production - soaps

8/9/2019 Production - Soaps

1/32

FAST MOVING CONSUMER GOODSINDUSTRY

ISSUE 1H 2010

ISI Analyticsthe Business research arm of ISI Emerging MarketsA Euromoney Institutional Investor Companywww.securities.com

India

IndustryRes

earch

ISIAnalyti

cs


2/32

1. Industry Profile 1

1.1 Industry Overview1.2 General Economic Environment1.3 Indias FMCG Industry Overview

1.3.1 Food Inflation1.3.2 Food and Beverages Industry1.3.3 Household Care1.3.4 Personal Care

2. Market Trends and Outlook2.1 Union Budget 2010-112.2 e-Choupal2.3 Growth in Rural Market2.4 Regulatory Issues

2.4.1 National Food Processing Policy2.4.2 FDI Policy in Retail Trading (Single Brand)

2.4.3 Government Policies and Initiatives

11

3. Leading Players and Comparative Matrix3.1 Leading Players

3.1.1 Hindustan Unilever Ltd (HUL)3.1.2 Nirma Ltd3.1.3 Dabur India Ltd (DIL)3.1.4 Colgate-Palmolive India Ltd (CPIL)3.1.5 Godrej Consumer Products Ltd (GCPL)

3.2 Comparative Matrix3.3 SWOT Analysis

19

Notes: 1 RMB = INR 6.5539

1 NZD = INR 31.55601 USD = INR 44.74151 lakhs = 100,000 units1 crores (cr) = 10,000,000 units

FMCG


3/32

ISI Analytics

FMCG india

1. Industry Profile

1.1 Industry Overview

Fast Moving Consumer Goods (FMCG) -alternatively known as consumer packagedgoods (CPG) are products that are soldquickly and generally consumed at a regularbasis, as opposed to durable goods such askitchen appliances that are replaced over aperiod of years. The FMCG industry primarilyengages in the production, distribution andmarketing operations of CPG. FMCG product

categories comprise of food and dairyproducts, pharmaceuticals, consumerelectronics, packaged food products,household products, drinks and others.Meanwhile, some common FMCG includecoffee, tea, detergents, tobacco andcigarettes, soaps and others. The big namesin this sector include Sara Lee, Nestle,Reckitt Benckiser, Unilever, Procter &Gamble, Coca-Cola, Carlsberg, Kleenex,General Mills, Pepsi, Mars and others.

FMCG in Vietnam urban area grew 19% in2008 as a result of the rising number ofyoung and sophisticated consumers.

Approximately 50% of consumers in Vietnamare under the age of 30 and this figure isprojected to increase to 70mn by 2018. Inaddition, the number of high income earners(from USD500 per month) has trebled overthe past six years while the number of lowincome earners (under USD250 per month)decreased from 62% in 1999 to 9% in 2008in major cities such as Hanoi and Ho ChiMinh City.

In China, statistics compiled by the ChinaChain Store and Franchise Associationshowed that 100 major FMCG firms reapedsales income of RMB530bn in 2006 aftersound growth of 20% over figures obtainedin the previous year. Sixteen out of the 100examined firms are foreign-funded firms thatgarnered RMB168.8bn in sales volume.Improved efficiency also contributedsignificantly to average sales growth of 27%yoy. Meanwhile, the remaining 84 domesticfirms reaped RMB360.8bn in sales after a

17% growth.

1

Chart 1: FMCG Value Growth in 2008 in Selected ASEAN Countries

Sources: Asean Affairs; TNS Media Vietnam


4/32

ISI Analytics

FMCG india

New Zealands FMCG plays a vital role in itseconomy, in which it accounted for 5% ofGDP, 31% of manufacturing GDP and 26%of manufacturing employment, while offering63,000 full time jobs to its people. Thenations export for food and beverage (F&B)trebled over the past 17 years, growing fromNZD6.96bn in 1990 to NZD21.43bn in 2008.Dairy, meat, seafood, fruits and vegetables,wine as well as specialty food industries areamong the main categories of the countrysF&B industry. Dairy industry that producesgoods ranging from high quality basics (milkpowders, butter and etc.) to specialty foods(ice-cream, artisan cheeses and etc.) isresponsible for 22% of total exports, whiledairy exports in 2008 amounted toNZD9.29bn.

In Malaysia, total FMCG expanded 8.2% in2007 with average prices increasing by 4.2%as inflation kicks in. Malaysians continued topurchase convenient and indulgent productsin spite of inflationary pressures, wherebynew launches for ice cream and snacks aswell as innovative products such as icecream minis were signs of successfulconvenient indulgence. In addition, fabricsoftener and air freshener experiencednotable growth. A survey that involved 1,000Malaysians indicated that Malaysianscontinue to be loyal to brands despite theglobal financial slowdown, particularly inFMCG goods such as dairy products (76%),staple food (78%), soft drinks (61%), cannedproducts (68%), healthcare (78%) andcosmetic products (74%).

1.2 General Economic Environment

India is one of the economies that shruggedoff the effects of the recent global financialcrisis with a growth of 7.87% during July-September 2009, up from 6.1% during theprevious quarter. Analyst projected that thenations economic growth is projected togrow between 7-7.5% in 2010-11 and couldbe the worlds fastest expanding economywithin the next four years relying on higherpool of savings to help finance developmentin the country to surpass China. Expandingat an average GDP of 7.1% over the decadethrough the third quarter of 2009, it ispossible for the Indian economy toexperience a double-digit growth within thenext four years.

The countrys finance ministry reported thatits fast-growing USD1.2tr economy currentlyhas saving rate of 32.5% of GDP comparedto 28% in Japan, 30% in South Korea and38% in Malaysia. With the support of growingpopulation in its workforce (220mn people by2030) as well as increasing savings byyoung working Indians that will addmomentum to the nations growth. Accordingto estimates published by the Index ofIndustrial Production (IIP), index forelectricity, manufacturing and mining eachregistered growth rates of 7.5%, 9.2% and9.5% during the second quarter of 2009-10.

GDP(yoy) Inflation(yoy) InwardFDI Export Import Population PopulationGrowth yoy

% % USD mn USD mn USD mn Person mn %

Mar-08 8.63 7.87 2,838 17,254 23,574 2002-03 1,056 1.54

Jun-08 7.8 7.69 -618 19,181 28,951 2003-04 1,072 1.52

Sep-08 7.75 9.77 1,159 15,789 31,136 2004-05 1,089 1.59

Dec-08 5.8 9.7 1,392 13,368 19,456 2005-06 1,106 1.56

Mar-09 5.76 8.03 1,067 12,916 16,597 2006-07 1,122 1.45

Jun-09 6.13 9.29 2,824 12,972 22,166 2007-08 1,138 1.43

Sep-09 7.87 11.64 6,607 13,608 21,377 2008-09 1,154 1.41

Table 1: Key Economic Indicators

Source: CEIC

2


5/32

ISI Analytics

FMCG india

Indian remains a resilient market foroverseas investors and local consumers.Overseas investment inflows into Indiasstock market totaled to USD816.69mn duringthe first trading week of 2010, while localcurrency rating outlook was raised fromstable to positive by Moodys InvestorsService as the country demonstratesresilience to the global financial meltdown aswell as positive outlook that its economy willresume high levels of economic growth.

Among the BRIC countries, Chinasunemployment rate of 4.3% is the lowestamong these markets while Indias IT-drivengrowth path is projected to provide jobopportunities that will lower the countryscurrent unemployment rate of 7.2%. Russiaand Brazils current jobless rate are at 9.9%(mid-2009) and 8.1% respectively. On theother hand, Brazils jobless rate is projectedto decline steadily as a result of its diversifiedeconomy.

The World Bank estimated that 41.6% ofIndias population lives below USD1.25 on a

daily basis and 75.6% live with less thanUSD2 per day. In the Union Budget 2009-10,INR39,100cr was allocated for ruralemployment programmes, up 144% over the2008-09 budget. During the first half of 2010,Indias Finance Minister expandedmicrofinance programmes through thebudget 2010-11 by doubling the allocation ofINR400cr to the Micro-Finance Developmentand Equity Fund.

According to Indias Economic Survey, areduction in unemployment rate is expectedto take place during the end of the 11

thFive

Year Plan (2007-12). The Survey alsoprojected that the countrys labour force from2007 to 2012 is expected to be around 45mn(unemployment rate to fall below 5% by2012) against 58mn employmentopportunities that would be created during its11th Five Year Plan. During April-June 2009,employment rate fell by 131,000, withdeclines in employment rate of 38,000 inApril and 157,000 a month later beforeincreasing 64,000 in June.

