Consumer Staples & Discretionary

Equity Research INDIA April 28, 2020 BSE Sensex: 31743 Consumer Staples & Discretionary ICICI Securities Limited is the author and Downgrade sector view to Neutral driven by snake & distributor of this report ladder trends

We downgrade Consumer sector view to Neutral (no stocks with BUY rating) as Sector update we see significant medium-term headwinds from (1) second-order macro impact and (2) category-specific trends (details below). In our view, relative winners will have (1) better value proposition, (2) diversified product portfolio, (3) ability to win back consumers who may have sampled regional brands, (4) direct distribution (less wholesale exposure), (5) categories with emphasis on hygiene and immunity, (6) traditional / organic food, (7) reimagining path to purchase (omni-channel), (8)

ramping-up last mile delivery capability and source transparency (for food

delivery), (9) appointment-based buying (in luxury retail like jewellery) and (10)

effective digital communication. Top picks are HUL and Jubilant Foodworks.

Summary stock views (we downgrade 80% of our consumer coverage stocks (15/19 excluding paint coverage)): BUY: None ADD: Bajaj Cons., Dabur, GCPL, HUL, ITC, Jubilant Food, Jyothy, Marico, USL HOLD: Avenue Supermarts, Emami, Nestle, Page, Titan, Westlife REDUCE: Bata, Britannia, Colgate, Sheela Foam Unmissable trends from our conversations with consumer industry practitioners:  Excess consumption reset: We believe that the ongoing crisis is likely to lead to a reset of excess consumption across categories. Given the likely weak macros, we expect medium-term decline in indulgence and impulse purchases – leading to a shift towards more essential products.  The dreaded word of “downtrading” likely to make a comeback: Even in the essential product categories, we expect meaningful downtrading. Potential implications from this include limited headroom for companies to raise prices – note that consumer prices have remained benign over the past five years (see figure 1).  Local / regional players to benefit in categories with low entry barriers: Amid the current lockdown, with significant complications in production and supply chain (requirement to get regional approvals, manufacturing plants shut, labour unavailability), products from large national brands are not always available on the Research Analysts: retail shelves. This is resulting in new trials, albeit forced, as consumers are buying the regional brands (which are more agile in terms of local supply chain). We believe Manoj Menon [email protected] that some consumers are likely to shift towards these new brands making it difficult +91 22 6637 7209 for the national brands to re-enter the consumers’ basket even after the availability Vismaya Agarwal, CFA issues are resolved. This is likely to happen more in categories like packaged food vismaya.agarwal @icicisecurities.com +91 22 2277 7632 (low entry barriers) and less so in HPC. While we expect industry consolidation to Karan Bhuwania benefit the larger players eventually, the best-execution and best-value-for-money [email protected] players are likely to emerge as winners. +91 22 6637 7351  Luxury and discretionary products need to persuade consumers to return: With the consumers’ shifting their focus towards essentials, luxury and high-ticket

discretionary products will have to find ways to persuade consumers to return to their stores (offline or online). This is likely to be driven by a change in messaging (importance of in-home focus) and emphasis on providing value to consumers.

Please refer to important disclosures at the end of this report

Consumer Staples & Discretionary, April 28, 2020 ICICI Securities

 Changes in distribution channel: Current period is witnessing new consumers coming into e-commerce and at the same time, mom-and-pop ‘kirana’ stores making a comeback. However, for these trends to continue, e-commerce companies will have to focus / improve last mile connectivity and ‘kiranas’ will have to continue relying on technology to remain connected with consumers.  Packaged food could witness a change in trend: Biscuits are likely to be the least impacted within packaged foods – though consumption could shift towards the value segment (glucose). On the other hand, beverages (carbonated soft drinks) could struggle from loss of social gathering occasions and lower out-of- home consumption.

