIL has delivered decent numbers in top-line but earnings growth has been in single digit and all other players, including bigger players like HUL and Dabur India as well as Emami and Gillette India, which are smaller in size, have outperformed on this front. CPIL could not scale up the margins over the period, rather the top-line growth has been achieved at the cost of flat margins at PAT level in the past. Because of the factors discussed in the past, we don’t expect very high growth rates in top-line, but see a marginal improvement in profitability trend.



Dabur India 16 15 11 1 (2) 4 8 7

Colgate Palmolive (India) 17 13 11 (3) 3 4 8 8

Emami 17 7 22 6 6 9 10 10

HUL 17 9 10 1 3 5 7 8

Gillette India 17 16 19 (11) (1) 8 12 13

Total 17 10 11 0 2 5 7 8


Dabur India 15 17 13 15 (1) 5 10 11

Colgate Palmolive (India) 14 1 24 14 1 6 10 9

Emami 16 (2) 25 27 10 0 12 12

HUL 22 12 16 10 5 21 14 12

Gillette India 25 (45) 154 65 25 15 15 19

Total 19 9 19 14 5 15 13 12


Dabur India 18 20 17 17 2 2 12 11

Colgate Palmolive (India) 11 9 4 4 (1) 9 10 10

Emami 22 28 21 19 5 6 11 12

HUL 41 2 11 (5) 9 18 15 13

Gillette India 15 (41) 208 34 19 19 15 22

Total 21 13 8 12 2 17 14 12




We have compared dividend growth and yield of CPIL with that of other consumer companies. Out of the companies we compared, HUL has highest dividend yield, close to 2%. CPIL’s dividend payout has witnessed a declining trend over the past five years. Currently, the dividend yield of CPIL is close to 1%. We believe the company will accelerate dividend payouts going forward.

Exhibit 14: Dividend yield trend Exhibit 15: DPS five-year CAGR band

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50



(%)

8.2

27.2

39.8

4.6 4.7

11.6

(4.4)

5.6

17.8

63.7

(10)

0

10

20

30

40

50

60

70


FY07-FY12 FY13-FY17

(%)





Price performance of CPIL has been quite volatile in the past 10 years. From CY12 onwards the company was delivering reasonable growth but because of subdued performance in the past couple of years, the stock underperformed in the past two years compared to HUL, Emami, Gillette India etc. Marico and Godrej Consumer Products have delivered relatively well consistently in the past five years compared to other HPC companies. In the current calendar year, CPIL witnessed an uptick although the returns are in line with Nifty index compared to HUL which has outperformed the index by more than 20% in the same period.




Dabur India 39 17 (26) 89 26 (1) 30 32 37 18 - 12



Emami India 104 23 (30) 120 64 (15) 76 19 66 27 (5) 20

Proctor & Gamble Hygiene % Healthcare - (9) (2) 127 7 1 46 10 91 (3) 26 19

Gillette India 17 58 (47) 81 44 6 26 (17) 60 42 (8) 27

Marico 47 27 (19) 86 16 21 50 2 50 39 15 26




Dabur India - (25) 53 8 7 32 2 24 4 23 (3) (9)



Emami India 46 (20) 45 25 39 12 38 11 26 32 (8) (2)

Proctor & Gamble Hygiene % Healthcare (28) (41) 104 29 (9) 34 15 3 45 1 22 (3)

Gillette India (16) 2 9 3 22 41 (2) (22) 21 48 (10) 3

Marico 5 (18) 68 6 (2) 61 17 (5) 14 45 12 2







CPIL currently trading at 46.1x one-year forward earnings i.e. at premium of 15% to five-year median P/E. Similarly, the stock is trading at premium of 12% and 21% to five-year median EV/EBITDA and P/sales, respectively. We also compared forward P/E of the stock with the indices and it has been observed that CPIL has been trading at a premium to both Nifty P/E as well as Nifty FMCG P/E of 2.5x and 1.2x, respectively.

Exhibit 17: CPIL trades at substantial premium Exhibit 18: Relative P/E(Nifty) marginally above the median

30

32

34

36

38

40

42

44

46

48

50

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7Forward PE Median

(x)

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

De

c-1

4

Ap

r-1

5

Au

g-1

5

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

Colgate Median

(x)


Exhibit 19: One-year forward EV/EBITDA Exhibit 20: One-year forward P/sales

20

22

24

26

28

30

32

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7


(x)

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7

Forward P/S Median

(x)


Exhibit 21: CPIL trades at a premium to Nifty and Nify FMCG indices

10

15

20

25

30

35

40

45

50

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Ap

r-1

2

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

De

c-1

4

Ap

r-1

5

Au

g-1

5

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

Nifty FMCG Forward PE NIFTY 50 Forward PE Colgate Forward PE Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research



Current valuation is not supported by future earnings outlook

Indian consumer and consumer discretionary stocks have consistently traded at a significant premium to their peers and this has been evident not just in a bear market, but also in a bull market. As discussed above, we expect a recovery in the HPC segment on account of a favourable base and pick-up of growth slowly. To understand the sustainability of current price multiples, we compared the PEG of consumer companies. As per our estimates, CPIL’s growth, both in terms of top-line and bottom line would be on the lower side compared to HUL or Gillette India. Therefore, we believe the current valuation multiple at which the stock trades is not sustainable.


Company CMP*

(Rs) Mkt cap

(USD mn)


%^

EBITDA CAGR

%^

EPS CAGR

%^



Dabur India 311 8,356 6.8 6.3 5.9 34.2 30.9 27.6 42.1 37.6 33.7 6.5 8.5 8.2 5.1



Emami India 1,095 3,793 9.2 8.3 7.5 32.5 28.7 25.1 38.9 35.2 31.5 9.8 7.9 9.4 4.1


Gillette India 5,550 2,760 9.6 8.6 7.6 40.8 34.8 29.3 59.8 52.1 42.7 11.0 16.3 18.7 3.2

Marico 311 6,134 6.0 5.3 4.6 31.9 27.0 23.7 45.3 38.1 33.0 13.6 13.1 14.9 3.0





We initiate coverage on CPIL with Accumulate rating and a target price of Rs1,100 by September 2018, implying a upside of 4.3% from the CMP. Our target price is based on P/E multiple of 41.2x (September 2019E EPS) which is at a discount of 11% to the current one-year forward P/E (46.1x), and in line with the five-year median P/E. We believe the oral care category has become extremely competitive and the growth rate in the category will not be as high as compared to personal care or home care segment and hence have considered a 14% discount to the target multiple assigned to HUL while arriving at the price multiple for CPIL.

Risks:






Factors like strong demand for Colgate’s naturals portfolio, faster than expected recovery of rural markets and wholesale channels could positively impact Colgate and there could be some deviation with respect to our financial projections.



Exhibit 23: Management committee members

Name Designation/Department

I. Bachaalani Managing Director

M.S. Jacob Finance

F. Giwa Legal

E. Jumbert Marketing

M. Chandrashekhar Customer Development

M.K. Ajay Human Resources

Dr. S. Potnis India Global Technology Centre

A. Lara Supply chain (Toothpaste)

M. Mehrotra Supply chain (Toothbrush)

V. Ganesh Customer service and Logistics



51

16

10

23






ARISAIG PARTNERS ASIA PTE LTD 3.38

COMMONWEALTH BANK OF AUSTR 1.72


MORGAN STANLEY 0.86

VANGUARD GROUP 0.83

JPMORGAN CHASE & CO 0.63

UTI ASSET MANAGEMENT CO 0.48

ICICI PRUDENTIAL ASSET MGMT CO 0.38





Financials (standalone)



Gross sales 43,491 45,202 47,546 51,350 55,458

Less: excise duty 4,810 5,383 5,986 6,470 6,988

Net Sales 38,682 39,819 41,560 44,880 48,470

% Growth (2.9) 2.9 4.4 8.0 8.0

COGS 14,766 14,768 15,323 16,502 17,812

Staff costs 2,624 2,885 3,003 3,210 3,442


Other expenses 7,435 7,604 7,881 8,447 9,077

Total expenses 29,300 30,374 31,569 33,888 36,498

EBITDA 9,382 9,444 9,991 10,991 11,972

% growth 14.1 0.7 5.8 10.0 8.9

EBITDA margin (%) 24.3 23.7 24.0 24.5 24.7

Other income 400 403 416 449 485

Interest costs - - - - -

Depreciation 1,114 1,332 1,403 1,554 1,581


8,667 8,515 9,004 9,886 10,875

Exceptional items (313) - - - -

Tax 2,534 2,740 2,701 2,966 3,263


PAT 5,820 5,775 6,303 6,920 7,613

PAT margin (%) 14.9 14.4 15.0 15.3 15.6

% Growth 4.1 (0.8) 9.1 9.8 10.0




Share capital 272 272 272 272 272

Reserves 10,038 12,466 14,175 15,697 16,915

Net worth 10,310 12,738 14,447 15,969 17,187


Deferred tax liability 97 275 350 350 350


Gross block 11,184 13,517 16,017 18,517 21,017

Depreciation 1,103 2,435 3,838 5,392 6,974

Net block 10,081 11,081 12,178 13,124 14,043


Investments 312 312 312 312 312

Inventories 2,915 2,926 3,036 3,294 3,343

Debtors 1,015 1,299 978 1,235 890

Cash 2,887 2,943 5,202 6,446 8,168

Loans & advances 425 956 800 750 730



Creditors 5,519 6,012 5,746 6,106 6,591


3,422 3,377 3,328 3,594 3,882


Net current assets (1,676) (1,397) 724 1,550 2,019

Total assets 10,603 13,281 15,114 16,636 17,854




PAT 5,820 5,775 6,303 6,920 7,613

Depreciation 1,114 1,332 1,403 1,554 1,581

Other income (400) (403) (416) (449) (485)

