On the road Discovering India PhillipCapital (India) Pvt. Ltd. FMCG: Sector Update 8 November 2012
We undertook a retailer survey covering 10 states, 26 cities meeting 45 Companies Covered distributors and more than 200 retailers across the country to gauge the consumption trends and category changes. Our key findings are as follows: ITC CMP Rs289 Long‐term growth trends intact; Near term sluggishness not very pronounced: Reco Sell Most retailers in UP, Bihar, Western Maharashtra and Northern Karnataka Target Price Rs260 indicated that the market had been sluggish in Q2FY13 but we also witnessed that the primary long‐term trends of rising consumerism, uptrading and rise of Hindustan Unilever CMP Rs532 modern trade have continued to remain robust. Reco Neutral Cigarettes seeing a massive overhaul‐ Big time volume strategy in the making: Target Price Rs500
We witnessed 13 new product launches in the 64mm segment which included 6 Nestle new products by ITC, 5 new products by Godfrey Philips India (GPI) and one each CMP Rs4883 by VST Industries and Golden Tobacco Company. We also noted that Godfrey Reco Neutral Philips India (GPI) has taken an aggressive stance in the 64mm category with Target Price Rs4815 extensive launches across states and advertising at Point of Sales. Godrej Consumer Festival season seeing positive traction: The FMCG retailers and distributors in CMP Rs695 our survey indicated that the month of October has seen pickup in trade activity Reco Neutral Target Price Rs655 and the trend is likely to sustain with the improving market sentiment. Limited impact of the deficient monsoon: The monsoon season for the year Colgate CMP Rs1308 started off in an erratic manner and has been deficient in certain parts of the Reco Neutral country. We visited retailers and distributors in monsoon deficient parts of Target Price Rs1215 Maharashtra and Karnataka. The channel partners in these regions indicated that volumes have declined by 10% YoY on account of deficient monsoons. The Marico other parts of India in our survey did not indicate any significant impact of late or CMP Rs206 Reco Neutral deficient monsoons. Target Price Rs191 Stock Specifics: GSK Consumer ITC: Volume growth has largely been flat but volumes are severely affected in UP CMP Rs3040 after the government raised VAT to 50%. Introduction of 64mm products in Reco Buy Target Price Rs3430 select markets continues to see traction while competitive intensity for the segment is rising. We maintain our Sell recommendation on the stock. Agrotech Foods CMP Rs421 HUL: We saw strong traction for Hindustan Unilever in the detergents business Reco Buy while the company continues to witness rising competitive intensity in personal Target Price Rs510 care. The distribution model of HUL with Zero Day Inventory is receiving strong positive reviews. We believe HUL will continue to outperform on the operational front but considering the expensive valuations we maintain our Neutral stance.
Nestle: We have received strong positive vibes about Nestle and believe that the volume growth is likely to see positive traction on account of lower base and improving market sentiment. With the recent stock run up, we estimate that these positives are being priced in, we maintain our NEUTRAL recommendation.
Marico: We have noted that the on‐road response for the acquired Paras Naveen Kulkarni (+ 9122 6667 9947) Deodorants has not been particularly inspiring. We also note the space is [email protected] crowded but continues to grow at rapid pace. We await Marico’s strategy to Ennette Fernandes (+ 9122 6667 9764) gather traction in the personal care space. [email protected]
8 November 2012 / INDIA EQUITY RESEARCH / FMCG SECTOR UPDATE
Table of Contents
10 states, 2500km – What a Journey! ...... 3 Long‐term trend intact; near term sluggishness not very pronounced...... 4 Signs of rising consumerism evidently witnessed in Tier 2 cities ...... 6 Star in the making – Starbucks opens its first outlet in Mumbai as crowds queue up for a cup of coffee ...... 10 Synopsis of findings state‐wise...... 11 Channel Partner Interviews ...... 13 Retailers feeling the heat from Modern Trade in Kerala and TN...... 28 Paint Sector – Dealers distressed over competition and lower margins offered by Asian Paints...... 31 Deodorants category is spraying up, but where are Set Wet and Zatak? ...... 33 India waking up: Breakfast cereals provide new growth avenues for the persistent...... 35 Certain regional brands found to be competitive in the FMCG sector...... 36 Cigarettes category lighting up...... 37 ITC exhibits clear focus on Cigarette volume with 64 mm launch under all the mainstay brands...... 38 Godfrey Phillips takes an aggressive stance in 64 mm cigarette segment to corner higher shelf space ...... 51 VST Industries 64 mm non filter pricing the most aggressive amongst the product launches in the 64 mm category ...... 57 Golden Tobacco launches 64 mm in the Panama brand to remain competitive ...... 58 Smoke‐less Tobacco category chewing into Cigarettes...... 59 64 mm can dent the Contraband cigarette market: But growth will be protracted ...... 62 Key Conclusions ...... 64
COMPANIES COVERED ITC...... 65 Hindustan Unilever ...... 67 Nestle...... 69 Godrej Consumer...... 71 Colgate...... 73 Marico...... 75 GSK Consumer ...... 77 Agrotech Foods...... 79
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10 states, 2500km – What a Journey!
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Long‐term trend intact; near term sluggishness not very pronounced
In our survey with more than 200 retailers, Wholesalers and distributors we witnessed certain key short term trends and long term trrends.
Short term trends Market in North India, Maharashtra Most retailers in the northern part of India, Maharashtra and northern Karnataka and North Karnataks has been sluggish indicated that the market had been sluggish in the June to September quarter but did in the last three months but not guided not sound concerned about the future growth prospects. Hence, we believe that the to be pronounced in the near term slow down to certain extent is seasonal and not very pronounced.
Volume de‐growth in Western Maharashtra and Northen Karnataka was pronounced on account of deficient rains.
Demand revival was being witnessed from the first week of October in Northern India.
Long term trends While the retailers indicated that they were witnessing some slowdown on account of Identified three long terms trends for seasonality and certain macro‐economic headwinds like deficient rains in certain areas; the Indian FMCG sector – Uptrading, we generally observed that the long‐term growth trends continue to be robust. We Consumerism and Rise in Modern Trade. gauge this by the increasing penetration of personal care and branded foods in tier 2 and tier 3 cities which are seeing sharp uptake of products.
We find the larger themes and trends continued to be resilient. The key trends were:
Rising consumerism: We observed that consumer basket has significantly expanded over the years. We noted the increasing penetration of certain products which clearly indicate the trends of rising consumerism.
Rising consumerism driving expansion Breakfast cereal: of consumer’s purchase basket. We saw significant penetration of branded breakfast cereals in Tier 2 and Tier 3 cities. Identifiable categories of interest – Breakfast Cereals, Snacks, Personal Care We noted the penetration of oats has significantly increased with brands like Quaker, with conditioners and Men’s grooming. Kelloggs and Saffola enjoying high levels of penetration.
Snacks: Snacking as a category is seeing sharp ascendance with more shelves being created for snacking products.
Personal care: Distributors reported sharp growth in certain personal care products like face wash. Consumers are consistently trying out new products in personal care which included conditioner shampoos, Male grooming products and new variants in deodorants.
Up‐trading trends continue: The retailers and distributors in our survey indicated strong up‐trading trends. Some of the key up‐trading trends indicated by the retailers were:
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Upgrade from detergent bars to detergent powders: Traction in the detergent segment Retailers and distributors in our survey indicated that detergent powders were growing driven by uptrading in deteregent bars significantly faster than detergent bars and detergent cakes. Further to this retailers also to powders and from local detergent indicated that premium detergents by multinational companies were growing powders to branded products of HUL significantly faster than regional detergent brands. and P&G Sharp growth in premium soaps and shampoos: The retailers and distributors in our survey indicated that the premium range of soaps and Shampoos and in particular Dove soaps and shampoos have continued to grow at sharp pace.
Up‐trade to Ponds from Fair and Lovely: A significant number of retailers in our survey indicated that he was noticing consumers up‐trading to Ponds range of products from Fair and Lovely. Traction observed in premium Personal
Wash and personal Product categories – Shampoo, Skin Cream, Sensitive toothpaste Rise of Modern trade: The ascendance of consumerism is forcing retailers to align their stores along the lines of modern trade with a higher number of SKUs. In our survey of south India it was particularly noted that retailers are resorting to an asset light model or aligning on the lines of modern trade to combat the rising consumerism and the preference for modern trade.
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Signs of rising consumerism evidently witnessed in Tier 2 cities
Mc Donald’s outlet in Kolhapur is said to be the company’s largest outlet in Asia.
Source: PhillipCapital India Research
Frequent footfalls by the locals primarily the youth were observed.
Mc Donald’s outlet in Kolhapur has a drive thru facility and play area. It is open 24 hours as highlighted on the signage.
The interiors are well designed with ample floor space for sit in’s. Special focus on advertisements directed on the youth was observed.
Source: PhillipCapital India Research
Outlet is located on the outskirts of the We visited the 24x7 highway McDonald’s of Kolhapur which was touted by the locals as city. However footfalls from local the largest McDonald’s outlet in Asia. population are significant. We were really surprised by the number of local walk‐ins in the outlet even though the outlet is located on the outskirts of the city. We witnessed a significant number of customers were local youths at the outlet. Our interactions with the locals indicated that the outlet consistently sees high number of walk‐ins with local population being a significant proportion.
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Dominos Pizza outlet in Kolhapur
Advertisement of the newly launched taco range at Domino’s alone outlet in Kolhapur
Healthy footfalls observed during lunch hours for dine in and delivery format.
Source: PhillipCapital India Research
We visited Domino’s Pizza’s single outlet in Kolhapur city. We visited the store during the lunch hours and observed healthy footfalls for sit in. Sales under the main delivery format also came across as healthy. Currently competitor Yum brands’ Pizza Hut does not have presence in Kolhapur city
Outdoor Advertisement of Gold Gym’s in the Tier 2 city of Kolhapur Presence of the premium Gold Gym facility in Kolhapur is sign of rising consumerism with high aspirational values noticeable among the youth
Promotional offer indicates the degree of competitive intensity among players even in smaller cities
Source: PhillipCapital India Research
We observed a large outdoor advertisement of the premium fitness and health player Gold Gym in Kolhapur. Gold Gym’s presence is indicative of rising consumerism in Tier 2 cities primarily led by the target consumer base of youth. The promotional offer illustrates that the industry is aggressively competitive even in the smaller cities.
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OOH of HUL’s product innovation in Fair & Lovely in Kolhapur OOH of Santoor soap brand in Karnataka
Source: PhillipCapital India Research
We observed a large outdoor advertisement of HUL’s product On our road trip in Karnataka, we noticed large OOH of Wipro’s innovation in the Fair & Lovely brand which is the launch of the Santoor brand. We estimate that media intensity in the future tube. Rs. 10 price point being one of the fastest selling in Personal wash category is increasing. Focus on increase in the consumer sector, the promotional offer will generate market share or maintenance of market share is gaining consumer trials for the product. The clear focus is on prominence for the incumbents. leveraging on the uptrading cycle in smaller cities and drive volume growth.
Olive oil and imported chocolates available in a local supermarket in the Tier 2 city of Coimbatore
In our visit to a local supermarket in the Tier 2 city of Coimbatore we were surprised to find the occupancy of shelf space by olive oil and imported chocolates. The retailer stated that because consumers walk in at certain times enquiring for such products he decided to store the same. This is a clear indication of uptrading and rising consumer awareness
Source: PhillipCapital India Research
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Premium priced Choco pie products find shelf space across states
Coimbatore – Tamil Nadu Hubli – Karnataka During our road trip the market presence of the brand Lotte Choco Pie was a revelation. Across states and irrespective of the size of the town the brand has managed to gather shelf space. The brand is premium priced and is said to be popular among children. The combination of chocolate + biscuit + marshmallow is the main USP of the product.
Faizabad ‐ Uttar Pradesh Vadodara ‐ Gujarat
Source: PhillipCapital India Research
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Star in the making – Starbucks opens its first outlet in Mumbai as crowds queue up for a cup of coffee
Significant footfalls at Starbucks outlet (Fort) observed in the Consumers willing to wait 30 minutes just to place the order noon
Resplendent interiors with specific emphasis on Starbucks’ USP Second floor of the outlet has ample seating space of Coffee. Below is the coffee station to collect the order from
Starbucks signature logo
Source: PhillipCapital India Research
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Synopsis of state‐wise findings
Synopsis of the route of UP east and Bihar We visited the markets of Lucknow, Faizabad, Gorakhpur, Hajipur and Patna. We note that Lucknow and Gorakhpur are feeder towns having wholesale mandis (markets) catering to the rural markets in the nearby region. Our key findings and observations were: • Most retailers indicated that they had observed a slowdown in the last three months. • Distributors indicated that certain discretionary products were seeing slowdown. • In eastern UP retailers also indicated that they were seeing revival in demand from the 1st week of October. • HUL’s detergents are outperforming the market and local detergents. • Colgate’s initiatives in modern trade are seeing robust revenue growth. • Nestle’s products continue to see strong traction. • Poor shelf space occupation by Marico’s deodorants SetWet and Zatak. • Demand for premium undergarments (women) is significant but supply of the products was poor.
Synopsis of the route of Paschim Maharashtra and North Karnataka We visited the towns of Satara, Karad, Kolhapur in Paschim Maharashtra and Belgaum, Dharwad and Hubli in North Karnataka. We note that Karad and Kolhapur are feeder towns of Paschim Maharashtra and Hubli is the feeder town in North Karnataka. Our key findings and observations were: • Distributors in these rain deficient regions indicated that volumes had de‐grown by ~10% YoY. • HUL’s detergents have outperformed both regional and P&G products by a significant margin. • Market in Northern Karnataka seemed more sluggish than Paschim Maharashtra. • Penetration of Modern trade in North Karnataka has increased manifold in the last 3 years.
Synopsis of the route of Kerala to Tamil Nadu We visited the towns of Cochin, Thrissur and Palakkad in Kerala and Coimbatore, Salem and Chennai in Tamil Nadu. Our key findings and observations are: • Observed significant number of kirana stores reporting negative impact on business by increase in Modern Trade market presence. • Channel partners across FMCG companies indicated sales growth is largely intact. • Organised chained pharmacy ‐ Med Plus, Apollo Pharma emerging as important distribution channels for FMCG Health based food products – Infant Food, MFD and Personal Care categories. • South Indian women visibly emulating consumption habits of North Indian women by significantly increasing spends on branded Personal Care products • Typical product stickiness trait prevalent among South Indian consumers is found to be diluted among the generation X, as the youth is ready to experiment with new products.
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Synopsis of the route of Gujarat We visited the markets of Dahod, Jhalot (rural Dahod), Anand and Vadodara. We note that the Dahod and Jhalot are rural centric markets while Anand and Vadodara are urban. Our key findings and observations were: • Most retailers indicated that market trends are positive. • The market is seeing acceptance of premium products (Livon) and new categories (Pet food) • In Jhalot (rural market), weaker brands such as Dyna (Anchor) are losing out
Synopsis of the route of Rajasthan We visited the markets of Alwar, Dausa and Jaipur. We note that the Dausa is a rural centric market while Alwar and Jaipur are urban markets. Our key findings and observations were: • Consumption growth remains strong, however, inflation has resulted in certain local products viz. Oswal Soap, ViJohn etc becoming more popular. Retailers too are happy promoting local brands as commissions are higher • However, distributor feedback indicates that RIN Supreme continues to do well • Bajaj Almond is growing at the cost of Dabur Amla, which is losing out shelf space
Synopsis of the route of Delhi‐Haryana We visited the markets of Delhi, Faridabad and Ballabgarh. Faridabad and Ballabgarh is located in Haryana near the NCR region. Our key findings and observations were: • There is some lull in consumption in the market leading to a decline in volumes. Price increases have however offset the volume decline. • Here too retailer feedback indicated that Bajaj Almond is growing at the cost of Dabur Amla. • P&G and HUL brands are doing well.
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Channel Partner Interviews
Retailer in Faizabad market – Uttar Pradesh
Source: PhillipCapital India Research
Dedicated shelf space to Personal Care products in small towns. Visiblity of products is prominent in the store layout.
For picture on the right: Large display counter placed by P&G for the men’s shaving brand Gillette. Even premium variants of Gillette part of the display.
Sales has been slower in the last 2 Retailer name: Shree Ram months Location: Faizabad
Detergents category growth is robust Key retailer comments and Observations: led by HUL brands and RSPL’s Ghari • Sales have been slower in the last 2 months. detergent • HUL detergents performing very well. Regional brand Ghari also performing well. Sensitive segment in toothpaste • Colgate sensitive getting push from the company and the product continues to gain category continues to gain traction. market traction. • Promotional schemes on Maggi witnessed good traction. Improvement in Maggi brand growth • Outlet with very limited shelf space has inventory of conditioners and breakfast enabled by promotional schemes cereals like oats.
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Retailer in Faizabad – Uttar Pradesh
Source: PhillipCapital India Research
Large display for Snack Foods observed in Uttar Pradesh primarily for Frito Lay products – Kurkure, Lays and Uncle Chips. Uncle Chips brand found to be popular.
For picture on the left: Kinder Joy chocolate expands distribution network to small towns (Tier 4) like Faizabad and finds sufficient shelf space.
Market has been dull but market Retailer name: New Saraswati Provision stores volatility has also increased in the Location: Faizabad recent past. Key comments and Observations: Significant growth reported in HUL’s • Market has been dull but the market has also become more volatile in the recent detergent brands and Dove Shampoo past. • HUL detergents see significant demand growth. Kama Sutra and Park Avenue • Dove shampoos see significant growth. deodorants sales driven by pull based • Quaker and Kelloggs oats both brands available at the store but not Saffola oats. demand factors • Deodorants occupy significant shelf space. Park Avenue and Kama Sutra deodorants sell by pull based factors.
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Retail outlet in Gorakhpur (UP) ‐ Aggressive in store Significant shelf space occupied by Pampers brand Advertisements by various brands
Source: PhillipCapital India Research
Colgate (below) and relaunched Dabur Vatika shampoo ads
For picture above: Premium green tea under the brand Organic India found in Tier 3 city – Gorakhpur.
For picture on right: Branded Walnut kernels under the brand Ambrosia (250 gm SKU for Rs. 250) finds store presence.
Krafts brand Tang gathers shelf space enabled by Cadbury’s domestic distribution presence.
Source: PhillipCapital India Research Retailer name: Milan Provision stores Consumers are holding back on spends. Location: Gorakhpur Market is sluggish in recent months.
Key retailer comments and Observations: Head & Shoulders sale has slowed • Market has been sluggish in the recent months. Consumers seem to be holding back down. Pantene is a top selling shampoo. their spending. • Robust growth reported in branded HUL detergents are doing very well. cornflakes. • Marico products are perceived to be expensive on a relative basis. • Branded cornflakes sales growth has been robust Marico products perceived to be • Significant shelf space dedicated for deodorants. expensive on relative basis • Sunsilk and Pantene are top selling shampoos but Head and Shoulders has slowed down.
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Dedicated Personal care outlet in Gorakhpur (Uttar Pradesh)
For picture on right: Sanitary napkins witness robust consumer demand in Tier 3 cities, visible signs of uptrading.
For picture below: Found Premium ayurvedic based Personal Care products under the Aromaz brand.
Source: PhillipCapital India Research
Store Sales have been stable. Lakme, Retailer name: Real Shringar Palace Garnier, L’oreal and Shahnaz Hussain Location: Gorakhpur are the top selling brands. Key retailer comments and observation Denver and Fogg deodorants are • Sales has been stable witnessing robust growth. • Lakme, Garnier, L’Oreal and Shahnaz Hussain products are the top selling products. • Dove is seeing good traction but Head and Shoulders has been slow. Robust growth reported in Dove • Deodorants are fast moving. Denver and Fogg are gaining traction. shampoo. Head & Shoulders growth has • slowed down. Himalaya, Garnier and Lakme facewash are seeing robust growth.
Market has been slow. Retailer name: Suhag Bhavan Location: Gorakhpur
In Personal Care category, HUL products Key retailer comments and observation are performing better than P&G. • Market has been slow • Lakme’s colour cosmetic products have significant brand pull. • HUL is doing better than P&G in personal care products • Demand for high quality under garments is very high. Distribution reach of these Lakme’s Colour cosmetics have products is very inadequate. significant demand pull. • L’Oreal outperforming Godrej hair colour products.
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Retailer in Kolhapur (Maharashtra) ‐ Noticeably fine interiors for a retail shop Interiors provide ample space to stock branded goods and staples.
Shampoo brands continue to receive push by companies with retailer and consumer schemes.
Set Wet brand deodorant performance is sluggish.
Godrej No. 1 soap brand is performing Source: PhillipCapital India Research well. Oats category growth is slow but stable Retailer in Kolhapur
In‐store shelf space promotion observed for ITC’s Dark Fantasy brand and HUL’s Brooke Bond Red Label Tea brand.
Dove brand – Shampoo and soap is registering robust growth.
Source: PhillipCapital India Research
Retailer name: Jaganath Super Market Location: Kolhapur
Key retailer comments and observation • Shampoos continue to get a push by the companies with retailer and consumer schemes • HUL detergents registering robust growth. • Dove shampoos and soaps registering healthy growth. Dr. Salt – premium priced low sodium salt • Set Wet not doing well. brand popular in Kolhapur. • Godrej No. 1 performing strongly • Oats sales slow but stable.
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Retailer in Cochin (Kerala) – Rs. 10 brands – Vivel, Godrej No. 1 Promotional scheme on Colgate’s main variant Strong Teeth find enquiries from price conscious consumers driving healthy volume growth
ITC’s Dark Fantasy captures shelf space Sun Plus brand resembling HUL’s popular Sunlight detergent brand
Source: PhillipCapital India Research Name of retailer: Kerala State Civil Supplies Corporation Volume growth has decelerated on YoY Location: Cochin basis. Consumers are getting price conscious. Key takeaways: • Volume growth in H1FY13 is lower on a YoY basis. Probability of downtrading in the HUL and ITC, have filled shelf space with near term as consumer’s get price conscious 6 months worth stock. • Certain companies have filled the shelf space with 6 months worth of stock namely Hindustan Unilever and ITC. • Robust growth in Branded Foods namely GSKConsumer’s MFD brand ‐ Horlicks Retailer has added new categories like • Colgate’s sales growth has been healthy. Growth supported by promotional offers Oats and premium biscuits recently. on the main variant Colgate Strong Teeth. • In Soaps; Pears and Medimix are the top selling brands. Vivel and Godrej No. 1 demand primarily due to Rs. 10 price point and promotional offers such as Buy 3 get 1 free Robust growth trends in Colgate • The retailer had increased the size of the shop to increase availability of brands and toothpaste led by promotional schemes increase number of categories. For ex: Sunfeast Dark Fantasy was the only biscuit and main variant Strong Teeth. brand available. Marico Oats is a recent addition.