Figure 1: Consumer prices have remained benign over the past five years

25 Volume growth Price / Mix growth 20

(%) 5

-5

-10

Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20

Source: Industry data, I-Sec research

Figure 2: Consumer sentiment was already low even before COVID pandemic

Consumer Confidence Survey: RBI: Current Situation Index Consumer Confidence Survey: RBI: Future Expectations Index

130

120

110

100

Jul-19

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Mar-17 Mar-18 Mar-19 Mar-20

Dec-15 Dec-12 Dec-13 Dec-14 Nov-16 Nov-17 Nov-18 Nov-19

Source: Reserve Bank of India, I-Sec research

Consumer Staples & Discretionary, April 28, 2020 ICICI Securities

Figure 3: Urban consumer sentiment 140

135

130

125

120

115

110

Q1CY15 Q3CY10 Q1CY11 Q3CY11 Q1CY12 Q3CY12 Q1CY13 Q3CY13 Q1CY14 Q3CY14 Q3CY15 Q1CY16 Q3CY16 Q1CY17 Q3CY17 Q1CY18 Q3CY18 Q1CY19 Q3CY19

Source: Industry data, I-Sec research

Consumer Staples & Discretionary, April 28, 2020 ICICI Securities

Company summaries

Staples (11 stocks)

Bajaj Consumer: Downgrade a notch to ADD from BUY. Medium-term growth likely impacted due to the discretionary nature of the product / segment. However, potential announcement of dividend policy is a key upside trigger in near term.

Britannia: Maintain REDUCE. Revenue growth in FY21 likely to benefit from increased consumption of packaged food. However, premiumisation tailwind could moderate resulting in margin pressure. We believe that success of new categories is imperative for rerating – likely delayed given the economic slowdown.

Colgate: Downgrade to REDUCE from BUY. Weak macros will impact premiumisation, which is imperative for Colgate’s performance given the highly penetrated nature of the category. Market shares gain trajectory will continue.

Dabur: Downgrade a notch to ADD from BUY. Health / ayurveda positioning is likely to result in strong (relative) performance in India. We expect significant acceleration in innovation to benefit from this trend (see figure 4 for ‘Immunity Kit’). However, likely impact of severe economic slowdown in crude-linked economies (Middle East) (25% revenue contribution) is headwind for FY21.

Figure 4: Dabur’s ‘Immunity Kit’ helps reinforce the brand’s Ayurveda strength

Source: Company data, I-Sec research

Emami: Downgrade to HOLD from BUY. We expect significant medium-term impact given most of its categories are relatively more discretionary within staples. If positioned appropriately, Zandu brand can gain from the higher consumer willingness to spend on health products.

GCPL: Downgrade a notch to ADD from BUY. India business likely to be less impacted given the nature of brands (household insecticides, soaps) and a significant urban focus (72%). However, margin is likely to be negatively impacted from a mix

Consumer Staples & Discretionary, April 28, 2020 ICICI Securities

change towards soaps and away from hair colours. In International, we expect Indonesia growth to decelerate and Africa recovery a binary event.

HUL: Top-pick. Downgrade a notch to ADD from BUY. Relative outperformer given large distribution presence and product assortment across the value chain. We also see likely positive narrative of soaps and Horlicks being hygiene & health trend beneficiaries.

ITC: Maintain ADD. Cigarette cessation rate likely to accelerate given potential habit change for light smokers during product unavailability in lockdown. We note Altria’s (US tobacco) performance despite industry volumes declining over 40 years (in US). However, we don’t believe that the price-led growth construct is sustainable in Indian context given high unaffordability. Near-term positives are, (1) likely high dividend, (2) potential market share gains (cyclical share gain era of VST and GPI likely over), (3) FMCG profitability improvement and (4) potential valuation tailwind from rerating of global tobacco / staples (high yield plays). (See report)

Jyothy Labs: Downgrade a notch to ADD from BUY. Home care focus (detergents, household insecticides, dishwash, soaps) likely to result in relatively less impact on performance versus peers. Likely increase in competitive intensity is the headwind for JYL.

Marico: Downgrade a notch to ADD from BUY. Likely short-term benefit from copra correction tailwind – that’s the upside trigger. We believe that acceleration in Parachute growth is imperative for stock performance. Saffola could benefit from the increased focus on health. However, we expect downtrading to limit growth in VAHO (was already facing pressure pre-COVID).