(Inc.)/dec. in working capital (532) (222) 139 417 1,253




Dividends paid (-) (3,274) (3,264) (4,538) (5,398) (6,395)




Others - - - - -



Change in cash balance 378 140 2,315 1,244 1,722




Per share (Rs)

EPS 21.4 21.2 23.2 25.4 28.0

Book value 37.5 46.8 53.1 58.7 63.2

DPS 10.0 10.0 13.9 16.5 19.6

Valuation (x)

P/Sales 5.2 6.8 7.4 6.9 6.4

EV/sales 5.1 5.9 6.4 5.9 5.4

EV/EBITDA 23.8 28.4 30.5 27.6 25.2

P/E 38.8 47.0 49.1 44.7 40.7

P/BV 22.2 21.3 21.4 19.4 18.0

Return ratios (%)

RoCE 65.4 54.8 49.1 46.8 46.2

RoE 52.9 50.1 46.4 45.5 45.9


Gross margin 61.8 62.9 63.1 63.2 63.3

EBITDA margin 24.3 23.7 24.0 24.5 24.7

EBIT margin 21.4 20.4 20.7 21.0 21.4

PAT margin 14.9 14.4 15.0 15.3 15.6


Current ratio 0.8 0.9 1.1 1.1 1.2

Quick ratio 0.5 0.6 0.8 0.8 0.9

Solvency ratio (x)

Debt to Equity ratio - - - - -

Turnover ratios



Debtor days 8 11 10 9 8


Creditor days 132 143 140 131 130



68 -



Initi

atin

g C

over

age

Reuters: DABU.BO; Bloomberg: DABUR IN

Dabur India

Naturals Space Is Somewhat Crowded

Dabur India is the most trusted healthcare and ayurveda company in India. It is engaged in contemporising ayurveda and with the help of scientific knowledge it has developed products in several niche areas in the personal care segment. We initiate coverage on Dabur India with an Accumulate rating and a target price of Rs305.

Diversified product portfolio: Dabur India has a fairly diversified and strong brand portfolio which strongly resonates with health and wellness mega trend resulting in a nationwide footprint. It has leadership status in nearly seven categories and in another four categories it ranks second.

Rural-centric business, high dependency on wholesale segment: Rural India contributes to more than 50% of the domestic business of Dabur India. Rural business is largely wholesale segment-driven. Disruption of wholesale channels had a very significant impact on the company. Although Dabur India has total distribution network comprising 6mn outlets, the direct reach is on the lower side i.e. 16% compared to companies like Colgate-Palmolive (India) (26%) and HUL (40%).

Competitive intensity in naturals space has gone up manifold: Naturals space has seen a slew of new product launches from domestic companies (Patanjali, Himalaya) and MNCs (Hindustan Unilever and L’Oreal) and Dabur India’s response as a naturals leader has not been adequate, resulting in growth lagging in this segment.

Margins to remain in a band: Margins, which are currently around 20%, are unlikely to witness any major improvement as the company will have to increase its branding and marketing investments which had registered a decline of 50bps-100bps in order to regain its top-line growth momentum.

Valuation and recommendation: We initiate coverage on Dabur India with an Accumulate rating and a target price of Rs305 by September 2018, implying a downside of 0.1% from the CMP. Our target price is based on P/E multiple of 35x (September 2019E EPS) which is at a discount of 14% to the current one-year forward P/E (40.7x), but in line with the five-year median P/E. We believe that because of a lot of competition and lack of innovation, the growth and margin prospects are not bright, at least in the medium term, and hence have considered a 26% discount to the target multiple assigned to HUL while arriving at a multiple for Dabur India.

ACCUMULATE

Sector: FMCG

CMP: Rs305

Target Price: Rs305

Downside: 0.1%


Key Data

Current Shares O/S (mn) 1,761.5


52 Wk H / L (Rs) 323/259

Daily Vol. (3M NSE Avg.) 1,303,277


80

90

100

110

120


DABUR INDIA LTD Nifty 50


1 M 6 M 1 Yr

Dabur India (0.4) 13.4 12.3

Nifty Index (1.5) 7.3 11.7

Source: Bloomberg


Net revenues 78,688 77,014 80,268 86,803 93,097

EBITDA 15,183 15,089 15,875 17,446 19,281

PAT 12,512 12,784 12,976 14,534 16,202

EPS (Rs) 7.1 7.3 7.4 8.3 9.2

EPS growth (%) 17.1 2.1 1.5 12.0 11.5

EBITDA margin (%) 19.3 19.6 19.8 20.1 20.7

P/E (x) 35.0 38.1 42.0 37.5 33.7

P/BV (x) 10.5 11.3 9.8 8.5 7.5

EV/EBITDA (x) 28.9 32.3 34.2 30.8 27.6

RoCE (%) 27.3 23.3 21.3 20.8 20.7

RoE (%) 33.4 28.4 24.8 24.1 23.6


29 September 2017




70 Dabur India

Investment thesis

Rural-centric business, high dependency on wholesale segment

Rural India contributes to more than 50% of the domestic business of Dabur India. The rural consumption story has not really picked up since the past two to three years mainly because of: 1) Two consecutive years of drought. 2) Poor income level in rural India. Average monsoon in FY17 had increased the hopes on revival of rural demand, but demonetisation hit the rural markets really badly and the situation is still not back to normal. Decline in volume growth over the past few quarters is a clear indicator of this fact. Rural business is largely wholesale segment-driven. Disruption of wholesale channels had a very significant impact on the company. Although Dabur India has total distribution network comprising 6mn outlets, the direct reach is on the lower side i.e. 16% compared to companies like Colgate-Palmolive (India) (26%) and HUL (40%). Hence, achieving normalcy of wholesale channels is of utmost importance for Dabur India.

Exhibit 1: Volume witnessed downturn in the past Exhibit 2: Distribution network of HPC players (mn outlets)

-10%

-5%

0%

5%

10%

15%

Q1

FY

13

Q2

FY

13

Q3

FY

13

Q4

FY

13

Q1

FY

14

Q2

FY

14

Q3

FY

14

Q4

FY

14

Q1

FY

15

Q2

FY

15

Q3

FY

15

Q4

FY

15

Q1

FY

16

Q2

FY

16

Q3

FY

16

Q4

FY

16

Q1

FY

17

Q2

FY

17

Q3

FY

17

Q4

Y1

7

1Q

FY

18

5.8 6

4.3

5.6

8

4.6

2.8

0

1

2

3

4

5

6

7

8

9


HUL Marico Jyothy


Herbal space is getting crowded

Disruptive entry of Patanjali Ayurveda has acted as an ‘unknown’ risk for FMCG companies including Dabur India. Growth of Patanjali in North and West India has put Dabur India to higher competition risk as nearly 60% of its business comes from these two regions. Despite being in the herbal space for so long, Dabur India is equally facing the heat as its offerings are beaten by Patanjali on both pricing and consumer preference fronts. And with naturals/herbals trend shaping up in a big way, all consumer companies have ventured into the space and banking big on it. Hence, in our opinion, there could be lesser scope for differentiation in terms of product offerings of Dabur India compared to that of other companies. This limits the ability of the company to command premium pricing unless it comes up with substantial innovation.

High fragmentation and competitive intensity in domestic business

Consumer market is extremely fragmented and there is lot of competition in existing categories. In domestic FMCG business, Dabur India has a presence in HPC, healthcare and food segments. Hair care and oral care forms major part of HPC business of Dabur India. Dabur India commands a leading position in key categories across verticals.

Exhibit 3: Leading position in key categories across verticals

Hone

y

Chyw

anpr

ash

Baby

mas

sage

oil

Glu

cose

Hair o

ils

Air F

resh

ners

Skin

care

Ble

ache

s

Toile

t cle

aner

s

Ora

l car

e

Mos

quito

Rep

ella

nt C

ream

s

Juice

s

#1#1 #2

#2 #2

#3

#1

#1#2

#1 #1

Healthcare Home and Personal Care Foods



71 Dabur India

However, both the categories, namely HPC and healthcare are facing challenges in terms of competition and dependency on trade channels. Also, both these are relatively mature categories. Foods segment has been doing well so far for Dabur India which enjoys leader status in fruit juices. However, now various companies are aiming at the fruit juice category as they believe the market will face a shift from carbonated beverages to non-carbonated beverages in terms of consumption. This could make things more competitive for Dabur India in that category. Healthcare portfolio of Dabur India, which was dominated by Honey and Chyawanprash for a long time, has started facing problems in terms of volume on account of cheaper offerings by competitors and high dependency on wholesale trade.