Chart 2: Gross Domestic Saving Household

Source: CEIC

3

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2004/05 2005/06 2006/07 2007/08 2008/09

INRbn

28

28.5

29

29.5

30

30.5

%o

fPersonalDisposable

Income(%)

Financial Savings

Physical Savings

% of Personal Disposable Income


6/32

ISI Analytics

FMCG india

1.3 Indias FMCG Industry Overview

Indias FMCG sector was valued atINR60,000cr in 2004 after a growth of 4%during 2003-04. According to a report by theFederation of Indian Chambers ofCommerce and Industry (FICCI), severalFMCG registered double-digit growth invalue terms, for example, shaving cream(20%), deodorant (40%), branded coconut oil(10%), anti-dandruff shampoos (15%), hairdyes (25%) and cleaners and repellents(20%). On the contrary, negative growth ofup to 8% was registered in products such aspersonal healthcare, laundry soaps, dishwash, toilet soap, toothpaste andtoothpowder.

In 2008, Indias FMCG sector had a value ofINR86,000cr and analysts projected a growthof 15% in 2010 (2009: 12%) as the economyshows signs of recovery. According to theFICCI-Technopak report, the FMCG sectorwill grow at a rate of 10-12% within the nextdecade to reach INR206,000cr by 2013 andINR355,000cr by 2018. The implementationof the proposed Goods and Services Tax(GST) and the less restrictive foreign directinvestment (FDI) policies are expected tocontribute to the growth of the FMCG sectorto INR225,000cr by 2013 and INR456,000crby 2018.

With a total market size in excess ofUSD14.7bn, Indias FMCG industry is thefourth largest sector in its economy andplays a vital role in Indias socio-economicfront with nearly eight million stores sellingFMCG and employing some 25mn people aswholesalers, distributors and others. Besidesthat, the FMCG sector purchases nearlyINR9,600cr worth of agricultural productsand processes them into value-addedproducts while the sector accounted fornearly 40% of the media industrys revenue.

Sales in the FMCG sector grew by astaggering 14.8% during the six-monthperiod ended September 2009 but onlyexpanded 7% during the two-month periodended November 2009. As a result of lowergrowth in the sector, Indias top 10 FMCGcompanies experienced deceleration in salesgrowth from 9.9% during the first half of thefinancial year (April-September 2009) to agrowth of 3.3% during the October-November period. In addition, contributingfactors such as price increase of 50-100%for most agri-commodities as well as highercrude oil prices caused operating margin tofall during the October-December quarter.

Table 2: FMCG Category and Products

Source: India Brand Equity Foundation (IBEF)

Category Products

Food and Beverages

Health beverages; soft drinks; staples/cereals/ bakery products (biscuits,bread, cakes); snack food; chocolates; ice cream; tea; coffee; soft drinks;

processed fruits; vegetables; dairy products; bottled water; branded flour;branded rice; branded sugar; juices etc.

Household Care

Fabric wash (laundry soaps and synthetic detergents); householdcleaners (dish/utensil cleaners, floor cleaners, toilet cleaners, airfresheners, insecticides and mosquito repellents, metal polish andfurniture polish).

Personal CareOral care; hair care; skin care; personal wash (soaps); cosmetics andtoiletries; deodorants; perfumes; feminine hygiene; paper products.

4


7/32

ISI Analytics

FMCG india

1.3.1 Food Inflation

As a result of the 2007-08 food price crisis,international food prices reached its peak in2008 but fell drastically a year later.Developing countries were largely affectedby the hike in food prices, where share ofexpenditure on food accounts for a largeproportion of total consumer spending.According to Chart 3, developing countriessuch as Indonesia, India and China eachspent 41.9%, 34.9% and 33.0% of theirconsumer spending on food in 2008.

In 2010, due to speculation that the Indiancentral bank may hike interest rates afterinstructing banks to raise more cashreserves, the nations food prices inflated fora second week. An index that measureswholesales prices of lentils, rice, vegetablesand other food products jumped 17.56% inthe week to January 23 over the previous

year. In addition, food inflation hiked 19.95%in the week to December 5, 2009, indicatingthe most significant increase sinceDecember 1998. Inevitably, high foodinflation could restrict consumers demandand pricing flexibility for FMCG whilelowering consumers purchasing power thatdiverts purchases away from certain FMCG.

Table 3 indicated that retail price for rice inBangalore had the most drastic hike in price,where its price increased two-fold fromINR12 per kg in 2007 to INR36 per kg twoyears later. The only price drop shown in thetable is the wheat price in Ahmedabad, inwhich its price fell 6.5% from INR12.3 per kgin 2007 to INR11.5 per kg the next yearbefore rising a staggering 30.43% to INR15per kg in 2009. Another notable increase isthe price for rice in Ahmedabad, where ahike of INR10.2 per kg to INR23 per kg in2009 from INR12.8 per kg two years earlier.

34.9

33.0

11.8

5.9

41.9

24.0

18.6

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0

Indonesia

India

China

Brazil

South Af rica

EU

USA

% of total spending

Chart 3: Share of Expenditure on Food in Total Consumer Spending in 2008

Sources: Euromonitor; OECD; Eurostat

INR per kg Rice Wheat Atta

2007 2008 2009 2007 2008 2009 2007 2008 2009

Delhi 16.0 22.0 23.0 12.0 13.0 15.5 13.0 14.0 17.5

Ahmedabad 12.8 16.5 23.0 12.3 11.5 15.0 13.0 13.5 16.0

Mumbai 15.3 17.5 19.0 15.5 16.0 20.0 16.0 17.0 22.0

Bangalore 12.0 17.0 36.0 16.0 16.0 21.0 16.0 17.0 21.0

Hyderabad 11.0 14.0 19.0 12.0 14.0 19.0 16.0 17.0 17.0

Chennai 15.0 18.0 22.0 17.0 18.0 21.0 18.0 20.0 22.0

Table 3: Agriculture Retail Price in Selected Cities

Source: CEIC

5


8/32

ISI Analytics

FMCG india

1.3.2 Food and Beverages Industry

Indias food industry accounted for nearly65% of the nations retail market and has anestimated value of USD182bn, while exportsof fresh and processed vegetables, fruits,livestock and cereals hike 10% to reachUSD8.67bn in 2008-09. According to a reportby Associated Chambers of Commerce andIndustry of India (ASSOCHAM), Indias foodmarket (includes processed F&B) has acurrent market size of INR7,198cr after a17% growth in 1Q 2009-10 and is projectedto grow 19% during 2Q FY10.

Agricultural and Processed Food ProductsExport Development Authority (APEDA)projected that Indias farm product exports inthe global trade will expand from its current2% to more than 5%, and Indias exports ofagricultural products might double to hitUSD20.6bn within the next five years. Eachyear, India produces 105 tonnes of milk(highest in the world), 150 tonnes of fruitsand vegetables (second largest), 485 mnlivestock (highest), 230 mn tonnes of food-grain (third largest) and 7m tonnes of fish(third largest).

Spices

In spite of a challenging economicenvironment, spice exports for India rose 6%in dollar terms to its all-time high ofUSD11.68bn (or 470,520 tonnes) in 2008-09,up from USD11.01bn (or 444,250 tonnes)during the previous fiscal.

Food Processing

On the food processing front, the Indianmarket has an estimated value ofUSD13.05bn that includes biscuits,chocolates, ice-cream, confectionery,snacks, cheese and butter. With major globalcompanies such as Britannia, Nestle, Amul,ITC Foods, Parle, Kelloggs,GlaxoSmithKline and others, this sector

exhibited sound growth of 14-15% over thepast three years. A total of USD143.8mn ofFDI flowed into Indias food processingindustry in 2007-08, up USD138.1mn fromprevious fiscal of USD5.7mn.

In order to allow the food processing sectorto prosper, the Indian government formulatedthe Vision-2015 action plan. In which it plansto treble the size of this industry from nearlyUSD70bn to USD210bn, thus increasing thelevel of processing of perishables from 6% to20%, thus expanding value addition from20% to 35% as well as strengthening thenations share in global food market from1.5% to 3%. Moreover, the governmentintroduced a blueprint for enhancing growthin the countrys food processing sectorthrough the formulation of the National FoodProcessing Policy, infrastructureimprovements in the rural areas as well asthe simplification of tax structures.