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Retailer in Thrissur (Kerala)
Dairy whitener brands from Amul and Nestle present
Business growth has decreased by 10% on a YoY basis. Product price hikes is impacting consumer sentiment.
Retailer had to adopt an asset light business model due to pressure on sales from Modern Trade. Source: PhillipCapital India Research
Advertisement for new packaging in Wills Navy Cut – 74 mm Stocked only Clinic Plus sachets in the shampoo category. Location: Thrissur
Key takeaways: • Business growth has decreased by 10 % on a YoY basis. Hike in product prices has GCPL’s Household Insecticide product contributed to the slowdown in consumption. portfolio maintains strong growth • In soaps Pears and Lux are the popular brands. Sunlight brand leads in detergent momentum. category. Detergent bar sales continue to outperform the detergent powder sales. • GCPL has captured adequate shelf space for Household Insecticide portfolio with healthy brand performance. Although in Q2FY13 Hit aerosol brand sales were slow due to unfavourable monsoon season of lower rains. • In sachets – Ariel brand outperforms in detergent category. The retailer stored only Hair Colour powder is the main format Clinic Plus sachets in the shampoo category. of usage. Godrej Expert powder brand • The fastest selling brand in hair oil is Parachute Rs. 6 SKU. growth is robust. • Hair Colour category in the town is dominated by powder format. Godrej Expert powder hair dye has reported good growth. • In toothpaste – Colgate brand growth continues to outperform peers. • In liquid dish wash category, HUL’s Vim brand growth is higher than that of Jyothy’s Pril brand. Overall too the Pril brand growth rate is average. In liquid dishwash, HUL’s Vim brand • We observed shelf space for dairy whitener brands ‐ Amulya (Amul) and Nestle, sales exceed Jyothy’s Pril brand. Henko Matic detergent washing powder and women sanitary napkins under Whisper brand in this small retail outlet.
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Retailer in Palakkad (Kerala) – 75% of store sales from sachet Low shelf space for branded snack foods in Kerala due to strong preference for local snacks – ex: banana chips
Source: PhillipCapital India Research
Purchases stock for Toilet soap and Biscuit category from Modern Trade Location: Palakkad (Big Bazaar) on account of relatively better product schemes. Key takeaways: • Business growth has not particularly slowed down, however sales in the past few weeks are getting slower. Consumers are turning price conscious ITC’s Personal Wash brands have • The retailer purchases his stock for Biscuit and Soap category from Modern Trade on acquired shelf space but growth is account of better product schemes relative to what is offered by the distributor. muted. • In Toilet soaps, HUL brand growth healthy led by Pears. ITC’s Fiama Di Wills (men) and Vivel (Luxury Crème) have acquired shelf space but demand has been muted. • In Detergents, HUL’s Sunlight is the dominant brand in powder and bar. P&G is creating presence with Ariel and Tide sachets which are being well received. Ariel and Tide detergent sachets are being received well by consumers. • Horlicks sachets sales continue to be higher than bottled SKU’s. • In Skin Care, Fair & Lovely brand dominance has sustained although competitive intensity has been on an increase from Loreal’s Garnier and ITC’s Vivel • In Mosquito coil GCPL’s Good Knight brand growth has been healthy. Jyothy’s Maxo Fair & Lovely has not lost market share coil brand sales have been poor. to Garnier and Vivel. • In Noodles Nestle continues to lead category growth. Consumer demand for ITC’s Sunfeast Yippee has been good. HUL’s Knorr Soupy noodles growth has stagnated. • In Shampoo, Clinic Plus is the main brand. P&G’s Head and Shoulders sales has overtaken HUL’s Clear shampoo brand. Dove shampoo sachet sales growth has been robust. In Mosquito coils, GCPL’s GoodKnight brand sales is faster than market leader • We found that Snack Foods occupies lower shelf space in retail outlets in relative to Jyothy’s Maxo brand. North and West India. Retailers and channel partners indicated that dominant demand for snacks is for local products like banana chips and brands promoted as international flavors ex; Spanish tomato, Cream and Onion find less favor.
Head & Shoulders shampoo has overtaken HUL’s Clear shampoo brand sales. Clinic Plus is the market leader
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Name of retailer: M/S TA Ibrahim Sales have slowed down in the past 3 Location: Cochin months. Sluggishness is broad based. Business impacted by Modern Trade. Key takeaways: • Sales growth has slowed down in the past 3 months. The slowdown has been across categories. 70% of sales for the store is from sachet • HUL Toilet soaps brand gaining from HUL soap brands gaining from consumer conversion of local brand users. Several conversion of local soap brand outdated local brands in Toilet Soap category available in the outlet namely Carbolic consumers. (Rs. 10 SKU), Dio Rose (Rs. 10 SKU ‐ packaging similar to Breeze), Lisa beauty soap (Rs. 10), Ayurvedamix (75 gm SKU for Rs. 17 – glycerin soap). • Business growth has been impacted by presence of hypermarket in the vicinity, as they present better product offers to consumers. • In Biscuits category, brand loyalty for Britannia and Parle brand is high while Brand loyalty to Parle and Britannia Sunfeast brand sales is slow. biscuit brand is high. Sunfeast sales are • In coils, GCPL’s Good Knight brand sale is higher than Jyothy’s Maxo brand in coils. slow.
Name of retailer: Mr Rahman Sales growth is 5% YoY, largely led by Pricing. Location: Salem
Key takeaways: • Sales growth at 5% YoY, largely led by pricing. Growth trend is estimated to sustain. Sustenance of traction in Men’s • In Toilet soaps HUL’s Hamam, GCPL’s Cinthol Red are top performing brands Grooming category led by robust • High growth in men’s grooming market with strong performance in Park Avenue growth in Park Avenue soaps. soaps • In Detergents, growth has been strong in HUL’s Surf Excel and Rin brands followed by P&G’s Tide brand. • In Toothpaste, Colgate growth is strong whereas HUL’s Pepsodent has been slow Strong growth observed in Breakfast moving. Sensitive toothpaste segment growth is robust led by Indoco Remedies cereals category. Demand for Oats led Sensodent ‐ K by adults and Cereals led by youth. • Retailer states that HUL brands do not witness slow growth because of the high brand investments undertaken across brands. HUL is pushing Dove brand by offering margins of ~12% against the company‘s average of ~8%. Growth in shampoo bottled SKU’s is • Breakfast cereals sales growth is robust. Youth have preference for Corn flake based faster than sachets. Visible signs of products and adults favour Oats. consumer uptrading. • In Shampoo, growth is led by bottled SKU’s than sachets indicating uptrading. Growth is being led by P&G brands Pantene and Head & Shoulder and HUL’s Clinic Plus • In Skin Care, apart from HUL’s Fair & Lovely and Ponds White Beauty, P&G’s Olay “HUL brands do not see slow growth due to the high brand investments and L’oreal’s Garnier Light are also witnessing good growth undertaken by the company”
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Organised Pharmacy chains emerging vital trade Aggressive expansion witnessed by organized pharmacy chains. Med plus channel for FMCG companies and Apollo Pharma have increased network by 3x and 2x respectively in In our road trip in South India we observed that organized pharmacy chains namely Tamil Nadu in the past 2 years. Apollo Pharma and Med Plus have aggressively expanded their distribution networks by 2x – 3x during CY10 – 12. FMCG companies based on the Health & Wellness platform in the listed space (GSKConsumer, Nestle) and Personal Care (HUL, Colgate, Marico) are Significant shelf space captured by leveraging on pharmacy chains to expand distribution network. We believe that Health & Wellness Food products and Pharmacy is emerging as a critical trade channel for FMCG companies to drive volume. Personal Care products – Hair Care, Skin Care, Oral Care, Deodorants, Baby Care Name of retailer: Vidhyethil Medicals and Women Hygiene. Location: Cochin
Key takeaways: • Sales growth has slowed down in the past quarter, however growth in Health & Growth in Nestlé’s Infant food segment Wellness categories like Baby Foods – Nestle brands, MFD’s ‐ GSKConsumer’s is strong as consumer demand is robust Horlicks, Baby Pampers – Nestle brand and Women Sanitary napkins – Nestle’s unaffected by pricing. Whisper brand are reporting good growth. • Strong uptrading trend are visible driven by increase in brand awareness. Consumers are ready to spend on expensive personal care products like Indulekha brand of hair Consumer is ready to spend Rs. 425 for oil priced at Rs. 425 for 100 ml and skin care oil priced at Rs. 189 for 100 ml. 100 ml hair oil (Indulekha brand) – Signs • Robust performance in Sensitive toothpaste category led by GSK’s Sensodyne of uptrading and brand awareness. toothpaste • Marico’s Parachute Ayurvedic oil growth is extremely strong with average sale of 12 bottles in 1 week. • In Household Insecticide, GCPL’s products across aerosol, liquid and coils are Parachute’s Ayurvedic hair oil sharp reporting strong growth. demand trends sustain, average 12 • Retailer plans to increase size of the shop in the near term and increase stock of bottles sold in a week. products • Consumers have preference from Mehendi products for hair colour. GCPL’s Nupur is the leading brand followed by Black Rose
Location: Salem
Key takeaways: • Sales growth has increased on a YoY basis and is broad based across categories. Consumer not particularly brand conscious about deodorants. • For deodorants, the consumer does not hold particular preference of a brand. Product choice is based on whichever product is easily visible and this is at the retailers discretion. • Higher sales in bottled SKU’s than sachets for categories like Shampoos, MFD’s Strong traction reported in the Sensitive • In Shampoo, P&G brands Pantene and Head & Shoulders are leading growth. The toothpaste segment. brands are converting users of HUL brands Sunsilk and Clinic Plus. • In MFD, Horlicks growth is strong while Krafts’s Bourvita is slow moving. • In toothpaste, Colgate brand leads growth. Growth in sensitive toothpaste segment P&G shampoo brands outsell HUL is strong led by Indoco Remedies Sensodent – K. brands. • Baby Foods, Cerelac brand sales growth healthy enabled by doctor’s prescription. • In toothbrush, Colgate is leading growth over P&G’s Oral B brand • In Men’s Grooming Emami’s Fair & Handsome continues to report robust growth. Volume growth in Nestle’s Infant Foods • Crème is the preferred mode of Hair Colour led by strong growth in Garnier brand. segment is strong. • Face Wash category growth is strong led by L’oreal’s Garnier brand and Zydus Wellness’ Everyuth brand
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Key input from other channel partners in Tamil Nadu
Britannia Industries Ltd. Britannia sales growth is down from • Sales growth has reduced significantly from 25% YoY in CY11 to the present growth 25% in CY11 to 12% YoY. Volume rate of ~12% YoY. Volume growth has reduced at 4 – 5% YoY. growth is in low single digits. Focus on • Britannia’s brand of Nutrichoice has been reporting strong growth. Good Day biscuit Modern Trade yielding benefits. brand growth is healthy at ~20% YoY with volume growth of 8 – 9% YoY. • Growth has slowed down in the salted biscuit brand of TimePass and the new product launches namely Oats and Snackuits. Robust growth observed in Nutrichoice • Britannia Cakes growth is at ~10% YoY. The company has increased schemes for the and GoodDay brand. Growth in brand. Timepass and new product launches • Britannia is increasing focus on Modern trade. Company’s market share is estimated including Snackuits is uninspiring. at 40 – 45% in Modern Trade
RobustComplan growth growth observed is down infrom Nutrichoice 25% in andCY11 GoodDay to 18% YoY. brand. Glucon Growth D brand in Heinz Ltd. Timepassreported best and performancenew product launchesto date • Complan growth from ~25% YoY in CY11 has decreased to 18% YoY. Complan brand includingenabled by Snackuits strong summer is uninspiring. season. has increased market share on a YoY basis. • Glucon D brand reported growth of ~25% YoY. The brand continues to grow on a MoM basis. In the present CY12 summer season the brand reported the highest absolute sales. Heinz ketchup growth sharply down • New product launches of Fruit Shot and Muesli were largely unsuccessful. from 30% in CY11 to flat growth. Brand has lost market share. • Heinz Ketchup growth has decelerated sharply from 30% YoY in CY11 to flat growth. The brand has lost market share contributed also by lack of product promotions.
Robust sales growth at ~22% YoY led by Johnson & Johnson pricing at 10 – 12% YoY. Annual average price hike is ~8%. • Sales growth of 22% YoY. Growth is led by pricing at 10 – 12% YoY. On an average J&J tends to take a price hike of ~8% YoY. • Demand for J&J products continues unabated, because of strong brand equity New launch of Baby Wipes is seeing • Recent introduction of Baby wipes is witnessing strong growth. tremendous growth.
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Retailer in Jhalot (Gujarat)
Marico’s Livon finds shelf space and good consumer response
Branded products are on display for consumers. Stock of the displayed products and staples kept at the back of the store
Strong business growth o/w 10% is volume and 10% is pricing growth
Regional brands losing market share to branded players in Toilet Soaps category.
High product stickyness observed for premium shampoo brands. Source: PhillipCapital India Research
Name of retailer: Vitthal stores Location: Jhalot (Gujarat)
Key Takeaways:
• Strong growth in consumers across categories • Volume growth of around ~10% and value growth of 10% • Clear trend of premiumisation eg. In soaps Dyna (Anchor) is losing ground to Godrej No. 1, Lux variants. • Premium niche products receive good consumer response, ex: Livon brand is gaining shelf space. • Among Shampoos he specifically mentioned that there are certain variants of Sunsilk that aren’t doing well. Otherwise, there’s a lot of stickiness of customer preferences especially among premium brands.
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Retailer in Vadodara (Gujarat)
Stocking Pedigree pet foods products, sign of rising consumerism
Observed high aggression from Parle for the snack food brand Hippo. Significant shelf space and in store advertisement.
Downtrading is not visibly evident. Consumer demand has not been impacted by inflation
Source: PhillipCapital India Research Retailer has improvised on store size and store display. Name of retailer: Mahavir Provisions Location: Vadodara
Key Takeaways: • Inflation hasn’t yet impacted consumption. Downtrading if any is happening at a very small scale and isn’t worrying yet. Business growth has been impacted by • The Kirana store has expanded his shop and made it look more organized. The store rise in modern trade in the vicinity. has also started keeping pet food – indicating an improvement in affluence in the area. • FMCG companies have become extremely stringent in credit terms • Retailer has improvised on display of products. • Business growth however has been affected by the growth of malls and organized retail. The retailer was very concerned about FDI in retail.
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Retailer in Jaipur (Rajasthan)
Distribution gains in North India for GSKConsumer MFD brands visible. Shelf space captured by
Horlicks Chocolate and Boost brand sachets. Source: PhillipCapital India Research
Growth is robust across categories. Name of retailer: Rajesh Kirana Limited adverse impact of Modern Location: Jaipur Trade on business in certain categories wherein higher discounts are offered. Key Takeaways: • The area that the retailer caters to is predominantly middle to upper income suburb. Growth is robust across categories. There is some cannibalization to organized retail for select products. However, the retailer feels that this is more to do with selective Brand performance by certain regional promotional discounts at malls. brands like Oswal (detergent category) • There are some categories where local/regional brands are giving strong is faster than national brands. competition to national players – in washing soap, Oswal soap is performing better Relatively low pricing is the than national brands as it has managed to restrict price hikes. differentiator. • He says that he is also happier with local brands due to higher commissions 8‐10% vs. 5% odd in national brands. • He feels that when malls give promotional offers, they sell products below purchase Consumers are getting confused with price. Also, he added that malls are able to get branded products at rates lower than the onslaught of product launches in the those offered to local retailers. Personal Care and Food categories. • In personal care and food products uptrading is continuing. However, with brands launching more variants, customers are getting confused. • In laggard products, specifically he mentioned that Gillette isn’t doing great and SuperMax is gaining at its expense. Among other products he said that ViJohn too is doing well. Underperformance reported in Gillette
brand with loss of market share to SuperMax.
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Retailer in Dausa (Rajasthan)
South based ‐ Cholayil Ltd. launches face wash under Medimix brand. Competition intense in face wash category. Name of retailer: J&K Enterprises Location: Dausa (Rajasthan)
Key Takeaways: • Broadly growth is robust at 20% YoY Value growth o/w 10% is Volume and 10% is P&G shampoo gaining market share pricing growth from Clinic Plus. Bajaj Almond hair oil is • In soaps and shampoos – P&G is gaining ground at the cost of Clinic Plus. However, gaining users from Dabur Amla hair oil. there is no decline in HUL’s sales. • In hair oil, Bajaj Almond is gaining ground at the cost of Dabur Amla.
Retailer in Ballabgarh (Faridabad ‐Delhi)
Significant shelf space by Snack Foods namely Parle’s Hippo, ITC’s Tangles and DFM Foods’ Crax
Source: PhillipCapital India Research Sales flat as volume degrowth is setting off pricing growth. Retailer is losing Location: Faridabad consumers to Modern Trade. Key Takeaways: • Business has not reported increase in sales. Price increase has been offset by declining volume ‐> cannibalization to other stores and malls Tata Tea is offering margins 2x on its • In hair oil, Bajaj Almond is gaining ground at the cost of Dabur Amla. brands than competitor HUL’s margins • In Tea, Tata is getting aggressive, the company is offering 15 – 18% margins on Tata of 6 – 8% on Red Label brand. Tea brand against the competitor HUL’s margins of 6 – 8% on Red Label brand • In Shampoo P&G and HUL brands are performing well. Dabur ‘s Vatika shampoo brand continues to underperform.
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Retailers feeling the heat from Modern Trade in Kerala and TN
Small retailers business has been adversely impacted by sharp increase in During our road trip we observed that Modern Trade has established significant market Modern Trade. Competition faced from presence in the South Indian states. Apart from the pan Indian players like Big Bazaar, local supermarkets also. Spencers, More etc there are several local retail chains operating namely Nilgiris etc. We also observed single location supermarkets retailing consumer products in cities like Cochin ‐ Ashish Supermarket (~5000 sq. ft.) Following are a few key takeaways:
Kirana stores in the vicinity of supermarkets witness impact on sales. Footfalls and ticket size of purchase decrease We visited certain retail stores located within a radius of 200 m from hypermarkets. The Consumers prefer Modern Trade to undertake bulk purchase at the start of sales for these general stores have evidently come under pressure on account of Modern the month. Retailers witness increase in Trade. Retailers mentioned that there has been a visible decrease in consumer footfalls. sales in the last 2 weeks of the month Also existing consumers are opting for Modern trade stores to make the first – bulk – on account of small ticket purchase of the month, thereby decreasing the ticket size for retailers. Retailers shared replenishment purchase. that sales during the first 2 weeks of the month is strained, however a pickup is witnessed in the latter 2 weeks as consumers make replenishment purchase (for small ticket items like soaps, biscuits) from local stores.
Consumers are increasingly getting price conscious, Modern trade has increased their demand for discounts Discounts and promotions offered by Retailers stated the consumer’s demand for discounts is being fuelled by the frequent Modern Trade are major pull factors for product promotions and pricing discounts offered by Modern Trade. Retailers very consumer. obviously are unable to compete with Modern Trade on promotions offered. Hence Modern Trade is emerging as the choice of preference for the increasing price conscious consumers.
Retailer’s response to Modern Trade challenge is mixed – few have adopted asset light model…… Certain retailers have been forced to We observed that certain retailers have submitted to competition from Modern Trade by adopt an asset light model due to impact of Modern Trade. adopting an asset light model by storing few SKU’s per brand. However they have increased the number of categories available ‐ enabled by the sachet revolution. This has enabled them in meeting the short term and varied demand of consumers.
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Retailer in Thrissur – notice the few SKU’s stored
Source: PhillipCapital India Research
Retailer in Palakkad – notice the empty shelf spaces (picture on the right). Business impacted by presence of Big Bazaar in the vicinity
Source: PhillipCapital India Research
……Others have increased investment in the store by expanding store size and product availability Long standing retailers have increased Retailers that have been in operation for a long time period (thereby have generated investments and have adopted mini strong consumer goodwill) and have the necessary resources, have increased the capex supermarket based business model on their store. They have primarily increased the store size and have effectively created hypermarket experience for consumers. By enhancing the shopping experience, their existing consumer base has been intact. They have also been able to increase the ticket size of purchase on per consumer basis. These stores are capitalizing on market trends of premiumisation and uptrading, thereby increasing store realization growth.
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Retailer in Coimbatore reinvents store as a Supermarket Increase in store size and introduces aisles similar to supermarket shopping experience
Source: PhillipCapital India Research
Shelf space labeled to provide consumer convenience Discounts offered on certain brands
Source: PhillipCapital India Research
FDI in Retail is expected to increase pressure on business Retailers are increasingly concerned on the recently announced FDI in Retail. General FDI in Retail is the most common thread stores that are currently under pressure on account of domestic organized trade itself of discussion among retailers and estimate that their operations may cease to exist with the onset of foreign retailers distributors. particularly Walmart.
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Paint Sector – Dealers distressed over competition and lower margins offered by Asian Paints
We have received mixed trends on paint industry volume growth in Kerala and Tamil Nadu. Undercutting at the dealers end has intensified. Repainting cycle has extended primarily on account of cost escalation. However Decorative paints growth maintains robust momentum in small towns. Also more importantly dealers were disappointed with low margins offered by Asian Paints, compelling them to promote competitors brand. Paint Sector volume growth robust in small towns at 12 – 15% YoY leading value growth of 20 – 25% YoY. Paint sector growth under pressure in cities but remains robust in small towns Paint sector volume growth has come under pressure in Cochin, with slowdown in Decorative paints led by Asian Paints. However in smaller towns namely Thrissur, the volume growth has been robust at 12 – 15% YoY with value growth of 20 – 25% YoY.
Sharp increase in sales target is leading to undercutting by dealers primarily Asian Paints. Ambitious sales targets, for ex: 15% YoY in the slower Cochin market is leading to undercutting at the dealers end. Undercutting is being observed across companies; High competitive intensity is visible however severity is higher in Asian Paints. Also while smaller organized players like even in small towns like Thrissur Berger Paints and Nerolac are offering rebates to dealers, the same is not being (Kerala). Dealer network has increased extended by Asian Paints. by 10x in the past 3 years Increase in dealer competition is also forcing undercutting There has been a significant increase in the number of dealers servicing a single market. For Ex: In Thrissur, from 2010 to 2012, the number of dealers has increased 10x from 3 dealers to 30 dealers. Dealer in Cochin has also cited that unhealthy competition among the paint dealers is forcing undercutting.