Nestle: Maintain HOLD. Financial performance to be least impacted given higher urban salience (75%) and benefit of packaged food tailwind. We believe that the stock will continue to command valuation premium for predictability and economic downturn resilient portfolio.

Discretionary (8 stocks)

Avenue Supermarts: Maintain HOLD. Near-term pressure on performance – revenue to be under pressure from store closures and lower footfalls due to social distancing norms while margins likely to be impacted from lower sales of general merchandise (high margin category). We see incremental growth levers from recruitment of new customers and supplying directly to housing societies. Upside trigger remains success of DMart Ready (scalability, profitability).

Bata: Downgrade to REDUCE from BUY. We model significant near-term impact from lockdown and slow recovery given the discretionary nature of the product. Increased value focus by consumers results in delay in the premiumisation tailwind.

Jubilant Foodworks: Top-pick. Downgrade a notch to ADD from BUY. We expect it to weather the near-term challenges driven by – (1) strong digital infrastructure and delivery relationships (continued to maintain its 27,000-odd delivery rider fleet despite the expansion of food aggregators), (2) strong balance sheet (debt-free) and (3) lack of franchisees (unlike say a Subway in India) which could have otherwise been under

Consumer Staples & Discretionary, April 28, 2020 ICICI Securities

pressure. We believe that QSR, given the low-ticket nature, is likely to be amongst the fastest to recover. Problems in start-up funding are likely to reduce competitive intensity – helps gain prominence on food aggregator platforms as well. Higher work- from-home adaptability could be a strong structural tailwind. We do note tough near- term comps which may increase stock volatility. (See report)

Page: Downgrade to HOLD from BUY as we expect a prolonged period of weak performance given a highly discretionary product. We expect the company to struggle in new category launches / scale up and premiumisation.

Sheela Foam: Downgrade to REDUCE from ADD as highly discretionary category and high-ticket product nature means significant impact on performance. On the positive side, there are near-term benefits from lower input prices.

Titan: Downgrade to HOLD from BUY. High-ticket discretionary nature and significant impulse-led purchase (only 20% of jewellery revenue is wedding-linked) means significant pressure on performance in FY21. We believe the long-term formalisation narrative continues with increased focus on driving premiumisation agenda by the new Jewellery CEO.

United Spirits: Downgrade a notch to ADD from BUY. We believe that some stocking post-lockdown is likely to offset the lost sales in this period. However, Prestige & Above to be more impacted versus Popular give greater contribution of out-of-home consumption. That said, competitive intensity for USL from Pernod Ricard may reduce as it has a higher share of on-trade consumption (in bars, restaurants etc.). On the positive side, we see near-term benefits from likely lower input cost. Higher taxes appears a near-term certainty, however, we expect profit growth to outpace revenue growth due to positive operating leverage (in 2HFY21) and potentially lower raw material and packing material costs.

Westlife: Downgrade to HOLD from BUY. Combination of near-term pressure on growth and high operating leverage business structure likely to result in losses. Although transitory, this could result in lesser ability for store expansion. Long-term benefits from expansion of food-service market remains intact given the strong brand and execution capability.

Consumer Staples & Discretionary, April 28, 2020 ICICI Securities

Figure 5: Target price and rating changes Target Price Rating Old New Old New Staples Bajaj Consumer 200 160 BUY ADD Britannia 2,600 2,800 REDUCE REDUCE Colgate 1,400 1,400 BUY REDUCE Dabur 520 530 BUY ADD Emami 250 200 BUY HOLD GCPL 700 600 BUY ADD HUL 2,400 2,500 BUY ADD ITC 200 200 ADD ADD Jyothy Labs 150 125 BUY ADD Marico 320 320 BUY ADD Nestle 15,000 17,500 HOLD HOLD Discretionary Avenue Supermarts 2,100 2,300 HOLD HOLD Bata 1,800 1,100 BUY REDUCE Jubilant Foodworks 1,800 1,600 BUY ADD Page Industries 27,000 18,000 BUY HOLD Sheela Foam 1,700 1,100 ADD REDUCE Titan 1,300 900 BUY HOLD United Spirits 680 600 BUY ADD Westlife Development 500 300 BUY HOLD Source: I-Sec research

