BERGER PAINTS Skirts GST Bumps; Prospects Intact

RESULT UPDATE

BERGER PAINTS Skirts GST bumps; prospects intact

India Equity Research| Consumer Goods

Berger Paints' (Berger) Q1FY18 revenue growth of 11.5% YoY came in EDELWEISS 4D RATINGS

line, while EBITDA and PAT dip of 5.1% and 6.1% YoY, respectively, came Absolute Rating BUY below our estimates. Decorative unit posted decent mid single digit Rating Relative to Sector Outperform volume growth (~5%) considering Asian Paints saw mere 2% YoY volume Risk Rating Relative to Sector Low growth. Rising input prices resulted in 383bps YoY dip in gross margin, Sector Relative to Market Underweight

while EBITDA margin drop was contained at 260bps YoY due to 126bps YoY savings in other expenses. Berger remains key beneficiary of recovery in urban demand, good monsoon (higher share in Tier‐3 markets), MARKET DATA (R: BRGR.BO, B: BRGR IN) CMP : INR 249 distribution expansion and share gains led by GST. Maintain ‘BUY’. Target Price : INR 289

52‐week range (INR) : 277 / 178 Good show on volume front; margins soft Share in issue (mn) : 971.0 Standalone net sales grew 11% YoY (gross sales grew 8.8% YoY ahead of 5.5% YoY M cap (INR bn/USD mn) : 242 / 3,789 witnessed by Asian Paints), suggesting lower impact of destocking in the run up to GST. Avg. Daily Vol.BSE/NSE(‘000) : 699.4 Standalone gross and EBITDA margins dipped 405bps and 264bps YoY, respectively,

due to the spike in raw material prices and discounts given to trade pre GST (Asian SHARE HOLDING PATTERN (%)

Paints’ standalone gross and EBITDA margins fell 471bps and 583bps YoY, respectively). Current Q4FY17 Q3FY17 Automotive and general industrial segment delivered soft performance (soft growth in Promoters * 75.0 75.0 75.0

2, 3 wheelers and CVs), while protective and infra coating witnessed better quarter. MF's, FI's & BK’s 3.3 3.2 7.7 FII's 10.8 10.9 6.6 Q1FY18 conference call: Key takeaways Others 10.9 10.9 10.8 Growth was strong in April and May, primarily led by advertised products. Tier 1 and 3 * Promoters pledged shares : NIL (% of share in issue) cities saw improvement in growth. Berger will need to undertake more price hikes to

counter the input price increase and restore margins to FY17 levels. Trade is expected PRICE PERFORMANCE (%) to normalise in couple of months – majority of dealers have migrated to GST. Berger EW Consumer Stock Nifty added strong 800 machines in Q1FY18 (24,000 dealers as at FY17 end); distribution goods Index and new products are driving growth. Margins dip was steeper in industrial segment. 1 month 1.6 4.1 (5.7)

3 months (3.8) 8.3 7.5 Outlook and valuations: Positive; maintain ‘BUY’ 12 months 3.7 15.8 16.4

FY18 is expected to be better in terms of growth, benefiting from pricing hikes, GDP

revival (volume growth 1.5‐1.6x GDP growth), government initiatives, new product launches and distribution expansion. Good monsoon will help revive rural demand. At CMP, the stock is trading 36.1x FY19E EPS. We maintain ‘BUY/SO’ with TP of INR289 based on target multiple of 42x (40x earlier). Abneesh Roy +91 22 6620 3141 Financials (INR mn) [email protected] Year to March Q1FY18 Q1FY17 % change Q4FY17 % change FY17 FY18E FY19E Tanmay Sharma, CFA

Net rev. 12,471 11,182 11.5 11,129 12.1 45,523 52,882 63,365 +91 22 4040 7586 EBITDA 1,851 1,951 (5.1) 1,611 14.9 7,186 8,247 10,753 [email protected] Adjusted Profit 1,129 1,203 (6.1) 1,055 7.0 4,194 5,017 6,689 Alok Shah Dilu. EPS (INR) 1.2 1.7 (33.0) 1.1 7.0 4.3 5.2 6.9 +91 22 6620 3040 Dilu.P/E (x) 56.3 48.2 36.1 [email protected]