Repainting cycle has extended primarily due to escalation in wage costs Repainting cycle delayed from the Sharp wage inflationary pressures have impacted the repainting cycle in Kerala. Labour earlier 1 to 1.5 years to 3 years on cost has increased from Rs. 275/8 hours in 2009 to Rs. 500/ 6.5 hours in 2012. Hence the account of sharp escalation in wage increase in painting cost has led to postponement of house painting decision. As a result costs the repainting cycle from 1 to 1.5 years has extended to 3 years.
Repainting Cycle (in years) 2007 2012 2009 1 ‐ 1.5 Paint cost 22 2012 3 Labour cost 13
Offer of higher margins by rival companies is leading to dealer push of competing brands over Asian Paints. Dealers in our interaction indicated that Asian Paints currently offers the lowest dealer margin in the paint sector while the other pan India organized and regional players are offering lucrative margins and schemes to the dealers. Hence dealers are converting Dealers are unhappy with lower footfalls in their outlet for Asian Paints’ brands to other competing products. margins offered by Asian Paints. Hence • Dealer in Thrissur has been successfully converting 50% of consumers asking for they are promoting the higher margin competitors brands over Asian Paints. Asian Paints brands to Berger Paints. Some of these dealers have reported • Dealer in Cochin has been pushing the regional brand Ellora Paints in the past 6 very successful conversion rate. months leading to 2x growth in Ellora’s brand sales.
Company Dealer Margins Asian Paints 3 ‐ 5% Berger Paints 10% + rebate Nerolac Paints 7% + rebate Ellora Paints* 30% * Regional company (Cochin)
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It is observed that Painters are also a medium of influencing the consumer preference Dealer also promotes competing for paint brands. The higher margins as aforementioned offered by competing brands products to the painter by sharing the are utilized by dealers to offer 2 ‐ 3% commission to the painters to promote the higher margins by offering 2 ‐3 % concerned brands. Dealers that we interacted with are also utilizing this channel to commissions. promote brands over Asian Paints.
Brand campaigns customized in Consumer demand for Asian Paints’ brands is fuelled by brand awareness. Smaller regional languages is one of the critical players need to step up investments to gain scale. factors in enabling competitors to gain High consumer demand for Asian Paints is primarily led by brand awareness. Asian Paints market share over Asian Paints. has developed regional TVC’s for the Kerala and Tamil Nadu markets. Dealers have stated that in terms of product quality smaller organized players like Berger Paints brands are equivalent to Asian Paints, however as they are unable to match Asian Paints’s brand investments, they continue to have low consumer recall. Hence for market share gains, the mid size paint companies will have to step up brand investments, with focus on regional advertisements to have effective consumer cognizance.
Asian Paints successfully runs marketing campaigns in regional languages in Kerala and Tamil Nadu for interior and exterior paints
Source: Company, PhillipCapital India Research
Emulsions, Enamel (high gloss) and Exterior paints sustain robust growth momentum The Distemper segment has contracted sharply with revenue contribution to the paint sector reduced to ~10% as per dealers. Exterior paints and Interior Emulsions maintain robust pace of growth. In Enamels, strong growth is again observed in the high gloss variants. These growth trends are estimated to sustain in the medium to long term
Conclusion We observe that demand and growth trends for the Paint sector continue to be robust. Market penetration and higher purchasing power mainly in smaller cities is evidently driving strong growth. However near term sluggishness is indicative on account of macroeconomic concerns. On company specific basis, Asian Paints market share is under threat as competiting brands get aggressive across markets primarily by providing lucrative high margins to paint dealers. Also sustained heightened competitive intensity can be a negative for the sector in the medium to long term.
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Deodorants category is spraying up, but where are Set Wet and Zatak?
Deodorant shelf space in mini supermarket in Coimbatore (TN) Deodorant shelf space in retail outlet at Faizabad (UP)
Source: PhillipCapital India Research
Hubli (Karnataka) Significant category presence in Gorakhpur (UP)
Source: PhillipCapital India Research
Deodorants category visibly gaining traction with sufficient shelf space Deodorant category penetration In our retailer survey we observed the shelf space dedicated for Deodorants has extends beyond Tier 1 cities to Tier2 and increased significantly over the last 5 years. Deodorants penetration is not limited to Tier Tier 3 cities driven by robust consumer 1 cities but even Tier 2, Tier 3 cities and rural areas are witnessing rise in Deodorants demand consumption. We observed the most of the sizeable retail outlets in our survey had a dedicated shelf space for Deodorants.
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Marico’s acquired brands Set Wet and Zatak conspicuously absent Marico’s acquired brands Set Wet and While the category is seeing sharp growth we also noted that Marico’s recently acquired Zatak were largely absent in terms of youth brands of SetWet and Zatak had a limited occupancy of shelf space in our surveyed shelf space occupancy in markets sample of 200 retailers. We do not believe that our sample size is representative for the surveyed. Indian FMCG market but considering our extensive visits across India we believe the absence of Marico’s products is rather conspicuous in the light of the acquisition cost paid by Marico for the portfolio.
Certain Deodorants brands enjoy consumer pull ability. Retailers responded negatively Brands like Fogg, KamaSutra and Park to Marico brands Avenue enjoy high consumer demand exceeding even the largest player HUL’s We also noted that across India, Park Avenue, Fogg and KamaSutra were occupying brand Axe. Retailer feedback largely significant amount of shelf space and retailers had very high regards for these brands. On negative for Marico brands quizzing the retailers on Marico’s deodorants portfolio, we found the responses to be mixed but generally negative.
Conclusion Branding and distribution presence are Display and presence on shelf space is a very critical aspect for deodorants as consumer critical for success in deodorant purchase decisions are based on trial from the shelf. Absence from shelf will generally category. Marico will have to result in loss of sales for the company. significantly step up investments. We conclude (although a little prematurely) that Marico will have to up the ante in the deodorants space to catch up with the market leaders.
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India waking up: Breakfast cereals provide new growth avenues for the persistent
Palakkad (Kerala) – Kellogs Oats Faizabad (Uttar Pradesh) – Kelloggs Ballabgarh (Faridabad – Delhi) ‐ Corn flakes Kelloggs Chocos
Source: PhillipCapital India Research
Gorakhpur (Uttar Pradesh) – Saffola Oats Faizabad (Uttar Pradesh) – local brand Faizabad (Uttar Pradesh) ‐ Quaker of Corn flakes Oats
Source: PhillipCapital India Research
Breakfast cereals significantly scaling Break Fast cereals is another fast growing category. Breakfast cereals are habit forming up market presence in flakes and oats products which provide long‐term growth potential for the companies operating in the across cities and towns. space. We noted Kelloggs (after years of perseverance) flakes (corn, wheat, choco etc) have reached the shelves of most tier 1, 2 and 3 city retailers.
Incumbents holding ability of product Oats is another category which is witnessing sharp ascendance in market share in the innovation and distribution strength are breakfast cereal category. Quaker oats was the most popular brand while Kelloggs and likely to witness sharp traction in Saffola oats were also gaining acceptance. growth We believe there is a lot scope for innovation in the category and companies in the space including Marico are likely to see robust revenue growth.
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Certain regional brands found to be competitive in the FMCG sector
Oswal brand faster selling than MNC brands in the detergent Regional brands in detergent cakes continue to category in Jaipur (Rajasthan) receive strong consumer demand (TN & Kerala)
Dr. Wash antiseptic soap priced at 35% discount to Strong Brand equity of the ayurvedic soap has been HUL’s Lifebuoy brand (Kerala) maintained, priced at Rs. 15 for 75 gm. (Kerala)
Source: PhillipCapital India Research
Certain regional brands continue to Uptrading trend has been driving the conversion of regional, local brand users to remain competitive in the Personal organized brands. The trend has been prevalent across categories primarily those that wash and Detergent category. are mature in nature with high market penetration ie Personal wash, Detergents etc.
In our interactions with retailers we chanced upon certain brands that continue to find Uptrading in the long term will loyal market audience due to the perceived value for money proposition. The finds were accelerate pace of conversion of local specifically in the Personal wash and Detergent categories. brand users. Regional brands that are unable to compete effectively will lead However on a long term basis we believe that uptrading cycle will accelerate the pace of to consolidation in the industry. conversion of local users. Certain brands that do not possess the wherewithal to remain Relatively lower competition positive competitively relevant will give way to consolidation in the Personal wash and Detergent for the market leader HUL. categories. Hence due to reduction in competition market leaders like HUL stand to gain in the future
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Cigarettes category lighting up
The category has recently witnessed a flurry of new product innovations in the 64mm which are aimed at driving volume growth for the sector.
In our survey we have witnessed 13 new product innovations in the 64mm category and one new product in the 69mm category. We have observed 7 new products by ITC, 5 by Godfrey Philips and one each by VST industries and Golden Tobacco Company.
64 mm Cigarettes – the most exciting product innovation in the Tobacco sector In the past decade the Cigarette Sector has largely been void of new product innovations including launch of new brands. The recent product innovations initiated in the Cigarette industry have been the launch of the 64 mm products. A quarter back we witnessed the few initial launches of the 64 mm cigarettes by the organized incumbents – ITC (under Gold Flake, Capstan), VST Industries and Godfrey Philips (Four Square). We observe that within a short duration of 3 months, ITC and Godfrey Phillips have significantly increased their focus on the 64 mm segment with launches across all the mainstay brands.
The companies have strategically priced these products at Rs. 28 to Rs 15 for 10 sticks with a clear objective of increasing volume market share and expanding the volume size of the cigarette category by converting the current contraband cigarettes and bidi consumers. We estimate that majority of the 64 mm brand launches are margin dilutive for the cigarette companies including sharp decrease in Rs. EBIT/ stick.
64 mm product launches in the Cigarette sector
VST Industries and Godfrey Phillips launch 64mm in the non filter segment under the brands Charminar and Cavendars respectively.
VST Industries – 64 mm launch under Charminar is the cheapest in the 64 mm category, priced at Rs. 1.5 per stick
Godfrey Phillips – has aggressively stepped up 64 mm product launches in 5 brands. The 64 mm products are competitively priced and introduced in GPI’s main markets in West and North India.
ITC‐ leading number of 64 mm launches with 6 brands. ITC prices 64 mm products aggressively to capture volume from contraband cigarette and bidi market.
Note: ITC has also launched 64 mm under the Scissors brand which is not present in the above photo; GPI has launched a 64 mm product under the Red and White brand which is not present in the picture above.
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ITC exhibits clear focus on Cigarette volume with 64 mm launch under all the mainstay brands
ITC has launched the 64 mm size cigarette across 6 main brands namely Gold Flake, Capstan, Scissors, Flake, Wills and Bristol. The revenue contribution of these brands for ITC is estimated at 70 ‐75%. The company has also launched a new 64 mm brand under Wills called Wills Royal.
ITC’s 64 mm product launches across brands and price per pack
Note: ITC has also launched 64 mm under the Scissors brand which is not present in the above photo
Gross realisation comparison of 69 mm and 64 mm under ITC brands Gold Flake Capstan Flake Bristol Scissors 69 mm MRP per stick 4.832 3.5 3.5 64 mm MRP per stick 2.822 1.9 2
64 mm launch focused on driving volume from conversion of users in contraband cigarette and smokeless tobacco markets ITC has undertaken a massive volume ITC has largely had to exit the < Rs. 2 per stick price point in the past few years on driven strategy with the 64 mm launch. account of the steep increase in the tax structure (excise+VAT). Hence the gap in the Company targets volume growth from product portfolio on account of low product affordability has contributed to loss of contraband cigarette and smokeless consumers to the contraband and smokeless tobacco markets. The lower excise duty tax tobacco market. structure in 64 mm has enabled ITC to launch cigarettes at affordable price points. Hence with 64 mm, ITC is primarily targeting increase in volume share by converting users in the contraband cigarettes, bidis and smokeless tobacco markets.
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ITC 64 mm product launches found in Channel partners indicate 64 mm can contribute in managing risks of downtrading to our surveyed states of Maharashtra, competing brands: Rajasthan, Bihar, Kerala, Tamil Nadu Downtrading risk for ITC holds by way of shift within ITC’s own brands ie. from premium to economic brands, or shift to cheaper competitor products. 64 mm launch being priced at a discount to 69 mm can enable to avert the latter mentioned downtrading risk, hence keeping intact ITC’s cigarette consumer base.
Certain 64 mm brands being launched in strategic markets to gain volume market share ITC through 64 mm has also crafted a business strategy to gain market share from competitors in smaller towns and cities. Hence in accordance with that, we observe that ITC is rolling out a state wise – brand wise 64 mm launch with Scissors 64 mm in South India, Gold Flake and Capstan 64 mm in North India.
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64mm strategy could be margin dilutive over the medium to long‐ term ITC has launched 64mm in brands which ITC’s margin in the cigarettes segment is 61.5% (Q2FY13) driven by high margin products contribute 54% of revenues and 60% of in the 69mm and 84mm. We estimate the EBIT margins in the 64mm products are operating profits. The key brands significantly lower than the company average and even more critical is absolute margin include Gold Flake, Bristol, Scissors and in the 64mm segment is 1/3rd of the company average at Rs 0.3. Capstan The 69mm category for the company is a highly profitable segment with Goldflake 69mm being the most profitable product for the company with an EBIT margin of ~70%. It is also very important to note that GoldFlake 69mm per stick EBIT is also the highest with an EBIT contribution of 36% of total cigarette EBIT (FY13E). We estimate that Bristol, Scissors and Capstan contribute 9%, 9% and 6% of the total cigarettes EBIT respectively.
We also find that introduction of 64mm in Flake is margin accretive on account of lower excise duty but Flake is relatively a small brand. Thus margin accretion will be limited.
Economics of ITC Cigarette brands including recently introduced 64 mm (Estimated Margins at current market prices) ______Gold Flake______Bristol______Scissors______Capstan______Flake______Navy Cut____ 84 mm 69 mm 64 mm 69 mm 64 mm 69 mm 64 mm 69 mm 64 mm 69 mm 64 mm 74 mm 69 mm Gross MRP 5.8 4.8 2.8 3.5 1.9 3.5 2.0 3.0 2.0 2.0 1.9 4.9 3.0 Excise duty 2.31 1.19 0.67 1.19 0.67 1.19 0.67 1.19 0.67 1.19 0.67 1.7 1.2 VAT 1.16 0.96 0.56 0.70 0.38 0.71 0.41 0.61 0.41 0.41 0.39 1.0 0.6 Dealer Margins 0.58 0.48 0.28 0.39 0.21 0.35 0.20 0.39 0.26 0.26 0.25 0.5 0.3 Net Realisations 1.75 2.17 1.29 1.22 0.64 1.24 0.72 0.80 0.66 0.14 0.60 1.7 0.9 RM 0.41 0.34 0.31 0.26 0.25 0.28 0.26 0.23 0.21 0.15 0.14 0.3 0.2 Manufacturing and Freight 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.3 0.3 EBIT per stick 1.04 1.53 0.68 0.66 0.10 0.66 0.16 0.28 0.15 ‐0.31 0.16 1.1 0.4 EBIT Margin % 59.35 70.57 52.34 53.93 14.93 53.30 22.20 34.70 22.92 67.1 39.6 Source: Company, PhillipCapital India Research Estimates
10 % downtrading in ITC’s 69 mm to 64 We estimate that even if only 10% of the 69mm consumers downtrade from the above mm estimated to result to decline in mentioned brands to the 64 mm products, EBIT margins could decline by 100bps but absolute EBIT by 4% more importantly absolute EBIT can decline by ~4%. We have not incorporated incremental volumes from contraband categories in our estimates as we believe down trading is a more significant risk.
Analysis of impact on Revenue and EBIT of 10% downtrading in 69 mm to 64 mm Gold Flake Bristol Capstan Scissors RSFT (69 mm) Revenue contribution 30.5 9.0 9.3 10.0 69 mm Brand revenue (Rs. Mn) 40,726 12,018 12,418 13,353 69 mm EBIT (Rs. Mn) 28,740 6,481 4,309 7,117 69 mm EBIT margins (%) 70.6 53.9 34.7 53.3 Brand revenue (69 mm + 64 mm) (Rs. Mn) 39,029 11,468 12,004 12,781 Brand EBIT (69 mm + 64 mm) (Rs. Mn) 27,109 5,930 4,068 6,575 Brand EBIT (69 mm + 64 mm) margins (%) 69.5 51.7 33.9 51.4 Brand EBIT degrowth due to 64 mm (%) ‐5.67 ‐8.50 ‐5.60 ‐7.62 Brand EBIT margin contraction (%) (1.1) (2.2) (0.8) (1.9)
ITC Cigarette Segment EBIT degrowth ‐3.9 ITC Cigarette Segment EBIT margin contraction 100 Source: PhillipCapital India Research Estimates
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Gold Flake 64 mm launch – Downtrading a major risk The GoldFlake franchise is the most profitable franchise for ITC. The revenue We estimate that Gold Flake 69 mm is contribution of the GoldFlake franchise is ~45% (Euromonitor CY10) with 84mm ITC’s most profitable brand with EBIT contributing ~15% of the total revenues and 69mm contributing ~30%. The GoldFlake contribution of ~36% and highest 69mm is the most profitable product for the company with an EBIT margin of ~70%. We revenue contributor at ~30%.. believe the brand has reached a critical juncture where the company is severely exposed to down trading risks and margin dilution for the company. The EBIT contribution of the GoldFlake brand to the total cigarette EBIT is ~50% with the 69mm contributing 36% of EBIT and 84mm contributing 15% of cigarettes segment EBIT respectively.
Gold Flake King Size (84 mm) – Regular Size (69 mm) – newly launched 64 mm
Source: PhillipCapital India Research
Gold Flake 64 mm point of sale advertisement at Hajipur‐ Bihar Gold Flake 64 mm point of sale advertisement at Karad‐ Maharashtra
Source: PhillipCapital India Research
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Ad of Price points of Gold Flake brands including 64 mm displayed Gold Flake 64 mm captures significant shelf space. Retailer at point of sale (Khopoli ‐ Maharshtra ) indicates strong demand for the product
Per stick economics of Gold Flake brand Gold Flake 84 mm 69 mm 64 mm Gross MRP 5.8 4.8 2.8 Excise duty 2.31 1.19 0.67 64 mm under Gold Flake branded as VAT 1.16 0.96 0.56 Gold Flake “Super Star”. 64 mm is priced Dealer Margins 0.58 0.48 0.28 at Rs. 28/pack, whereas Gold Flake 69 Net Realisations 1.75 2.17 1.29 mm is priced at Rs. 48/pack RM 0.41 0.34 0.31 Manufacturing and Freight 0.30 0.30 0.30 EBIT per stick 1.04 1.53 0.68 EBIT Margin % 59.4 70.6 52.3 Source: PhillipCapital India Research Estimates
64 mm under ITC’s largest brand GoldFlake is launched in Rajasthan, Maharashtra and Extensive point of sale advertisements Bihar with strategic focus to increase market share for Gold Flake 64 mm launch observed ITC has launched 64 mm under its largest brand Gold Flake in the states of Rajasthan, in certain markets. Bihar and Maharashtra. Gold Flake brand’s revenue contribution to ITC is estimated at ~45%. The brand has been strategically launched in those markets wherein the competitor Godfrey Phillip’s brand Four Square is a formidable player. Hence considering the market location of the 64 mm launch we estimate that ITC is aiming to gain market share.
Downtrading is an imminent risk: Focus Group Study Gold Flake 64 mm in comparison to 69 The pricing growth in 69 mm Gold Flake has been steep at ~14% CAGR during FY08 – 13E mm differs in size of packaging and with MRP per stick moving from Rs. 2.5 to Rs. 4.8. Hence on account of the high net cigarette filter. However Product taste realizations, the 69 mm Gold Flake is the most profitable brand for ITC with EBIT/stick of is largely similar. Rs. 1.53. We tested the various Gold Flake products on a focus group to ascertain the product differences and associated aspirational values. Our key findings are as follows: 84 mm v/s 69 mm • Superior product experience of 84 mm over 69 mm on account of filter length. • Blend and taste of product is very similar • Aspirational values of 84 mm is much higher Hence we conclude consumers more likely to uptrade to 84 mm in the medium to long term, but downtrading from 84 mm to 69 mm has lower probability.
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Gold Flake 64 mm launched in markets 69mm v/s 64 mm where competitor Godfrey’s brand Four • Marginally superior product experience of 69 mm over 64 mm, but consumer is Square is strong. We estimate ITC to be unable to make out the difference between the products in a blind test targeting volume market share gains • Blend and taste of product is very similar • Consumer is largely indifferent to the length of the stick
Hence we conclude that introduction of 64 mm Gold Flake in overlapping markets with 69 mm Gold Flake is more likely to trigger downtrading due to high difference in the MRP and largely insignificant differences in the size of the cigarette, blend of tobacco and taste of the product. Although the management has guided for probability of downtrading to be restricted to 1 to 2%, we estimate it to be much higher. ITC will have to have rigorous check and control measures to manage the guided probability of downtrading.
Margins improved with price hike to Rs. 2.8 per stick……… Gold Flake 64 mm EBIT margins improve ITC had launched the 64 mm at Rs. 2.5 per stick at which we estimate the EBIT margins to from 41% to 52% after recent price hike be ~43%. However with the latest round of price hikes in Gold Flake RSFT, ITC has also from Rs. 25 to Rs. 28/pack of 10 sticks, hiked the prices of 64 mm to Rs. 2.8 per stick. Post this price hike, the EBIT margins are but continue to remain lower than the 70% margins of Gold Flake 69 mm. estimated to improve to ~52%, but continue to be significantly lower than the 69 mm EBIT margins at 70%.
……But downtrading and incremental volumes from 64 mm brand to be margin dilutive and contribute to lower absolute earnings Downtrading to the relatively lower We estimate that downtrading and incremental volumes generated from 64 mm Gold margin 64 mm product will lead to Flake (that earlier would probably accrue to 69 mm Gold Flake) is estimated to dilute contraction in brand margin and ITC brand margins. 69 mm Gold Flake being the most profitable brand for ITC the dilution in Cigarette segment EBIT margin brand margins is estimated to lead to contraction in company margins. Also EBIT per stick of 64 mm being ~45% of the 69 mm, any incremental volume generated from 64 mm will also impact absolute earnings for ITC.