Figure 6: Recommendation for consumer coverage ADD HOLD REDUCE Bajaj Consumer Avenue Supermarts Bata Dabur Emami Britannia GCPL Nestle Colgate HUL Page Industries Sheela Foam ITC Titan Jubilant Foodworks Westlife Development Jyothy Labs Marico United Spirits Source: I-Sec research

Consumer Staples & Discretionary, April 28, 2020 ICICI Securities

Figure 7: Valuation summary

CMP TP Upside PE (x) EV/EBITDA (x) ADTV Market Cap Company (Rs) (Rs) (%) Rating FY21E FY22E FY21E FY22E (US$ mn) (Rs bn) (US$ bn) Staples Bajaj Consumer 145 160 10 ADD 11 10 9 8 0.7 19 0.3 Britannia 3,242 2,800 (14) REDUCE 47 42 37 33 17.5 614 8.2 Colgate 1,552 1,400 (10) REDUCE 50 44 32 29 10.6 313 4.2 Dabur 492 530 8 ADD 51 47 48 43 14.2 754 10.1 Emami 200 200 (0) HOLD 19 18 14 13 2.4 73 1.0 GCPL 537 600 12 ADD 37 33 26 24 12.9 509 6.8 HUL 2,320 2,500 8 ADD 60 52 44 39 50.1 4,618 61.9 ITC 180 200 11 ADD 14 13 10 10 50.1 1,933 25.9 Jyothy Labs 115 125 9 ADD 20 17 15 14 0.8 36 0.5 Marico 297 320 8 ADD 35 31 25 22 11.5 342 4.6 Nestle 17,951 17,500 (3) HOLD 76 62 53 44 20.2 1,460 19.6

Discretionary Avenue Supermarts 2,324 2,300 (1) HOLD 100 59 64 40 35.2 1,360 18.2 Bata 1,290 1,100 (15) REDUCE 231 45 138 31 13.9 156 2.1 Jubilant Foodworks 1,485 1,600 8 ADD 171 47 33 19 25.0 184 2.5 Page Industries 18,453 18,000 (2) HOLD 162 49 81 32 11.5 198 2.7 Sheela Foam 1,292 1,100 (15) REDUCE 62 25 36 16 0.2 69 0.9 Titan 928 900 (3) HOLD 100 41 57 26 38.9 813 10.9 United Spirits 522 600 15 ADD 91 35 47 23 21.6 352 4.7 Westlife Development 291 300 3 HOLD (109) 59 32 16 2.1 49 0.7 Source: Company data, I-Sec research

EV/ sales (x) P/B (x) P/CEPS (x) RoE (%) RoCE (%) CAGR (FY19-22E) (%) Company FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E Revenues EBITDA PAT Staples Bajaj Consumer 2.2 2.1 3 3 11 10 28 27 30 28 2 (3) (2) Britannia 6.3 5.7 13 11 42 37 27 26 22 21 9 12 16 Colgate 8.9 8.2 28 31 40 36 60 73 71 86 5 8 9 Dabur 9.7 8.9 12 11 45 42 25 25 18 18 6 9 8 Emami 3.6 3.3 4 4 20 17 23 25 27 30 2 2 (1) GCPL 5.7 5.3 7 6 32 29 19 20 15 16 5 5 7 HUL 11.9 10.6 15 15 54 47 41 29 34 25 14 17 21 ITC 4.1 3.7 4 4 13 12 28 31 30 34 10 8 5 Jyothy Labs 2.4 2.3 3 2 16 14 15 15 14 15 3 6 13 Marico 5.1 4.7 11 11 31 28 33 35 30 33 6 8 8 Nestle 12.7 10.9 74 60 67 56 106 106 41 43 12 16 19