Snacks and Confectionery

This market is poised for steady growth of15-20% with an estimated worth of USD3bn.The branded snack market has an estimatedvalue of USD1.34bn, while the unorganizedmarket has an estimated value atUSD1.56bn with a potential growth rate of 7-8%.

Health Food

FMCG companies forayed into Indiasgrowing branded health food sector.Hindustan Unilever Ltds (HUL) health foodbrand - Kissan Amaze is being marketed ona trial basis in three southern states in India.

Meanwhile, joint venture partnershipbetween Godrej Food & Beverages Ltd andHershey Company - Godrej Hershey Foods& Beverages Ltd (GHFBL) has plans tointroduce several brands from itsinternational portfolio into the Indian brandedhealth food sector.

6


9/32

ISI Analytics

FMCG india

Dairy

Dairy India 2007 projected that Indiascurrent dairy sector is USD62.67bn with a5% yoy growth, of which its exportsincreased from USD210.5bn in 2007-08 toUSD113.57bn a fiscal year later. Indiasposition as the worlds largest milk producerwas maintained with production of 110mntonnes in 2008-09.

Beverages

Indias market size for carbonated drinks wasnearly USD1.5bn, while the juice and juice-based drinks market size was nearlyUSD0.25bn. The fruit-drink market is anexpanding market that has a growth rate of25% while sports and energy drinks categoryhave potential to expand due to its lowpenetration in the domestic market. As aresult of rising disposable income among theIndian population, growth in foreign tourists

as well as favourable government policies,Indias alcoholic beverages category sawconsistent growth over the years (9% CAGRby 2013) with its wine industry expanding ata rate of 25% yoy growth.

Outlay, Expenditure and Investments

Investments play an important role for growthof Indias food sector, particularly in the foodprocessing industry. The food processingindustry currently employs some 48 mnpeople (direct employment: 13mn; indirectemployment 35mn). And in 2004-05, thissector contributed INR280,000cr (or nearly14%) to manufacturing GDP. Outlay andexpenditure for this sector each increased60.21% and 72.06% from 2004-05 to 2008-09. On the contrary, inflow FDI contracted26.9% from 2007-08 to the next fiscal whenglobal financial crisis adversely affectedinward investments (Chart 4).

Chart 4: Outlay, Expenditure and Inflow FDI for Food Processing Industry

0

2

4

6

8

10

2004-05 2005-06 2006-07 2007-08 2008-09

Outlay&Expenditure

(inINRcr)

0

100

200

300

400

500

600

700

Inflow

FDI(inINR

cr)

Outlay Expenditure Inflow FDI

Source: Ministry of Food Processing Industries (MOFPI)

Table 4: Production of Selected Food Products

BiscuitsChocolate and Sugar

ConfectionaryMaltedFood

MilkPowder

WheatFlour and

MaidaSugar Salt

Tonnes Tonnes Tonnes TonnesTonnes

thTonnes

thTonnes

th

2007 1,248,081 55,898 82,115 17,992 2,169 26,905 18,388

2008 1,378,157 61,787 61,821 17,889 2,146 26,025 17,425

Mar-09 355,344 17,079 13,421 51,253 547 7,875 5,433

Jun-09 377,363 13,635 12,847 27,467 572 701 11,428

Source: CEIC

7


10/32

ISI Analytics

FMCG india

1.3.3 Household Care

As a result of rapid urbanisation andemergence of small packs and sachets, thissegment saw high level of penetration, inwhich it is projected to grow at a CAGR of2% from 2005 to 2010. Detergent productionin India expanded 66.92% from 639,472tonnes in 1999 to 1,067,415 tonnes in 2007before contracting 6.18% to 1,001,454tonnes a year later.

In 2010, Procter & Gamble (P&G) and HULwere engaged in a price war. With the lower

priced version of Tide introduced by P&G,HUL retaliated by slashing prices by 10-30%for its detergent products, namely Rin andSurf where HUL cut the price for Rin fromINR70 to INR50 per pack. As for Surf ExcelBlue, prices were brought down from INR91to INR82 for a 500gm pack. Contributingclose to one-fourth (in FY2009) of its totalsales, the detergent segment remains a keymarket for HUL. With P&Gs new urgency inthis segment, the company promoted TideNatural with smart advertising as well asthrough volume discounts.

Chart 5: Exports of Selected Food Products

Source: CEIC

Chart 6: Production for Selected Beverages Products

Source: CEIC

0

100

200

300

400

500

600

700

Jun-07

Aug-07

Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

Apr-09

Jun-09

Beer (Litre th)Coff ee (Ton)Tea (Ton)Soft Drinks and Soda (Bottle mn)

8

0

50

100

150

200

250

300

350

2003

2004

2005

2006

2007

2008

Mar-09

Jun-09

Sep-09

DairyProducts,

ProcessedFru

its&

JuicesandProcessedVegetab

les

(inUSDmn)

0

200

400

600

800

1,000

1,200

1,400

1,600

Spices(inUSDmn)

Dairy Products

Processed Fruits and JuicesProcessed Vegetables

Spices


11/32

ISI Analytics

FMCG india

1.3.4 Personal Care

This segment of FMCG has beenexperiencing growth for the past few yearsand has an estimated worth of USD4bn. Keysegments of Indias personal care industryinclude personal hygiene products, hair care,skin care, colour cosmetics, and fragrances.In addition, the largely dominated bar soapsegment saw annual growth ofapproximately 5% for the past four years.ASSOCHAM reported that IndiasINR3,360cr oral care market (includestoothbrush and tooth powder) experienced a10.8% growth during the first quarter of2009-10.

Analysts estimated that this market will grow11.5% during the second quarter of 2009-10with a projected market size of INR3,450cr.However, the INR18.5bn skin care andcosmetics market that includes skin/fairnesscreams, shaving creams and deodorants,experienced a 11.52% growth during the firstquarter of 2009-10 and is projected to see a12% growth during 2Q FY10. Meanwhile, thehair care market size (includes hair oils,shampoos, creams, conditioners, hair dyes

and etc.) was approximately INR8,000cr withstrong growth of 14.68% in the first quarter of2009-10 and is expected to post soundgrowth of 16% in 2Q FY10.

The key trend in the personal care segmentis moving away from health products towardsbeauty products, hence consumers areswitching demand from basic products (suchas soaps, shampoos, hair oils and etc.) tospecialized products (such as skin whiteningcream, anti-ageing products, sun blocklotions and etc.). With rising disposableincome from USD2,720 in 2008 to anestimated USD3,482 in 2012 as well asgrowing female population (2008: 178mn;2012: estimated 191mn) between the agegroup 25-44 years will definitely boost thismarket segment.

Sales of whitening cream outpaced those ofCoca-Cola and tea in India as most Indiansconsider having fair-complexions an asset.As a consequence, the countrys market forwhitening cream expanded at a whopping18% yoy growth while analysts predicted thatit will grow to nearly 25% in 2010 with anestimated market worth of USD432mn.

6%

1%

46%

31%16% Hair Care

Bath & Shower

Products

Colour Cosmetics

Fragrances

Skin Care

Chart 7: Market Share of Personal Care Products

Source: Tata Strategic Management Group

9


12/32

ISI Analytics

FMCG india

Table 5 shows that industrial production ofhair oil and Ayurvedic hair oil in India jumped192.06% from 7.52mn litres in 2004 to21.97mn litres a year later and saw a growthof 56.99% from figures in 2005 to 34.49mnlitres in 2008. Industrial production of soap(IPP) shrank 30.9% from 584,414 tonnes in2003 to a low of 403,833 in 2007 beforegradually rising 41,832 tonnes to 445,665tonnes a year later.

On the contrary, production of soap (SSI)grew 6.24% from 3,592,000 tonnes in 2003to 3,816,000 tonnes in 2008. Production fortoothpaste expanded 249.57% from 19,061tonnes in 2003 to 66,632 tonnes in 2008while production for toothpowder contracted22.58% from its peak of 8,382 tonnes in2004 to a low of 6,489 tonnes in 2007.

In 2009, one of the FMCG companies Marico Ltd (Marico) test marketed newproducts (Nihar Naturals Cooling Oil andParachute Advanced Cooling Oil) in order togain greater market share. In addition tolaunching new products, Marico increased its

presence in the Indian market throughincreased penetration in the rural markets.The company has a 21% market share in theINR2,200cr hair oil segment and aims toincrease market share in this lucrativesegment through cooling hair oil products.