Focus on brand equity and innovation is the need of the hour

Dabur India has been a perceived as a herbal player since inception. Most of its products have a ayurvedic/herbal base. Still a player like Patanjali could cause serious disruption to the demand for Dabur India’s products in almost no time. This, according to us, is because of the not-so-strong brand image of the products of Dabur India. The company has been offering various discounts as a part of promotion in select categories, but it has somehow not been able to set the tone for demand in the past couple of years. In our opinion, there has to be some serious investment for branding so as to create an impact on the minds of consumers rather than giving freebies or discounts which are not long-lasting from demand point of view. If we compare the media spending across the HPC space, Dabur India spends the lowest in terms of percentage of sales. As per IND AS, advertisement spending of Dabur India was down to 8.4% from 14.0%-15.0% in the pre- IND AS regime which reflects the amount of promotion and freebies being offered by the company. Talking about research and development or R&D, Dabur India has a team of 126 scientists and it spends around Rs340mn which, in our opinion, is not adequate in the current scenario.

Exhibit 4: Key brands of Dabur India Exhibit 5: Comparison of media spending as a percentage of revenues (FY17)

8.4%

12.9%

10.9%

13.3%

17.8%

5%

7%

9%

11%

13%

15%

17%

19%

Dabur Colgate HUL Gillette Emami


Exhibit 6: Focus on innovation



72 Dabur India

Overall outlook remains challenging in overseas markets

Dabur India has a relatively higher share of international revenues (almost 30%) compared to players like Emami, Marico etc. Major chunk (almost 33%) of its international revenues comes from the Middle East region which is reeling under pressure because of macroeconomic headwinds faced by Saudi Arabia. Nepal and Bangladesh are key markets for Dabur India as far as international revenue growth is concerned. Although Turkey and Egypt have been growing rapidly in constant currency terms, massive depreciation of these countries’ currencies has almost eroded the growth achieved there. We believe the growth in overseas markets will continue to be led by Nepal and Bangladesh. Middle East is not likely to get on track very soon, and so is the case with the currency depreciation problem mentioned above.

Exhibit 7: Break-up of international business (%)

Particulars Key Markets FY12 FY13 FY14 FY15 FY16 FY17

Asia (excl. India) Nepal, Bangladesh, Pakistan 16 17 16 17 17 17

Europe (incl. Turkey) Turkey, UK 6 4 13 12 11 11

Americas USA 26 22 22 16 17 17

Middle East Saudi Arabia, UAE 30 36 28 32 33 33

Africa Egypt, Nigeria, Kenya, South Africa 22 21 21 23 22 22


Fiscal benefits for domestic business

Dabur India has been one of the lowest indirect tax-paying companies along with Emami in the FMCG space because of plants strategically set up in states where it gets fiscal benefits in the form of exemption and/or refund. Recently, in March 2017, Dabur India commissioned its new plant at Tezpur in Assam by investing Rs2.5bn. This facility is the largest of Dabur India across the world and the entire range of its ayurvedic medicines, health supplements, hair oils, shampoos, toothpastes, skin care and home care products will be manufactured at this plant. This gives a major relief in terms of taxation as far as indirect tax is concerned. In our opinion, this will benefit Dabur India compared to other companies like Colgate-Palmolive (India) which is paying higher amount of indirect tax in proportion to sales.

To sum up, both domestic business and international operations have shown a declining trend over a couple of years. We compared the growth in domestic versus international on quarterly basis and it was observed that the geographical diversification has not worked out in favour of the company in the past three years. Domestic growth rate was flattish in FY14, and later on started to decline on QoQ basis. International business was slightly volatile on QoQ basis, but the overall trend has been declining.

Exhibit 8: Domestic and international growth on quarterly basis (%)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Q1

FY

14

Q2

FY

14

Q3

FY

14

Q4

FY

14

Q1

FY

15

Q4

FY

15

Q1

FY

16

Q2

FY

16

Q3

FY

16

Q4

FY

16

Q1

FY

17

Q2

FY

17

Q3

FY

17

Q4

Y1

7

1Q

FY

18

Domestic FMCG International business



73 Dabur India


On account of poor consumption trends, especially in rural India, increasing competitive intensity and macroeconomic headwinds in some of the trade partnering countries, performance of Dabur India has been poor over the past couple of years. Things started to weaken, especially in FY16 when the company reported flattish growth. However over the long run, Dabur India posted sales, EBITDA and PAT five-year CAGR of 8%, 12% and 15%, respectively.

Category-wise performance of domestic FMCG business

Domestic FMCG business consists of HPC (50%), healthcare (31%) and foods (19%). HPC is dominated by hair care (22%) and oral care (16%) segments in its domestic business. Competitive intensity in both these categories is very high and some of the segments (like Babool, Vatika hair oil, shampoo portfolio etc) under both the categories have been clearly under pressure. Apart from Patanjali, the trade channel woes have also hampered the categorical performance. Demonetisation has disrupted the wholesale channels completely and things are not yet completely back on track. Hence, products/categories like hair care, skin care, digestives etc, mainly dependent on wholesale channels, have taken a big hit. Healthcare segment is dominated by health digestives which mainly includes Chyawanprash and Honey. Compared to Honey, performance of Chyawanprash has improved in subsequent quarters. Honey portfolio is under pressure as a result of demonetisation and attractive pricing by Patanjali. Food segment has been growing rapidly led by Real fruit juice which enjoys around 50% market share.

Exhibit 9: Sales composition (%)

Particulars (%) FY16 FY17 FY18E FY19E FY20E

Geographical break-up

Domestic FMCG business 66 70 68 68 69

International business 32 27 29 28 28

Others 4 3 3 4 3

Category wise break-up

Home and personal care 49 50 49 48 48

Oral care 15 16 16 16 16

Home care 6 7 7 7 7

Skin care 5 5 5 5 5

Hair care 23 22 21 21 20

Healthcare 33 31 32 32 32

Healthcare supplements 18 17 17 17 17

OTC and ethicals 9 9 9 9 9

Digestives 6 5 5 5 5

Foods 18 19 20 20 20


We expect modest recovery in demand going forward. We believe that growth rates across categories have bottomed out and will see upward movement going forward. Quarterly growth trend clearly depicts the weakness among the categories. Foods category will continue to deliver double-digit growth going forward, but for the current financial year we have considered conservative estimates due to subdued first-half and a higher base effect. HPC growth is likely to pick up, especially in the second-half of the current financial year once things settle down after GST implementation. However, we do not expect instant recovery in overseas operations and the portfolio to continue to weaken in the current financial year. We have categorically assumed growth rate for next two years to arrive at top-line growth. Growth rates assumptions are as follows:

Exhibit 10: Segment-wise growth trend (%)

Particulars 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18


Oral care 17.5 18.7 10.5 18.3 11.6 0.8 (5.0) 9.0 0.1

Home care 12.0 12.4 8.4 19.3 2.0 20.0 (5.2) (6.5) 8.3

Skin care 5.2 2.2 9.5 (2.2) (3.1) 6.6 (11.4) 0.0 12.3

Hair care 12.7 9.4 (0.6) 6.0 (3.3) (4.6) (22.8) (4.2) (3.7)

Healthcare

Healthcare supplements 1.2 9.0 (7.1) 1.8 (1.1) (5.6) (14.4) 5.0 (3.7)

OTC and ethicals 16.7 10.8 7.5 7.1 (10.1) (0.7) (11.7) (4.0) (3.7)

Digestives 1.7 1.6 (2.4) 6.5 (5.6) (3.4) (10.7) (5.0) (3.7)

Foods 15.5 2.4 (23.7) 11.7 4.3 15.2 52.2 10.0 (11.7)



74 Dabur India

Exhibit 11: Category-wise growth expectations (%)

Particulars (%) FY17 FY18E FY19E FY20E

Domestic FMCG portfolio

Home and personal care (0.7) 7.9 7.7 6.9

Oral care 6.6 9.7 6.5 8.0

Home care 3.7 10.7 9.0 8.0

Skin care 4.3 7.7 8.5 6

Hair care (7.7) 5.7 8.0 6.0

Healthcare (7.2) 9.2 9.5 8.0

Healthcare supplements (3.5) 10.3 10.0 8.0

OTC and ethicals (10.4) 8.7 8.9 8.0

Digestives (12.2) 6.8 9.1 8.0

Foods 13.9 3.8 11.5 10.0

Total Domestic FMCG (0.3) 7.5 9.0 7.9

Overseas business Growth rate (5.0) (2.8) 5.7 6.7


We have factored in margin improvement to some extent going forward assuming continued softening of input costs and cost control measures. However, compared to other companies, we believe that the scope for improvement in margins is relatively lesser as Dabur India predominantly operates in the herbal space and with so much competition around, likelihood of considerable price hikes is limited. Also, the company will have to spend on R&D, media and increasing the distribution network.