Discretionary Avenue Supermarts 5.3 3.8 12 10 79 50 12 18 15 23 25 28 33 Bata 6.7 4.6 9 8 95 34 4 18 1 20 6 4 7 Jubilant Foodworks 5.1 4.0 13 10 42 26 8 25 15 38 10 7 18 Page Industries 8.8 6.0 23 20 105 41 14 43 13 37 6 4 5 Sheela Foam 3.2 2.2 6 5 42 20 10 22 11 25 10 15 16 Titan 4.7 2.9 11 9 69 34 11 25 14 32 15 14 18 United Spirits 5.0 3.7 9 7 58 28 10 22 10 23 6 3 11 Westlife Development 3.1 2.3 8 7 41 19 (7) 13 (1) 19 13 21 nm Source: Bloomberg, I-Sec research

Consumer Staples & Discretionary, April 28, 2020 ICICI Securities

Figure 8: Financial summary Revenue EBITDA EPS

Rs mn Growth (%) Rs mn Growth (%) Rs Growth (%)

Company FY21 FY22 FY21 FY22 FY21 FY22 FY21 FY22 FY21 FY22 FY21 FY22 Staples

Bajaj Consumer 8,478 8,965 (0.9) 5.7 2,199 2,341 (11.2) 6.5 13.2 14.1 (10.9) 6.9 Britannia 124,394 137,810 7.1 10.7 20,908 23,277 12.7 11.3 69.4 77.8 19.6 12.1 Colgate 47,150 51,053 2.7 8.3 13,037 14,433 5.3 10.7 31.2 34.9 6.2 11.8 Dabur 89,233 96,982 3.1 8.7 19,368 21,642 5.4 11.9 9.6 10.4 6.8 8.5 Emami 26,161 27,940 (2.0) 6.8 6,780 7,352 (3.7) 8.4 10.6 11.4 (8.5) 7.7 GCPL 101,290 108,748 2.0 7.4 21,801 23,526 3.0 7.9 14.7 16.3 2.8 10.6 HUL 462,030 517,542 3.3 12.1 121,430 139,473 3.8 14.9 39.0 44.7 17.1 14.7 ITC 498,300 551,541 8.4 10.7 193,993 207,450 8.4 6.9 12.9 13.5 4.5 4.8 Jyothy Labs 17,849 18,880 (0.4) 5.8 2,968 3,206 4.1 8.0 5.8 6.8 10.2 16.7 Marico 74,873 81,541 2.6 8.9 15,400 17,219 5.0 11.8 8.6 9.5 6.2 10.2 Nestle 133,402 154,986 8.5 16.2 31,954 38,149 13.5 19.4 235.4 287.3 15.2 22.0

Discretionary

Avenue Supermarts 276,703 388,465 11.1 40.4 22,756 36,631 2.1 61.0 23.1 39.4 4.0 70.3 Bata 23,935 34,787 (22.0) 45.3 1,167 5,266 (75.9) 351.3 5.6 28.6 (77.8) 411.6 Jubilant Foodworks 37,466 47,362 (4.5) 26.4 5,816 10,126 (33.7) 74.1 8.7 31.8 (62.1) 266.9 Page Industries 23,546 34,171 (22.1) 45.1 2,543 6,412 (57.1) 152.1 113.8 378.5 (66.7) 232.7 Sheela Foam 18,126 26,396 (16.4) 45.6 1,595 3,524 (40.3) 120.9 20.8 52.0 (45.9) 150.2 Titan 167,367 276,984 (20.7) 65.5 13,865 30,715 (41.6) 121.5 9.3 22.6 (43.1) 143.6 United Spirits 76,217 103,082 (17.2) 35.2 8,100 16,429 (47.8) 102.8 5.7 14.9 (52.9) 160.2 Westlife Development 14,718 19,790 (4.8) 34.5 1,452 2,930 (27.8) 101.9 (2.7) 5.0 1,351.4 (286.5) Source: Company Data, I-Sec research