EV/EBITDA (x) 33.5 29.0 22.1 ROAE (%) 27.0 27.5 31.7 August 7, 2017 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited Consumer Goods

Table 1: Trends at a glance Berger Paints Asian Paints Sales growth Gross EBITDA EBITDA growth Sales growth Gross EBITDA EBITDA growth Standalone comparison (% YoY) margin margin (% YoY) (% YoY) margin margin (% YoY) Q2FY11 14.2 36.6 10.6 5.9 6.0 44.7 19.6 4.0 Q3FY11 29.2 35.6 10.2 30.5 37.3 40.5 17.2 16.0 Q4FY11 24.0 36.3 10.0 26.1 23.6 40.9 16.0 12.3 Q1FY12 30.5 34.4 9.6 12.6 28.6 40.0 18.8 20.0 Q2FY12 22.2 37.3 11.1 27.4 25.0 40.6 15.6 (0.8) Q3FY12 27.5 35.9 10.8 34.5 20.3 41.5 17.2 20.3 Q4FY12 26.0 34.7 10.4 31.4 28.9 43.9 16.3 28.9 Q1FY13 16.9 36.1 10.2 23.6 6.7 44.2 19.7 6.7 Q2FY13 12.6 37.1 10.5 7.0 16.2 44.4 15.7 16.2 Q3FY13 17.0 37.9 12.2 32.8 20.3 41.4 17.8 20.3 Q4FY13 8.4 40.7 11.6 20.9 7.5 42.3 15.9 7.5 Q1FY14 9.3 39.1 11.0 18.5 12.9 44.2 18.1 3.6 Q2FY14 16.8 39.9 10.9 21.4 18.2 44.4 18.0 35.3 Q3FY14 7.7 39.0 12.0 6.0 12.2 41.4 16.8 5.8 Q4FY14 15.9 39.6 13.0 20.1 22.2 42.3 15.6 19.8 Q1FY15 14.9 40.1 12.9 24.1 18.2 43.2 17.9 16.8 Q2FY15 15.7 41.4 11.4 20.7 18.3 44.8 16.1 5.4 Q3FY15 10.9 41.8 13.5 24.4 6.4 44.8 17.9 13.1 Q4FY15 8.6 42.8 13.1 18.8 6.0 46.0 17.3 18.1 Q1FY16 7.8 38.6 15.4 20.3 7.2 43.4 22.2 25.1 Q2FY16 7.2 39.3 14.1 23.3 2.3 43.6 18.9 11.4 Q3FY16 10.1 45.4 16.2 32.2 13.2 48.3 20.9 31.9 Q4FY16 8.5 43.4 16.1 31.6 11.5 46.1 20.4 23.9 Q1FY17 9.3 43.9 18.0 28.1 8.8 48.5 24.5 19.9 Q2FY17 6.1 42.7 15.3 15.0 9.4 45.7 20.3 17.6 Q3FY17 4.4 40.7 15.6 (6.3) 0.7 44.4 20.7 (5.9) Q4FY17 7.7 41.6 15.5 3.2 9.4 44.5 19.2 3.4 Q1FY18 11.0 39.9 15.4 (5.3) 7.3 43.8 18.6 (18.2) Source: Company, Edelweiss research

Q1FY18 conference call: Key takeaways Outlook and Macro economic scenario  The company’s Decorative paint segment is expected to look up post stabilisation of GST and good monsoon. Normalisation should restore over next 2 months.  Some wholesalers are yet to come under GST. Otherwise, most trade channels are now compliant with GST.  April to mid May was strong followed by destocking.  Upward trend in key raw material (RM) prices and foreign exchange fluctuation remain concerns.  Tier 1 cities, which were languishing has shown recovery and Tier 3’s growth rates have been better QoQ.  It is possible that unorganized players’ market share could have shrunk.

Decorative  The vertical recorded healthy performance in spite of some slowdown in off‐take immediately prior to GST implementation.

2 Edelweiss Securities Limited Berger Paints

 Advertised products of the segment grew well. Express coating products also saw good offtake.

Industrial and auto  General industrial/automotive business was subdued for the quarter because of lower off‐take of commercial vehicles.  Protective & infrastructure coatings logged improved performance. Some increase of government spends was seen.

New JVs and acquisitions  Saboo Coatings was consolidated for 1 month in the quarter.