Exhibit 12: Dabur India to see slightly below normal top-line growth

Exhibit 13: EBITDA growth has bottomed out, see some revival

16.3 14.7

10.6

0.5

(2.1)

4.2

8.1 7.3

(5)

0

5

10

15

20

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000


Net Sales Sales growth

(Rsmn) (%)

14.9

17.4

13.5

15.3

(0.6)

5.2

9.9 10.5

(2)

0

2

4

6

8

10

12

14

16

18

20

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000


EBITDA EBITDA growth

(Rsmn) (%)


Exhibit 14: Net profit versus NP margin versus EBITDA margin

Exhibit 15: Return ratios lower

12.2 12.713.3

15.5 16.0 15.616.1

16.8

0

2

4

6

8

10

12

14

16

18

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000


Net Profit NP margin

(Rsmn) (%)

26.7 27.9 27.7 27.3

23.321.3 20.8 20.7

34.7

38.535.7

33.4

28.4

24.8 24.1 23.6

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1,00,000

0

5

10

15

20

25

30

35

40

45


Capital employed RoCE RoE

(Rsmn)(%)



75 Dabur India

Exhibit 16: Our versus consensus estimates

Particulars

FY18E FY19E FY20E

Our estimate (Rsmn)

Consensus (Rsmn)


(Rsmn) Consensus

(Rsmn) Variance (%)

Our estimate (Rsmn)

Consensus (Rsmn)

Variance (%)

Sales 80,268 83,398 (3.8) 86,803 93,890 (7.5) 93,097 1,05,377 (11.5)

EBITDA 15,875 16,192 (2.0) 17,446 18,526 (5.8) 19,281 21,114 (8.7)

Net income 12,993 13,930 (6.7) 14,551 16,040 (9.3) 16,219 18,476 (12.2)



We compared the financial performance of some HPC companies. Dabur India’s performance, both in terms of top-line and margins, has been poor compared to a much bigger player like HUL. Despite being much bigger, top-line growth rates of HUL in the past have been in line with the other companies. Because of the factors discussed in the thesis section, we expect top-line growth rates of Dabur India to be in mid high single-digit only. Similarly, growth in profitability would be low-teen digit number because of moderate growth expectations. The story drills down to underlying volume growth which is missing in this case and in our opinion, innovation and improved distribution reach could turn things around where Dabur India is lagging behind compared to a bigger player like HUL.



Dabur India 16 15 11 1 (2) 4 8 7


Emami 17 7 22 6 6 9 10 10

HUL 17 9 10 1 3 5 7 8

Gillette India 17 16 19 (11) (1) 8 12 13

Total 17 10 11 - 2 5 7 8


Dabur India 15 17 13 15 (1) 5 10 11


Emami 16 (2) 25 27 10 0 12 12

HUL 22 12 16 10 5 21 14 12

Gillette India 25 (45) 154 65 25 15 15 19

Total 19 9 19 14 5 15 13 12


Dabur India 18 20 17 17 2 2 12 11


Emami 22 28 21 19 5 6 11 12

HUL 41 2 11 (5) 9 18 15 13

Gillette India 15 (41) 208 34 19 19 15 22

Total 21 13 8 12 2 17 14 12



76 Dabur India

Dabur India’s dividend payout has been stable in the past. We have compared dividend growth and yield of Dabur India with that of other consumer companies. Out of the companies we compared, HUL has highest dividend yield, close to 2%. Dabur India’s dividend yield is on the lower side, close to 1%. DPS growth in the past five years has outpaced similar period in the past.

Exhibit 18: Dividend yield trend Exhibit 19: DPS in five-year CAGR band

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50



(%)

8.2

27.2

39.8

4.6 4.7

11.6

(4.4)

5.6

17.8

63.7

(10)

0

10

20

30

40

50

60

70


FY07-FY12 FY13-FY17

(%)



77 Dabur India


If we look at last 10 years’ price performance, Dabur India has delivered well in absolute terms before CY15, after which because of deteriorating growth profile, stock returns have fallen significantly. In CY16, Dabur India posted 0% return. If we look at the relative price performance of Dabur India with Nifty, it has been fairly volatile and no major outperformance has been witnessed with the exception of a few years. In the current calendar year, all consumer companies’ stocks have rallied and at least delivered returns in line with Nifty index whereas a player like HUL has outperformed. In the same period, Dabur India has underperformed Nifty by 9%. Players like Marico and Godrej Consumer Products have delivered relatively well on a consistent basis in the past five years.



Absolute Performance (%)

Dabur India 39 17 (26) 89 26 (1) 30 32 37 18 - 12



Emami 104 23 (30) 120 64 (15) 76 19 66 27 (5) 20

Proctor & Gamble Hygiene & Healthcare . - (9) (2) 127 7 1 46 10 91 (3) 26 19

Gillette India 17 58 (47) 81 44 6 26 (17) 60 42 (8) 27

Marico 47 27 (19) 86 16 21 50 2 50 39 15 26




Dabur India - (25) 53 8 7 32 2 24 4 23 (3) (9)



Emami India 46 (20) 45 25 39 12 38 11 26 32 (8) (2)

Proctor & Gamble Hygiene & Healthcare. (28) (41) 104 29 (9) 34 15 3 45 1 22 (3)

Gillette India (16) 2 9 3 22 41 (2) (22) 21 48 (10) 3

Marico 5 (18) 68 6 (2) 61 17 (5) 14 45 12 2




Source: Bloomberg, Nirmal Bang Institutional Equities


78 Dabur India

Dabur is currently trading at 40.1x one-year forward earnings i.e. at premium of 13% to five-year median P/E. Similarly, the stock is trading at premium of 15% and 18% to five-year median EV/EBITDA and P/sales, respectively. We also compared forward P/E of the stock with the indices and it has been observed that Nifty FMCG index and Dabur India are trading at a similar P/Es and at a significant premium to Nifty P/E.

Exhibit 21: One-year forward P/E of Dabur India Exhibit 22: Relative P/E (Nifty) of Dabur India

20

25

30

35

40

45

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7Fwd PE Median

(x)

1.5

1.7

1.9

2.1

2.3

2.5

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

De

c-1

4

Ap

r-1

5

Au

g-1

5

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

Dabur Median

(x)



15

20

25

30

35

40

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7

Fwd EV/EBITDA Median

(x)

3

4

5

6

7

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7

Fwd P/Sales Median

(x)


Exhibit 25: Dabur India vis-à-vis Nifty and Nifty FMCG

10

15

20

25

30

35

40

45

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Ap

r-1

2

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

De

c-1

4

Ap

r-1

5

Au

g-1

5

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

NIFTY 50 Forward PE Nifty FMCG Forward PE Dabur Forward PE

Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research


79 Dabur India

Current valuation is not supported by future earnings outlook

Indian consumer and consumer discretionary stocks have consistently traded at a significant premium to their peers and this has been evident not just in bear market, but also in a bull market. As discussed above, we are expecting a recovery in the HPC segment on account of favourable base and pick up of growth slowly. To understand the sustainability of current price multiples, we have compared the PEGs of consumer companies. As per our estimates, Dabur India is not likely to witness massive growth - both in terms of top-line as well as margins compared to HUL or Gillette India. Therefore, we believe the current valuation multiple at which the stock trades is not sustainable.


Company CMP*

(Rs) Mkt cap

(USD mn)


%^

EBITDA CAGR

%^

EPS CAGR

%^



Dabur India 311 8,356 6.8 6.3 5.9 34.2 30.9 27.6 42.1 37.6 33.7 6.5 8.5 8.2 5.1



Emami India 1,095 3,793 9.2 8.3 7.5 32.5 28.7 25.1 38.9 35.2 31.5 9.8 7.9 9.4 4.1


Gillette India 5,550 2,760 9.6 8.6 7.6 40.8 34.8 29.3 59.8 52.1 42.7 11.0 16.3 18.7 3.2

Marico 311 6,134 6.0 5.3 4.6 31.9 27.0 23.7 45.3 38.1 33.0 13.6 13.1 14.9 3.0





We initiate coverage on Dabur India with Accumulate rating and target price of Rs.305 by September 2018, implying a downside of 0.1% from the CMP. Our target price is based on P/E multiple of 35x (September 2019E EPS) which is at a discount of 14% to the current one-year forward P/E (40.7x), and in line with the five-year median P/E. We believe that Dabur India’s response to a slew of product launches in the naturals segment as a naturals leader has not been adequate. Also, margins are unlikely to witness any major improvement as the company will have to increase its branding and marketing investment. As a result, we have considered a 27% discount to the target multiple assigned to HUL while arriving at a multiple for Dabur India.