In 2010, Mumbai-based VVF Ltd acquiredthree brands from Chennai-based HenkelIndia (Henkel) a FMCG company, namelyAramusk and Moloy soaps as well asMahobringol hair oil. Three months after theacquisition, VVF - one of the worlds largestcontract manufacturers of bar soaps boughtHenkels plant in Tiljala, Calcutta, in whichthe cost of acquisition is estimated INR23crwhile the plant accounted for INR18cr.

The acquired brands are estimated to yieldlittle turnover at a national level but brandssuch as Aramusk is famous in its domesticmarket as it is one of the oldest maledeodorant soaps in India with a loyalconsumer base. Meanwhile, Moloysandalwood soap and Mahabringol hair oilare popular brands in eastern India.

Table 5: Industrial Production of Selected Personal Care Products

Hair Oil & AyurvedicHair Oil

Soap(IPP) *

Soap(SSI) **

Toothpaste Toothpowder

Litre th Tonnes Tonnes th Tonnes Tonnes

2003 2,127 584,414 3,592 19,061 7,744

2004 7,521 502,045 3,647 17,673 8,382

2005 21,966 480,811 3,651 32,771 8,233

2006 26,308 484,775 3,697 48,189 7,237

2007 30,636 403,833 3,761 53,129 6,489

2008 34,485 445,665 3,816 66,632 7,802

Mar-09 9,248 135,270 960.2 17,097 2,018

Jun-09 10,055 156,102 961.4 18,731 2,052

* IPP = Independent Power Producer** SSI = Small Scale Industries

Source: CEIC

10


13/32

ISI Analytics

FMCG india

2.1 Union Budget 2010-11

The FMCG industry is expected to yieldhigher growth on the back of higherdisposable income led by income tax cuts,while FMCG prices are expected to hike.Prices of daily use products such as soaps,talcum powder, shampoos, hair dyes,diapers and sanitary napkins are expected toincrease by 2-5%, while diapers and sanitarynapkins that were previously fully exemptfrom excise are now slapped with a 10%duty. However, prices of deodorants andperfumes are expected drop by 5% while

duty charges on medicinal and toiletpreparations will be reduced from 16% to10%.

Most FMCG companies including HUL,Colgate-Palmolive, Nestle, Reckitt Benckiserand Dabur India Ltd have largemanufacturing plants in excise-free zonesthat are not affected by a hike or cut inexcise duty, while higher cost of productionwill inevitably cause price hike. Also, theestablishment of five additional food parkswill no doubt boost the food processingindustry.

2. Market Trends and Outlook

11

Table 6: Union Budget 2010-11: Central Plan Outlay by Sectors

in INR cr2009-10 Budget

Estimates2009-10 Revised

Estimates2010-11 Budget

Estimates

Agriculture and Allied Activities 10,629 10,123 12,308

Rural Development * 51,769 51,560 55,190

Irrigation and Flood Control 439 404 526

Energy 115,574 109,685 146,579

Industry and Minerals 35,740 30,694 39,019

Transport ** 94,306 88,948 101,997

Communications 16,731 16,099 18,529

Science Technology and Environment 11,207 9,908 13,677

General Economic Services 6,270 5,446 7,554

Social Services *** 103,856 101,370 127,570

General Services 1,400 1,353 1,535

Grand Total 447,921 425,590 524,484

* Includes provision for rural housing but excludes provision for rural roads** Includes provision for rural roads*** Excludes provision for rural housing

Source: Ministry of Finance

Fertilizer Subsidy: Effective from 1st April,

2010, a Nutrient Based Policy for thissector will enhance agriculturalproductivity as well as provide betterreturns for Indian farmers, hencereducing the volatility in demand forfertilizer subsidy.

Foreign Direct Investment: Cleardefinition in the calculation of indirectforeign investments in Indian companiessimplifies the FDI regime. Also, completeliberalisation of pricing and payment oftechnology transfer fee and trademark,brand name and royalty payments willease the process of FDI.


14/32

ISI Analytics

FMCG india

Agricultural Growth:

(a) Agricultural Production:

1. The provision of INR400cr to strengthengreen revolution in Eastern India, namelyBihar, Chattisgarh, Jharkhand, UttarPradesh, Bengal and Orissa.

2. The provision of INR300cr for rain-fedareas to organise 60,000 pulses and oilseed villages and also the provision ofwater harvesting watershed managementas well as soil health to increaseproductivity of dry farming areas.

3. The provision of INR200cr forconservation farming that sustained thegains made in the green revolution areas.It involves concurrent attention to soilhealth, water conservation as well aspreservation of biodiversity.

(b) Reduction in Wastage of Produce:

1. Government will address the issueregarding the opening up of retail tradethat will close the gap between farm gate,wholesale and retail prices.

2. An ongoing scheme for private sectorparticipation will lower deficit in storagecapacity.

(c) Credit Support to Farmers:

1. Banks are to meet target ofINR375,000cr set for agriculture creditflow.

2. In view of drought and floods in somestates, repayment period of the loanamount owed by farmers are to beextended by six months from 31

st

December, 2009 to 30th June, 2010under the Debt Waiver and Debt ReliefScheme for Farmers.

3. Farmers who promptly repay short-termcrop loans will receive additionalincentive of 2% (instead of 1%) for 2010-11.

(d) Impetus to the Food Processing Sector:

1. The government will add another fivemega food parks, hence bringing Indiasfood parks to a total of fifteen.

2. Cold storage and cold room facilities(including farm level pre-cooling andpreservation or storage of agriculturaland allied produce, marine products andmeat) will be available through ExternalCommercial Borrowings.

Infrastructure: A whopping INR173,552crwas allocated for infrastructuredevelopment, while allocation for roadtransport and railway transport eachamounted to INR19,894cr andINR16,752cr.

Energy: Allocation for the power sector(excluding Rajiv Gandhi GrameenVidyutikran Yojana) doubled toINR5,130cr in 2010-11, up fromINR2,230cr in 2009-10. The CoalRegulatory Authority was introduced toallow fair competition in the coal sector,in which the Ministry of New andRenewable Energys plan outlay rose61.29% to INR1,000cr in 2010-11, upfrom INR620cr. In addition, projects thatinvolve solar, small hydro and micropower are to be established in Jammuand Kashmir at a cost of INR500cr.

Education: Allocation for schooleducation was increased fromINR26,800cr in 2009-10 to INR31,036crin 2010-11, thus showing a 15.81%growth. Moreover, under the ThirteenthFinance Commission grants for 2010-11,

states are entitled to some INR3,675crfor elementary education purposes.

Rural Development: The MahatmaGandhi National Rural EmploymentGuarantee Scheme and ruraldevelopment were allocated INR40,100crand INR66,100cr respectively. Besides

12


15/32

ISI Analytics

FMCG india

that, allocated funds for Backward RegionGrant Fund expanded 25.86% fromINR5,800cr in 2009-10 to INR7,300cr in2010-11, while additional centralassistance of INR1,200cr will be providedfor drought mitigation in Bundelkhand.

2.2 e-Choupal

e-Choupal was developed by Indiasconglomerate, Indian Tobacco Co. (ITC).Prior to the introduction of this facility,farmers were restricted to selling theirproducts in the local mandi through amiddleman, hence the low earnings. Theavailability of e-Choupal allowed farmers tobe trained to manage the Internet kiosk thatallows them to yield the best price throughthe access of daily prices of crops in India aswell as overseas. Apart from changing thequality of farmers lives, e-Choupal providesinformation regarding weather forecasts,farming techniques, crop insurance andothers.

Covering ten states across 40,000 villages,e-Choupal allows 4mn farmers (of whichconstitutes a majority of 75% of thepopulation living below poverty line) acrossIndia to obtain relevant information that helpsimprove rural economy. The network of6,500 e-Choupal centres expanded thespectrum of commodities such as wheat,rice, pulses, soya, maize, spices, coffee,

aqua-products leaving farms, also, thisfacility carries FMCG, durables, automotivesand banking services back to the rural areas.

2.3 Growth in Rural Market

The population in Indias rural areas currentlyaccounts for approximately 70% of thecountrys 1.14bn population, and has beenexperiencing an increase in income as wellas consumption and production. According toa report by IBEF, FMCG companiesconcentrate on rural markets for volume andurban markets for value while the previousmarket remained a major market for FMCGcompanies (52.5% of total demand in 1998-99). Most companies offer convenientpackaging and low-priced products to therural market, and offer urban consumers withhigher-valued products.