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Bristol 64 mm sharply brand margin dilutive on account of lower realizations
Bristol newly launched 64 mm – Regular size (69 mm) Bristol 64 mm point of sale advertisement at Maharashtra
Source: PhillipCapital India Research
Per stick Economics of Bristol brand Bristol 69 mm 64 mm Gross MRP 3.5 1.9 Excise duty 1.19 0.67 VAT 0.70 0.38 Dealer Margins 0.39 0.21 Net Realisations 1.22 0.64 RM 0.26 0.25 Manufacturing and Freight 0.3 0.3 EBIT per stick 0.66 0.10 EBIT Margin % 53.93 14.93 Source: PhillipCapital India Research Estimates
64 mm under Bristol launched as Bristol Bristol 64 mm launched in West India at realizations sharply lower than the 69 mm. “Deluxe Filter”. Sharp pricing differential between 69 mm and 64 mm Relative pricing discount of 64 mm v/s 69 mm in Bristol brand lowest among the 64 mm with 64 mm priced at Rs. 19/ pack of 10 product launches. sticks and 69 mm priced at Rs. 35/pack of 10 sticks. ITC has launched 64 mm under the Bristol brand as Bristol Deluxe Filter in Maharashtra state as per our findings. Bristol brand revenue contribution is estimated at ~9%. The 64 mm is priced at Rs. 1.9 per stick sharply lower than that of the 69 mm Bristol at Rs. 3.5 per stick. We observe that the relative pricing of 64 mm against the 69 mm in the Bristol Bristol 64 mm launched in Maharashtra. brand is the lowest in comparison to other ITC and competing brands. Point of sale advertisements initiated.
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Only 64 mm product under ITC where in Bristol is the only brand in which ITC has differentiated packaging size but maintained size of filter is similar but size of pack is filter size. In conjunction with low pricing it is indicative of strategy to recruit new differentiated. Hence with steep low consumers to drive volume. pricing under Bristol brand, ITC is targeting volume generation from mass Bristol is the only brand under ITC’s 64 mm product launches wherein the size of the contraband consumers by leveraging on pack has been differentiated but the filter size has been maintained. Taking into context 69 mm Bristol brand strength. the low product pricing, we estimate that ITC’s business strategy for Bristol 64 mm is to offer a similar quality product as 69 mm at an affordable price point to consumers. ITC is clearly targeting recruit of new mass consumers to drive cigarette volume growth
Bristol 64 mm launched in markets of 69 mm, hence sharp pricing difference can Incremental volumes to be margin dilutive with significantly lower EBIT/stick trigger downtrading. Bristol 64 mm EBIT margins at ~15% significantly lower We believe the 64 mm will generate incremental volumes for the company but will than the 69 mm at ~54%, thereby being primarily be margin dilutive with uneventful contribution to cigarette segment EBIT. On margin dilutive account of lower pricing, EBIT margins for Bristol 64 mm is estimated at ~15%, significantly lower than that of Bristol 69 mm and ITC’s Cigarette segment EBIT margins at 54% and ~57% respectively. Bristol 64 mm absolute EBIT contribution is also estimated to be uninspiring at Rs. 0.1 per stick against ITC’s Cigarette segment EBIT/ stick at Rs. 0.9. Bristol 64 mm EBIT/stick at R.s 0.1, significantly lower than 69 mm EBIT/stick of Rs. 0.7. Hence earnings accretion from Bristol 64 mm is insignificant.
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Capstan 64 mm launch is generating consumer interest in Uttar Pradesh
Capstan newly introduced 64 mm ‐ Regular size (69 mm) Capstan 64 mm advertisement in Patna‐ Bihar
Source: PhillipCapital India Research
Per stick economics of Capstan brand Capstan 64 mm under Capstan launched as 69 mm 64 mm Capstan “Deluxe Filter”. Gross MRP 32 Excise duty 1.19 0.67 VAT 0.61 0.41 Dealer Margins 0.39 0.26 Capstan 64 mm priced at Rs. 20/pack of Net Realisations 0.80 0.66 10 sticks, 69 mm is priced at Rs. 30/pack RM 0.23 0.21 of 10 sticks. MRP differential between Manufacturing and Freight 0.30 0.30 69 mm and 64 mm is lowest among the EBIT per stick 0.28 0.15 other 64 mm launches under ITC brands. EBIT Margin % 34.70 22.92 Source: PhillipCapital India Research Estimates
Capstan 64 mm launched in the brands largest market of Uttar Pradesh and Bihar Capstan 69 mm with revenue contribution of ~9% is a popular brand ITC has launched 64 mm under its economic brand Capstan priced at Rs. 2 per stick. in UP and Bihar. 64 mm under Capstan Capstan brand’s revenue contribution to ITC stands at ~9%. The company has launched has been introduced in the brand’s main the 64 mm in Uttar Pradesh state, which is the largest market for the Capstan Brand and states Bihar. Capstan is indicated to have a ~50%+ market share in UP.
Packet size and cigarette filter non – differentiated between 69 mm and 64 mm ITC has maintained the same size of the pack for the 69 mm and 64 mm Capstan brand. 64 mm pack and filter size is similar to The size of the filter is also similar and difference in the size of the stick being visible only 69 mm. With affordable pricing, 64 mm in the length of the tobacco. We interpret this as: can drive uptrading and/or Cigarette users who have been unable to uptrade to 69 mm Capstan brand will find it preemptively manage downtrading easier to do so due to lower price point and marginal difference in product quality due to pressure within the Capstan brand. similar size of the filter.
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In case of any visible sign of downtrading, it can be limited within the Capstan brand, hence preemptively restricting loss of consumers to competing brands.
64 mm Capstan targets to convert contraband cigarette and smokeless tobacco users. However shift of smokeless tobacco consumers to be challenging
Capstan 64 mm strategic launch in markets indicative of focus to drive Capstan 64 mm is being launched in markets ‐ UP and Bihar wherein the contraband volumes by converting contraband and cigarette and smokeless tobacco market is extremely strong. With lower pricing at Rs. 2 smokeless tobacco users. However shift per stick, ITC is aiming at converting the Re. 1 contraband cigarette users by offering a of smokeless tobacco users to be better quality product. Guthka is effectively banned in Bihar, and the ban is also to be challenging. implemented in UP from 1st April 2013. ITC is targeting to capitalise on the ban by shifting guthka users (pack priced at Rs. 2) to smoking tobacco category with cigarettes. However as stated above we estimate that smokeless tobacco users will largely seek to find alternatives in smokeless tobacco rather than shift to cigarettes.
With 64 mm finding initial acceptance with consumers, the launch is estimated to Initial response to Capstan 64 mm has contribute to ITC’s volume growth been encouraging as per channel Interactions with channel partners have indicated that the 64 mm Capstan is generating checks. Launch to be volume additive consumer interest. We also observed numerous point of sale advertisements of the for ITC. Capstan 64 mm launch. Hence considering the high brand saliency in the UP markets and the attractive price point, the 64 mm Capstan is expected to contribute to ITC’s cigarette volume growth.
64 mm launch is margin dilutive although dilution is relatively lower than that for the Capstan 64 mm is margin dilutive but Gold Flake brand dilution lower than the Gold Flake Capstan similar to Gold Flake brand is estimated to be margin dilutive for ITC with brand. We estimate that impact of estimated EBIT margins at 23% against ~35 % for the 69 mm Capstan brand. The addition to cigarette volumes from difference in the Gross MRP for 69 mm and 64 mm being lower than that of Gold Flake Capstan to be lower in terms of brand the EBIT per stick for 64 mm is 54% of Capstan 69 mm. This is relatively higher earnings accretion. than that of Gold Flake 64 mm. Downtrading holds imminent risk for the Capstan brand also.
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Wills Flake 64 mm to improve the Flake brand profitability for ITC
Wills Flake Regular size (69 mm) – newly launched 64 mm
64 mm under Wills Flake launched as Flake “Gold Crest”.
Source: PhillipCapital India Research
Per stick Economics of Wills Flake brand Flake 69 mm 64 mm The new 64 mm product under Flake Gross MRP 2.0 1.9 brand is priced equitably to the 69 mm Excise duty 1.19 0.67 at Rs. 2 per stick. With excise duty VAT 0.41 0.39 savings for ITC on 64 mm, the new Dealer Margins 0.26 0.25 launch improves the existing low Net Realisations 0.14 0.60 margin profile of the brand RM 0.15 0.14 Manufacturing and Freight 0.3 0.3 EBIT per stick ‐0.31 0.16 EBIT Margin % nmf 26.07 Source: PhillipCapital India Research Estimates
69 mm and 64 mm Flake brand priced equitably ITC’s Wills Flake Special Filter at 69 mm is priced at Rs. 2 per stick. The company has recently launched the 64 mm variant in Kerala as Wills Flake Gold Coast priced marginally Marginal differentiation between Flake 69 mm and 64 mm : With similar filter lower at Rs. 1.9 per stick. However on a loose stick basis both the brands retail at Rs. 2 size product quality is same as 69 mm. per stick. Size of pack is identical to 69 mm. Also Pack and Cigarette filter size being similar; consumers will be unable to decipher the difference. As exhibited, there is no difference in the size of the pack of the 69 mm and the 64 mm Flake brands. More importantly the size of the filter on the stick is also similar, on account of which the difference in the product quality will be limited. With similar retail price of Rs. 2 per stick, we estimate that consumers will be unable to decipher the difference between a 69 mm and 64 mm Flake.
Retailers have initiated push of 64 mm Flake over 69 mm. MRP being same, Excise duty On account of similar product pricing, savings will be value accretive for ITC retailers are able to initiate push of 64 In Tamil Nadu we observed that, on consumer’s request for Rs. 2 stick of Flake brand, the mm over 69 mm. retailers are pushing the 64 mm over the 69 mm. The 64 mm Flake brand reverses the economics of 69 mm Flake brand for ITC, as MRP being similar, ITC will benefit from the Rs. 0.5 per stick of excise duty savings. Hence the net realizations under Flake 64 mm improve by 4x from Rs. 0.15 per stick in the 69 mm to Rs. 0.60 per stick. With conversion
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of consumers from 69 mm to 64 mm being initiated, the strategy with introduction of Flake 64 mm is estimated to be value accretive for ITC.
New 64 mm brand being test marketed under Wills called Wills Royal. The product’s packaging largely resembles Godfrey Phillips’s MacroPolo brand
ITC’s new 64 mm brand Wills called Wiils Royal. Similar in packaging to GPI’s 64 mm brand MacroPolo
Source: PhillipCapital India Research
ITC launches new 64 mm brand under ITC is test marketing new brand in 64 mm category under Wills Wills called Wills Royale. It is currently ITC has initiated test marketing of new 64 mm brand in the Kerala market under Wills in test market phase, priced at Rs called Wills Royal. The brand has been launched recently in mid September 2012. The 19/pack of 10 sticks product is priced at Rs. 19 for 10 sticks, similar to the other 64 mm cigarette launches by ITC.
Packaging of Wills Royale resembles Brand packaging resembles Godfrey Phillip’s Macro Polo brand but as yet has not been competitor Godfrey Phillip’s brand launched in Macro Polo brand’s market. Macro Polo. With a cursory observation of the new Wills Royal brand we find that the product resembles Godfrey Phillip’s Macro Polo brand. Godfrey has also launched a 64 mm under the Macro Polo brand priced at Rs. 20 for 10 sticks. The Wills Royal brand has not yet been launched in markets wherein MacroPolo is present i.e namely North India states. Hence in the current preliminary stages it is yet early to ascertain whether the business strategy is to compete with Macro Polo under the Wills Royal brand.
New 64 mm brand under Wills will Prudent business strategy by ITC to launch a new 64 mm brand under Wills rather than enable ITC to recruit new consumers by dilute the Wills Navy Cut 74 mm brand. capitalizing on Wills’ brand equity. Wills Navy Cut 74 mm primarily known as Wills contributes ~10% to ITC’s revenues. Any 64 mm introduction under the Wills Navy Cut would have diluted the premium brand equity of Wills Navy Cut 74 mm. Hence we estimate that so as to capitalise on the Wills premium brand equity and offer an economic proposition to the consumer with 64 mm ITC has launched the new Wills Royal brand.
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Downtrading risk would have been Do not expect downtrading threat for the Wills brand with the 64 mm launch amplified if ITC had introduced 64 mm Taking into account the sharp difference in the MRP and the size of the products ie. 74 under the current Wills brand. Hence mm and 64 mm, we do not expect downtrading to be a visible risk for the Wills brand. the new 64 mm brand averts the threat. The 64 mm launch is estimated to generate incremental volumes for ITC from contraband users who would be willing to overlook the marginal difference in size between 69 mm and 64 mm so as to uptrade to the Wills brand.
Scissors Metro being test marketed in smaller towns targeting market share gains ITC has launched 64 mm under the Scissors brand as Scissors Metro. The product has Scissors 64 mm being test marketed in been introduced in smaller towns in the state of Kerala. Scissors brand is the market small towns in Kerala state. The product leader in Kerala with an estimated market share of 50 – 55%. As indicated by ITC channel has achieved success in gaining volume partners, the company is targeting gain in market share in strategic market locations market share from competing brands wherein competing brands have considerable market presence. The channel partners like VST’s Moments. shared that since the launch of Scissors Metro in the town of Nandapuram in August 2012, the volume of the main brand ‐ VST Industries’ Moments has halved from 4 mn sticks to 2 mn sticks. Presently ITC has not launched the 64 mm in the larger markets of 69 mm Scissors brand; hence threat of downtrading is limited in the near term.
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Godfrey Phillips takes an aggressive stance in 64 mm cigarette segment to corner higher shelf space
Godfrey Phillips has significantly Godfrey Phillips had initiated the 64 mm product launch under the Four Square brand increased product activations in the and the company has extended the 64 mm launch under the Tipper, Red & White and newly developed 64 mm cigarette MacroPolo in the last 6 months. The company has also launched 64mm in non‐filter segment to meet competitive pressure cigarette under the brand Cavenders. from ITC.
Godfrey Phillips 64 mm product launches across brands and price per pack
Note: Godfrey has also launched 64 mm under the Red & White brand which is not present in the above picture Source: PhillipCapital India Research
GPI has introduced 64 mm filter Aggressively meeting competitive pressure from ITC and increasing shelf space cigarette under 4 brands namely Four ITC has stepped up the introduction of 64 mm Gold Flake brand in Rajasthan; one of the Square, Red & White, Tipper and main markets for Godfrey’s largest brand Four Square (contributes 58% to the MacroPolo. 64 mm non filter product is company’s revenues). With ITC placing pressure on the company with a slew of 64 mm introduced under Cavendars brand. launches, Godfrey has also expanded the number of 64 mm launches under various brands and extended the market coverage with introduction in several West India states. Godfrey is also supporting the launches with extensive point of sale advertisements. The company has introduced the 64 mm With this strategy GPI is aiming to increase its product shelf space at retailer end so as to products in several West India states drive volume growth and mitigate competitive pressure. and has initiated extensive point of sale advertisements. Economics of Godfrey’s 64 mm product launches relatively better than ITC Godfrey has priced its 64 mm launches competitively, similar to ITC however the Difference in net realization of GPI’s 69 difference in realizations between 69 mm and 64 mm are not as steep as observed in few mm and 64 mm is lower than ITC. Hence of ITC’s main brands Gold Flake, Bristol, Scissors and Capstan. Hence the estimated we estimate economics of GPI’s 64 mm impact of 64 mm launch on margin dilution and EBIT/ stick is relatively better for Godfrey product launches are relatively superior to ITC’s than for ITC.
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Four Square 64 mm competing with Gold Flake 64 mm on pricing
Four Square newly introduced 64 mm and Regular size (69 mm) 64 mm point of sale advertisement in Maharashtra
Source: PhillipCapital India Research
Per stick Economics of Four Square brand Four Square 69 mm 64 mm 64 mm launched under Four Square brand launched as Four Square “Prime Gross MRP 3.7 2.5 Blend”. Four Square 64 mm priced at Rs. Excise duty 1.19 0.67 25/pack of 10 sticks, while 69 mm is VAT 0.93 0.63 priced at Rs. 37/pack of 10 sticks. Four Dealer Margins 0.41 0.28 Square Red 64 mm launched in Net Realisations 1.17 0.93 Maharashtra. Four Square Green 64 mm Source: PhillipCapital India Research Estimates launched in Rajasthan. Four Square 64 mm launched in 2 variants. Pack and filter size similar to Four Square 69 mm Godfrey has launched 64 mm in 2 variants under the Four Square brand. We found 64 mm Four Square (Red) launch in Maharashtra and Four Square (Green) launch in 64 mm pack and filter size is similar to Rajasthan. The size of the pack and cigarette filter is similar to the Four Square 69 mm. 69 mm. Product quality is largely This is against ITC introducing 64 mm Gold Flake in a smaller pack and filter relative to similar. the 69 mm. The 64 mm is priced at Rs. 2.5 per stick against Rs. 3.7 per stick for 69 mm.
64 mm Four Square competes effectively with 64 mm Gold Flake with similar product pricing. Hence incremental volume for Gold Flake 64 mm brand estimated to be challenging. With Gold Flake 64 mm, ITC is targeting 69 mm Four Squares’ market. Hence product Four Square 64 mm pricing is equivalent intervention with 64 mm under Four Square is imperative for Godfrey. We estimate that to Gold Flake’s 64 mm pricing at time of product quality between Four Square and Gold Flake is largely similar, hence product its launch. GPI is also aggressively pricing is the critical point. Godfrey has priced the 64 mm Four Square at Rs. 2.5 per stick promoting 64 mm launch in markets similar to the price point of Gold Flake 64 mm (at the time of its launch). Recently, ITC wherein ITC’s Gold Flake 64 mm is present. Hence incremental volumes has hiked the 64 mm Gold Flake prices to Rs. 2.8 per stick however Four Square 64 mm from Gold Flake 64 mm to be a price has been maintained. Both the competing 64 mm brands are also investing challenge for ITC extensively in point of sale advertisements. We estimate that on account of the increase in competitiveness by Godfrey Phillips, Gold Flake 64 mm brand’s ability to generate incremental volumes from shift of Four Square brand users is to be challenging.
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Four Square 64 mm margins marginally Margin dilution impact on Four Square brand from 64 mm is marginal. Relative to Gold lower than 69 mm as excise duty Flake 64 mm, the economics for Four Square brand is better. savings lowers impact of difference in Net realization difference between Four Square 69 mm and 64 mm is marginal. 64 mm realizations. Hence although GPI has realizations are estimated at Rs. 0.93 which is lower than Rs. 1.17 for 69 mm. Hence the priced Four Square competitively to margin dilution between Four Square 69 mm and 64 mm is marginal. In comparison to its Gold Flake 64 mm, the economics are main competing brand Gold Flake, the 64 mm net realizations for Four Square is ~80% relatively better that of the 69 mm while that under the Gold Flake brand in ~60%. Hence the quantum of margin dilution and decrease in absolute EBIT per stick is estimated to be lower for the Four Square brand. Inspite of Godfrey pricing Four Square 64 mm competitively against ITC’s Gold Flake brand, prima facie the economics are estimated to be relatively better, a positive for Godfrey.
Aggressive brand investments undertaken for Four Square brand
Consumer promotion scheme advertisement for Four Square Kings (left picture) and Four Square brand (right pictire) at point of sale (Mumbai – Maharashtra)
Source: PhillipCapital India Research
We notice that along with aggressive launch of 64 mm cigarette under the Four Square brand, Godfrey has also stepped up competitiveness in the Kings (84 mm) and RSFT (69 mm) variants of the Four Square brand. The company is undertaking initiatives to step up presence in the Kings category and maintain/gain volume market share in the 69 mm category. We have noticed significant presence of point of sale advertisements promoting schemes for consumers across outlets in Mumbai. Mumbai is one of the main markets for the Four Square brand. Hence we estimate that Godfrey is also focusing on a massive volume strategy in its mainstay brand of Four Square.
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64 mm launched in the non filter segment under Cavendars brand
Cavanders newly launched 64 mm non filter – Regular size (69 mm)
Source: PhillipCapital India Research
GPI launches 64 mm non filter under the Godfrey also launches 64 mm in the non filter segment. Company is clearly focused on Cavandars brand in. The product is defending its current cigarette volume market share. priced at Rs. 20/pack of 10 sticks at a Godfrey has launched a 64 mm in the non filter cigarette segment in Gujarat under the discount to the 69 mm product price of Cavandars brand. The product is priced at Rs. 2 per stick against the 69 mm product price Rs. 37/pack of 10 sticks. 64 mm launch of Rs. 3.7 per stick. We observe that Godfrey is being broad based in its product launches found in the state of Gujarat. under the 64 mm segment. Introductions in the non filter segment also indicate the clear focus of the company in defending its current volume market share across brands and segments.
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Godfrey’s pricing of MacroPolo 64 mm estimated to contribute to similar net realizations as 69 mm GPI launches 64 mm under MacroPolo Macro Polo brand was launched by Godfrey Phillips as a flanking strategy for the main brand as MacroPolo “Prince”. 64 mm brand Four Square to manage downtrading consumers from Four Square within the product priced at Rs. 20/pack of 10 Godfrey portfolio of brands. MacroPolo 69 mm was launched with an aggressive pricing sticks as against 69 mm product price of of Rs. 28/pack of 10 sticks to compete effectively against ITC’s brands of Bristol and Rs. 28/pack of 10 sticks Flake. The product has a very attractive packaging, and the launch of the product was accompanied by consumer and retailer promotions.
MacroPolo Regular size (69 mm) – newly launched 64 mm MacroPolo 64 mm point of sale advertisement at Uttar Pradesh
Source: PhillipCapital India Research
MacroPolo 69 mm promotion ad in Mumbai
Per stick economics of MacroPolo brand Macro Polo 69 mm 64 mm Gross MRP 2.8 2 Excise duty 1.19 0.67 VAT 0.70 0.50 Dealer Margins 0.31 0.22 Net Realisations 0.60 0.61 Source: PhillipCapital India Research Estimates
Source: PhillipCapital India Research
64 mm launched under MacroPolo in UP as Macro Polo Prince. Size of packaging 64 mm pack size is similar; however size similar to 69 mm but size of the filter is smaller of cigarette filter differs. Hence there is a difference in the 69 mm and 64 mm Godfrey has launched 64 mm under Macro Polo brand as Macro Polo Prince. We came product quality across the launch in the state of UP. We observe that similar to certain other 64 mm launches the size of the packaging is similar. However there is a visible difference in the size of the cigarette filter, on account of which there is a difference in the product quality between 69 mm and 64 mm.