Risks






Any significant innovation on the part of Dabur or faster than expected recovery of rural markets and wholesale trade could have a positive impact on the company performance.


80 Dabur India

Exhibit 27: Management committee

Name Designation

Sudhir Achar Executive VP – R&D (HPC and Foods)

Krishan Kumar Chutani ED, Consumer care business

Sunil Duggal CEO

Arun Gupta VP, Corporate Affairs

Ashok Kumar Jain VP- Finance and Accounts

Krishnan V VP – Human Resources

Lalit Malik CFO

P.D. Narang Group Director, Corporate Affairs

Adarsh Sharma Executive VP- Sales

Shahrukh Adi Khan ED – Operations



68

18

8

6






COMMONWEALTH BANK OF AUSTR 3.65


MATTHEWS INTL CAPITAL MANAGEMENT 1.78

BLACKROCK 1.41

BARCLAYS MRCT BANK 1.21

VANGUARD GROUP 1.06

ICICI PRUDENTIAL ASSET MGMT CO 0.73

TEMPLETON ASSET MGMT. 0.71

SUN LIFE FINANCIAL INC. 0.47



81 Dabur India

Financials (consolidated)



Net Sales 78,688 77,014 80,268 86,803 93,097

% Growth 0.5 (2.1) 4.2 8.1 7.3

COGS 38,496 38,432 40,015 43,163 45,949

Staff costs 7,941 7,896 8,439 8,989 9,560


Other expenses 7,716 6,461 6,637 7,268 7,794

Total expenses 63,505 61,925 64,393 69,358 73,817

EBITDA 15,183 15,089 15,875 17,446 19,281

% growth 15.3 (0.6) 5.2 9.9 10.5

EBITDA margin (%) 19.3 19.6 19.8 20.1 20.7

Other income 2,172 2,984 2,996 3,234 3,538

Interest costs 485 540 498 465 435

Depreciation 1,332 1,429 1,782 2,027 2,109


15,538 16,104 16,591 18,189 20,274

Exceptional items - - (145) - -

Tax 2,999 3,303 3,454 3,638 4,055


PAT 12,512 12,784 12,976 14,534 16,202

PAT margin (%) 15.5 16.0 15.6 16.1 16.8

% Growth 17.4 2.2 1.5 12.0 11.5




Share capital 1,759 1,762 1,760 1,760 1,760

Reserves 39,947 46,712 54,238 62,668 71,093

Net worth 41,706 48,474 55,998 64,428 72,853

Total debt 7,922 9,115 8,300 7,750 7,250



Gross block 20,825 23,700 27,200 30,700 34,200

Depreciation 7,831 8,360 10,142 12,168 14,278

Net block 12,994 15,340 17,059 18,532 19,923

Capital work-in-progress 4,734 4,665 5,244 5,244 5,044

Investments 26,301 32,402 35,318 39,062 41,894

Inventories 10,965 11,067 10,859 12,319 11,851

Debtors 8,092 6,504 7,570 6,699 7,585

Cash 2,198 3,048 4,618 7,915 12,254

Loans & advances 422 465 616 409 601



Creditors 13,301 13,027 14,205 15,323 16,312


3,831 3,876 4,415 4,774 4,655


Net current assets 9,622 8,940 9,861 14,154 18,675

Total assets 46,788 55,085 61,778 69,946 78,159




PAT 12,512 12,784 12,976 14,534 16,202

Depreciation 1,332 1,429 1,782 2,027 2,109

Other income (2,172) (2,984) (2,996) (3,234) (3,538)

(Inc.)/dec. in working capital (1,993) 1,542 869 709 697




Dividends paid (-) (4,764) (5,062) (5,450) (6,104) (7,777)

Inc./(dec.) in total borrowings 579 1,194 (815) (550) (500)



Others - - - - -



Change in cash balance (510) 850 1,570 3,296 4,339




Per share (Rs)

EPS 7.1 7.3 7.4 8.3 9.2

Book value 23.7 27.5 31.8 36.6 41.4

DPS 2.3 2.4 2.6 2.9 3.7

Valuation (x)

P/Sales 5.6 6.3 6.8 6.3 5.9

EV/sales 5.6 6.3 6.8 6.2 5.7

EV/EBITDA 28.9 32.3 34.2 30.8 27.6

P/E 35.0 38.1 42.0 37.5 33.7

P/BV 10.5 11.3 9.8 8.5 7.5

Return ratios (%)

RoCE 27.3 23.3 21.3 20.8 20.7

RoE 33.4 28.4 24.8 24.1 23.6


Gross margin 51.1 50.1 50.1 50.3 50.6

EBITDA margin 19.3 19.6 19.8 20.1 20.7

EBIT margin 17.6 17.7 17.6 17.8 18.4

PAT margin 15.5 16.0 15.6 16.1 16.8


Current ratio 1.4 1.4 1.4 1.6 1.7

Quick ratio 0.9 0.9 1.0 1.1 1.3

Solvency ratio (x)

Debt to Equity ratio 0.2 0.2 0.1 0.1 0.1

Turnover ratios



Debtor days 98 105 100 98 96


Creditor days 115 125 124 125 126



82



Initi

atin

g C

over

age

Reuters: EMAM.BO; Bloomberg: HMN IN

Emami

Challenges of a niche player

Emami, a Kolkata-based FMCG player has grown at a remarkable pace over the past few years and forayed into the personal care space, mainly hair care and skin care. It has introduced new segments like cooling oil, fairness cream for men etc, and also made some strategic acquisitions like Zandu, KeshKing etc, over the years. Emami has been successful in creating an international presence, spread across 60 countries in SAARC, CIS and GCC regions etc. However, following weak consumer sentiment on account of macro-economic disruption in India and the Middle East, it has witnessed substantial slowdown in its growth rate.

High wholesale channel dependence remains a concern: Emami’s high dependence of 52% on overall basis on wholesale channel and 70% on KeshKing, which continues to perform poorly as compared to other channels, remains a significant cause for concern. North India market, which is the major market for Emami, is still showing signs of stress.

Growth in core brands is below expectation: Navratna, Zandu, Boro Plus and Fair & Handsome - all core brands - have delivered single-digit growth over the past two to three years. KeshKing grew 48% in FY17, but growth going forward will be challenging because of trade channel woes and competition in the market.

Headroom for margin expansion is limited: Emami enjoys highest operating margin in the industry. With rising competition and higher input costs (mentha), we see limited room for further improvement in its margin profile. We also don’t envisage any substantial product launch which will drive this going forward.

Valuation and recommendation: We initiate coverage on Emami with a Sell rating and a target price of Rs1,000 by September 2019, implying a downside of 8.3% from the CMP. Our target price is based on P/E multiple of 30x (September 2019E EPS) which is at a discount of 19% to the current one-year forward P/E (37x), and 15% discount to the five-year median P/E. We believe that sluggish performance of core brands and limited scope for margin expansion justify attaching a 37.3% discount to the target multiple assigned to HUL while arriving at target multiple for company.

SELL

Sector: FMCG

CMP: Rs1,090


Downside: 8.3%


Key Data



52 Wk H / L (Rs) 1,261/935



70

80

90

100

110

120


EMAMI LTD Nifty 50


1 M 6 M 1 Yr

Emami 1.2 7.3 (6.9)

Nifty Index (1.5) 7.3 11.7

Source: Bloomberg


Net revenues 23,583 24,930 27,165 29,974 33,002

EBITDA 6,873 7,591 7,606 8,513 9,538

PAT 5,757 6,017 6,391 7,066 7,881

EPS (Rs) 25.4 26.5 28.2 31.1 34.7

EPS growth (%) 4.1 -0.8 9.1 9.8 10.0

EBITDA margin (%) 29.1 30.4 28.0 28.4 28.9

P/E (x) 36.7 40.1 40.6 36.8 33.0

P/BV (x) 13.1 13.8 12.6 10.9 9.4

EV/EBITDA (x) 31.6 32.3 34.0 30.0 26.3

RoCE (%) 35.3 31.6 31.3 32.4 31.7

RoE (%) 39.1 35.7 33.5 31.7 30.6


29 September 2017




2 Emami

Investment thesis

Significant wholesale channel dependence remains a cause of concern

Although nearly all consumer companies are dependent on wholesale as a trade channel, the dependence in case of Emami is fairly high at 52% and that too after company’s deliberate efforts to increase its direct reach. The two-year old acquisition, KeshKing, is more than 70% wholesale channel-dependent. This has created a drag, especially after demonetisation. Growth in key brands over the past three quarters is a good indicator of this. As per our channel checks and state visits, wholesale as a trade channel has not revived significantly and especially regions like North and East India continue to face challenges. North India is the biggest market for Emami with a 35% revenue share in domestic market. North and East India markets together contribute around 50% revenues from domestic operations. Most of the rural demand is routed through wholesale channels. Rural trends were weak in the past couple of years because of a poor monsoon and low income level of farmers. And now with things likely to improve after an average monsoon and continuous government thrust to improve farmers’ income, demonetisation has disrupted trade channels, mainly wholesale. Emami has been working on expanding its direct reach which may exert some pressure on margins. Total reach of Emami (4.3mn) is relatively less. Hence, we believe that with high dependence on wholesale channel,lower reach does make the growth prospects for Emami somewhat challenging in medium term.