A study projected that Indias consumer willtreble to become the fifth largest consumermarket by 2025 and (2007: 12

thlargest

consumer market). A report indicated thatthe nations per capita disposable income iscurrently at USD556 (annual) and will morethan doubled to a projected USD1,150 by2015. Chart 8 showed that the consumingpopulation in India was 26% of its totalpopulation in 2003 and is projected to doubleto reach 54% as the number of aspirants fall350% between 2003 and 2015.

Chart 8: Household Income Distribution

Sources: HUL; National Council for Applied Economic Research (NCAER); IBEF

13


16/32

ISI Analytics

FMCG india

2.4 Regulatory Issues

2.4.1 National Food Processing Policy

Indias food processing sector has enormousimportance in the nations development andwith India being the second largest foodproducer in the world, this sector has solidgrowth potential. Food production isexpected to double within the next decade toaccommodate the rising consumption ofvalue added food products. Benefits such aseconomic growth, growing agricultural yields,higher productivity and job creation willdefinitely raise the living standards of theIndian community, especially those living inthe rural areas.

This policy will facilitate the establishment ofcold chain, low cost pre-cooling facilities thatare located near farms, cold stores andgrading, sorting as well as packing facilitiesso that wastage levels can be lowered whilstimproving quality and shelf life of thoseproducts. New technologies in the foodprocessing and packaging will be developed

in order to provide mechanism to facilitatethe process of technology transfer through anetwork of R&D institution. In addition, agrofood parks will be built to facilitate the foodproduction process.

The following will have greater priority andspecial consideration in view of policy andplans:

The North Eastern Region, the HillyAreas, and ITDP (Initiative forTransportation and DevelopmentProgrammes) areas in India shall begiven priority in terms of attention andconsideration.

Fiscal incentives (such as excise duty orsales tax concession and tax holidays)are to be given to the above mentionedareas as well as areas that areestablished outside these areas near themarket centre.

Food processing units can enjoy taxholiday (excluding liquor, cigarettes andaerated drinks and similar luxuryproducts) for a period of 10 years.

Table 7: Challenges, Constraints and Concerns

Potential GrowthIndia is a major food producer with more than 600 mn tonnes of food productsunder its production. It has growth potential to become the largest food producerin the world.

WastageProcessing level is currently very low while wastage level is high that shrinksnational wealth.

Value AdditionValue addition to raw products in India is only at a 7% and this figure isconsidered low when compared to Chinas 23% and Philippines 45%.

Small Scale andUnorganizedSectors

These sectors account for 75% of the food processing industry and only haslocal presence in which it lacks access to knowledge, technology and marketingnetwork.

Low DemandThe price gap between farmers realization and consumers final price is verybig caused by low productivity, high cost of production, spoilage due to poorinfrastructure and high cost of borrowing.

Marketing EffortsThe marketability of processed food is low despite vast domestic market size.However, this market has growth potential should awareness and educationalcampaigns are held.

Source: Confederation of Women Entrepreneurs (CoWe)

14


17/32

ISI Analytics

FMCG india

2.4.2 FDI Policy in Retail Trading(Single Brand)

In February 2010, ministers in Indiaadvocated that its retail market lackscompetition for a check on prices as well asliberalisation of the industry. The share ofFDI inflow to the retail trading (single brand)sector has been increasing over the years, inwhich it accounted for 0.18% of IndiasINR469,364.98cr FDI inflows from April 2000to December 2009. However, from April2000 to December 2008, FDI inflow to theretail trading sector only accounted for0.03% of total FDI inflow ofINR338,384.74cr.

The key driving forces for retail growth arebanks, capital goods, engineering, FMCG,software services, oil marketing, power, two-wheelers and telecommunication companies.On July 2009, FDI inflows of retail trading(single brand) hit an approximate

USD46.6mn, meanwhile Indias retail sectoris expected grow to a market size ofUSD833bn by 2013 and USD1.3tn by 2018with a CAGR of 10%. The nations retailmarket saw exponential growth asdevelopments take place in major cities,metros as well as tier-II and tier-III citiesacross India.

The 51:49 joint venture partnership betweenUK-based Marks & Spencer and India-basedReliance Retail Ltd has 15 retail storesspanned across India while plans are beinglaid out to open as many as 35 stores overthe next five years. Besides that, Europeslargest retail Carrefour S.A. is expected tocommence its wholesale operations in Indiaby 2010. This retail giant also plans toestablish its first wholesale cash and carryoutlet in the National Capital Region and thecompany currently exports USD170mn worthof products from India.

Table 8: Sector-wise FDI Inflows

* Processing and warehousing coffee and rubber

Source: Department of Industrial Policy and Promotion

FDI Inflows (in INR cr)Apr 2000 toDec 2009

Apr 2000 toDec 2008

Apr 2000 toDec 2007

Agriculture Services 7,123.17 785.44 741.22

Food Processing Industries 4,388.45 3,422.26 2,786.23

Retail Trading (Single Brand) 822.70 107.47 6.64

Soaps, Cosmetics & Toilet Preparations 680.50 498.49 434.18

Agricultural Machinery 668.95 664.91 639.98

Vegetable Oils and Vanaspati 605.63 376.92 175.88

Tea and Coffee * 381.38 377.43 142.21

Sugar 183.90 183.66 160.98

15


18/32

ISI Analytics

FMCG india

2.4.3 Government Policies and Initiatives

Removal of QuantitativeRestrictions and ReservationPolicy

The abolishment of most of the food and agro-processing

industries (except for alcohol, cane sugar, hydrogenated animalfats and oils etc. and items reserved for the exclusivemanufacture in the SSI sector) as well as the removal onquantitative restrictions in 2001 led to market expansion in theFMCG industry.

Central and State Initiatives

State government such as Himachal Pradesh, Uttaranchal andJammu and Kashmir provided companies with fiscal incentives(such as allotment of land at concessional rates, 100% subsidy onproject reports and 30% capital investment subsidy on fixedcapital investment up to USD63,000) that encouraged them toestablish manufacturing plants in their respective regions.

The reduction of excise and import duty allows most of theprocessed food products to be exempted from excise duty.

Location (District) in Andhra Pradesh Name of Park

Chittoor Food processing park (existing)

Ranga Reddy Agri-biotech park (existing)

Guntur, Khammam and Nellore Food processing park (upcoming)

Location (District) in Uttar Pradesh Name of Park

Barabanki and Varanasi Agro park

Food Processing Policy, 2004-2009

Targets to facilitate better returns for farmers and attract investment in this sector.

Will emphasize on employment opportunities as well as minimise wastage on agri-products.

Sugar Policy, 2004

Incentives and concessions such as exemption of entry tax on sugar, reimbursement ofadministrative charge and trade tax on molasses to establish sugar mills in Uttar Pradesh.

Location (District) in Madhya Pradesh

Name of Park

Mandideep, Pillukhedi, Borgaon and Maneri Food Park

Biotechnology Policy, 2003

Targets to conserve the states biodiversity and the sustainable use of its biotic resources.

Production of high-yielding, draught and pest resistant seeds for agriculture and horticulturecrops that is suitable for different agro-climatic areas.

Sources: HUL; NCAER; IBEF

Table 9: Sector-specific Infrastructure

16


19/32

ISI Analytics

FMCG india

2.4.3.1 Milk and Milk Powder ControlOrder, 1992 (MMPO)

With intentions to maintain and increase thesupply of liquid milk that are of desiredquality in view of public interest, the centralgovernment of India introduced the MMPO inorder to regulate the production, supply anddistribution of milk and milk products,whereby milk carries the meaning of milk ofcow, buffalo, sheep, goat or a mixturethereof, raw or processed in any form andincludes pasteurised, sterilised, recombined,flavoured, acidified, skimmed, toned, doubletoned, standardised or full cream milk.

The functions of this board are as follows:

Provide assistance and advise thecentral government on any matter thatconcerns the production, manufacture,sale, purchase and distribution of milkand milk products.

Registering authorities or other officialsauthorised by it may carry out periodicinspection of any premises thatmanufacture or process milk or milkproducts, or business in which milk ormilk products are carried out. This is toensure compliance that are stated in theOrder as well as genuine and propersupply of milk or milk products toconsumers.

Without prejudice to the provisions of theprevious provision, the board shall advisethe central government on mattersrelating to:

(a) Facilitation of the supply of availability ofliquid milk, through balancing uneven

distribution supplies in different regionsand seasons.

(b) Maintenance or increase in supplies ofmilk as well as balance the distribution ofmilk and milk products.

(c) Establishment of appropriate standardsand norms for controlling and handlingmilk and milk products.