Margins  In May, the company undertook 2.7% price hike. Full effect of the price hike would be seen in next quarter, which should help improve margins.  The company will need to take further hike prices to restore margins to earlier levels.  Roughly 2‐3% price hike leads to 1% price increase in contractor cost.  RM prices of Tio2, monomers and solvents jumped. Some solvent and monomers prices have shown declining trend in recent times. However, other RM prices have remained firm.  Decline in margins was more in Industrial than in Decorative segment.  Ad spends would be higher in Q2FY18.  Currently, Assam plant’s utilisation is lower than other plants.

International business and subsidiary  Berger’s wholly‐owned subsidiary, BJN Nepal, extended its robust performance both in top line & profitability.  Polish operations too showed healthy growth.

GST  58% of CGST would be refunded from Assam plant.

Distribution  Added 800 tinting systems, which were above budgeted numbers. These machines are capitalised and rented to dealers. Rental income is shown in other operating income.  Approx 24,000 dealers, as at FY17, had tinting machines.

Capacity  2 Assam factories will add ~100,000 tonnes p.a.  Small increase in other plants to the extent space is available. Area expansion can happen at Hindupur.  No new plant will need to be added in terms of new location for next 2‐3 years.  New plants would break even in 2.5‐3 years. Assam plant should reach break‐even little earlier.  No major contribution difference between old and new plants. At optimal level, difference could be ~1.5‐3%.

3 Edelweiss Securities Limited Consumer Goods

Chart 1: Standalone sales growth (% YoY) 50.0

40.0

30.0 (%) 20.0

10.0

0.0 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 Berger Paints Asian Paints

Chart 2: Gross margin (standalone) gap with leader 60.0

52.0

44.0 (%) 36.0

28.0

20.0 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 Berger Paints Asian Paints

Chart 3: EBITDA margin (standalone) 25.0

20.0

15.0 (%) 10.0

5.0

Source: Company, Edelweiss research

4 Edelweiss Securities Limited Berger Paints

Outlook and valuations: Positives galore; maintain ‘BUY’ Growth for paint industry is likely to accelerate with strong thrust by government on infrastructure development, faster execution, housing for all, development of 100 new Smart Cities and reversal of interest rate cycle. We believe Berger is well poised to reap benefits of impending recovery, riding its strong market share, pricing power, brand strength and widespread dealer network (~24,000 dealers as at end of FY17). We expect the company to be one of the best plays on the much‐anticipated recovery in macros given that its paint volumes surged a healthy 1.5‐2.0x GDP. Further, paint industry will be one of the prime beneficiaries of GST implementation in terms of market share gains from the unorganised segment. Berger will also significantly benefit from recovery in rural demand following better monsoon and increased rural stimulus (considering higher rural salience).

We expect Berger to clock double‐digit volume growth in FY18 anchored by recovery in urban sentiment, GDP revival and rational competition (global behemoths Akzo, Nippon and Jotun have failed to make headway in India). Additionally, low per capita paint consumption in India (one‐fourth of China’s) and reduction in repainting cycle (5 years now from 7 years a decade ago) renders Berger a strong play on paint sector growth and comparable to leader, Asian Paints. Industrial segment’s growth, which has languished in past few quarters, is likely to pick up, especially in automotive space (helped by the new joint venture with Nippon), led by likely improvement in discretionary spends.

We expect Berger to extend its strong growth run on sharp distribution expansion and new product launches. At target multiple of 42x to FY19E earnings (earlier 40x) our TP is pegged at INR289. We maintain ‘BUY/Sector Outperformer’ recommendation/rating on the stock.

Chart 4: 1‐ year forward P/E band

350

280 45x 40x 210 35x 30x (INR) 140 25x 20x 70

0 17 16 15 14 13 12 11 17 16 15 14 13 12 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Feb Feb Feb Feb Feb Feb Aug Aug Aug Aug Aug Aug Aug