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On account of excise duty savings under Godfrey’s pricing of the 64 mm product estimated to sustain absolute net realizations 64 mm, the absolute net realizations for of the MacroPolo brand. Hence margins estimated to improve. the MacroPolo brand is estimated to be The company has priced 64 mm MacroPolo Prince at Rs. 2 per stick as against the Rs. 2.8 sustained at Rs. 0.6 per stick. Hence the per stick pricing of the 69 mm. After ITC’s pricing of the 64 mm Flake (Rs. 1.9 per stick 64 mm product EBIT margins estimated nearly similar to the 69 mm at Rs. 2 per stick), it is Godfrey’s pricing for the Macro Polo to be higher than 69 mm. 64 mm that is at a lower discount to the 69 mm. On account of the pricing and the Rs. 0.50 excise duty savings, we estimate Godfrey to generate similar absolute net realizations from the 64 mm as the 69 mm i.e Rs. 0.6. Hence margins for 64 mm are estimated to be higher than the 69 mm product. In a scenario of possible downtrading or recruitment of new consumers by the 64 mm variant, we estimate brand margins to improve and absolute EBIT to sustain, a positive for Godfrey Phillips.
Tipper 64 mm being launched aggressively in Maharashtra
Tipper newly launched 64 mm pack Point of sale advertisement in Maharashtra
Source: PhillipCapital India Research
Tipper 64 mm launched in Maharashtra. Expected to enable Godfrey to sustain growth in Tipper filter brand 64 mm launched under Tipper brand in We observe that Godfrey has initiated an aggressive launch of 64 mm under Tipper Maharashtra at Rs. 20/pack of 10 sticks. brand in Maharashtra with product pricing of Rs. 2 per stick. Tipper brand revenue Aggressive point of sale advertisements contribution is marginal at 2% to 3%. The pricing is in line with that observed for majority observed of the 64 mm product. of the 64 mm product launches. Godfrey had launched 69 mm filter cigarette in Tipper brand after the steep hike in excise duty for non filter cigarette segment so as to migrate consumers to the filter segment. We view the 64 mm launch a step in the similar direction to maintain traction in the Tipper filter brand and prevent probable loss of consumers to competing 64 mm launches.
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VST Industries 64 mm non filter pricing the most aggressive amongst the product launches in the 64 mm category
Charminar regular size (69 mm) non filter and newly introduced 64 mm
Currently VST and Golden Tobacco have launched 64 mm products under a single brand respectively.
Source: PhillipCapital India Research
VST launches 64 mm in the non filter VST Industries has launched 64 mm under the Charminar brand in non filter segment. segment under the Charminar brand. 64 Aggressive pricing estimated to impact margins. mm product launched as Charminar VST has launched 64 mm in the Charminar brand in Maharashtra as per our findings. The “Regular”. Pricing post competitive in size of the packaging is distinctly smaller than the 69 mm. 69 mm non filter Charminar is the 64 mm space at Rs. 15/pack of 10 priced at Rs. 2.9 per stick whereas the 64 mm is priced at Rs. 1.5 per stick. The product sticks. pricing of 64 mm by VST is the most aggressive in the 64 mm category, wherein Godfrey has also priced its introduction in the 64 mm non filter at Rs. 2 per stick. VST’s pricing being at a steep discount to the 69 mm, EBIT margins in 64 mm relative to 69 mm is estimated to be lower. As per our channel checks the company is yet to launch 64 mm in the filter segment. Hence the initial launch by VST in 64 mm is estimated to hold negative impact for the company.
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Golden Tobacco launches 64 mm in the Panama brand to remain competitive
64 mm launched under Panama brand Golden Tobacco has also launched 64 mm filter cigarette Golden Tobacco launches 64 mm filter under the company’s main brand Panama in the state of cigarette in the Panama brand. Product Kerala as per our observations. The product is priced at priced at Rs. 19/pack of 10 sticks. 64 Rs. 19 for 10 sticks. Considering series of product mm product launch observed in Kerala launches in the 64 mm segment by ITC in Kerala state state. (under 3 brands – Scissors, Wills and Flake), Golden Tobacco’s 64 mm launch in this context is so as to remain competitive.
Source: PhillipCapital India Research
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Smoke‐less Tobacco category chewing into Cigarettes
Smokeless tobacco category volume In the past 5 years, growth in Cigarette category has primarily been driven by pricing growth continues to outperform the Cigarette volume growth. Intensity has with flat to marginal positive volume growth. However Tobacco industry volume growth increased in the past 5 years. has been robust primarily driven by strong volumes in the Smokeless tobacco industry. Our interactions with channel partners in Cigarette segment has indicated that perceived threat from smokeless tobacco has increased in the past few years, with loss of new Competitive risk from Smokeless consumers to smokeless tobacco and inability to shift alternative smoking tobacco tobacco market for Cigarettes has product consumers like bidi users to cigarettes. While Smokeless tobacco has been the increased. major tobacco industry in North and West Indian states, the market presence in South Indian states has increased significantly driven by migration patterns.
Premium smokeless tobacco products occupy significant shelf space Note the shelf space for paan masala and smokeless tobacco products
Note: 200 sq. ft tobacco products retail outlet in up‐market Rajarampuri ‐ Kolhapur Note: Paan bidi shop at Hajipur – Bihar (Gutkha has been banned in the state) Source: PhillipCapital India Research
New mass consumers in age group of 15 Addition of new consumers in Tobacco industry is largely being observed in smokeless – 18 years continue to opt for smokeless tobacco segment relative to smoking tobacco. tobacco products as dominance of Majority of new middle and lower class consumers in the age group of 15 – 18 years are smokeless tobacco on peer consumption opting for smokeless tobacco over smoking tobacco. Main drivers being adoption of peer habit continues and wide product consumer habit that continues to be dominated by smokeless tobacco and wide range of portfolio in terms of quality and pricing. products at diverse price points including several that are affordably priced. Hence the Cigarette sector has been losing out on potential new consumers
Labour class consumption habit continues to be predominated by smokeless tobacco. Migration from North and Central Indian states shifting habits in the smoking tobacco Smokeless tobacco increasing market denominated states. presence in cigarette dominated states Smokeless tobacco has been developing into a sizeable market in the Cigarette habit in South India. Trend is being driven by dominated South India states. The major contributor being migration of laborers from migration pattern. North and Central India based states. A brief survey by one of ITC’s channel partners in South India of his retailers startlingly revealed that absolute revenues generated from Cigarettes was equivalent to Smokeless tobacco. Hence the direct threat from the smokeless tobacco industry to Cigarettes has intensified in the recent few years.
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Smoking tobacco industry losing out to smokeless tobacco industry. Shift of Bidi Bidi category has contracted sharply. consumers to smokeless tobacco being witnessed Bidi product users are overlooking direct The Indian Bidi industry has severaly contracted in the last decade. Steep increase in product substitute ie. Cigarettes and opt product pricing is exerting pressure on bidi volumes. In the table below we have for smokeless tobacco products. Hence depicted broad indicators as provided by the distributor. However against the probable Cigarette category’s ability to leverage assumption that Cigarette being a direct substitute would have benefited from change in on the opportunity is being limited. consumption habit of Bidi consumers, the shifting gain has largely accrued to Smokeless tobacco products. The main reasons for the shift being affordability and better product experience.
Ratio of bidi : cigarette users < CY2000 CY2011 Kerala Pan India Kerala Pan India Bidi 82518 Cigarette 1111 Source: ITC Channel partner in South India
Tobacco based toothpowder found Steep pricing of Bidi at Rs. 12/ pack of 25 sticks widely
Source: PhillipCapital India Research
Cigarette category faces competitive Large consumer base exists for premium smokeless tobacco products that are of pressure also at the high end from superior quality. Hence competitive pressure for cigarette category from smokeless premium smokeless tobacco products tobacco not restricted to only affordable mass products that are of superior product quality. In our findings we observed that apart from mass smokelesss tobacco products that are easily available, there is a large market for premium smokeless tobacco products. In certain high end outlets that retail tobacco products, the premium smokeless tobacco Premium Smokeless tobacco products products occupy higher shelf space than King size and imported cigarette brands. Hence occupy higher shelf space than imported smokeless tobacco products offer wide choice in terms of pricing and product quality to and king size cigarette brands in high users. end retail tobacco outlets
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Guthka users ready to pay 4x the price Ban on Guthka does not hold the perceived market opportunity for Cigarette segment for products in the black market. Hence as consumers most likely to shift to readily available alternatives in smokeless tobacco due to high level of stickyness – probability of guthka consumers shifting to alternative smokeless Plain tobacco easily available in states where guthka ban has been imposed tobacco products is higher
Guthka users have several alternative options under smokeless tobacco category – paan masala+tobacco, khaini, plain tobacco and paan.
Note: Retail outlet in Karad ‐ Maharashtra Source: PhillipCapital India Research
Plain tobacco products can be utilized 14 states in India have announced ban on sale of guthka products in CY12. Inspite of the by guthka users in developing alternative products for consumption. ban media reports and interactions with channel partners indicate that black market is Plain tobacco easily available in states certainly present. Rs. 2 per packet Guthka is available at Rs. 8 per packet in the black wherein guthka ban has been imposed. market. Inspite of 4x increase in product price, consumer demand for guthka continues unabated.
In the medium to long term as the ban is rigorously implemented, we believe that Guthka users will not easily shift to smoking tobacco namely Cigarettes against the We estimate Cigarette category has prevailing perception. There are several smokeless tobacco products available to guthka limited ability to capitalise on the users ‐ paan masala + tobacco, khaini, plain tobacco and paan. These products provide opportunity of ban on guthka. similar product experience as guthka and would largely be the preferred choice to shift mode of tobacco consumption. Hence ban on guthka does not hold high market potential for the Cigarette category.
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64 mm can dent the Contraband cigarette market: But growth will be protracted
The Contraband cigarette industry has scaled up significantly in the past few years. The segment currently represents ~15% of total Cigarette volumes. Generally contraband Contraband cigarette market has products retail for as cheap as Rs 5 for 10 sticks to Rs 25 per 10 sticks. Product significantly increased market presence to ~15% of the total Cigarette market. affordability has been the key driver for expansion in the contraband category. The present organized incumbents like ITC have been unable to compete on pricing with the contraband segment. However now 64 mm has presented the opportunity to introduce products at a lower price point and tap the potential of converting contraband users.
Contraband cigarette brands acquired across states during our road trip
Decreasing affordability of RSFT (69 mm) brands has led to increase in consumer addition to contraband market.
Contraband cigarettes priced largely at Re1/stick. However, good quality contraband cigarettes also available at Rs. 2 to 2.5/stick
Source: PhillipCapital India Research
Contraband cigarette brand Midland 69 mm cigarette segment has been facing threat from the contraband cigarette market. has achieved successful market The 69mm cigarette segment volume growth has lagged that of the Cigarette category presence in small towns in Kerala state (including contraband) on account of steep price growth, new consumers opting for contraband and smokeless tobacco and possible downtrading. Contraband cigarettes in 69 mm are primarily available at Re. 1 per stick, this is against the majority of the product pricing at Rs. 3 to Rs.5 per stick in the organized filter cigarette segment. Hence Cigarette companies have been unable to counter the contraband market with their current product portfolio.
Certain contraband cigarette Certain premium (Rs. 2 – Rs. 2.5 per stick) contraband cigarettes are enjoying good manufacturers are ex – ITC OEM’s. success. Hence these products are also of good There are also certain contraband cigarettes priced at Rs. 2 to 2.5 per stick in the 69 mm quality on account of better product quality. Midland, Good Times are certain brand names available in the premium contraband market. The manufacturers of some of the contraband brands are said to be Ex – ITC Cigarette OEM’s. In Kerala state Midland brand has exhibited strong growth. The packaging and the brand name has been able to establish the impression of lower priced imported brand on mass consumers.
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Contraband cigarette market is an 64 mm opportunely places cigarette companies to tap volume from contraband important market opportunity for 64 cigarettes. ITC relatively better placed to capitalise on generating volumes from mm. 64 mm has enabled cigarette contraband market. companies to launch products at lower price points to compete effectively with contraband cigarette With 64 mm, cigarette companies now have the ability to price products competitively against contraband cigarettes. We estimate companies that are aggressive in their ITC with aggressive 64 mm product pricing and distribution strategy to gain most in volume terms from the contraband launches under 6 brands, distribution segment. With rising competitive intensity in the 64 mm market, We believe that ITC strength, market leadership is best with launches in 6 brands, competitive pricing and largest market presence is better placed to capitalise on incremental placed to capitalise on the contraband market opportunity. volumes from contraband cigarette market.
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Key Conclusions
We find the cigarettes category is now seeing dynamic changes with new product introductions and regulatory changes some positive and some negative for the sector. We believe the organized cigarettes sector has the potential to register volume growth over the medium‐term even as incidence of smoking has continued to fall.
The key reasons which can contribute to rise in cigarette category growth are as follows: 1. Bidis price growth has been significant in the last 5 years with the current MRP of Rs 12 for 25 sticks. While the transition bidi consumers to smokeless tobacco are more frequent but cigarettes at right price points provide an attractive avenue to coax consumers. 2. The proliferation of 64mm products in these markets could help the cigarette companies to attract the consumers. 3. Contraband has continued to grow at fast pace and currently constitutes 15% of the cigarettes market. Contraband products are generally of poor quality (except a few) and attracting these consumers will help the cigarette companies to register volume growth. 4. Ban on Gutkha if implemented for a fairly long duration could attract the potential new consumers to cigarettes which can generate healthy volume growth.
Thus, we see certain positives for the sector and believe that the sector has the potential to register volume growth over the medium term but while volume growth could see traction we believe that ITC may not be able to meet the long‐term expectations as we continue to see strong headwinds for the sector. The key headwinds are as follows: 1. Pricing efficacy is declining as state VAT has continued to rise at rapid pace. State VAT paid by ITC has grown at 25% CAGR over the last 5 years. 2. Ban of Gutkha by 14 states will lead the states to further hike VAT on cigarettes. 3. Considering the flattish to marginal volume growth in FY13E, excise duty hikes in FY14 cannot be ruled out. 4. Competitive intensity in the category is rising with GPI taking an aggressive stance. 5. Down trading risks are more imminent now with the introduction of low priced 64mm cigarettes. 6. FCTC regulations including harsher pictorial warnings and plain packaging pose severe long‐term risks for the sector.
Hence, we believe the negatives outweigh the positives for the sector while the steep valuations leave little room for negative surprises which will reduce the defensive capabilities of the stock.
We continue to remain negative on ITC on account of category changes, rising regulatory risks and steep valuations. We maintain our Sell recommendation on the stock.
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ITC Massive volume strategy in the making PhillipCapital (India) Pvt. Ltd. FMCG: Company Update 8 November 2012
Massive volume strategy in the making: In our survey we observed that ITC has launched 7 new products which include 6 new products in the 64mm category SELL and one in 69mm (Will Navy Cut in South India) product. The pricing of 64mm ITC IN | CMP RS 289 products across the industry is very aggressive with the cheapest product at Rs TARGET RS 260 (‐10%) 1.5/stick (VST’s Charminar) and most expensive at Rs 2.8/stick (ITC’s Gold Flake). Company Data We find the cigarettes industry is gearing up for a massive volume strategy as O/S SHARES (MN) : 7863 State VAT continues to rise reducing the pricing efficacy for cigarettes category. MARKET CAP (RSBN) : 2260 Thus, cigarette companies are looking to win more consumers and drive volume MARKET CAP (USDBN) : 41.5 52 ‐ WK HI/LO (RS) : 299 / 189 growth with attractive price points. LIQUIDITY 3M (USDMN) : 31.8 FACE VALUE (RS) : 1
Pan India launch of 64mm over the next 6‐12 months: Price points may not be Share Holding Pattern, % materially different: Retailers in UP indicated that the Capstan 64 mm is FII / NRI : 49.4 witnessing reasonable off‐take and the product has gained market acceptance. In FI / MF : 34.1 Kerala, Scissors Metro (64 mm variant in Scissors brand) has gained significant NON PROMOTER CORP. HOLDINGS : 5.7 PUBLIC & OTHERS : 10.7 market share from VST’s Moments brand in the markets of launch. We believe cigarette companies are likely to accelerate the pan‐India launch of 64mm Price Performance, % 1mth 3mth 1yr products over the next 6‐12 months, failing which, market share loss to ABS 4.2 10.8 36.6 competition is imminent. We also believe the price points are unlikely to be REL TO BSE 5.3 1.8 29.9 materially different as the current price points are attractive to upgrade Bidis and Price Vs. Sensex (Rebased values) contraband cigarette consumers while the competitive intensity is likely to keep 250 prices in check. 220 But the strategy is margin dilutive: While volume growth is critical for consumer 190 companies, we find the 64mm strategy is margin dilutive for ITC on account of 160 down trading risks as the EBIT margins and absolute EBIT/stick for 64mm are significantly lower than the company average. The 69mm Goldflake is the most 130 profitable product for ITC with current operating margins at ~70% with an EBIT 100 contribution of 36% (of cigarettes EBIT FY13E) while the 64mm GoldFlake has 70 EBIT margins at ~52% with an absolute EBIT of Rs 0.7 as compared to Rs 1.5 for Apr‐10 Dec‐10 Aug‐11 Apr‐12 69mm. We believe the differences between product quality of 69mm and 64mm ITC Rel. to BSE are not very significant and thus down trading will translate to margin dilution Source: Bloomberg, Phillip Capital Research and sluggishness in EBIT growth. Other Key Ratios Rs mn FY12 FY13E FY14E Smokeless tobacco continues to remain at epidemic levels: 14 states have Net Sales 247,984 286,624 333,297 banned Gutkha products but we found that smokeless tobacco continues to Ebidta 88,486 104,102 121,954 remain at epidemic levels in India. We also found that consumers more readily Net Profit 61,621 71,586 83,477 shift from bidis and cigarettes to smokeless tobacco than vice‐versa. We believe EPS, Rs 8.0 9.2 10.7 PER, X 36.3 31.6 27.1 that ban of smokeless products is unlikely to have any significant impact on EV/EBIDTA, % 25.0 21.1 17.8 cigarette consumption as consumers continue to have a number of alternatives. EV/Net Sales, x 8.9 7.7 6.5 ROE, % 35.5 35.4 35.5 Source: PhillipCapital India Research Est. Maintain Sell recommendation on ITC with price target of Rs 260: ITC’s cigarette business currently trades at PER of 28x on FY14E earnings, inline with consumer staples sector which is not sustainable in the long run. Thus considering the rising strategic risks, increasing state VAT (now a bigger risk than excise duty), regulatory risks (FCTC regulations) and stretched valuations we believe the risk to reward ratio is highly unfavorable for ITC. We maintain our Sell recommendation on the stock with a price objective of Rs 260 in‐line with our DCF valuation.