(d) Maintenance of proper sanitary andhygiene standards during the

manufacturing process of milk and milkproducts.

(e) Establishment, promotion or registrationof any industry that is relatable to milkproducts.

2.4.3.2 Meat Food Product Order, 1973

This Order came into effect from 15th

July,1975 with instructions stating that no personshall conduct business his/her business as amanufacturer except under and incompliance with the terms and conditions ofa license granted to him/her under thisOrder. As stated in the Order, sanitary andother requirements are to be complied withby a licensee are as follows:

All parts of the factory shall always bekept clean, lighted, ventilated and shouldbe cleaned, disinfected and deodourisedat a regular basis.

All factories shall be equipped withadequate cold storage facilities, efficientdrainage as well as plumbing systems.

The factory shall be constructed andmaintained as to allow hygienicproduction. All operations relating to thepreparation or packing of meat foodproducts shall be carried out with stricthygienic procedures and the factorypremises shall not be utilized for living orsleeping purposes provided that it isseparated from the factory by a wall.

Meat used for the preparations of meatfood products (if it is not slaughtered inthe factory) should only be obtained fromslaughter houses in which ante-mortemand post-mortem inspections have beenconducted in compliance with rules

prescribed and so certified by the localauthority.

All parts of the internal surface above thefloor or pavement of the slaughter houseshall be washed with hot lime washwithin the first ten days of March, June,September and December. Meanwhile,any blood or liquid refuse or filth in theslaughter house shall be thoroughlywashed and cleaned with water and

17


20/32

ISI Analytics

FMCG india

deodorant or disinfectant within threehours after the completion of slaughter.

Requirements of the finished meat foodproducts:

- No meat food products shall containany of the following poisonous metalsin excess of the quantity specified.

- No meat food products shall contain any ofthe following preservatives in excess of thequantity specified.

18

Name of PoisonousMetal

Parts per mn(by weight)

1. Arsenic 1

2. Copper 20

3. Lead 2.5

4.

Tin

250

5. Zinc 50

Name of PreservativesParts per mn(by weight)

1. Commercial saltpetre 500

2. Sodium and potassiumnitrite

200

3. Sulphur dioxide 450

- No meat food products shall containany of the following insecticides inexcess of the quantity specified.

Name of InsecticideTolerance

Limit mg/kg(ppm*)

Name of InsecticideTolerance

Limit mg/kg(ppm*)

1. Aldrin dieldrin 0.20 11. Carbendazim 0.10

2. Dichlorodiphenyltrichloroethane 7.00 12. Benomyl 0.10

3. Fenitrothion 0.03 13. Carbofuran 0.10

4. Lindane 2.00 14. Cypermethrin 0.20

5. Chlorfenvinphos 0.20 15. Edifenphos 0.02

6. Chlorpyrifos 0.10 16. Fenthion 2.00

7. 2, 4-D 0.05 17. Fenvalerate 1.00

8. Ethion 0.20 18. Phenthoate 0.05

9. Monocrotophos 0.02 19. Phorate 0.05

10. Trichlorfon 0.10 20. Pirimiphos-methyl 0.05

* Parts per million


21/32

ISI Analytics

FMCG india

3.1.1 Hindustan Unilever Ltd (HUL)

Sunlight and Lifebuoy soaps were introducedin 1888 and 1895 respectively. And in 1895,Lever Brothers appointed agents in citiessuch as Mumbai, Chennai, Kolkata andKarachi. Several products were introduced

by this FMCG giant Pears soap (1902),Brooke Bond Red Label tea (1903), Luxflakes (1905), Vim scouring powder (1913),Vinolia soap (1914), Rinso soap powder(1922) and others. In 1924, Gibbs dentalpreparations were introduced and a yearlater North West Soap Co. was fully underthe control of Lever Brothers. Unilever waslater established in 1930 through the mergerbetween Lever Brothers and Margarine Unie.

In 1931, Unilevers first subsidiary in India

was established under the name HindustanVanaspati Manufacturing Co., followed byLever Brothers India Ltd (1933) and UnitedTraders Ltd (1935). The merger betweenthese three companies resulted in theestablishment of HUL in 1956. Indias tradeliberalisation in 1991 benefited HULs growthas less trade restrictions allowed this FMCGgiant to explore different opportunities

without production capacity constraints. Withthe Ayush range and Ayush TherapyCentres, HUL made its foray into theAyurvedic health and beauty segment in2002 and a year later, the companylaunched Hindustan Lever Network throughthe acquisition of the Amalgam Group. In

2007, the company was renamed toHindustan Unilever Ltd.

HULs soaps and detergents portfolioregistered sound sales growth of 54% withannual segmental margin slightly shrinkingby 20 basic points. Despite cost pressures,fabric wash remains its growth momentumand brands such as Surf, Rin, Sunlight andWheel registered strong value and volumegrowth. On the personal products front, HULcomprises categories such as hair care, skin

care, toothpaste, toothbrush, deodorants andcolour cosmetics, while its well-positionedshampoo segment has a powerful brandportfolio that accommodates consumersneeds from different income groups - Clinicis a mass market brand, Sunsilk falls into themid-price market while Dove is in thepremium segment.

3. Leading Players and

Comparative Matrix

19

3.1 Leading Players

Table 10: Indias Top 5 FMCG Companies (as at FY2009)

IndustryTotal Revenue

(in INR th)

1. Hindustan Unilever Ltd (HUL)Food manufacturing, beverage and tobaccoproduction, chemical manufacturing, andothers

210,952,300

2. Nirma Ltd Chemical manufacturing 30,700,300

3. Dabur India Ltd (DIL) Food manufacturing, chemical manufacturing 28,522,700

4. Colgate-Palmolive India Ltd (CPIL) Chemical manufacturing 17,886,700

5. Godrej Consumer Products Ltd (GCPL) Chemical manufacturing 14,365,800

Company

Source: EMIS


22/32

ISI Analytics

FMCG india

Following the detergent price war betweenP&G and HUL, the latters stock wasdowngraded by a majority of brokerage firmsin March 2010. P&G indirectly decreased theprice of Tide Naturals by increasinggrammage (25% across stock-keeping units)and adding an extra 50g to a 200g pack ofTide Naturals for the same price of INR10,while 100g would be added to a 400g packof Tide Naturals at the same price of INR20.Share price at HUL fell 8.75% over 11th and12th March and closed at INR219.60 at theend of the week. Analysts estimated thatHULs detergent segment could be renderedas the detergent price war intensifies, inwhich the segment accounts for 10-12% ofthe companys earnings before income tax.

Also in March 2010, analysts indicated thatHUL has been an underperformer over the

past one year; in fact, it has underperformedmost of its smaller rivals since the pastconsecutive 12 months. HULs currentoperating margin of 14% is lower than itspeak operating margin registered at 18% in2002. FMCG giants such as Colgate andHUL are projected to have substantial controlof nearly 85% of Indias toothpaste market.

With soaring demand in the whitening creamsegment in which HULs Fair & Lovely is thesegment leader. The companys cutting-edgeskin-lightening technology is known to be thebest in the world and has nearly 250mnconsumers spanned across 30 countries.This product contains no bleach or harmfulingredients and was rated as the 12th MostTrusted Brand in India by ACNielsen ORG-MARG in 2003.

Chart 9: Share Price of HUL

Source: Bombay Stock Exchange

3.1.2 Nirma Ltd

Nirma started its one-man operation in 1969and at present, the company has grew into a14,000 employee-base with annual turnoverof more than INR2,500cr. Its operationsstarted off with door-to-door selling of Dr.Karsanbhai Patels detergent powder thatwas priced at a shocking INR3 per kg whilethe cheapest brand in the market was pricedat INR13 per kg. Through innovative and

low-profile marketing operations, a newdomestic marketplace for the detergentsegment was created.

During the 1980s, Nirmas brand was wellahead of its closest rival HULs Surf, inwhich Nirma offered a perfect match ofproduct, price, promotion and place, hencecapturing a greater slice of market share inits domestic market. Currently, Nirma has thelargest share in Indias detergent market

20


23/32

ISI Analytics

FMCG india

(38%) and the second largest share toiletsoap market (20%).

Nirma witnessed a challenging FY2009 whenthe worlds financial system crumbled over,triggering poor economic performance inmost developed countries. Nirmasconsolidated revenue was mainly contributedby soaps and surfactants, processedminerals as well as pharmaceutical with netsales growing from INR2,684.46cr inFY2007-08 to INR4,574.82cr during the nextfiscal. Soaps and surfactants accounted for57.64% of net sales for FY2009, down20.23% from previous years 77.87%.