Source: Edelweiss research

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Financial snapshot (INR mn) Year to March Q1FY18 Q1FY17 % change Q4FY17 % change FY17 FY18E FY19E Net revenues 12,471 11,182 11.5 11,129 12.1 45,523 52,882 63,365 Raw material costs 7,409 6,215 19.2 6,435 15.1 25,923 30,574 36,063 Employee expenses 838 748 12.0 763 9.9 3,067 3,411 4,019 Other expenses 2,373 2,268 4.6 2,320 2.3 9,347 10,651 12,531 Total expenditure 10,620 9,231 15.0 9,518 11.6 38,337 44,635 52,612 EBITDA 1,851 1,951 (5.1) 1,611 14.9 7,186 8,247 10,753 Depreciation 305 261 16.8 275 10.6 1,081 1,209 1,284 EBIT 1,547 1,690 (8.5) 1,336 15.8 6,105 7,038 9,468 Other income 135 100 34.5 180 (25.0) 545 650 680 Interest 28 28 (0.4) 40 (29.5) 162 200 165 Add: Prior period items Add: Exceptional items Profit before tax 1,654 1,763 (6.2) 1,476 12.0 6,488 7,488 9,983 Provision for taxes 556 595 (6.6) 446 24.6 2,294 2,471 3,294 Minority interest Associate profit share 31 35 (10.9) 25 25.5 ‐ ‐ ‐ Profit‐ Discontinued Ops Reported net profit 1,129 1,203 (6.1) 1,055 7.0 4,194 5,017 6,689 Adjusted Profit 1,129 1,203 (6.1) 1,055 7.0 4,194 5,017 6,689 Diluted shares (mn) 971 694 971 971 971 971 Adjusted Diluted EPS 1.2 1.7 (33.0) 1.1 7.0 4.3 5.2 6.9 Diluted P/E (x) ‐ ‐ ‐ 56.3 48.2 36.1 EV/EBITDA (x) ‐ ‐ ‐ 33.5 29.0 22.1 ROAE (%) ‐ ‐ ‐ 27.0 27.5 31.7

As % of net revenues COGS 59.4 55.6 57.8 56.9 57.8 56.9 Employee cost 6.7 6.7 6.9 6.7 6.4 6.3 Other expenses 19.0 20.3 20.8 20.5 20.1 19.8 EBITDA 14.8 17.4 14.5 15.8 15.6 17.0 EBIT 12.4 15.1 12.0 13.4 13.3 14.9 PBT 13.3 15.8 13.3 14.3 14.2 15.8 Adjusted net profit 9.1 10.8 9.5 9.2 9.5 10.6 Tax rate 33.6 33.7 30.2 35.4 33.0 33.0

6 Edelweiss Securities Limited Berger Paints

Company Description Berger Paints is the second largest paints company of India headquartered in Kolkata, India. Paints sales in domestic and international markets contributed ~94% and 6%, respectively, to the company’s consolidated revenue. Domestic decorative paints form 80‐85% of domestic revenue. In powder coatings, Kansai is the leader followed by Berger at No. 2 position. In protective coatings, Berger is the leader. In automotive and GI space, Berger is number 3 behind Kansai and APL. Berger has international operations in Russia, Nepal and Bolix SA of Poland. Berger also has a tie up with Becker of Sweden. In 2013, the company acquired the decorative business of Sherwin Williams. Recently it has tied up with Nippon to strengthen its presence in automotives segment.

Investment Theme The paints industry is expected to post robust volume growth led by strong repainting demand and from construction. Growth in the repainting segment, accounting for about 90% of decorative demand, is on account of good demand in rural and small towns. Further, expected growth in construction activity over the next five years creates opportunity for fresh painting. Berger Paints is expected to post robust growth with focus on premiumisation, brand equity and increasing distribution muscle, continued slowdown in real estate and auto segments can act as barrier.

Key Risks Slowdown: A slowdown in the economy is the biggest risk for the paints industry, as about 80‐85% of demand for decorative paints arises from repainting, which in turn, depends heavily on the country’s economic conditions.

Raw material prices: Rise in crude oil prices and rupee depreciation could hurt the company’s margins as crude derivatives account for majority of its input costs.

Industrial slowdown: High competition in industrial business, particularly from foreign players like PPG, Nippon Paints, Akzo Nobel and BASF, impacts pricing power of the business.

New initiatives: Berger may face challenge in standardising its Express Painting service when it launches it pan India (also highlighted by the leader).