8 November 2012 / INDIA EQUITY RESEARCH / ITC COMPANY UPDATE
Income Statement Cash Flow Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Net sales 211,676 247,984 286,624 333,297 Pre‐tax profit 72,682 88,973 104,125 122,760 Growth, % 16.6 17.2 15.6 16.3 Depreciation 6,559 6,988 8,030 8,701 Total income 214,590 251,738 290,003 337,097 Chg in working capital ‐4,336 1,324 ‐4,500 ‐4,090 Operating expenses ‐140,464 ‐163,252 ‐185,900 ‐215,143 Total tax paid ‐22,637 ‐26,643 ‐41,266 ‐39,283 EBITDA 74,126 88,486 104,102 121,954 Cash flow from operating activities 52,268 70,642 66,389 88,088 Growth, % 22.1 19.4 17.6 17.1 Capital expenditure ‐11,834 ‐24,029 ‐9,037 ‐16,575 Margin, % 35.0% 35.7% 36.3% 36.6% Chg in investments 1,724 ‐7,621 19,533 0 Depreciation ‐6,559 ‐6,988 ‐8,030 ‐8,701 Cash flow from investing activities ‐10,110 ‐31,650 10,496 ‐16,575 EBIT 67,567 81,499 96,072 113,253 Free cash flow 42,158 38,991 76,885 0 Growth, % 22.1 19.4 17.6 17.1 Equity raised/(repaid) 3,920 80 0 0 Margin, % 35.0 35.7 36.3 36.6 Dividend (incl. tax) ‐40,015 ‐40,890 ‐43,172 ‐45,444 Interest received/(paid) ‐684 ‐779 ‐806 ‐867 Cash flow from financing activities ‐36,095 ‐40,810 ‐43,172 ‐45,444 Other Income 5,798 8,253 8,860 10,374 Net chg in cash 6,063 ‐1,819 33,713 26,069 Pre‐tax profit 72,682 88,973 104,125 122,760 Tax provided ‐22,806 ‐27,352 ‐32,539 ‐39,283 Profit after tax 49,876 61,621 71,586 83,477 Valuation Ratios & Per Share Data Net profit 49,876 61,621 71,586 83,477 FY11 FY12 FY13E FY14E Growth 22.9 23.5 16.2 16.6 EPS, Rs 6.5 7.96 9.16 10.7 Unadj. shares (m) 7,713 7,738 7,818 7,818 BVPS, Rs 21.2 24.9 27.7 32.5 Wtd avg shares (m) 7,541 7,541 7,818 7,818 DPS, Rs 4.6 4.7 4.8 5.0
Return on assets (%) 20.5 22.5 23.6 24.6
Return on equity (%) 33.2 35.5 35.4 35.5 Balance Sheet Return on Invested capital (%) 39.7 43.8 46.8 50.7 Y/E Mar, Rs mn FY11 FY12 FY13E FY14E RoIC/Cost of capital (x) 5.0 5.5 5.9 6.4 Cash & bank 22,432 28,189 61,891 87,959 RoIC ‐ Cost of capital (%) 31.8 35.9 38.9 42.8 Debtors 8,851 9,860 11,190 13,012 Return on capital employed (%) 24.4 27.0 28.3 29.5 Inventory 52,692 56,378 64,524 72,296 Cost of capital (%) 7.9 7.9 7.9 7.9 Loans & advances 18,032 18,311 20,716 23,866 RoCE ‐ Cost of capital (%) 14.5 16.5 19.1 20.4 Total current assets 102,007 112,739 158,321 197,134 Asset turnover (x) 1.7 1.8 1.9 2.0 Investments 55,545 63,166 43,633 43,633 Sales/Total assets (x) 0.9 0.9 0.9 1.0 Gross fixed assets 127,770 141,519 159,019 174,019 Sales/Net FA (x) 2.2 2.4 2.5 2.8 Less: Depreciation 44,208 50,452 60,880 69,581 Working capital/Sales (x) 0.2 0.1 0.1 0.1 Add: Capital WIP 13,226 22,763 16,697 18,272 Receivable days 15 15 14 14 Net fixed assets 96,789 113,830 114,837 122,711 Inventory days 91 83 82 79 Non‐current assets 4,083 4,243 0 0 Payable days 116 107 106 102 Total assets 258,424 293,978 318,278 364,965 Current ratio (x) 2.3 2.3 2.9 3.3 Quick ratio (x) 1.1 1.2 1.7 2.1 Current liabilities and Provisions 44,735 48,087 54,176 59,953 Interest cover (x) 98.8 104.6 119.1 130.6 Total current liabilities 44,735 48,087 54,176 59,953 Dividend cover (x) 1.4 1.8 1.9 2.1 Non‐current liabilities 13,094 13,861 891 891 PER (x) 44.7 36.3 31.6 27.1 Total liabilities 98,892 106,059 101,957 110,612 Price/Book (x) 13.7 11.6 10.4 8.9 Paid‐up capital 7,738 7,818 7,818 7,818 EV/EBIT (x) 29.8 25.0 21.1 17.8 Reserves & surplus 151,794 180,100 208,502 246,534 EV/NOPLAT (x) 43.4 36.0 30.7 26.2 Shareholders’ equity 159,532 187,918 216,321 254,353 EV/CE 10.3 9.0 8.3 7.1 Total equity & liabilities 258,424 293,977 318,278 364,965 EV/IC (x) 17.2 15.8 14.4 13.3
Source: Company, PhillipCapital India Research Estimates
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Hindustan Unilever Strong operational performance PhillipCapital (India) Pvt. Ltd. FMCG: Company Update 8 November 2012
We met several channel partners of Hindustan Unilever in our survey and we received a strong and a positive feedback for the company. Our key findings for NEUTRAL the company are as follows: HUVR IN | CMP RS 532 TARGET RS 500 (‐6%) Zero Day Inventory distribution model garnering positive reviews: HUL has been Company Data rolling out the new Zero Day Inventory distribution model in Tier 1 and Tier 2 O/S SHARES (MN) : 2162 cities. The new distribution model reduces the investment requirements by the MARKET CAP (RSBN) : 1153 distributor on inventory and significantly curtails the storage space for inventory. MARKET CAP (USDBN) : 21.2 52 ‐ WK HI/LO (RS) : 571 / 368 As HUL has reduced the investment requirements the company is encouraging LIQUIDITY 3M (USDMN) : 21.7 distributors to increase investment on quality manpower to improve the sales FACE VALUE (RS) : 1 throughput and provide better quality of service to the retailers. We have noted Share Holding Pattern, % that the model has been received very well by the distributors who are able to PROMOTERS : 52.5 manage inventory more efficiently and earn a higher return on capital employed. FII / NRI : 20.4 FI / MF : 9.9 NON PROMOTER CORP. HOLDINGS : 3.1 Detergents continue to perform very well: We received a positive feedback PUBLIC & OTHERS : 14.2 across India for HUL’s detergents segment. The company’s retail as well Price Performance, % consumer initiatives have yielded strong results and the company has managed 1mth 3mth 1yr to gain market share in the regions of our visit. Distributors indicated that HUL ABS ‐4.1 15.9 42.9 has successfully managed to ward off competition from new entrants and REL TO BSE ‐3.0 6.9 36.2 consolidate its leadership position. Price Vs. Sensex (Rebased values) 260 Skin care and Hair care see strong growth: The channel partners indicated that premiumisation trend continues to be strong in both Skin care and Hair care 220 category. Dove continues to grow faster than the market growth rate. We also 180 observed that facewash category is registering revenue growth of 60%‐70% at various distributor and retailer points with uptrading to premium products. 140 100 Improvement in Toothpaste segment will remain protracted: In the recent 60 months HUL has taken initiatives to drive growth in the oral category with the Apr‐10 Dec‐10 Aug‐11 Apr‐12 launch of new products in the Pepsodent. In our survey we noted that Pepsodent HUL BSE Sensex continues to remain sluggish, we believe that volume growth will be protracted in the wake of new media initiatives. Source: Bloomberg, Phillip Capital Research Other Key Ratios Foods and Beverages have seen flattish trends: We generally observed flattish Rs mn FY12 FY13E FY14E Net Sales 223,947 266,166 303,455 trends for the majority of foods portfolio with growth in Kissan sauces but tea Ebidta 35,697 46,112 54,153 has witnessed de‐growth. Coffee is witnessing growth but the indicative figures Net Profit 26,118 33,483 38,388 have not been inspiring. EPS, Rs 12.1 15.5 17.8 PER, X 44.0 34.3 30.0 Operating metrics continue to be robust but steep valuations force us to take a EV/EBIDTA, % 31.7 24.3 20.6 EV/Net Sales, x 5.2 4.4 3.8 Neutral stance: We have observed that the company has managed to step‐up its ROE, % 84.6 96.5 92.5 operating performance in most of the key categories and geographies we visited Source: PhillipCapital India Research Est. but considering the steep valuations, room for negative surprises is limited. We believe in the wake of slower economic growth and possibility of a slowdown in detergents category (base effect and mature category) we maintain our Neutral stance on the stock.
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Income Statement Cash Flow Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Net sales 193,810 217,356 255,579 291,341 Pre‐tax profit 27,302 33,502 43,641 51,510 Growth, % 10.6 12.1 17.6 14.0 Depreciation 2,208 2,183 2,283 2,458 Other operating income 6,274 6,591 10,587 12,114 Chg in working capital ‐6,183 2,158 310 2,398 Total income 200,084 223,947 266,166 303,455 Total tax paid ‐2,723 ‐6,320 ‐10,876 ‐12,233 Operating expenses ‐170,571 ‐188,250 ‐220,054 ‐249,302 Cash flow from operating activities 20,604 31,522 35,357 44,133 EBITDA 29,513 35,697 46,112 54,153 Capital expenditure ‐2,426 ‐1,233 ‐3,500 ‐4,000 Growth, % 1.8 21.0 29.2 17.4 Chg in investments 34 ‐11,775 0 0 Margin, % 15.2 16.4 18.0 18.6 Cash flow from investing activities ‐2,392 ‐13,009 ‐3,499 ‐3,998 Depreciation ‐2,208 ‐2,183 ‐2,283 ‐2,458 Free cash flow 18,212 18,513 31,858 40,135 EBIT 27,304 33,514 43,829 51,696 Equity raised/(repaid) ‐11,597 ‐9,206 0 0 Growth, % 1.8 21.0 29.2 17.4 Dividend (incl. tax) ‐16,497 ‐17,753 ‐29,376 ‐32,666 Margin, % 14.1 15.4 17.1 17.7 Cash flow from financing activities ‐28,094 ‐26,959 ‐29,376 ‐32,666 Interest received/(paid) ‐2 ‐12 ‐192 ‐192 Net chg in cash ‐9,882 ‐8,446 2,482 7,469 Pre‐tax profit 27,302 33,502 43,641 51,510 Tax provided ‐5,769 ‐7,384 ‐10,158 ‐13,122 Profit after tax 21,533 26,118 33,483 38,388 Growth, % 2.4 21.3 28.2 14.7 Valuation Ratios & Per Share Data Extraordinary items: Gains/(Losses) 1527 1189 7109 0 FY11 FY12 FY13E FY14E Unadj. shares (m) 2,180 2,160 2,162 2,162 EPS, Rs 9.9 12.1 15.5 17.8 Wtd avg shares (m) 2,180 2,160 2,162 2,162 BVPS, Rs 12.2 16.3 15.8 22.6
DPS, Rs 6.5 7.5 16.5 9.5
Return on assets (%) 22.1 24.7 28.4 28.7 Balance Sheet Return on equity (%) 82.1 84.6 96.5 92.5 Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Return on Invested capital (%) 399.8 651.9 1234.8 1560.1 Cash & bank 16,285 18,300 27,888 35,349 RoIC/Cost of capital (x) 37.7 61.5 116.5 147.2 Debtors 9,432 6,790 8,358 9,815 RoIC ‐ Cost of capital (%) 389.2 641.3 1224.2 1549.5 Inventory 28,113 25,167 27,986 30,215 Return on capital employed (%) 82.1 84.6 96.6 92.2 Loans & advances 8,167 8,820 10,607 12,091 Cost of capital (%) 10.6 10.6 10.6 10.6 Other current assets 354 354 366 366 RoCE ‐ Cost of capital (%) 71.5 74.0 86.0 81.6 Total current assets 62,350 59,430 75,204 87,835 Asset turnover (x) 33.3 50.9 89.2 112.6 Investments 12,607 24,382 24,382 24,382 Sales/Total assets (x) 2.0 2.1 2.2 2.2 Gross fixed assets 37,596 38,117 41,617 45,617 Sales/Net FA (x) 7.9 9.0 10.5 11.4 Less: Depreciation 15,905 16,642 18,925 21,382 Working capital/Sales (x) ‐0.1 ‐0.2 ‐0.2 ‐0.1 Add: Capital WIP 2,888 2,155 2,155 2,155 Fixed capital/Sales (x) 0.2 0.2 0.2 0.2 Net fixed assets 24,579 23,629 24,847 26,389 Receivable days 17.8 11.4 11.9 12.3 Other Non‐current assets 2,097 2,142 2,142 2,142 Inventory days 52.9 42.3 40.0 37.9 Total assets 101,631 109,584 127,183 141,357 Payable days 123.7 106.6 102.7 101.4 Current ratio (x) 0.8 0.8 0.8 1.0 Current liabilities 57,828 54,994 61,888 69,248 Quick ratio (x) 0.5 0.5 0.5 0.6 Provisions 20,300 16,850 17,733 20,593 Dividend cover (x) 1.5 1.6 0.9 1.9 Total current liabilities 75,031 74,453 92,750 92,243 PER (x) 53.9 44.0 34.3 30.0 Non‐current liabilities 4 2 176 346 Price/Book (x) 43.6 32.7 33.6 23.6 Total liabilities 75,035 74,455 92,926 92,589 EV/EBIT (x) 38.8 31.7 24.3 20.6 Paid‐up capital 2,160 2,162 2,162 2,162 EV/NOPLAT (x) 49.2 40.6 31.7 27.6 Reserves & surplus 24,437 32,968 32,096 46,607 EV/CE 43.0 32.2 32.6 22.7 Shareholders’ equity 26,596 35,129 34,257 48,769 EV/IC (x) 196.5 264.9 391.6 430.8 Total equity & liabilities 101,631 109,585 127,183 141,357 Source: Company, PhillipCapital India Research Estimates
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Nestle Volume growth to surprise? PhillipCapital (India) Pvt. Ltd. FMCG: Company Update 8 November 2012
In our interactions with channel partners of Nestle and retailers, the key NEUTRAL takeaway is that volume growth in the core Baby Foods category maintains healthy momentum inspite of aggressive price hikes undertaken by the company NEST IN | CMP RS 4883 in the past 2 years. The noodles brand Maggi is also posting recovery in volume. TARGET RS 4815 (‐1%) We believe that the present muted volume growth has the ability to surprise our Company Data estimates on the upside in CY13E. O/S SHARES (MN) : 96 MARKET CAP (RSBN) : 465 Healthy volume growth in the core Baby Foods brands sustains. Chained MARKET CAP (USDBN) : 9 52 ‐ WK HI/LO (RS) : 5024 / 3930 pharmacy is driving expansion in distribution reach: LIQUIDITY 3M (USDMN) : 0.7 Channel partners indicated that volume growth in the Cerelac, Lactogen, Nan and FACE VALUE (RS) : 10
Nestum brands in the main Baby Foods segment continue to report healthy Share Holding Pattern, % trends inspite of the 30 – 35% YoY pricing growth. In South India the division’s PROMOTERS : 62.8 distribution reach is also receiving a fillip from the sharp expansion in organized FII / NRI : 11.4 chained pharmacy stores ‐ Apollo Pharma, Med Plus. FI / MF : 7.8 NON PROMOTER CORP. HOLDINGS : 2.4 PUBLIC & OTHERS : 15.7
Recovery observed in Maggi’s volume growth. Sales push undertaken recently Price Performance, % in Modern Trade channel. 1mth 3mth 1yr Our findings indicate that Maggi noodles value growth has been maintained, but ABS 4.9 9.8 7.1 volume has decelerated. However recent signs of recovery are visible driven by REL TO BSE 5.9 0.8 0.4 high brand investment. Nestle has also aggressively pushed the brand with Price Vs. Sensex (Rebased values) promotional schemes in Modern Trade (MT) and retail stores. 900 gm SKU is the 200 fastest selling in MT. Robust growth momentum in Maggi Pasta sustains. 170 Growth in Chocolates and Beverages remains muted 140
Channel partners stated that value growth in Coffee and Chocolate segment has 110 been flat. Considering the sharp pricing growth in Coffee, volume is under pressure. Nestle has also exercised sales push drive for Coffee in the MT channel 80 in August 2012 which received strong positive response. Nestle promotes the 50 Chocolate segment at the retailer end by providing relatively higher margins. Apr‐10 Dec‐10 Aug‐11 Apr‐12 Nestle BSE Sensex
New product launches receive mixed consumer response Source: PhillipCapital India Research Maggi Juicy Meals is well received in MT. Certain variants in Milkmaid Creations Other Key Ratios have received positive consumer response. Maggi Superroni has been reporting Rs mn CY11 CY12E CY13E robust growth. Growth in Nestle Dark chocolate is uninspiring. Nescafe My First Net Sales 74,908 86,171 101,751 Cup is largely an unsuccessful launch. Ebidta 15,528 19,067 23,043 Net Profit 9,615 11,045 13,546 EPS, Rs 99.7 114.6 140.5 Recent stock appreciation captures the impending volume growth benefit, PER, X 49.0 42.6 34.8 Maintain NEUTRAL recommendation: We estimate the current sluggishness in EV/EBIDTA, % 30.8 24.9 20.2 volume growth to abate in the near term and expect growth rates to revert to EV/Net Sales, x 6.4 5.5 4.6 ROE, % 90.3 71.3 62.2 historical average levels by CY13E with Infant foods and Prepared dishes segment Source: PhillipCapital India Research Est. being the key growth drivers. However we believe that this improvement in volume and earnings growth is largely being captured in the stock price given the recent run up by 11% in the past 3 months. We maintain our NEUTRAL recommendation on the stock.
8 November 2012 / INDIA EQUITY RESEARCH / NESTLE COMPANY UPDATE
Income Statement Cash Flow Y/E Dec, Rs mn CY10 CY11 CY12E CY13E Y/E Dec, Rs mn CY10 CY11 CY12E CY13E Net sales 62,547 74,908 86,171 101,751 Pre‐tax profit 11,451 13,879 16,078 19,776 Growth, % 21.9 19.8 15.0 18.1 Depreciation 1,278 1,637 2,596 2,852 Total income 62,547 74,908 86,171 101,751 Chg in working capital 1,575 1,887 1,801 ‐408 Operating expenses ‐50,051 ‐59,381 ‐67,104 ‐78,708 Total tax paid ‐3,252 ‐4,162 ‐5,032 ‐6,229 EBITDA 12,497 15,528 19,067 23,043 Cash flow from operating activities 11,052 13,242 15,442 15,990 Growth, % 20.8 24.3 22.8 20.8 Capital expenditure ‐5,136 ‐17,965 ‐6,633 308 Margin, % 20.0 20.7 22.1 22.6 Chg in investments 526 163 0 0 Depreciation ‐1,278 ‐1,637 ‐2,596 ‐2,852 Cash flow from investing activities ‐4,610 ‐17,802 ‐6,633 308 EBIT 11,219 13,890 16,471 20,191 Free cash flow 6,442 ‐4,560 8,809 16,298 Growth, % 20.8 24.3 22.8 20.8 Equity raised/(repaid) 3 0 ‐8 0 Margin, % 20.0 20.7 22.1 22.6 Debt raised/(repaid) 0 9,709 671 ‐3,120 Interest received/(paid) ‐11 ‐51 ‐674 ‐775 Dividend (incl. tax) ‐5,448 ‐5,430 ‐5,528 ‐6,486 Other Income 427 509 643 818 Cash flow from financing activities ‐5,445 4,279 ‐4,865 ‐9,606 Pre‐tax profit 11,451 13,879 16,078 19,776 Net chg in cash 997 ‐281 3,944 6,691 Tax provided ‐3,264 ‐4,264 ‐5,032 ‐6,229 Profit after tax 8,187 9,615 11,045 13,546 Valuation Ratios & Per Share Data Growth, % 25.0 17.5 14.9 22.6 CY10 CY11 CY12E CY13E Unadj. shares (m) 96 96 96 96 EPS, Rs 84.9 99.7 114.6 140.5 Wtd avg shares (m) 96 96 96 96 BVPS, Rs 88.7 132.1 189.3 262.5
DPS, Rs 48.5 48.5 49.0 57.5
Return on assets (%) 36.2 28.0 24.3 26.0 Balance Sheet Return on equity (%) 114.0 90.3 71.3 62.2 Y/E Dec, Rs mn CY10 CY11 CY12E CY13E Return on Invested capital (%) 242.4 89.3 64.5 79.3 Cash & bank 2,553 2,272 6,216 12,907 RoIC/Cost of capital (x) 22.9 8.5 6.1 7.5 Debtors 633 1,154 923 1,167 RoIC ‐ Cost of capital (%) 231.8 78.7 53.9 68.7 Inventory 5,760 7,340 6,618 8,436 Return on capital employed (%) 114.1 62.2 44.9 45.9 Loans & advances 1,514 1,964 2,231 2,577 Cost of capital (%) 10.6 10.6 10.6 10.6 Total current assets 10,460 12,730 15,987 25,087 RoCE ‐ Cost of capital (%) 103.5 51.7 34.4 35.3 Investments 1,507 1,344 1,344 1,344 Asset turnover (x) 17.0 6.2 4.2 5.1 Gross fixed assets 18,547 25,522 34,022 38,022 Sales/Total assets (x) 2.8 2.2 1.8 1.9 Less: Depreciation 8,420 9,765 12,316 15,168 Sales/Net FA (x) 5.4 3.4 2.7 3.1 Add: Capital WIP 3,489 14,186 12,275 7,967 Working capital/Sales (x) ‐0.1 ‐0.1 ‐0.1 ‐0.1 Net fixed assets 13,616 29,944 33,981 30,821 Fixed capital/Sales (x) 0.5 0.5 0.6 0.5 Other Non‐current assets ‐333 ‐435 ‐280 ‐135 Receivable days 3.7 5.6 3.9 4.2 Total assets 25,250 43,583 51,032 57,117 Inventory days 33.6 35.8 28.0 30.3 Payable days 55.5 62.1 56.0 51.1 Current liabilities 7,617 10,096 10,304 11,022 Current ratio (x) 0.6 0.6 0.7 1.0 Provisions 9,079 11,038 12,099 13,527 Quick ratio (x) 0.3 0.3 0.4 0.7 Total current liabilities 16,696 21,135 22,403 24,549 Interest cover (x) 1044.1 271.9 24.4 26.0 Non‐current liabilities 0 9,709 10,379 7,259 Dividend cover (x) 1.8 2.1 2.3 2.4 Total liabilities 16,696 30,843 32,783 31,808 PER (x) 57.5 49.0 42.6 34.8 Paid‐up capital 964 964 964 964 Price/Book (x) 55.0 37.0 25.8 18.6 Reserves & surplus 7,590 11,775 17,285 24,345 EV/EBIT (x) 37.5 30.8 24.9 20.2 Shareholders’ equity 8,554 12,740 18,249 25,310 EV/NOPLAT (x) 52.4 44.5 36.3 29.5 Total equity & liabilities 25,250 43,583 51,032 57,118 EV/CE 54.7 21.3 16.6 14.3 Source: Company, PhillipCapital India Research Estimates EV/IC (x) 127.0 39.7 23.4 23.4
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Godrej Consumer All round outperformance by Household Insecticide PhillipCapital (India) Pvt. Ltd. FMCG: Company Update 8 November 2012
Our survey with channel partners conclusively indicates sustenance of NEUTRAL outstanding business performance in GCPL’s domestic Household Insecticides segment. Godrej No. 1’s distribution expansion in South India is evident. GCPL IN | CMP RS 695 Following are few of the key takeaways: TARGET RS 655 (‐6%)
Company Data GCPL’s Household Insecticide business outperforms across formats O/S SHARES (MN) : 340 We received only positive feedback for GCPL’s domestic HI business. Robust MARKET CAP (RSBN) : 235 growth is witnessed across formats including coil. Channel partners in Kerala MARKET CAP (USDBN) : 4 52 ‐ WK HI/LO (RS) : 760 / 368 indicated that GoodKnight coil growth is faster than the market leader Jyothy’s LIQUIDITY 3M (USDMN) : 3 Maxo brand. The company’s market share gains in liquids and coils are evident. FACE VALUE (RS) : 1
We also noticed that seasonality in HI sales in smaller cities persists. Share Holding Pattern, % PROMOTERS : 64.0 Godrej No. 1 has achieved distribution expansion in South India, but volume FII / NRI : 27.2 growth is uninspiring FI / MF : 1.0 NON PROMOTER CORP. HOLDINGS : 1.8 Godrej No. 1 brand growth in its mainstay market of North India is strong; PUBLIC & OTHERS : 6.0 however in South India sales growth is largely muted. We observed that the Price Performance, % brand has managed to gain shelf space in South India as guided by the 1mth 3mth 1yr management but growth is driven largely by frequent promotional schemes. ABS ‐0.8 8.4 62.8 Also in newly launched markets the brand is known to being a Rs. 10 SKU which REL TO BSE 0.3 ‐0.5 56.1 restricts ability to exercise pricing actions in the medium to long term. Price Vs. Sensex (Rebased values) 300 Cinthol relaunch can leverage on the strong brand equity in certain markets 250 Cinthol Original brands robust growth in certain markets namely Tamil Nadu is driven by its strong brand equity. Scale of Cinthol’s brand relaunch will enable 200 GCPL to capitalise on the brand strength in specific markets. We estimate the 150 brand growth to gain significant traction in the near to medium term. 100
Sluggishness in Hair Colour business persists. 50 In markets wherein the main format of hair Colour product usage is Mehendi and 0 Powders (certain towns in Kerala), GCPL’s business growth is healthy. However in Apr‐10 Dec‐10 Aug‐11 Apr‐12 GCPL BSE Sensex value terms the growth continues to lag the Hair Colour industry due to underperformance in Crème. Channel partners indicated that the Rs. 8 SKU of Source: Bloomberg, Phillip Capital Research Godrej Expert is the fastest selling for the company. The company has recently Other Key Ratios launched hair colour crème and colouring kit products in sachets under the Rs mn FY12 FY13E FY14E Godrej Expert brand. We will have to closely watch the progress of the launch to Net Sales 48,558 64,608 79,471 Ebidta 8,602 11,168 13,674 gauge the potential in improving the company’s current muted growth trends. Net Profit 5,974 7,413 9,246 EPS, Rs 18.4 21.8 27.2 Triggers in domestic business limited, risks in International business persist. PER, X 37.8 31.9 25.6 Maintain Neutral recommendation: We observe that an important trigger for EV/EBIDTA, x 28.2 22.4 17.9 EV/Net Sales, x 4.9 3.8 3.0 the domestic business by way of distribution synergies has largely been captured. ROE, % 25.9 24.0 25.6 Secondly, the favourable impact of currency gains on International business is Source: PhillipCapital India Research Est. estimated to wane from Q3FY13E. With the company being in major investment mode, cost savings will largely be directed to fund new product launches. The stock is currently trading at expensive valuations considering limited triggers and high business risk. We maintain our Neutral recommendation.