Worldwide recession impacted thecompanys processed minerals segment asglobal demand for soda ash deterioratedfollowing contractions in the construction andauto industries, whereby the glass industryaccounted for nearly 50% of worldwidedemand for soda ash. Processed mineralsare manufactured in the US and are mainlymarketed in markets such as the US, LatinAmerica, Europe, China, Japan and Gulfcountries. In order to counter the effects ofthe recessionary pressure in the US market,Nirma sought alternative markets,reallocated its employees, as well asintroduced maintenance programmes.

Chart 10: Production of Selected Goods

640.28

59.88

78.71

57.37

86.74

692.74

0 200 400 600 800

Detergents

Toilet Soap

Linear Alkyl

Benzene

Tonnes (in th)

2007-08

2008-09

Source: Companys Annual Report

3.1.3 Dabur India Ltd (DIL)

DIL was established in 1884 with itsmanufacturing plant set up two years laterand further expanded to setting up itsresearch laboratories in 1919. DIL was

restructured into a public limited company in1986 and entered into a joint venturepartnership with Spain-based Agrolimen tomanufacture and market confectionaryproducts in its domestic market. With itsoncology formulation centre, DIL entered thespecialised healthcare area of cancertreatment in 1993. Two years later, DIL

entered into joint venture agreements withIsrael-based Osem for food and France-based Bongrain for cheese and other dairyproducts.

In 2003, Dabur demerged its pharmaceutical

operations from the FMCG operations sothat each entity can focus on their respectiveoperations. With this, DILs FMCG businesscomprises of personal care products,healthcare products as well as Ayurvedicspecialities. In addition, its pharmaceuticalbusiness includes allopathic, oncologyformulations and bulk drugs. And in

21


24/32

ISI Analytics

FMCG india

2005, DIL adopted an inorganic growthstrategic through the acquisition of Mumbai-based Balsaras oral care and householdcare product in a INR143cr all-cash deal andadded brands such as Promise, Babool,Sanifresh and Odonil to its product range.Also, the acquisition allows DIL to expand itsscale of operation through synergies in itsmarketing, sales, distribution andprocurement activities.

A year later, DIL crossed the USD2bn markin market capitalisation and in line with itscommitment to adhere global best practicesand highest standards of transparency aswell as governance, DIL adopted the USGAAP (the US Generally AcceptedAccounting Principles). In 2007, thecompany entered the organised retailbusiness through H&B Stores Ltd a wholly-owned subsidiary of DIL. In order to increasepresence in its domestic retail market, DILwill invest INR140cr by 2010 with aims toestablish a chain of stores selling health andbeauty products.

Despite a challenging year that saw aslowdown in the economy, DIL financialperformance showed a positive trend duringthe FY2008-09. In which consolidatedrevenue increased to INR2,834.1cr after a18.3% growth while consolidated net profitgrew by 17.5% to INR391.2cr. Also, duringFY2008-09, the company had four divisions,namely, consumer care, internationalbusiness, consumer health, and others andthese divisions generated consolidated salesof 72.8%, 18.5%, 7.3% and 1.4%respectively.

Due to consistent profitable growth andimproved market position, credit ratingagency Crisil upgraded DILs rating in termsof its long-term bank facilities as well as nonconvertible debentures from AA+ to thehighest grade in long-term rating of AAA.This upgrade also reflected DILs successfulintegration of its operations following theacquisition of a major player in the womensskin care market Fem Care Pharma Ltd aswell as DILs strong market presence in theherbal products segment.

Chart 11: Category-wise Share of Consumer Care Division Sales

Source: Companys Website

22


25/32

ISI Analytics

FMCG india

3.1.4 Colgate-Palmolive India Ltd (CPIL)

Colgates business was established in 1806when William Colgate started a starch, soapand candle business in New York City. In1820, a starch factory located in New Jerseywas built. However, the company wasrestructured and renamed as Colgate & Co.in 1857. Within the next two decades,Colgate introduced perfumed soaps andtoothpastes in jars. Wisconsin-based B.J.Johnson Co. was producing soaps in 1864but Palmolive Soap was only introduced in1898. Owing to the popularity of Palmolivesoaps, the company was renamed asPalmolive Co. and was later engaged in amerger with Kansas-based soap producerknown as the Peet Brothers to becomePalmolive-Peet in 1926. Two years later,Colgate-Palmolive-Peet Co. was establishedthrough a merger while Colgate was listed onthe New York Stock Exchange in 1930.

Again, the company was renamed asColgate-Palmolive in 1953 and it acquiredHills Pet Nutrition in 1976, whereby the latteris currently the global leader in pet nutrition.The joint venture partnership between HongKong-based Hawley & Hazel a leading oralcare company and Colgate-Palmoliveallowed the latter to strengthen its position inmajor markets in the Asian region. Today,the FMCG giant has sales that surpassedUSD15bn with core business that include

oral care, personal care, home care as wellas pet nutrition and its products are sold inmore than 200 countries.

Colgate-Palmolive (India) Ltd (CPIL) wasestablished in 1937 using hand-carts todistribute its dental cream. Today, CPILdistributes its products through 3.5mn retailoutlets spanned across India. The Mumbai-based FMCG company has strong presencein the oral care segment, in which it hasapproximately 46% market share in thatsegment. The companys high sales volumewas supported by the introduction of lowerprice-points variants and improved ruraldistribution. Driven by the discount brand -Cibaca, Indias rural market currentlyaccounts for nearly 35% of its revenue.

As a result of low per capita toothpasteconsumption of 108-110gms (developednations: 400-450gms; other Asian countries:200-250gms), the Indian market offersgrowth opportunities in the toothpastesegment. In addition, its rural market offersattractive growth opportunities. During thethird quarter ended 31st December, 2009,CPIL recorded net sales of INR490.6cr,showing a growth of 17% over thecorresponding a year ago. Similarly, netprofit for the third quarter of FY2009-10 hitINR116.4cr after a 29.77% growth againstINR89.7cr (qoq).

Chart 12: Index Comparison

Source: Bombay Stock Exchange

23


26/32

ISI Analytics

FMCG india

During the end of 2009, Oral Health Month -a joint campaign by CPIL and the IndianDental Association was successful inconcluding its 6

thedition oral health

awareness with an aim to promote theimportance of good oral care habits. Thisawareness campaign was brought togetherwith the support of 17,500 dentalprofessionals and was successful in covering1,000 towns across India. In addition, mobiledental vans were used to reachunderprivileged areas and provide more than1.2lakhs free dental check-ups through 37cities.

3.1.5 Godrej Consumer Products Ltd(GCPL)

Godrej Group was established in 1897 andhas since grown into a group that has aturnover of USD2.5bn with seven majorcompanies operating in real estate, FMCG,industrial engineering, appliances, furniture,security, agri care and other businesses.Nearly 20% of the groups business isconducted abroad and has market presencein more than 60 countries.

With its personal and home care products,GCPL is one of the leading companies inIndias FMCG sector. GCPL offers productssuch as Cinthol, No. 1, Expert, Ezee and etc.to its domestic market. In order to ensurethat it has market coverage in the pan-Indiaarea, GCPL has established branch officesin Mumbai, Delhi, Kolkata and Chennai whileits factories are located in Malanpur (MadhyaPradesh), Thana (Himachal Pradesh), Katha(Himachal Pradesh), Guwahati (Assam) andSikkim so that the companys diverse

product portfolio can accommodate differentrequirements. Moreover, GCPL has severalinternational brands and trademarks inEurope, Australia, Canada, Africa and theMiddle East.

In 2005, UK-based Keyline Brands Ltd (KBL)was acquired by Godrej Group, in which theformer operates in the toiletries and personalcare segment and its portfolio comprises ofseveral niche brands such as Cuticura,Aapri, Erasmic, Nulon and Inecto. With majorcustomers such as Boots, Superdrug, Tesco,Asda, Sainsbury, and Morrisons in the UK,KBL has a current turnover of nearlyGBP20mn.

Also during the end of 2009, GCPLannounced that it will concentrate on threecore brands, namely No. 1 (soaps), Cinthol(soaps, talcum powder and deodorant) andExpert (hair colour). These three brands willreceive higher investments to furtherinnovate their brands. During the quarterended 30

thSeptember, 2009, the company

achieved a staggering 167.78% growth inconsolidated net profit to reach INR93cr overINR34.73cr during the same quarter a fiscalbefore. The surge in profit was mainlycontributed by volume growth in soaps andhair-care segments as well as lower cost ofproduction such as palm oil.