7 Edelweiss Securities Limited Consumer Goods

Financial Statements Key Assumptions Income statement (INR mn) Year to March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E Macro Net revenue 42,231 45,523 52,882 63,365 GDP(Y‐o‐Y %) 7.2 6.5 7.1 7.7 Materials costs 24,702 25,923 30,574 36,063 Inflation (Avg) 4.9 4.5 4.0 4.5 Freight, Octroi and Delivery 2,969 2,937 3,324 3,868 Repo rate (exit rate) 6.8 6.3 5.8 5.8 Power and fuel 428 412 478 574 USD/INR (Avg) 65.0 67.5 66.0 66.0 Employee costs 2,735 3,067 3,411 4,019 Company Other Expenses 3,050 3,886 4,436 5,200 Sales assumptions Ad. & sales costs 1,899 2,111 2,411 2,889 Volume growth‐standalone 11.0 10.0 12.0 16.0 EBITDA 6,447 7,186 8,247 10,753 Price change‐standalone (2.3) (3.0) 4.0 4.0 Depreciation 987 1,081 1,209 1,284 Subsidiary sales growth (2.7) 17.9 20.0 18.0 EBIT 5,461 6,105 7,038 9,468 Cost assumptions Add: Other income 346.8 545.4 650.00 680.00 Excise (% grs sale stn) 9.8 10.6 10.5 10.5 Less: Interest Expense 273 162 200 165 COGS as % of sales (Con) 55.5 56.9 57.8 56.9 Profit Before Tax 5,535 6,488 7,488 9,983 COGS as % of sales (std) 55.4 57.8 58.5 57.5 Less: Provision for Tax 1,886 2,294 2,471 3,294 Staff cost (% of sales) 6.1 6.7 6.4 6.3 Associate profit share 57 101 ‐ ‐ Std Staff cost (% sales) 4.9 5.5 5.4 5.3 Reported Profit 3,706 4,737 5,017 6,689 Con A&P (% of sales) 6.9 4.6 4.6 4.6 Exceptional Items ‐ 442 ‐ ‐ Dom A&P (% of sales) 7.1 4.6 4.5 4.5 Adjusted Profit 3,706 4,295 5,017 6,689 Financial assumptions 2 3 3 3 Shares o /s (mn) 971 971 971 971 Tax rate (Consol) 34.1 33.1 33.0 33.0 Adjusted Basic EPS 3.8 4.4 5.2 6.9 Capex (INR mn) 1,324 2,200 1,500 1,500 Diluted shares o/s (mn) 971 971 971 971 Debtor days 44 45 45 45 Adjusted Diluted EPS 3.8 4.4 5.2 6.9 Inventory days 105 125 110 110 Adjusted Cash EPS 4.8 5.5 6.4 8.2 Payable days 89 105 100 95 Dividend per share (DPS) 1.2 1.7 1.8 2.4 Cash conversion cycle 60 65 55 60 Dividend Payout Ratio(%) 37.2 35.0 35.0 35.0 Dep. (% gross block) 6.5 6.3 6.4 6.3 Tax rate (%) 34.1 33.1 33.0 33.0 Dividend payout 37.2 35.0 35.0 35.0 Common size metrics Year to March FY16 FY17 FY18E FY19E Materials costs 58.5 56.9 57.8 56.9 Staff costs 6.5 6.7 6.4 6.3 Ad. & sales costs 4.5 4.6 4.6 4.6 Freight and Forwarding 7 6 6 6 Other expenses 7.2 8.5 8.4 8.2 Depreciation 2.3 2.4 2.3 2.0 Interest Expense 0.6 0.4 0.4 0.3 EBITDA margins 15.3 15.8 15.6 17.0 EBIT margins 12.9 13.4 13.3 14.9 Net Profit margins 8.8 9.4 9.5 10.6

Growth ratios (%) Year to March FY16 FY17 FY18E FY19E Revenues 7.2 7.8 16.2 19.8 EBITDA 28.3 11.4 14.8 30.4 PBT 38.8 17.2 15.4 33.3 Adjusted Profit 39.7 15.9 16.8 33.3 EPS 40 0 15 9 16 8 33 3