Exhibit 1: Volume trend in domestic business Exhibit 2: Total distribution reach of HPC companies (mn outlets)

15.4 13.5

9.3

18.0 18.0

11.0

0.2 (1.5)

(18.0)

(20)

(15)

(10)

(5)

0

5

10

15

20

25

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

(%)

5.8 6

4.3

5.6

8

4.6

2.8

0

1

2

3

4

5

6

7

8

9


HUL Marico Jyothy



3 Emami

Exhibit 3: Distribution network of Emami


Sluggish growth of core brands

Navratna, Zandu, Boro Plus and Fair & Handsome are Emami’s core brands. Growth in core brands has not been promising since the past couple of years. Navratna cool oil, which accounts for around 23% of domestic sales, has witnessed single-digit growth over the past two years. Rural India accounts for 43% of Navratna product range revenues. We believe that, poor rural growth rate in the past couple of years coupled with increased competitive intensity in the hair care market resulted in poor performance of a highly marketed brand like Navratna. Sales in the current financial year from Navratna are likely to be weak as the summer season is the crucial period for the brand. Performance of Fair & Handsome cream, which is also largely wholesale channel- dependent (around 40%), has been consistently weak. Zandu range had a mixed performance in the past few years. However, the company is banking heavily on the Zandu range and expects it to grow rapidly over the medium term. Boroplus antiseptic cream has witnessed an improvement and we expect this brand to continue to deliver low mid-teen growth going forward because of its leadership position in the market. KeshKing, the two-year old acquisition of the company which enjoys nearly 60% gross margin, has also been struggling after demonetisation because of its extremely high dependence on the wholesale channel. When the company bought this brand, it was almost 100% dependent on the wholesale channel which has now reduced to 70%. It accounts for almost 15% of domestic sales and grew 48% in FY17 despite poor growth in the second-half after demonetisation. We have considered just 10% growth in FY18E and higher numbers for the next two years assuming reduced wholesale channel dependency and overall recovery. Hence, in our opinion, the overall outlook on top-line growth is not bright as the good growth in Boro Plus and Zandu range will be offset by subdued performance of Fair & Handsome, Navratna, KeshKing etc.

Exhibit 4: Domestic revenue mix and market share movement

Brand/product (%) Domestic revenue mix (x) Market share (%)

FY16 FY17 FY16 FY17

Navratna oil 24 23 61 61

Boro Plus antiseptic cream 14 15 72 70

Zandu and Mentho Plus balms 23 23 60 59

Fair & Handsome cream 11 9 59 60

Kesh King oil 11 15 36 34

Navratna Cool talc 5 6 27 26



4 Emami

Exhibit 5: Quarterly growth trends

Particulars (%) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18

Navratna Cool Oil 17.0 0.0 (6.0) 4.0 8.0 (3.0) (4.0) 5 (15)

Boroplus Antiseptic cream 12.0 16.0 2.0 41.0 38.0 16.0 13.0 2 41

Balms 27.0 3.0 10.0 12.0 6.0 19.0 (5.0) 1 (21)

Zandu HCD 28.0 45.0 25.0 30.0 14.0 0.0 (6.0) 1 N.A.

Fair and Handsome 20.0 10.0 8.0 0.0 1.0 1.0 (18.0) 5 (19.0)

Kesh King N.A. N.A. N.A. N.A. 23.0 50.0 2.0 1 (28)


Headroom for margin expansion is somewhat limited

Emami enjoys highest operating margin in the industry because of its niche offerings. Prices of mentha, which is one of the main raw materials used by the company, have surged in the past one year by 12%-14% and is likely to remain in the same range, if not rise further, and as a result it is difficult to maintain existing gross margin. Emami spends a considerable sum on advertising and promotion as percentage of sales in the industry. In order to remain competitive, the management has given guidance of an upward revision of advertisement expenses which will exert pressure on margins by 100bps-120bps. Also, we believe the company might not be able to go for aggressive price hikes in its core brands, looking at the growth profile over the past couple of years. Interest costs will come down as Emami will repay its long-term debt in FY18 and the savings in interest costs will add to the bottom line (PAT). Overall, we believe that it is very difficult to maintain the existing margin profile and all these factors will result in dilution of margin for Emami in the medium term.

Exhibit 6: COGS likely to increase in the medium term Exhibit 7: Media spending as a percentage of sales rises

42.1

37.435.2 34.4 33.4 34.2 34.2 34.1

0

5

10

15

20

25

30

35

40

45


(%)

16.415.2

17.7 18.3 17.819.0 18.7 18.5

0

2

4

6

8

10

12

14

16

18

20


(%)


Innovation momentum needs to be stepped up further

We believe that, Emami has delivered robust returns over the past few years mainly because of better margins which stemmed from several niche product innovation and launches, be it cooling oil, fairness cream, face wash for men etc. The company was able to carve out a niche for itself in these offerings which were appreciated by consumers. However, in the current scenario, we believe that such kind of innovation momentum is somewhat missing without which it will be very difficult for the company to grow at a high rate similar to that in past and also maintain margins which are already the highest in the industry. The company has been spending just about 1% of its revenues on R&D substantially lower compared to other player like Colgate, HUL. Emami does spend a lot on advertising but, in our opinion consumers equally cares about high functional benefits and efficacy and we expect it will need to step up spends further in this area and continue to match fast changing consumer needs and lifestyle.


5 Emami

Headwinds in MENAP region impacting international business

Emami has also forayed into international business which contributes around 10% to consolidated revenues. It has a strong presence mainly in SAARC countries and MENAP region. Emami has also set up a manufacturing facility in Bangladesh. MENAP region has been struggling because of macro-economic headwinds in Saudi Arabia. MENA and Pakistan together account for around 27% of international revenues for Emami. Performance of Bangladesh has been pretty impressive and it has been one of the main drivers of international business along with SAARC countries. In the CIS region, apart from Russia, Emami has been concentrating on Ukraine and Belarus. Emami has claimed leadership position in some of its power brands like Navratna oil, Boro Plus and Fair & Handsome creams in overseas markets also.

Exhibit 8: Key overseas markets for core brands of Emami


We believe the outlook for international business remains weak because of economic headwinds in the MENA region and some countries in the CIS region, although that will be partially offset by stellar performance of SAARC countries and Bangladesh.

Exhibit 9: Break-up of international business

Particulars (%) FY14 FY15 FY16 FY17 FY18E FY19E FY20E

SAARC & SEA 44 40 44 47 48 50 52

MENAP 50 41 38 35 34 32 31

CISEE 4 17 11 11 11 10 10

Others 2 2 7 7 7 7 7



6 Emami


Consistent performance in the past

Emami has consistently delivered on the financial front over the past few years. The company witnessed sales/EBITDA/PAT five-year CAGR of 11%/15%/18%, respectively. This has been achieved through introduction of niche products (either in-house launch or through acquisition) which enjoy very high margin. Emami has also forayed into international markets and overseas operations now account for around 10% of consolidated business. The overseas operations also have delivered well in the past till FY15. However, thereafter things started to worsen both in domestic and international markets and hence the company was able to grow only in mid single-digits over the past two years as opposed to its average growth rate of 15%-20% in past.

Growth of key brands and overseas business under pressure

Slowdown in the growth of key brands remains a cause for concern and we believe that most of its brands will grow by around 8%-10% in domestic market in the medium term as against high-teen growth enjoyed in the past in case of some brands. Also, economic pressure in Saudi Arabia and depreciation of currencies in countries like Ukraine will continue to keep things tough for overseas operations. Therefore, we expect 9%-10% growth in top-line in the medium term which is relatively less considering the size at which it operates.

Exhibit 10: Growth in top-line

Particulars (%) FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Domestic 5 19 15 7 9 11 10

International 23 44 (47) (10) 5 7 8

Consolidated 7 22 6 6 9 10 10


Exhibit 11: Brand-wise sale mix (domestic business) Exhibit 12: Brand-wise sale mix (international business)

23%

15%

23%

9%

15%

6%

9%

Navratna Oil

Boro Plus antiseptic cream

Zandu and Mentho plus balms

Fair and Handome cream

Kesh King Oil

Navratna Cool Talc

Others

28%

24%16%

10%

22%

Fair and Handsome

Navratna

Boro Plus

OTC products

Others


Exhibit 13: Region-wise sales break-up (FY17)

20%

32%19%

29%

South

North

East

West



7 Emami

Limited room for margin improvement

Although, Emami has managed to improve its operating margin over the past few years, in our opinion because of the factors discussed in the thesis, the margins have topped and are likely to fall in the current financial year because of a challenging and competitive environment and input costs going up. As a result, we may see a similar dilution in return ratios and remain in that range in the medium term.