8 November 2012 / INDIA EQUITY RESEARCH / GODREJ CONSUMER COMPANY UPDATE
Income Statement Cash Flow Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Net sales 36,763 48,558 64,608 79,471 Pre‐tax profit 6,117 7,819 9,872 12,768 Growth, % 80 32 33 23 Depreciation 499 645 834 893 Other operating income 173 152 175 201 Chg in working capital ‐3,735 89 ‐969 ‐1,465 Total income 36,936 48,710 64,783 79,672 Total tax paid ‐1,266 ‐1,644 0 0 Operating expenses ‐30,406 ‐40,108 ‐53,615 ‐65,998 Cash flow from operating activities 1,615 6,909 9,736 12,196 EBITDA 6,530 8,602 11,168 13,674 Capital expenditure ‐25,612 ‐7,080 ‐1,253 ‐1,272 Growth, % 55 33 30 23 Chg in investments 670 0 0 0 Margin, % 17.3 17.4 17 17 Cash flow from investing activities ‐24,942 ‐7,080 ‐1,253 ‐1,272 Depreciation ‐499 ‐645 ‐834 ‐893 Free cash flow ‐23,327 ‐171 8,483 10,924 EBIT 6,031 7,958 10,334 12,781 Equity raised/(repaid) 4,976 6,567 0 0 Growth, % 52 33 30 24 Debt raised/(repaid) 19,731 ‐1,258 ‐2,728 609 Margin, % 16 16 16 16 Dividend (incl. tax) ‐1,966 ‐1,820 ‐2,298 ‐2,921 Interest received/(paid) ‐436 ‐658 ‐843 ‐897 Cash flow from financing activities 22,741 4,125 ‐6,448 ‐3,227 Other Income 522 520 381 884 Net chg in cash ‐586 3,954 2,035 7,697 Pre‐tax profit 6,117 7,819 9,872 12,768 Tax provided ‐1,223 ‐1,600 ‐1,919 ‐2,607 Valuation Ratios & Per Share Data Profit after tax 4,894 6,219 7,952 10,161 FY11 FY12 FY13E FY14E Minorities 0 ‐245 ‐539 ‐915 EPS, Rs 15.3 18.4 21.8 27.2 Net profit 4,894 5,974 7,413 9,246 BVPS, Rs 54.0 89.1 96.9 115.4 Growth, % 44 22 24 25 DPS, Rs 5.1 4.8 5.8 7.4 Extraordinary items: Gains/(Losses) 276 1,341 0 0 Return on assets (%) 17.1 12.6 13.6 15.6 Unadj. shares (m) 319 325 340 340 Return on equity (%) 36.5 25.9 24.0 25.6
Return on Invested capital (%) 22.8 16.3 19.5 22.9 Balance Sheet RoIC/Cost of capital (x) 2.0 1.4 1.6 1.9 Y/E Mar, Rs mn FY11 FY12 FY13E FY14E RoIC ‐ Cost of capital (%) 11.1 4.3 7.3 10.7 Cash & bank 2,269 6,390 6,320 11,411 Return on capital employed (%) 21.8 15.6 17.5 20.4 Debtors 3,840 4,725 5,951 7,117 Cost of capital (%) 11.6 12.0 12.1 12.2 Inventory 4,394 7,839 9,607 11,441 RoCE ‐ Cost of capital (%) 10.2 3.6 5.4 8.2 Loans & advances 3,418 3,786 4,523 5,364 Asset turnover (x) 1.8 1.3 1.5 1.8 Other current assets 122 124 124 124 Sales/Total assets (x) 1.2 0.9 1.0 1.2 Total current assets 14,043 22,865 26,525 35,457 Sales/Net FA (x) 2.0 1.4 1.7 2.1 Gross fixed assets 34,552 41,856 43,106 44,356 Working capital/Sales (x) 0.1 0.1 0.1 0.1 Less: Depreciation ‐3,775 ‐4,940 ‐5,773 ‐6,666 Fixed capital/Sales (x) 0.84 0.77 0.58 0.48 Add: Capital WIP 80 376 379 401 Receivable days 38 36 34 33 Net fixed assets 30,857 37,293 37,712 38,091 Inventory days 44 59 54 53 Non‐current assets 72 116 0 0 Payable days 86 105 95 89 Total assets 44,972 60,273 64,237 73,548 Current ratio (x) 1.9 1.9 1.7 2.0 Quick ratio (x) 1.3 1.2 1.1 1.4 Current liabilities 7,535 12,298 15,169 17,545 Interest cover (x) 13.8 12.1 12.3 14.2 Total current liabilities 7,535 12,298 15,169 17,545 Dividend cover (x) 3.0 3.8 3.8 3.7 Non‐current liabilities 20,183 18,952 16,114 16,723 PER (x) 45.4 37.8 31.9 25.6 Total liabilities 27,718 31,250 31,283 34,268 Price/Book (x) 12.9 7.8 7.2 6.0 Paid‐up capital 324 340 340 340 EV/EBIT (x) 40.9 30.5 24.2 19.2 Reserves & surplus 16,928 27,722 32,614 38,940 EV/NOPLAT (x) 51.2 38.4 30.1 24.2 Shareholders’ equity 17,252 28,063 32,955 39,280 EV/CE 6.4 5.0 5.0 4.3 Total equity & liabilities 44,970 60,195 64,237 73,548 EV/IC (x) 11.6 6.2 5.9 5.5 Source: Company, PhillipCapital India Research Estimates
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Colgate Sustenance of strong volume growth momentum PhillipCapital (India) Pvt. Ltd. FMCG: Company Update 8 November 2012
In our survey we observed that Colgate is able to maintain its undisputed leadership in the oral care market. Our key takeaways are as follows: NEUTRAL CLGT IN | CMP RS 1308 Sensitive range of products registers robust growth: TARGET RS 1215 (‐7%) We gathered strong vibes for sensitive range of toothpastes both from the Company Data retailer as well as the distributor. The company is providing good promotional O/S SHARES (MN) : 136 schemes to the retailers while backing it up with advertising campaigns on MARKET CAP (RSBN) : 176 television. MARKET CAP (USDBN) : 3 52 ‐ WK HI/LO (RS) : 1264 / 932 LIQUIDITY 3M (USDMN) : 1.7 Focus on modern trade yielding good results: FACE VALUE (RS) : 1
Our interaction with the distributors catering to modern trade indicated that Share Holding Pattern, % modern trade is seeing robust growth in oral care category. The company has PROMOTERS : 51.0 managed to reduce its investment in modern trade by appointing a dedicated FII / NRI : 21.2 distributor for modern trade. FI / MF : 6.0 NON PROMOTER CORP. HOLDINGS : 1.2 PUBLIC & OTHERS : 20.6 Competitive intensity for Colgate is not very severe: Price Performance, % While there have been new product launches by Hindustan Unilever in the 1mth 3mth 1yr Pepsodent brand; the competitive intensity for Colgate is not very severe. Pricing ABS 4.8 9.6 20.5 in the category has remained largely stable and promotional schemes have also REL TO BSE 5.9 0.6 13.8 been largely stable. Price Vs. Sensex (Rebased values) 200
Strong operating performance but expensive valuations; Maintain Neutral: 170 Colgate is largely a single product company but trades at premium to the FMCG 140 sector. We had upgraded the stock to Neutral post the business outperformance reported in Q2FY13 results. Although we find the operating performance to be 110 robust we believe the premium valuation entail higher risks and leave little room 80 for negative surprises. 50 Apr‐10 Dec‐10 Aug‐11 Apr‐12 Colgate Pal BSE Sensex
Source: Bloomberg, Phillip Capital Research
Other Key Ratios Rs mn FY12 FY13E FY14E Net Sales 26,932 31,985 37,392 Ebidta 5,785 7,109 8,612 Net Profit 4,464 5,483 6,362 EPS, Rs 32.8 40.3 46.8 PER, X 39.8 32.4 28.0 EV/EBIDTA, % 30.2 24.4 20.1 EV/Net Sales, x 6.7 5.6 4.7 ROE, % 109.0 112.5 107.9 Source: PhillipCapital India Research Est.
8 November 2012 / INDIA EQUITY RESEARCH / COLGATE COMPANY UPDATE
Income Statement Cash Flow Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Net sales 22,206 26,239 31,189 36,499 Pre‐tax profit 5,200 5,883 7,250 8,612 Growth, % 13.2 18.2 18.9 17.0 Depreciation 342 393 436 536 Other operating income 656 694 796 893 Chg in working capital 210 ‐725 62 711 Total income 22,861 26,932 31,985 37,392 Total tax paid ‐1,163 ‐1,372 ‐1,767 ‐2,250 Operating expenses ‐17,715 ‐21,147 ‐24,876 ‐28,780 Cash flow from operating activities 4,589 4,180 5,981 7,610 EBITDA 5,147 5,785 7,109 8,612 Capital expenditure ‐444 ‐999 ‐256 ‐1,500 Growth, % 25.3 12.4 22.9 21.1 Chg in investments ‐177 ‐84 0 0 Margin, % 23.2 22.0 22.8 23.6 Cash flow from investing activities ‐621 ‐1,082 ‐256 ‐1,500 Depreciation ‐342 ‐393 ‐436 ‐536 Free cash flow 3,968 3,097 5,724 6,110 EBIT 4,804 5,392 6,673 8,076 Equity raised/(repaid) ‐501 ‐633 ‐700 ‐1,291 Growth, % 25.3 12.4 22.9 21.1 Debt raised/(repaid) ‐45 ‐1 0 0 Margin, % 23.2 22.0 22.8 23.6 Dividend (incl. tax) ‐3,489 ‐3,952 ‐4,296 ‐5,360 Interest received/(paid) ‐17 ‐16 0 0 Cash flow from financing activities ‐4,035 ‐4,586 ‐4,996 ‐6,650 Other Income 412 507 577 537 Net chg in cash ‐67 ‐1,488 728 ‐541 Pre‐tax profit 5,200 5,883 7,250 8,612 Tax provided ‐1,174 ‐1,419 ‐1,767 ‐2,250 Profit after tax 4,026 4,464 5,483 6,362 Valuation Ratios & Per Share Data Growth, % ‐1.5 10.9 22.8 16.0 FY11 FY12 FY13E FY14E Unadj. shares (m) 136 136 136 136 EPS, Rs 29.6 32.8 40.3 46.8 Wtd avg shares (m) 136 136 136 136 BVPS, Rs 28.2 32.0 39.7 47.0
DPS, Rs 22.0 25.0 27.0 29.9
Return on assets (%) 42.1 41.4 44.2 43.3 Balance Sheet Return on equity (%) 113.4 109.0 112.5 107.9 Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Return on Invested capital (%) ‐651.0 ‐693.3 ‐877.8 ‐960.4 Cash & bank 3,951 3,098 4,380 5,130 RoIC/Cost of capital (x) ‐61.4 ‐65.4 ‐82.8 ‐90.6 Debtors 753 873 1,033 1,180 RoIC ‐ Cost of capital (%) ‐661.6 ‐703.9 ‐888.4 ‐971.0 Inventory 1,537 2,177 2,362 2,527 Return on capital employed (%) 113.0 109.2 112.5 107.9 Loans & advances 910 1,318 1,559 1,825 Cost of capital (%) 10.6 10.6 10.6 10.6 Total current assets 7,151 7,466 9,334 10,662 RoCE ‐ Cost of capital (%) 102.4 98.6 101.9 97.3 Investments 387 471 471 471 Asset turnover (x) ‐36.3 ‐41.4 ‐50.9 ‐55.1 Gross fixed assets 5,798 6,132 7,082 8,582 Sales/Total assets (x) 2.3 2.4 2.5 2.5 Less: Depreciation 3,248 3,587 4,023 4,559 Sales/Net FA (x) 8.6 8.9 9.9 10.3 Add: Capital WIP 82 694 0 0 Working capital/Sales (x) ‐0.1 ‐0.1 ‐0.1 ‐0.1 Net fixed assets 2,633 3,238 3,059 4,022 Receivable days 12.4 12.1 12.1 11.8 Other Non‐current assets 168 121 121 121 Inventory days 25.3 30.3 27.6 25.3 Total assets 10,340 11,296 13,531 15,823 Payable days 99.0 82.5 83.2 84.6 Current ratio (x) 1.1 1.1 1.1 1.1 Current liabilities 4,806 4,781 5,672 6,671 Quick ratio (x) 0.9 0.8 0.9 0.9 Provisions 946 971 687 1,049 Interest cover (x) 290.0 345.8 14128.1 16762.3 Total current liabilities 6,499 6,942 8,137 9,426 Dividend cover (x) 1.3 1.3 1.5 1.6 Total liabilities 6,500 6,942 8,137 9,426 PER (x) 44.2 39.8 32.4 28.0 Paid‐up capital 136 136 136 136 Price/Book (x) 46.3 40.9 33.0 27.8 Reserves & surplus 3,705 4,218 5,258 6,261 EV/EBIT (x) 33.8 30.2 24.4 20.1 Shareholders’ equity 3,841 4,354 5,394 6,397 EV/NOPLAT (x) 43.6 39.8 32.3 27.2 Total equity & liabilities 10,340 11,295 13,532 15,823 EV/CE 45.3 40.1 32.2 27.0 Source: Company, PhillipCapital India Research Estimates
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Marico Why is the odour missing? PhillipCapital (India) Pvt. Ltd. FMCG: Company Update 8 November 2012
Our survey of channel partners of Marico indicates that Marico is seeing stable NEUTRAL growth for its core portfolio but we have also found the performance of the newly acquired Paras’s deodorants portfolio has not been inspiring. The key MRCO IN | CMP RS 206 takeaways and observations are as follows: TARGET RS 191 (‐7%)
Company Data Stable growth for core portfolio; however products perceived to be expensive: O/S SHARES (MN) : 645 The core portfolio of Marico comprising of Saffola and Parachute brands MARKET CAP (RSBN) : 136 continue to witness robust traction. Retailers and distributors alike indicated that MARKET CAP (USDBN) : 2.5 52 ‐ WK HI/LO (RS) : 214 / 134 Saffola’s positioning based on healthy heart is undisputed in the market while LIQUIDITY 3M (USDMN) : 1.4 Parachute with its strong brand franchise continues to register stable volume FACE VALUE (RS) : 1 growth. However, they also indicated that there is a rising consumer perception Share Holding Pattern, % of Marico’s products being relatively premium priced namely for the Saffola PROMOTERS : 59.8 brand in the edible oil category. FII / NRI : 29.4 FI / MF : 3.6 NON PROMOTER CORP. HOLDINGS : 3.3 Deodorants performance uninspiring; but category growth is robust: PUBLIC & OTHERS : 3.8 In our survey we noted that distribution of the recently acquired Paras’s Price Performance, % deodorants has been particularly uninspiring. We noted that most decent sized 1mth 3mth 1yr retail outlets have dedicated shelf space for deodorants but we hardly found the ABS 3.5 11.4 40.7 REL TO BSE 4.5 2.5 34.0 SetWet and Zatak brands on the retailer shelves. The retailers indicated that the category is witnessing strong growth and uptrading. Brands like Park Avenue, Price Vs. Sensex (Rebased values) Fogg and Kama Sutra are very aggressive with shelf space strategy and are even 200 competing with HUL’s AXE brand. 180 160 Earnings growth holds limited probability of surprising positively: While we 140 closely watch the progress of Marico’s strategy for the recently acquired personal 120 care brands; we believe that earnings growth for the core portfolio is unlikely to 100 surprise us positively as the management has indicated implementation of price 80 correction in the focus brands namely Parachute and Saffola. Considering the 60 imminent risks and relatively higher valuations at 28x FY14E, we downgraded the Apr‐10 Dec‐10 Aug‐11 Apr‐12 stock to NEUTRAL post the Q2FY13 results. Marico BSE Sensex
Source: Bloomberg, Phillip Capital Research
Other Key Ratios Rs mn FY12 FY13E FY14E Net Sales 39,931 48,229 56,851 Ebidta 4,697 6,627 7,781 Net Profit 3,042 4,026 4,757 EPS, Rs 4.9 6.2 7.4 PER, X 41.6 33.0 27.9 EV/EBIDTA, x 28.3 21.3 17.8 EV/Net Sales, x 3.5 3.1 2.6 ROE, % 28.9 25.0 21.1 Source: PhillipCapital India Research Est.
8 November 2012 / INDIA EQUITY RESEARCH / MARICO COMPANY UPDATE
Income Statement Cash Flow Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Net sales 29,940 37,647 45,206 53,305 Pre‐tax profit 3,277 3,874 5,436 6,480 Growth, % 19.8 25.7 20.1 17.9 Depreciation 708 725 880 1,012 Other operating income 1,412 2,284 3,023 3,547 Chg in working capital ‐4,258 ‐522 ‐9,210 ‐1,425 Total income 31,352 39,931 48,229 56,851 Total tax paid ‐850 ‐783 ‐1,311 ‐1,604 Operating expenses ‐27,169 ‐35,234 ‐41,602 ‐49,071 Other operating activities 552 ‐398 ‐500 0 EBITDA 4,183 4,697 6,627 7,781 Cash flow from operating activities ‐571 2,896 ‐4,705 4,463 Growth, % 11.5 12.3 41.1 17.4 Capital expenditure ‐875 ‐1,058 ‐1,770 ‐634 Margin, % 14.0 12.5 14.7 14.6 Chg in investments ‐62 ‐2,067 0 0 Depreciation ‐708 ‐725 ‐880 ‐1,012 Cash flow from investing activities ‐937 ‐3,125 ‐1,770 ‐634 EBIT 3,475 3,972 5,747 6,768 Free cash flow ‐1,508 ‐228 ‐6,474 3,830 Growth, % 11.5 12.3 41.1 17.4 Equity raised/(repaid) 287 31 5,000 0 Margin, % 14.0 12.5 14.7 14.6 Debt raised/(repaid) 3,283 107 2,500 0 Interest received/(paid) ‐410 ‐424 ‐632 ‐741 Dividend (incl. tax) ‐472 ‐500 ‐515 ‐608 Other Income 212 326 322 452 Cash flow from financing activities 3,142 ‐382 6,886 ‐976 Pre‐tax profit 3,277 3,874 5,436 6,480 Net chg in cash 1,633 ‐610 412 2,854 Tax provided ‐850 ‐783 ‐1,311 ‐1,604 Profit after tax 2,428 3,092 4,125 4,876 Valuation Ratios & Per Share Data PC Net profit 2,378 3,042 4,026 4,757 FY11 FY12 FY13E FY14E Growth, % ‐1.5 27.9 32.3 18.2 EPS, Rs 3.9 4.95 6.2 7.4 Extraordinary items: Gains/(Losses) 489 ‐18 0 0 BVPS, Rs 15.3 19.0 31.9 38.1 Unadj. shares (m) 614 615 644 644 DPS, Rs 0.7 0.7 0.7 0.9 Wtd avg shares (m) 614 615 644 644 Return on assets (%) 14.3 13.9 14.1 13.2
Return on equity (%) 29.6 28.9 25.0 21.1 Balance Sheet Return on Invested capital (%) 30.4 32.0 36.0 35.0 Y/E Mar, Rs mn FY11 FY12 FY13E FY14E RoIC/Cost of capital (x) 2.9 3.0 3.4 3.3 Cash & bank 2,206 1,588 2,001 4,283 RoIC ‐ Cost of capital (%) 19.9 21.4 25.4 24.4 Debtors 1,779 1,816 2,240 2,640 Return on capital employed (%) 17.8 17.2 17.2 15.7 Inventory 6,011 7,202 8,230 9,568 Cost of capital (%) 10.6 10.6 10.6 10.6 Loans & advances 2,608 3,415 4,005 4,574 RoCE ‐ Cost of capital (%) 7.2 6.7 6.6 5.1 Total current assets 12,604 14,021 16,732 21,469 Asset turnover (x) 2.9 3.2 3.2 3.2 Investments 889 2,956 2,956 2,956 Sales/Total assets (x) 1.6 1.6 1.4 1.3 Gross fixed assets 7,615 8,648 11,156 12,656 Sales/Net FA (x) 7.0 7.8 7.7 7.7 Less: Depreciation 3,366 4,031 4,911 6,120 Working capital/Sales (x) 0.2 0.2 0.2 0.2 Add: Capital WIP 327 402 502 570 Fixed capital/Sales (x) 1.0 0.8 0.7 0.6 Net fixed assets 4,576 5,018 6,747 7,106 Receivable days 21.7 17.6 18.1 18.1 Total assets 22,345 26,174 38,014 43,109 Inventory days 73.3 69.8 66.5 65.5 Payable days 53.7 56.4 52.0 50.9 Current liabilities 4,000 5,444 5,926 6,843 Current ratio (x) 3.2 2.6 2.8 3.1 Total current liabilities 4,000 5,444 5,926 6,843 Quick ratio (x) 1.6 1.3 1.4 1.7 Non‐current liabilities 7,759 7,912 10,348 10,348 Interest cover (x) 8.5 9.4 9.1 9.1 Total liabilities 12,971 14,493 17,482 18,510 Dividend cover (x) 5.9 7.1 8.3 8.2 Paid‐up capital 614 615 644 644 PER (x) 53.2 41.6 33.0 27.9 Reserves & surplus 8,540 10,817 19,638 23,925 Price/Book (x) 13.5 10.8 6.5 5.4 Shareholders’ equity 9,155 11,432 20,283 24,569 Yield (%) 0.3 0.3 0.4 0.4 Total equity & liabilities 22,345 26,174 38,014 43,109 EV/EBIT (x) 31.6 28.3 21.3 17.8 EV/NOPLAT (x) 42.6 35.5 28.1 23.7 Source: Company, PhillipCapital India Research Estimates EV/CE 7.2 6.4 4.4 3.8
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GSK Consumer Core portfolio is Boosting growth PhillipCapital (India) Pvt. Ltd. FMCG: Company Update 8 November 2012
Our interactions with channel partners of GSKConsumer indicate that strong growth momentum in the core MFD portfolio sustains. Traction in the non MFD BUY portfolio is estimated in the near to medium term. SKB IN | CMP RS 3040 TARGET RS 3430 (+13%) Robust growth in Malted Food Drinks business segment sustains. Distribution Company Data gains evident in North India O/S SHARES (MN) : 42 Channel partners in Tamil Nadu stated that volume growth in the MFD segment MARKET CAP (RSBN) : 129 is strong at ~10% YoY with strong growth of 15% YoY in Horlicks brand and 30% MARKET CAP (USDBN) : 2 52 ‐ WK HI/LO (RS) : 3200 / 2179 YoY robust growth in Boost brand The company has significantly scaled up the LIQUIDITY 3M (USDMN) : 1.5 revenue contribution of LUP’s in the MFD business. The LUP’s are said to be the FACE VALUE (RS) : 10 fastest selling product in the MFD segment. The indicated growth for Rs. 5 sachet Share Holding Pattern, % in Horlicks in Tamil Nadu is sharp at ~30% YoY. We noticed the presence of PROMOTERS : 43.2 Horlicks chocolate and Boost sachets at retail outlets in North India. The products FII / NRI : 13.5 are gathering healthy consumer response. FI / MF : 18.4 NON PROMOTER CORP. HOLDINGS : 9.7 PUBLIC & OTHERS : 15.2
Non MFD business growth is led by Biscuits and expected to maintain traction. Price Performance, % Horlicks biscuit business growth continues to outperform at 50 – 60% YoY as per 1mth 3mth 1yr channel partners in South India. With the new product launch of Horlicks ABS 3.1 12.2 22.5 Nutribic, biscuit segment growth is expected to gain traction. The noodles REL TO BSE 4.1 3.2 15.8 business growth is estimated to recover post the revision in strategy. Price Vs. Sensex (Rebased values) 250 New product innovations are being well received and aiding volume growth Channel partners in South India indicated that GSK’s product innovations under 210 the Horlicks – Women’s, Junior, and Mother’s have been well received and aid 170 volume growth in the MFD segment. The latest introduction in the Eno brand – launch of Cola variant, has supported strong growth at~30% YoY in. 130 90 Increasing Competition risk in South India; GSK well placed to meet pressure Heinz’s Complan brand has been reporting strong sales performance and is said 50 to have increased market share in past few years. Kraft’s Bournvita has stepped Apr‐10 Dec‐10 Aug‐11 Apr‐12 GSK Consumer BSE Sensex up distribution presence in South Indian markets, however business growth has Source: Bloomberg, Phillip Capital Research been uninspiring. GSK’s lack of presence in the super premium segment currently defined by the Pediasure brand has led to marginal market share pressure. GSK is Other Key Ratios Rs mn CY11 CY12E CY13E expected to undertake a new product launch in this segment in the near term. Net Sales 26,855 30,785 35,694 Hence with strong distribution network in main geography of South India Ebidta 4,253 4,881 5,789 especially in bakery’s, high brand equity and product innovations, GSK holds Net Profit 3,551 4,502 5,324 ability to manage market share leadership. EPS, Rs 84.4 107.1 126.6 PER, X 36.0 28.4 24.0 EV/EBIDTA, x 27.5 23.5 19.7 Relative cheap valuations, recovery in volume to aid robust earnings growth: EV/Net Sales, x 4.4 3.7 3.2 Maintain BUY: ROE, % 33.8 35.8 35.6 The company has displayed strong pricing power in the past few quarters by Source: PhillipCapital India Research Est. sustaining the average value growth in the MFD segment. Volume growth is estimated to recover to the double digit trajectory as laggards namely CSD and Export sales improve in the near term. We believe that the company has an interesting pipeline of products that hold potential to be the future legs of growth. We maintain our Buy recommendation on the stock.