8 Edelweiss Securities Limited Berger Paints

Balance sheet (INR mn) Cash flow metrics As on 31st March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E Share capital 694 694 694 694 Operating cash flow 5,982 4,754 5,451 5,522 Reserves & Surplus 14,098 16,372 18,780 21,990 Investing cash flow (2,572) (1,682) (1,000) (820) Shareholders' funds 14,792 17,065 19,473 22,684 Financing cash flow (3,724) (3,225) (3,309) (4,143) Minority Interest ‐ (101) (101) (101) Net cash Flow (314) (153) 1,142 558 Total Borrowings 3,710 3,110 2,610 2,110 Capex (1,324) (2,200) (1,500) (1,500) Long Term Liabilities 144 144 144 144 Dividend paid (1,377) (2,463) (2,609) (3,478) Def. Tax Liability (net) 687 687 687 687 Sources of funds 19,333 20,906 22,814 25,524 Profitability and efficiency ratios Gross Block 15,938 18,138 19,638 21,138 Year to March FY16 FY17 FY18E FY19E Net Block 7,799 8,919 9,210 9,425 ROAE (%) 27.1 27.0 27.5 31.7 Capital work in progress 623 650 800 800 ROACE (%) 31.2 34.5 36.6 43.5 Intangible Assets 1,964 1,964 1,964 1,964 Inventory Days 105 125 110 110 Total Fixed Assets 10,387 11,533 11,974 12,190 Debtors Days 44 45 45 45 Cash and Equivalents 4,086 3,934 5,076 5,634 Payable Days 89 105 100 95 Inventories 7,582 8,878 9,214 10,868 Cash Conversion Cycle 60 65 55 60 Sundry Debtors 5,806 5,612 6,520 7,812 Current Ratio 1.9 1.9 2.0 2.1 Loans & Advances 1,202 1,202 1,202 1,202 Adjusted Debt/Equity 0.3 0.2 0.1 0.1 Other Current Assets 128 128 128 128 Net Debt/Equity ‐ ‐ (0.1) (0.2) Current Assets (ex cash) 14,718 15,820 17,064 20,011 Interest Coverage Ratio 20.0 37.6 35.2 57.3 Trade payable 6,934 7,457 8,376 9,386 Other Current Liab 2,924 2,924 2,924 2,924 Operating ratios Total Current Liab 9,859 10,382 11,301 12,310 Year to March FY16 FY17 FY18E FY19E Net Curr Assets‐ex cash 4,860 5,439 5,763 7,700 Total Asset Turnover 2.2 2.3 2.4 2.6 Uses of funds 19,333 20,906 22,814 25,524 Fixed Asset Turnover 1.1 1.1 1.2 1.4 BVPS (INR) 15.2 17.6 20.1 23.4 Equity Turnover 3.1 2.9 2.9 3.0

Free cash flow (INR mn) Valuation parameters Year to March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E Reported Profit 3,706 4,737 5,017 6,689 Adj. Diluted EPS (INR) 3.8 4.4 5.2 6.9 Add: Depreciation 987 1,081 1,209 1,284 Y‐o‐Y growth (%) 40.0 15.9 16.8 33.3 Interest (Net of Tax) 180 109 134 111 Adjusted Cash EPS (INR) 4.8 5.5 6.4 8.2 Others (101) (592) (584) (625) Diluted P/E (x) 65.2 56.3 48.2 36.1 Gross cash flow 4,771 5,333 5,776 7,458 P/B (x) 16.3 14.2 12.4 10.7 Less: Changes in WC (1,211) 579 325 1,937 EV / Sales (x) 5.7 5.3 4.5 3.8 Operating cash flow 5,982 4,754 5,451 5,522 EV / EBITDA (x) 37.4 33.5 29.0 22.1 Less: Capex (1,324) (2,200) (1,500) (1,500) Dividend Yield (%) 0.5 0.7 0.7 1.0 Free Cash Flow 4,658 2,554 3,951 4,022

Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E Berger Paints 3,789 48.2 36.1 29.0 22.1 27.5 31.7 Asian Paints 17,283 52.8 41.4 34.1 26.7 24.4 27.4 Colgate 4,569 42.6 36.4 26.8 22.7 52.8 52.7 Hindustan Unilever 40,243 49.6 41.6 33.9 28.3 73.6 80.8 ITC 53,342 29.3 25.8 19.2 16.9 28.9 29.6 Pidilite Industries 6,537 45.6 37.0 30.7 24.7 24.9 26.1 Median ‐ 46.9 36.7 29.8 23.7 28.2 30.7 AVERAGE ‐ 44.7 36.4 28.9 23.6 38.7 41.4 Source: Edelweiss research