Exhibit 14: Sales vis-à-vis growth Exhibit 15: EBITDA vis-à-vis growth

16,991 18,208

22,172 23,583

24,930 27,165

29,974

33,002

16.9

7.2

21.8

6.4 5.7

9.0 10.3 10.1

0

5

10

15

20

25

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000


Sales Growth

(Rsmn) (%)

4,436 4,335

5,401

6,873 7,591 7,606

8,513

9,538

16.5

(2.3)

24.6 27.3

10.5

0.2

11.9 12.0

(5)

0

5

10

15

20

25

30

35

0

2,000

4,000

6,000

8,000

10,000

12,000


EBITDA Growth

(Rsmn) (%)


Exhibit 16: PAT vis-à-vis PAT margin Exhibit 17: Return ratios to witness a downturn

3,147

4,024

4,854

5,757 6,017 6,391

7,066

7,881

18

21 21

24 24 23

2324

0

5

10

15

20

25

30

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


Adj PAT Adj PAT margin

(Rsmn) (%)

8,923 9,697

13,683

22,830 22,277 22,139

25,408

28,553

36

43 43

35

32

31 32 32

42

47

43

39

36

33 32 31

0

5

10

15

20

25

30

35

40

45

50

-

5,000

10,000

15,000

20,000

25,000

30,000


Capital Employed RoCE % RoE %

(%)(Rsmn)


Exhibit 18: Comparison with consensus expectations

Particulars

FY18E FY19E FY20E

Our estimate

(Rsmn)

Consensus estimate

(Rsmn)

Variance (%)

Our estimate

(Rsmn)

Consensus estimate

(Rsmn)

Variance (%)

Our estimate

(Rsmn)

Consensus estimate

(Rsmn)

Variance (%)

Sales 27,165 27,611 (2) 29,974 32,127 (7) 33,002 37,262 (11)

EBITDA 7,606 8,120 (6) 8,513 9,496 (10) 9,538 11,431 (17)

Net income 6,391 5,674 12 7,066 7,007 0 8,586 8,586 (9)



8 Emami


We have compared financial performance of some HPC companies. Emami’s growth in the past couple of years has been subdued like other consumer companies, despite being smaller in size compared to HUL, Dabur India and Colgate-Palmolive (India). On a smaller base, Emami has outperformed other peer in terms of growth in profitability. Growth in net income considered from FY16 onwards is after adjusting amortisation of KeshKing brand. Including amortisation in computation would have resulted in lower growth rate for the said period. We expect, HUL and Gillette India to deliver better performance - both in terms of top-line and bottom-line - than Emami because of the factors discussed in the thesis section.



Dabur India 16 15 11 1 (2) 4 8 7


Emami 17 7 22 6 6 9 10 10

HUL 17 9 10 1 3 5 7 8

Gillette India 17 16 19 (11) (1) 8 12 13

Total 17 10 11 0 2 5 7 8


Dabur India 15 17 13 15 (1) 5 10 11


Emami 16 -2 25 27 10 0 12 12

HUL 22 12 16 10 5 21 14 12

Gillette India 25 -45 154 65 25 15 15 19

Total 19 9 19 14 5 15 13 12


Dabur India 18 20 17 17 2 2 12 11


Emami 22 28 21 19 5 6 11 12

HUL 41 2 11 (5) 9 18 15 13

Gillette India 15 (41) 208 34 19 19 15 22

Total 21 13 8 12 2 17 14 12


We have compared dividend growth and yield of Emami with that of other consumer companies. Out of the companies that we compared, HUL has highest dividend yield, close to 2%. Emami’s dividend yield profile has been quite volatile in the past and currently has a yield of less than 1%; much below that of HUL and Colgate-Palmolive (India). DPS growth in the past five years has been lower when compared with a similar period earlier.


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50



(%)

8.2

27.2

39.8

4.6 4.7

11.6

(4.4)

5.6

17.8

63.7

(10)

0

10

20

30

40

50

60

70


FY07-FY12 FY13-FY17

(%)



9 Emami


Supported by healthy financial performance, Emami has delivered very good returns in the past consistently. In CY16, it reported negative 5% return whereas Nifty outperformed the company by 8%, for first time since CY07. During the current calendar year, the stock has risen 20% just matching the returns of the index unlike HUL which outperformed the index by 22%. Marico and Godrej Consumer Products have delivered relatively well consistently in the past five years compared to other HPC peers.




Dabur India 39 17 (26) 89 26 (1) 30 32 37 18 - 12



Emami 104 23 (30) 120 64 (15) 76 19 66 27 (5) 20

Proctor & Gamble Hygiene & Healthcare - (9) (2) 127 7 1 46 10 91 (3) 26 19

Gillette India 17 58 (47) 81 44 6 26 (17) 60 42 (8) 27

Marico 47 27 (19) 86 16 21 50 2 50 39 15 26




Dabur India - (25) 53 8 7 32 2 24 4 23 (3) (9)



Emami 46 (20) 45 25 39 12 38 11 26 32 (8) (2)

Proctor & Gamble Hygiene & Healthcare . (28) (41) 104 29 (9) 34 15 3 45 1 22 (3)

Gillette India (16) 2 9 3 22 41 (2) (22) 21 48 (10) 3

Marico 5 (18) 68 6 (2) 61 17 (5) 14 45 12 2




Source: Bloomberg, Nirmal Bang Institutional Equities


10 Emami

Emami is currently trading at 36.9x one-year forward earnings i.e. at premium of 5% to five-year median P/E. Similarly, the stock is trading at premium of 7% and 2% to five-year median EV/EBITDA and P/Sales, respectively. We have also compared forward P/E of the stock with the indices and it has been observed that Nifty FMCG index and Emami are trading at a similar PE range, which is premium to Nifty PE by more than 60%.

Exhibit 23: One-year forward P/E Exhibit 24: Relative P/E (Nifty)

15

20

25

30

35

40

45

50

55

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7

Forward PE Median

(x)

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

De

c-1

4

Ap

r-1

5

Au

g-1

5

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

Emami Median

(x)



10

15

20

25

30

35

40

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7


(x)

3

4

5

6

7

8

9

10

11

12

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7

Forward P/S Median

(x)


Exhibit 27: Emami PE vis-à-vis Nifty and Nifty FMCG

10

15

20

25

30

35

40

45

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Ap

r-1

2

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

De

c-1

4

Ap

r-1

5

Au

g-1

5

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

NIFTY 50 Forward PE Nifty FMCG Forward PE Dabur Forward PE Source: Company, Nirmal Bang Institutional Equities Research


11 Emami

Current valuations are not well justified by earnings growth outlook

Indian consumer and consumer discretionary stocks have consistently traded at a significant premium to their peers and this has been evident not just in a bear market, but in a bull market as well. As discussed above, we expect a recovery in the HPC segment on account of a favourable base and slow pick-up in growth. To understand the sustainability of current price multiples, we have compared the PEG of consumer companies. As per our estimates, Emami is not likely to witness massive growth - both in terms of top-line as well as margins - compared to HUL or Gillette India. Therefore, we believe the current price multiple at which the stock trades is not sustainable.


Company CMP*

(Rs) Mkt. cap

(USD mn)


%^

EBITDA CAGR

%^

EPS CAGR

%^



Dabur India 311 8,356 6.8 6.3 5.9 34.2 30.9 27.6 42.1 37.6 33.7 6.5 8.5 8.2 5.1



Emami 1,095 3,793 9.2 8.3 7.5 32.5 28.7 25.1 38.9 35.2 31.5 9.8 7.9 9.4 4.1

Procter & Gamble Hygiene & Healthcare . 8,366 4,145 9.9 8.7 N.A. 33.8 30.4 N.A. 53.9 46.6 N.A. N.A. N.A. N.A. N.A.

Gillette India 5,550 2,760 9.6 8.6 7.6 40.8 34.8 29.3 59.8 52.1 42.7 11.0 16.3 18.7 3.2

Marico 311 6,134 6.0 5.3 4.6 31.9 27.0 23.7 45.3 38.1 33.0 13.6 13.1 14.9 3.0



*Last traded price of 28-September -2017 have been considered. ^3 year CAGR (FY17-FY20E)


We initiate coverage on Emami with a Sell rating and a target price of Rs1,000 by September 2018, implying a downside of 8.3% from the CMP. Our target price is based on P/E multiple of 30x (September 2019E EPS) which is at a discount of 11% to the current one-year forward P/E (37x), and 15% discount to the five-year median P/E. We believe that with the subdued performance of core brands and lack of innovation, there is less/no scope for margin expansion going forward and hence we have considered a 37% discount to the target multiple assigned to HUL while arriving at a multiple for Emami.

Risks





Higher wholesale channel dependence is the major hurdle for Emami on a relative basis. However, if the Rural and wholesale channel recovery is much faster than anticipated as well as if the company manages to increase its direct reach to consumers substantially our earnings estimate could prove to be conservative.