Consumer Staples & Discretionary, April 28, 2020 ICICI Securities

Price charts Akzo Nobel Asian Paints Avenue Supermarts Bajaj Consumer 2,700 2,000 2,800 550 2,500 1,800 2,400 2,300 475 1,600 2,000 2,100 1,400 400 1,600

1,900 (Rs) 325 (Rs) 1,200(Rs) 1,200 (Rs) 1,700 1,000 250 1,500 800 800 175 1,300 400

600 100

Oct-17 Apr-20 Apr-17 Apr-18 Oct-18 Apr-19 Oct-19

Oct-17 Apr-19 Apr-17 Apr-18 Oct-18 Oct-19 Apr-20

Apr-17 Oct-18 Apr-20 Oct-17 Apr-18 Apr-19 Oct-19

Apr-19 Apr-20 Oct-17 Apr-18 Oct-18 Oct-19 Apr-17 Bata India Berger Paints Britannia Colgate 2,000 700 4,000 1,800 600 3,500 1,500 1,600 3,000 500 1,400 1,000 2,500

400 (Rs) (Rs) 1,200

(Rs) 2,000 500 300 (Rs) 1,000 1,500 200 800 0 1,000

100 600

Oct-17 Apr-18 Apr-17 Oct-18 Apr-19 Oct-19 Apr-20

Apr-19 Apr-17 Oct-17 Apr-18 Oct-18 Oct-19 Apr-20

Oct-17 Apr-19 Apr-18 Oct-18 Oct-19 Apr-20

Apr-17

Oct-18 Oct-17 Apr-18 Apr-19 Oct-19 Apr-20 Apr-17

Dabur Emami GCPL HUL 560 800 1,020 2600 520 920 2300 480 600 2000 440 820 400 720 1700 400

(Rs) 360 1400

(Rs) (Rs)

(Rs) 620 320 1100 520 280 200 800 240 420 200 500

0 320

Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20

Apr-20 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19

Apr-18 Apr-17 Oct-17 Oct-18 Apr-19 Oct-19 Apr-20

Oct-17 Oct-19 Apr-18 Oct-18 Apr-19 Apr-20 Apr-17

ITC Jubilant Foodworks Jyothy Labs Kansai Nerolac 600 375 2,200 4,000 3,500 550 325 1,700 3,000 500 275 2,500 450 (Rs) 400 1,200 (Rs)

(Rs) 2,000 225 (Rs) 1,500 350 700 300 175 1,000 250

125 200

Oct-17 Apr-18 Apr-17 Oct-18 Apr-19 Oct-19 Apr-20

Oct-17 Apr-20 Apr-18 Oct-18 Apr-19 Oct-19

Apr-17

Apr-18 Apr-20 Apr-17 Oct-17 Oct-18 Apr-19 Oct-19

Oct-17 Apr-19 Apr-18 Oct-18 Oct-19 Apr-20 Apr-17 Marico Nestle Page Industries Sheela Foam 450 20,000 42,000 2,050 18,000 1,850 400 16,000 32,000 1,650 14,000 350 1,450

12,000 22,000

(Rs) (Rs) 10,000 1,250(Rs) (Rs) 300 8,000 12,000 1,050 250 6,000 850 4,000 2,000

200 650

Oct-19 Apr-20 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19

Oct-17 Apr-19 Apr-17 Apr-18 Oct-18 Oct-19 Apr-20

Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20

Titan United Spirits Westlife Development 1,550 1,000 600 1,350 500 1,150 800 400

950 600 (Rs)

750 (Rs) 300 (Rs) 400 550 200 350 200 100

150

Oct-18 Apr-17 Oct-17 Apr-18 Apr-19 Oct-19 Apr-20

Apr-17 Oct-18 Oct-17 Apr-18 Apr-19 Oct-19 Apr-20

Oct-19 Oct-17 Apr-18 Oct-18 Apr-19 Apr-20 Apr-17

Source: Bloomberg

Consumer Staples & Discretionary, April 28, 2020 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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