9 Edelweiss Securities Limited Consumer Goods

Additional Data Directors Data Mr. Kuldip Singh Dhingra Non‐Executive Chairman Mr. Gurbachan Singh Dhingra Non‐Executive Vice Chairman Mr. Abhijit Roy M.D & CEO Mrs. Rishma Kaur Additional Director Mr. Kanwardip Singh Dhingra Additional Director Mr. Gopal Krishna Pillai Non Executive Independent Director Mr. Dhirendra Swarup Non Executive Independent Director Mr. Pulak Chandan Prasad Non Executive Independent Director Mr. Naresh Gujral Non Executive Independent Director Mr. Kamal Ranjan Das Non Executive Independent Director

Auditors ‐ S.R. Batliboi & Co. *as per last annual report

Top 10 holdings Perc. Holding Perc. Holding Nalanda India Fund 5.23 Wasatch Advisors Inc 0.94 Vanguard Group Inc 0.65 Dimensional Fund Advisors LP 0.51 Templeton Asset Mgmt 0.41 Royal Bank Of Scotland 0.31 Birla Sun Life Asset Management 0.29 Matthews International Capital 0.25 California Public Emp ‐ Calpers 0.23 Axis Asset Management Co 0.16 *as per last available data

Bulk Deals Data Acquired / Seller B/S Qty Traded Price 28 Mar 2017 Ksd Family Trust Sell 6500000 232.00 28 Mar 2017 U K Paints India Pvt Ltd Buy 13000000 232.00 28 Mar 2017 Gbs Dhingra Family Trust Sell 6500000 232.00

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 30 Mar 2017 GBS Family Trust Sell 6500000.00 30 Mar 2017 UK Paints India Pvt. Ltd. Buy 13000000.00 30 Mar 2017 KSD Family Trust Sell 6500000.00 02 Jan 2017 UK Paints India Pvt. Ltd. Buy 1000000.00 02 Jan 2017 Kuldip Singh Dhingra Sell 500000.00

*in last one year

10 Edelweiss Securities Limited RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk Asian Paints BUY SO M Bajaj Corp HOLD SU H Berger Paints BUY SO L Britannia Industries BUY SO L Colgate HOLD SP M Dabur BUY SO M Emami BUY SO H GlaxoSmithKline Consumer HOLD SU M Healthcare Godrej Consumer BUY SO H Hindustan Unilever HOLD SP L ITC HOLD SP M Marico BUY SO M Nestle Ltd HOLD SP L Pidilite Industries BUY SO M United Spirits HOLD SP H

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

11 Edelweiss Securities Limited Consumer Goods

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91‐22) 4009 4400, Email: [email protected]

Aditya Narain

Head of Research

[email protected]

Coverage group(s) of stocks by primary analyst(s): Consumer Goods Asian Paints, Bajaj Corp, Berger Paints, Britannia Industries, Colgate, Dabur, Godrej Consumer, Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries, GlaxoSmithKline Consumer Healthcare, United Spirits

Recent Research Date Company Title Price (INR) Recos

04‐Aug‐17 Dabur Minor blip; innovation fuelled 307 Buy India growth ahead; Result Update 03‐Aug‐17 Colgate Decent show despite GST; 1,083 Hold Palmolive share gains to be gradual; Result Update 03‐Aug‐17 Emami Dismal quarter, 1,105 Buy outperformance ahead ; Result Update

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12‐month period * 1stocks under review Hold appreciate up to 15% over a 12‐month period > 50bn Between 10bn and 50 bn < 10bn

Reduce depreciate more than 5% over a 12‐month period Market Cap (INR) 156 62 11

One year price chart

300

270

240

(INR) 210

180

150 17 16 17 17 17 16 16 17 17 17 16 16 16 16 16 17 17 17 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jul Jan Jun Oct Oct Apr Sep Feb Dec Dec Aug Aug Nov Mar Mar May May Berger Paints

12 Edelweiss Securities Limited Berger Paints

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13 Edelweiss Securities Limited Consumer Goods

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14 Edelweiss Securities Limited Berger Paints

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