12 Emami

Exhibit 29: Management committee members

Name Designation

R.S. Agarwal Chairman

S.K. Goenka Managing Director

N.H. Bhansali CEO- Finance, Strategy and Business development

Punita Kalra CEO- R&D and Innovation

C.K. Katiyar CEO- Technical

K.S. Arun Kumar President - IT

Mohan Panchabhai COO - Operations

Madan Mohan Pandey President - Sales

Kaushik Gupta Senior VP - Marketing

Rana Bannerji President - HCD

Ajit Babu Narsimha CEO - HCD

Raghav Agarwal CEO- IMD



73

15

4

9



Exhibit 31: Top 20 Public shareholders



AVEES TRADING AND FINANCE 2.57

MATTHEWS INTL CAPITAL MANAGEMENT 1.73

AMANSA HOLDINGS 1.27

BANK OF MONTREAL 1.25

STANDARD LIFE ABERDEEN PLC 0.98

VANGUARD GROUP 0.77

JO HAMBRO CAPITAL MANAGEMENT 0.75

NOMURA 0.51

T ROWE PRICE GROUP INC 0.45

SUNDARAM ASSET MANAGEMENT CO. 0.43

HDFC LIFE INSURANCE CO. 0.43

UTI ASSET MANAGEMENT CO. 0.37

GOLDMAN SACHS GROUP INC 0.33


ICICI PRUDENTIAL ASSET MGMT CO. 0.33

ROCHDALE INVESTMENT MANAGEMENT 0.3

L&T INVESTMENT MANAGEMENT 0.29


BMO INVESTMENTS II IRELAND PLC 0.26



13 Emami

Financials

Exhibit 1: Exhibit 32: Income statement


Net sales 23,583 24,930 27,165 29,974 33,002

% Growth 6.4 5.7 9.0 10.3 10.1

COGS 8,121 8,336 9,290 10,251 11,254

Staff costs 2,078 2,336 2,608 2,878 3,135


Other expenses 2,207 2,240 2,499 2,728 2,970

Total expenses 16,711 17,339 19,559 21,461 23,464

EBITDA 6,873 7,591 7,606 8,513 9,538

% growth 27.3 10.5 0.2 11.9 12.0

EBITDA margin (%) 29.1 30.4 28.0 28.4 28.9

Other income 444 311 300 330 363

Interest costs 540 580 188 180 100

Depreciation 423 469 658 808 988

Amortisation 2,127 2,617 2,599 2,599 2,599


4,228 4,236 4,462 5,256 6,214

Exceptional items - - - - -

Tax 597 836 669 788 932

PAT 3,631 3,400 3,792 4,467 5,282

Adjusted PAT 5,757 6,017 6,391 7,066 7,881

PAT margin (%) 24.0 23.8 23.3 23.3 23.6

% Growth 18.6 4.5 6.2 10.6 11.5


Exhibit 2: Exhibit 34: Balance sheet


Share capital 227 227 227 227 227

Reserves 15,889 17,320 20,412 23,681 27,326

Net worth 16,116 17,547 20,639 23,908 27,553

Total debt 6714.393 1729.6 1500 1500 1000



Gross block 6,835 9,966 11,966 14,966 17,966

Depreciation 2,129 2,462 3,120 3,928 4,916

Net block 4,706 7,504 8,846 11,038 13,050


Intangible assets 15048 12479 9832 7233 4634

Investments 474 1277 1357 1700 1745

Inventories 1,505 1,792 1,670 1,981 1,904

Debtors 1,309 970 1,263 1,201 1,511

Cash 1,084 501 2,673 5,290 9,890

Loans & advances 105 88 89 89 89



Creditors 2,487 1,847 2,989 2,628 3,538

Other current liabilities & provisions 1,145 4,172 1,343 1,599 1,860


Net current assets (2,293) (3,170) 1,035 4,253 8,530

Total assets 19,534 18,337 21,614 24,924 28,615


Exhibit 3: Exhibit 33: Cash flow


Adjusted PAT 5,757 6,017 6,391 7,066 7,881

Depreciation 423 469 658 808 988

Other income (444) (311) (300) (330) (363)

(Inc.)/dec. in working capital (305) (509) 1,272 (558) 868


Capital expenditure (-) (16,040) (210) 276 (401) (401)

Net cash after capex (10,065) 6,041 8,489 6,770 9,077

Dividends paid (-) (1,912) (1,899) (3,439) (3,802) (4,240)

Inc./(dec.) in total borrowings 6,520 (1,985) (230) - (500)

Inc./(dec.) in investments 5,307 (492) 219 (12) 318

Cash from financial activities 5,044 (4,168) (4,369) (3,940) (4,795)

Others - - - - -

Opening cash balance 3,541 1,084 501 2,673 5,290

Closing cash balance 1,084 501 2,673 5,290 9,890

Change in cash balance (2,457) (584) 2,173 2,617 4,600


Exhibit 4: Exhibit 35: Key ratios


Per share (Rs)

EPS 25.4 26.5 28.2 31.1 34.7

Book value 71.0 77.3 90.9 105.3 121.4

DPS 7.0 7.0 12.7 14.0 15.6

Valuation (x)

P/Sales 9.0 9.7 9.6 8.7 7.9

EV/sales 9.2 9.8 9.5 8.5 7.6

EV/EBITDA 31.6 32.3 34.0 30.0 26.3

P/E 36.7 40.1 40.6 36.8 33.0

P/BV 13.1 13.8 12.6 10.9 9.4

Return ratios (%)

RoCE 35.3 31.6 31.3 32.4 31.7

RoE 39.1 35.7 33.5 31.7 30.6


Gross margin 65.6 66.6 65.8 65.8 65.9

EBITDA margin 29.1 30.4 28.0 28.4 28.9

EBIT margin 27.4 28.6 25.6 25.7 25.9

PAT margin 24.0 23.8 23.3 23.3 23.6


Current ratio 0.7 0.6 1.2 1.7 2.3

Quick ratio 0.5 0.4 0.9 1.4 2.0

Solvency ratio (x)

Debt to equity ratio 0.4 0.3 0.1 0.1 0.0

Turnover ratios



Debtor days 18 17 15 15 15


Creditor days 100 95 95 100 100



14

Disclaimer

Stock Ratings Absolute Returns

BUY > 15%

ACCUMULATE -5% to15%

SELL < -5%

DISCLOSURES

This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as “NBEPL”) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH000001436. NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: We, Vijay Chugh, the Independent Research Analyst and Abhishek Navalgund, Research Associate are the authors of this report, hereby certify that the views expressed in this research report accurately reflects our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.


15

DISCLAIMER This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. NBEPL is not soliciting any action based upon it. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any such transaction. In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader.

This research has been prepared for the general use of the clients of NBEPL and must not be copied, either in whole or in part, or distributed or redistributed to any other person in any form. If you are not the intended recipient you must not use or disclose the information in this research in any way. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. NBEPL will not treat recipients as customers by virtue of their receiving this report. This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject NBEPL & its group companies to registration or licensing requirements within such jurisdictions. The report is based on the information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up-to-date and it should not be relied upon as such. We accept no obligation to correct or update the information or opinions in it. NBEPL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. NBEPL or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.

This information is subject to change without any prior notice. NBEPL reserves its absolute discretion and right to make or refrain from making modifications and alterations to this statement from time to time. Nevertheless, NBEPL is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries.

Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. Opinions expressed are subject to change without any notice. Neither the company nor the director or the employees of NBEPL accept any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Here it may be noted that neither NBEPL, nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profit that may arise from or in connection with the use of the information contained in this report.

This report is jointly prepared by Independent Research Analyst, Mr. Vijay Chugh who is registered with SEBI as ‘Research Analyst’ having registration no. INH000005209 and Mr. Abhishek Navalgund employed with NBEPL as Research Associate. As represented by Third Party Research Analyst, there is no material conflict of interest of him. We reviewed the third party research report for material fact and information before distribution of the same.

Copyright of this document vests exclusively with NBEPL. Our reports are also available on www.nirmalbang.com

Access all our reports on Bloomberg, Thomson Reuters and Factset.

Team Details:

Name Email Id Direct Line

Rahul Arora CEO [email protected] -

Girish Pai Head of Research [email protected] +91 22 3926 8017 / 18

Dealing

Ravi Jagtiani Dealing Desk [email protected] +91 22 3926 8230, +91 22 6636 8833

Pradeep Kasat Dealing Desk [email protected] +91 22 3926 8100/8101, +91 22 6636 8831

Michael Pillai Dealing Desk [email protected] +91 22 3926 8102/8103, +91 22 6636 8830

Nirmal Bang Equities Pvt. Ltd.

Correspondence Address

B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park,

Lower Parel (W), Mumbai-400013. Board No. : 91 22 3926 8000/1; Fax. : 022 3926 8010

indian consumer sector want it all - nirmal bang sector - 29... · indian consumer goods spending...

Documents