In March 2010, GCPL entered an agreementto acquire Nigeria-based Tura from TuraGroup a leading personal caremanufacturer and distributor of high qualitypersonal care products in several Africanmarkets. Tura is one of the leading beautyproducts in Nigeria and this acquisition willbuild GCPLs pan-African presence as wellas introduce its portfolio into other WesternAfrican countries. The fact that Tura is awell-established beauty company that hasoffered consumers with high quality productsin the personal care segment over the past

20 years will help provide GCPL a platformfor value creation in the pan-African region.

24


27/32

ISI Analytics

FMCG india

Chart 13: Sales Turnover (Net of Excise Duty) for Selected Segments

Source: Companys Website

71,379.77

29,249.84

4,284.81

3,519.80

56,661.66

26,219.20

3,846.63

1,940.94

0 20,000 40,000 60,000 80,000

Soaps

Hair colour and other

toiletries

Detergents

Fatty acids and glycerine

INR lakhs

FY2007-08

FY2008-09

3.2 Comparative Matrix

HUL Nirma DIL CPIL GCPL

Mar 2009 * Mar 2009** Mar 2009** Mar 2009** Mar 2009**

Total Revenue 21,059.20 4,644.75 2,852.27 1,788.67 1,436.58

Net Profit 2,504.51 126.60 391.21 285.78 172.62

Net Profit Margin (%) 11.89 2.73 13.72 15.98 12.02

Return on Equity (%) 11.49 1.59 4.52 21.01 6.72

Return on Assets (%) 28.94 2.40 20.71 35.40 14.62

Debt / Equity Ratio (x) 29.90 34.12 12.37 43.53 23.90

EPS (INR) 11.46 12.85 4.548 20.89 6.83

Current Ratio (x) 0.98 3.79 1.18 0.86 2.22

Share Equity 217.98 79.57 86.51 13.60 25.70

Total Assets 8,653.97 5,276.53 1,889.11 807.22 1,180.81

Current Assets 5,786.78 2,341.64 950.80 500.05 732.75

Total Liabilities 6,516.50 2,715.06 1,070.30 591.95 613.96

Current Liabilities 5,883.94 619.74 807.65 583.52 329.89

Market Capitalisation(as at 26/03/10)

51,836.88 2,886.60 14,306.49 9,465.78 8,187.07

* Period length of 15 months** Period length of 12 months

Sources: Reuters; EMIS

Table 11: Financial Highlights (in INR cr unless otherwise stated)

25


28/32

ISI Analytics

FMCG india

Strengths Weaknesses

CPIL and HUL are projected to share asubstantial combined market share of nearly80% of Indias toothpaste segment (in 2009).

Has the highest total revenue and net profitof INR21,059.20cr and INR2,504.51crrespectively among Indias top 5 FMCGcompanies.

Its shampoo segment has powerful brandportfolio that accommodates consumersneeds from different income group - Clinic isa mass market brand, Sunsilk falls into to the

mid-price market while Dove is in thepremium segment.

Issued bonus debentures with face value ofINR6 (with annual interest rate of 9% payableannually).

HULs INR1cr challenge advertisingcampaign aims to promote Rins superiorvalue to its consumers.

Engaged in price war with P&G - HULs stockwas downgraded by a majority of brokeragefirms in March 2010 as analysts estimatedthat its detergent segment could be renderedif the detergent price war intensifies.

Current operating margin of 14% is lowerthan its peak operating margin of 18% in2002.

Opportunities Threats

Its Fair & Lovely brand is the leader in Indiaswhitening cream segment and serves 250mn

consumers across 30 countries. This productwas also rated as the 12

thMost Trusted

Brand in India by ACNielsen ORG-MARG in2003.

Competes with P&G in the detergentsegment, in which this segment accounts for

10-12% of the companys earnings beforeincome tax.

Detergent price war with its rival P&G willerode profit margins.

Small players like Dabur is chipping awayHULs market share in the oral care, haircare, soaps segment. During April-June2009, Daburs shampoo segment grew by7.3% while HULs share with Sunsilk brandfell 50% (45.4% in value terms).

HULs share in the toothpaste segment fellfrom 29.6% to 28% during April-June 2008while Daburs share increased from 9.3% to

10% and CPILs share grew from 47.7% to49.5%.

Calcutta High Court passed an interim orderthat restrains HULs television commercialthat directly compares the performance of itsRin with P&Gs Tide

HUL

3.3 SWOT Analysis

26


29/32

ISI Analytics

FMCG india


Nirma currently has the largest market sharein Indias detergent market (38%) and thesecond largest share in toilet soap segment(20%).

Sought alternative markets, reallocated itsemployees and introduced maintenanceprogrammes to counter the effects of therecessionary pressure in the US market.

Net sales grew from INR2,684.46cr inFY2007-08 to INR4,574.82cr during the nextfiscal.


Nirmas consolidated revenue was mainlycontributed by the soaps and surfactants,processed minerals and pharmaceuticalsegments - the company could further investin Indias toothpaste segment as it offerspotential growth opportunities (low per capitaltoothpaste consumption).

Worldwide recession impacted Nirmasprocessed minerals segment as globaldemand for soda ash shrank due tocontractions in the construction and autoindustries.

Nirma

3.3 SWOT Analysis (Cont)

27


30/32

ISI Analytics

FMCG india


28


Demerged its pharmaceutical operationsfrom FMCG segment so that each entity canfocus on their respective operations.

Adopted an inorganic growth strategythrough the acquisition of Mumbai-basedBalsaras oral care and household careproduct in a INR143cr all-cash deal, thusadding brands such as Promise, Babool,Sanifresh and Odonil to its product range aswell as expand its scale of operation throughsynergies.

Consolidated revenue ballooned 18.3% to

INR2,834.1cr during the FY2008-09 whileconsolidated net profit grew 17.5% toINR391.2cr.

During April-June 2009, Daburs shampoosegment grew by 7.3%

Lack financial stability and market presenceto compete with multinationals like CPIL andHUL in the oral care market - both CPIL andHUL are estimated to enjoy a combinedmarket share of 85% in India while DIL has a10% share.


Entered the organised retail business throughH&B Stores Ltd.

Will invest INR140cr by 2010 to establish achain of stores selling health and beautyproducts.

Seek to acquire South African hair carecompany - Isoplus that generates sales ofnearly INR100cr.

Competes with FMCG giants like HUL andCPIL in Indias INR16,000cr oral caresegment.

DIL


31/32

ISI Analytics

FMCG india


29


CPIL upped its shareholdings from a 75%stake to 100% in the Hyderabad-basedtoothpowder manufacturer - CC Health CareProducts at a cost of INR69.07lakh.

CPIL is a leader in the toothpaste segment inIndia with a substantial market share of 46%(in 2009).

Promoted the importance of good oral carehabits with the help of Indian DentalAssociation.

Net profit for 3Q FY2009-10 reachedINR116.4cr after achieving a growth of

29.77% against INR89.7cr (qoq).

Has the lowest current ratio of 0.98 amongIndias top 5 FMCG company, thereforeindicating that the company may faceproblems meeting obligations in the short-term.


High sales volume was due to theintroduction of lower-price points variants andimproved rural distribution network thataccounts for nearly 35% of its revenue.

Indias toothpaste market offers potentialgrowth due to low per capita toothpasteconsumption of 108-110gms.

Profit margins may erode when P&Gintroduce its global toothpaste brand - Crest,in India at an attractive price point.

CPIL


32/32

ISI Analytics



Branches offices and factories are located invarious parts of India so that the companysdiverse product portfolio can accommodatedifferent requirements.

GCPL also have several international brandsand trademarks in Europe, Australia,Canada, Africa and the Middle East.

During the quarter ended 30th

September,2009, GCPLs net profit grew 167.78% toINR93cr.

Too much diversification may steer thecompany away from its core businessoperations.


UK-based Keyline Brands Ltd was acquiredby the Group, thereby allowing the Group todiversify country risks.

Surge in net profit was a result of lower palmoil price.

Acquired Nigeria-based Tura to penetratemarkets in the pan-African region.

Competes with other FMCG giants like HULand CPIL that has vast experience in globalFMCG segment.

GCPL

The research report is based on material compiled from data considered to be reliable at the time of

writing. However, information and opinions expressed will be subject to change without notice. We donot accept any liability directly or indirectly that may arise from investment decision-making based on

this report.

production - soaps

Documents