8 November 2012 / INDIA EQUITY RESEARCH / GSK CONSUMER COMPANY UPDATE
Income Statement Cash Flow Y/E Dec, Rs mn CY10 CY11 CY12E CY13E Y/E Dec, Rs mn CY10 CY11 CY12E CY13E Net sales 23,061 26,855 30,785 35,694 Pre‐tax profit 4,517 5,402 6,710 7,946 Growth, % 20.0 16.5 14.6 15.9 Depreciation 397 464 367 529 Total income 23,061 26,855 30,785 35,694 Chg in working capital 1,953 ‐61 ‐458 522 Operating expenses ‐19,294 ‐22,602 ‐25,904 ‐29,905 Total tax paid ‐1,677 ‐1,982 ‐2,286 ‐2,622 EBITDA 3,767 4,253 4,881 5,789 Other operating activities 0 1,637 3,179 5,071 Growth, % 21.3 12.9 14.8 18.6 Cash flow from operating activities 5,191 5,459 7,512 11,446 Margin, % 16.3 15.8 15.9 16.2 Capital expenditure ‐1,181 ‐1,075 493 ‐2,995 Depreciation ‐397 ‐464 ‐367 ‐529 Cash flow from investing activities ‐1,181 ‐1,075 493 ‐2,995 EBIT 3,369 3,789 4,514 5,260 Free cash flow 4,010 4,384 8,004 8,451 Growth, % 21.3 12.9 14.8 18.6 Equity raised/(repaid) ‐910 ‐1,104 ‐2,644 ‐4,531 Margin, % 16.3 15.8 15.9 16.2 Dividend (incl. tax) ‐1,711 ‐2,265 ‐2,741 ‐3,766 Interest received/(paid) ‐26 ‐35 ‐28 ‐36 Cash flow from financing activities ‐2,620 ‐3,369 ‐5,385 ‐8,298 Other Income 1,174 1,648 2,223 2,722 Net chg in cash 1,390 1,015 2,619 153 Pre‐tax profit 4,517 5,402 6,710 7,946 Tax provided ‐1,520 ‐1,851 ‐2,207 ‐2,622 Valuation Ratios & Per Share Data Profit after tax 2,998 3,551 4,502 5,324 CY10 CY11 CY12E CY13E Growth, % 28.8 18.5 26.8 18.3 EPS, Rs 71.3 84.4 107.1 126.6 Unadj. shares (m) 42 42 42 42 BVPS, Rs 228.3 272.0 325.2 386.7 Wtd avg shares (m) 42 42 42 42 DPS, Rs 35.0 46.0 54.5 76.3
Return on assets (%) 18.8 18.5 20.2 20.6 Balance Sheet Return on equity (%) 32.1 33.8 35.8 35.6 Y/E Dec, Rs mn CY10 CY11 CY12E CY13E Return on Invested capital (%) 1582.4 ‐3078.7 ‐539.7 ‐913.8 Cash & bank 9,761 10,796 13,358 13,997 RoIC/Cost of capital (x) 149.3 ‐290.4 ‐50.9 ‐86.2 Debtors 505 992 695 1,065 RoIC ‐ Cost of capital (%) 1571.8 ‐3089.3 ‐550.3 ‐924.4 Inventory 3,120 3,700 3,954 4,719 Return on capital employed (%) 31.9 33.7 35.9 35.7 Loans & advances 501 721 693 803 Cost of capital (%) 10.6 10.6 10.6 10.6 Other current assets 344 492 436 640 RoCE ‐ Cost of capital (%) 21.3 23.1 25.3 25.1 Total current assets 14,231 16,700 19,136 21,224 Asset turnover (x) 146.0 ‐295.7 ‐50.7 ‐84.1 Gross fixed assets 5,990 6,366 6,116 8,816 Sales/Total assets (x) 1.4 1.4 1.4 1.4 Less: Depreciation 3,967 4,360 4,727 5,256 Sales/Net FA (x) 8.5 7.9 9.4 8.7 Add: Capital WIP 1,083 1,711 1,468 1,763 Working capital/Sales (x) ‐0.2 ‐0.1 ‐0.1 ‐0.1 Net fixed assets 3,106 3,717 2,857 5,323 Fixed capital/Sales (x) 1.1 0.9 0.8 0.8 Other Non‐current assets 383 478 478 478 Receivable days 8.0 13.5 8.2 10.9 Total assets 17,720 20,895 23,772 28,202 Inventory days 49.4 50.3 46.9 48.3 Payable days 89.0 107.6 94.8 97.3 Current liabilities 4,704 6,663 6,731 7,969 Current ratio (x) 1.8 1.8 1.9 1.8 Provisions 0 99 111 203 Quick ratio (x) 1.4 1.4 1.5 1.4 Total current liabilities 8,003 9,376 10,094 11,940 Interest cover (x) 129.5 109.3 162.9 147.4 Non‐current liabilities 115 79 0 0 Dividend cover (x) 2.0 1.8 2.0 1.7 Total liabilities 8,118 9,455 10,094 11,940 PER (x) 42.6 36.0 28.4 24.0 Paid‐up capital 421 421 421 421 Price/Book (x) 13.3 11.2 9.3 7.9 Reserves & surplus 9,180 11,020 13,258 15,841 EV/EBIT (x) 31.3 27.5 23.5 19.7 Shareholders’ equity 9,601 11,441 13,678 16,261 EV/NOPLAT (x) 47.2 41.9 35.0 29.4 Total equity & liabilities 17,719 20,896 23,772 28,201 EV/CE 12.2 10.2 8.4 7.0 Source: Company, PhillipCapital India Research Estimates EV/IC (x) 747.5 ‐1289.0 ‐188.7 ‐268.2
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Agrotech Foods Sundrop oil gets slippery PhillipCapital (India) Pvt. Ltd. FMCG: Company Update 8 November 2012
Channel partners for AgroTech Foods have indicated mixed trends in volume growth BUY for the major brand Sundrop oil. However robust growth trend for Act – II popcorn brand sustains. ATFL IN | CMP RS 421 TARGET RS 510 (+21%) Volume growth visibility in South India markets for Sundrop oil brand but Company Data outweighed by pressure in North India O/S SHARES (MN) : 24 Channel partners in South India indicated volume growth of 5% YoY for the MARKET CAP (RSBN) : 10 Sundrop oil with value growth of 10 ‐ 15% YoY. Volume growth in the high margin MARKET CAP (USDMN) : 196 52 ‐ WK HI/LO (RS) : 517 / 340 Sundrop Heart variant is robust. Conversely volume has degrown in North Indian LIQUIDITY 3M (USDMN) : 0.2 states namely UP. Volume degrowth for Sundrop on a pan India basis, implies FACE VALUE (RS) : 10 volume decline to be meaningful in North India Share Holding Pattern, % PROMOTERS : 51.8 Channel partners cautious regarding company’s focus on driving higher FII / NRI : 3.4 FI / MF : 7.9 realizations in Sundrop brand NON PROMOTER CORP. HOLDINGS : 14.1 In our findings we observed that ATFL has exercised frequent price hikes in PUBLIC & OTHERS : 22.9
Sundrop oil. The pricing driven strategy is weighing on the brand’s volume. On Price Performance, % account of the relatively premium realizations, new consumer recruitment by the 1mth 3mth 1yr brand has slowed down. Competition in the edible oil sector is said to have ABS 2.9 ‐13.2 4.1 increased significantly including Sundrop brand’s main competitor Saffola. Hence REL TO BSE 4.0 ‐22.2 ‐2.6 pricing strategy may not be conducive for the brand in the medium to long term. Price Vs. Sensex (Rebased values) 250 Act – II popcorn brand growth continues to be robust 200 Growth in Act – II popcorn brand is strong at 15 – 20% YoY. The Rs. 5 Ready to eat SKU launched last year is gaining meaningful traction. However growth in the 150 newly introduced Rs. 15 SKU has been slow moving. On account of seasonality, 100 traction in Act – II brand sales is significant at 30 – 40% YoY during Oct – Dec period and off season (rest of the year) growth is indicated at 10 ‐ 20% YoY. 50
0 Skepticism on future success of Sundrop Peanut butter brand Apr‐10 Dec‐10 Aug‐11 Apr‐12 Channel partners in South India have indicated that consumers are largely Agro Tech Foods BSE Sensex unaware of the peanut butter category as ATFL currently does not undertake any Source: Bloomberg, Phillip Capital Research amount of brand investments. Hence they hold a skeptical view on the scope of Other Key Ratios the Sundrop peanut butter brand. We understand that the channel partners are Rs mn FY12 FY13E FY14E not informed of ATFL’s strategy to introduce innovative product formats under Net Sales 7,021 7,519 8,630 peanut butter such as sachets at affordable price points and undertake necessary Ebidta 515 579 673 brand investments as was done to develop the Act – II popcorn brand. Net Profit 362 408 467 EPS, Rs 14.8 16.7 19.2 PER, X 28.4 25.2 22.0 Robust earnings growth potential remains intact. Maintain Buy rating: EV/EBIDTA, % 19.1 16.7 14.1 We remain believers of ATFL’s strategy in developing future revenue growth EV/Net Sales, x 1.4 1.3 1.1 drivers by way of product innovations in the nascent rapidly growing Branded ROE, % 18.7 18.0 17.7 Foods category. Subsequently the earnings traction is estimated to be higher as Source: PhillipCapital India Research Est. the company focuses on improving margins in the mainstay Sundrop edibe oil brand and increasing contribution from the relatively higher margin Snack Foods business. We maintain our BUY rating.
8 November 2012 / INDIA EQUITY RESEARCH / AGROTECH FOODS COMPANY UPDATE
Income Statement Cash Flow Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Y/E Mar, Rs mn FY11 FY12 FY13E FY14E Net sales 7,187 7,021 7,519 8,630 Pre‐tax profit 297 506 567 662 Growth, % 11 ‐2 7 15 Depreciation 46 57 68 83 Total income 7,187 7,021 7,519 8,630 Chg in working capital ‐554 ‐159 ‐239 ‐20 Operating expenses ‐6,912 ‐6,506 ‐6,940 ‐7,957 Total tax paid ‐171 ‐136 ‐135 ‐195 EBITDA (Core) 275 515 579 673 Cash flow from operating activities ‐382 268 261 531 Growth, % 6.7 87.3 12.4 16.2 Capital expenditure ‐185 ‐257 4 ‐275 Margin, % 3.8 7.3 7.7 7.8 Cash flow from investing activities ‐185 ‐257 4 ‐275 Depreciation ‐46 ‐57 ‐68 ‐83 Free cash flow ‐567 11 265 256 EBIT 229 458 511 589 Equity raised/(repaid) 24 27 38 49 Growth, % 0.8 99.8 11.5 15.3 Dividend (incl. tax) ‐50 ‐50 ‐62 ‐71 Margin, % 3.2 6.5 6.8 6.8 Cash flow from financing activities ‐26 ‐22 ‐24 ‐22 Interest paid ‐1 ‐1 ‐1 ‐1 Net chg in cash ‐593 ‐12 241 234 Other Non‐Operating Income 69 49 56 74 Pre‐tax profit 297 506 567 662 Tax provided ‐153 ‐145 ‐159 ‐195 Valuation Ratios & Per Share Data Profit after tax 144 362 408 467 FY11 FY12 FY13E FY14E Net Profit 144 362 408 467 EPS, Rs 5.9 14.8 16.7 19.2 Growth, % (42.8) 150.8 12.7 14.5 BVPS, Rs 72.8 85.6 99.9 116.2 Net Profit (adjusted) 144 362 408 467 DPS, Rs 1.8 1.8 2.1 2.4 Unadj. shares (m) 24 24 24 24 Return on assets (%) 5.6 13.1 13.5 13.5 Wtd avg shares (m) 24 24 24 24 Return on equity (%) 8.8 18.7 18.0 17.7
Return on Invested capital (%) 11.9 22.4 23.4 25.9
RoIC ‐ Cost of capital (%) 11.9 22.4 23.4 25.9 Balance Sheet Return on capital employed (%) 8.8 18.8 18.1 17.8 Y/E Mar, Rs mn FY11 FY12 FY13E FY14E RoCE ‐ Cost of capital (%) 8.8 18.8 18.1 17.8 Cash & bank 447 408 612 796 Asset turnover (x) 7.7 4.8 4.8 5.4 Debtors 351 346 350 378 Sales/Total assets (x) 2.8 2.5 2.5 2.5 Inventory 674 645 668 730 Sales/Net FA (x) 11.9 9.1 9.0 9.6 Loans & advances 504 485 451 475 Working capital/Sales (x) 0.1 0.1 0.1 0.1 Other current assets 12 14 14 14 Receivable days 17.8 18.0 17.0 16.0 Total current assets 1,989 1,899 2,096 2,393 Inventory days 34.2 33.5 32.4 30.9 Investments 14 14 14 14 Payable days 45.7 36.5 36.7 35.7 Gross fixed assets 698 839 1,114 1,389 Current ratio (x) 2.1 2.6 2.7 2.7 Less: Depreciation ‐202 ‐249 ‐312 ‐395 Quick ratio (x) 1.4 1.7 1.8 1.9 Add: Capital WIP 178 285 0 0 Interest cover (x) 171.1 705.0 786.1 906.7 Net fixed assets 674 874 802 994 Dividend cover (x) 3.4 8.5 8.1 8.1 Non‐current assets 0 0 306 306 PER (x) 71.1 28.4 25.2 22.0 Total assets 2,708 2,810 3,218 3,707 PEG (x) ‐ y‐o‐y growth (1.7) 0.2 2.0 1.5 Price/Book (x) 5.8 4.9 4.2 3.6 Current liabilities 934 724 784 878 Yield (%) 0.4 0.4 0.5 0.6 Total current liabilities 934 724 784 878 EV/Net sales (x) 1.4 1.4 1.3 1.1 Total liabilities 934 724 784 878 EV/EBITDA (x) 35.7 19.1 16.7 14.1 Paid‐up capital 244 244 244 244 EV/EBIT (x) 42.8 21.5 18.9 16.1 Reserves & surplus 1,531 1,843 2,191 2,587 EV/NOPLAT (x) 80.6 26.6 23.0 19.8 Shareholders’ equity 1,775 2,087 2,435 2,831 EV/CE 5.5 4.7 4.0 3.3 Total equity & liabilities 2,708 2,810 3,219 3,708 EV/IC (x) 10.5 6.7 6.1 5.9 Source: Company, PhillipCapital India Research Estimates
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Management Vineet Bhatnagar (Managing Director) (91 22) 2300 2999 Sajid Khalid (Head – Institutional Equities) (91 22) 6667 9972 Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735
Research Automobiles, IT Services Economics Retail, Real Estate Deepak Jain (9122) 6667 9758 Anjali Verma (9122) 6667 9969 Abhishek Ranganathan, CFA (9122) 6667 9952 Neha Garg (9122) 6667 9996 Neha Garg (9122) 6667 9996 Varun Vijayan (9122) 6667 9992 Engineering, Capital Goods Ankur Sharma (9122) 6667 9759 Mid‐caps Banking, NBFCs Jishar Thoombath (9122) 6667 9986 Kapil Bagaria (9122) 6667 9965 Manish Agarwalla (9122) 6667 9962 Raheel Arathodi (9122) 6667 9768 Sachit Motwani, FRM (9122) 6667 9953 Metals Dhawal Doshi (9122) 6667 9769 Technicals & Quant Consumer, Media, Telecom Dharmesh Shah (9122) 6667 9974 Neppolian Pillai (9122) 6667 9989 Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Shikha Khurana (9122) 6667 9948 Ennette Fernandes (9122) 6667 9764 Infrastructure Vivekanand Subbaraman (9122) 6667 9766 Vibhor Singhal (9122) 6667 9949 Sr. Manager – Equities Support Raheel Arathodi (9122) 6667 9768 Rosie Ferns (9122) 6667 9971 Cement Vaibhav Agarwal (9122) 6667 9967 Oil&Gas, Fertiliser Gauri Anand (9122) 6667 9943 Saurabh Rathi (9122) 6667 9951
Sales & Distribution Sudhir Padiyar (9122) 6667 9991 Sunil Kamath (Sales Trader) (9122) 6667 9747 Mayur Shah (Execution) (9122) 6667 9945 Kinshuk Tiwari (9122) 6667 9946 Chetan Savla (Sales Trader) (9122) 6667 9745 Gurudatt Uchil (Execution) (9122) 6667 9750 Pawan Kakumanu (9122) 6667 9934 Rajesh Ashar (Sales Trader) (9122) 6667 9746 Shubhangi Agrawal (9122) 6667 9964 Dipesh Sohani (9122) 6667 9756
Contact Information (Regional Member Companies)
SINGAPORE MALAYSIA HONG KONG Phillip Securities Pte Ltd Phillip Capital Management Sdn Bhd Phillip Securities (HK) Ltd 250 North Bridge Road, #06‐00 Raffles City Tower, B‐3‐6 Block B Level 3, Megan Avenue II, 11/F United Centre 95 Queensway Hong Kong Singapore 179101 No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (852) 2277 6600 Fax: (852) 2868 5307 Tel : (65) 6533 6001 Fax: (65) 6535 3834 Tel (60) 3 2162 8841 Fax (60) 3 2166 5099 www.phillip.com.hk www.phillip.com.sg www.poems.com.my JAPAN INDONESIA CHINA Phillip Securities Japan, Ltd PT Phillip Securities Indonesia Phillip Financial Advisory (Shanghai) Co. Ltd. 4‐2 Nihonbashi Kabutocho, Chuo‐ku ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, No 550 Yan An East Road, Ocean Tower Unit 2318 Tokyo 103‐0026 Jakarta 10220, Indonesia Shanghai 200 001 Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.co.jp www.phillip.co.id www.phillip.com.cn THAILAND FRANCE UNITED KINGDOM Phillip Securities (Thailand) Public Co. Ltd. King & Shaxson Capital Ltd. King & Shaxson Ltd. 15th Floor, Vorawat Building, 849 Silom Road, 3rd Floor, 35 Rue de la Bienfaisance 6th Floor, Candlewick House, 120 Cannon Street Silom, Bangrak, Bangkok 10500 Thailand 75008 Paris France London, EC4N 6AS Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.phillip.co.th www.kingandshaxson.com www.kingandshaxson.com UNITED STATES AUSTRALIA SRI LANKA Phillip Futures Inc. PhillipCapital Australia Asha Phillip Securities Limited 141 W Jackson Blvd Ste 3050 Level 37, 530 Collins Street Level 4, Millennium House, 46/58 Navam Mawatha, The Chicago Board of Trade Building Melbourne, Victoria 3000, Australia Colombo 2, Sri Lanka Chicago, IL 60604 USA Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 Tel (1) 312 356 9000 Fax: (1) 312 356 9005 www.phillipcapital.com.au www.ashaphillip.net/home.htm INDIA PhillipCapital (India) Private Limited No. 1, C‐Block, 2nd Floor, Modern Center , Jacob Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in
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Disclosures and Disclaimers
PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.
This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance.
This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice
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Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd does not hold more than 1% of the shares of the company(ies) covered in this report.
Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results.
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PhillipCapital (India) Pvt. Ltd. 2nd Floor, C‐Block, Modern Centre, Mahalaxmi, Mumbai ‐ 400011
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