Consumer Goods Recovery in discretionary categories points to steady Q3 Sector Update

Consumer goods companies (barring ITC) are expected to post steady performance Q3FY2021 Results Preview in Q3FY2021 with revenue growth of 5-10%, largely driven by a rise in sales volumes of value-added hair oils (VAHO), hair colour, higher demand for winter care products Sector: Consumer Goods and sustained demand for healthcare products. Meanwhile, sales of products such as hand sanitizers that peaked during the pandemic, will moderate as the virus Sector View: Positive threat eases, while sales of biscuits and packaged foods will stabilise in Q3FY21 (but will stay high compared with Q3FY20). Rural demand will continue to outpace urban demand due to better rural economics driven by a strong kharif and rabi seasons. We expect HUL (core business - excluding GSK Consumer’s portfolio), Britannia and Our coverage universe Nestle to achieve volume growth of 6-9% in Q3FY2021. We expect mid-cap CMP PT companies such as India, , and Companies Reco. (Rs) (Rs) (GCPL) to achieve volume growth of 7-12% driven by a recovery in discretionary categories and sustained high demand for healthcare products. Tata Consumer 2,803 Buy UR Products is expected to post strong double-digit growth driven by double digit Britannia 3,538 Buy 4,200 growth in India beverage and Tata businesses while the recently-acquired Industries foods business is set to register mid-to-high teen growth. ITC’s cigarette sales volume Colgate- are expected to grow in low single digit while non-cigarette FMCG business will Palmolive 1,598 Buy 1,850 maintain double digit growth momentum. Asian Paints performance will be boosted (India) by sustained double-digit growth in the decorative paints business. Companies like Dabur India 534 Buy 605 HUL, Marico, GCPL, TCPL and Zydus Wellness will see gross margins decline by Emami 90-350 bps affected by a sharp surge in prices of inputs such as palm oil, copra, 451 Buy 510 domestic raw and HDPE prices. However companies such as Emami, Britannia, Limited Nestle India and Asian Paints would post better gross margins due to lower input Godrej prices. Overall, we expect all consumer goods companies would deliver higher OPM Consumer 745 Buy 850 y-o-y as they reap the benefits of cost saving initiatives undertaken in the past few Products quarters and judicious ad spends. Hindustan 2,417 Buy 2,790 Outlook ITC 205 Buy 250 Revenue growth momentum to sustain; better operating leverage to drive Jyothy Labs 148 Buy 170 profitability in FY2022: Q3FY2021 would be another quarter that sees a sequential recovery in volume growth and sustained high OPM on a y-o-y basis. We believe that Marico 419 Buy 477 a shift in demand towards branded products, rural demand staying of urban demand, Nestle India 18,511 Buy 19,055 gradual recovery in the out-of-home categories and new product launches remain Tata key revenue growth catalyst in the near to medium term. Growing caution on health Consumer 605 Buy 630 among consumers will continue to fuel growth for healthcare products, while increasing Products the importance of categories such as floor cleaners/toiler cleaners/disinfectants in Zydus the near to medium term. Raw material prices have increased in the recent past and 2,087 Buy 2,300 Wellness sustenance of this trend will bring some softness in the gross margins. Judicious price hikes, sustained benefits of cost saving initiatives and prudent media spends would Source: Sharekhan Research UR = Under Review coupled with strong revenue growth would help OPM to remain stable in FY2022. The structural growth story of domestic consumer goods market is intact with lower per capita consumption of products as compared to other international countries, lower penetration in rural markets and opportunities to launch new differentiated products and gaining market share from small players. Valuation Price chart More room for outperformance: Consumer goods sectors saw faster recovery compared to some of the other sectors in the pandemic environment. We remain positive on the 65000 14000 consumer goods space in view of strong earning visibility, strong balance sheet and 52500 11500 better return profile compare to other sectors. In large cap space we continue stocks like 40000 9000 HUL as more than 80% of its product portfolio is essential in nature and derives ~50% 27500 6500 of revenue from the rural market and Asian Paints as a strong recovery is expected in FY2022 due to higher pent-up demand and market share gains. Discounted valuations 15000 4000 15 17 21 19 16 16 18 20 18 - - - -

- and an improving margin profile of non-cigarette FMCG business makes ITC a preferred - - - - Jul Jul Jan Apr Apr Dec Aug Nov

Mar pick in the basket. Among mid-caps, we prefer Ltd and Dabur India as both companies have good earnings visibility in the near to medium term. We BSE Sensex BSE FMCG Index also like Emami as management has changed its gear to improve the growth prospects of the company and improve the shareholders value in the medium term. Key risks: Increase in competition in some of the high penetrated categories and sustain spike in the key input prices would act as a key risk to performance of consumer goods companies. Leaders in Q3FY2021: Asian Paints, Emami and Dabur India Laggards in Q3FY2021: ITC Preferred picks: Asian Paints, HUL, ITC, Dabur India, TCPL and Emami

January 06, 2021 14 Sector Update

Q3FY2021 earnings estimates Net sales (Rs cr) OPM (%) Adjusted PAT Company Q3FY21E Q3FY20 YoY (%) Q3FY21E Q3FY20 Y-o-Y BPS Q3FY21E Q3FY20 Y-o-Y % Asian Paints 5946.8 5420.3 9.7 23.3 21.9 137 932.4 779.7 19.6 3259.3 2982.7 9.3 19.0 16.8 216 451.5 369.9 22.1 Colgate-Palmolive (India) 1202.7 1147.2 4.8 29.7 27.6 215 234.2 199.1 17.6 Dabur India 2671.4 2353.0 13.5 21.5 20.9 58 485.7 415.0 17.0 Emami 939.2 812.6 15.6 35.1 32.5 260 243.5 200.0 21.8 Godrej Consumer Products 3059.6 2755.1 11.1 23.4 22.9 51 486.2 421.2 15.4 11782.5 9808.0 20.1 24.5 24.9 -44 2048.2 1688.3 21.3 ITC 12240.0 12013.0 1.9 34.3 38.4 -406 3564.9 3898.4 -8.6 Jyothy Labs 439.1 407.3 7.8 16.2 16.0 25 45.9 42.6 7.6 Marico 2012.4 1824.0 10.3 20.0 20.4 -45 304.5 276.0 10.3 Nestle India 3209.9 2960.8 8.4 25.1 22.9 224 530.6 473.0 12.2 Tata Consumer Products 2809.9 1961.9 43.2 13.0 12.2 76 257.2 136.4 88.5 Zydus Wellness 355.1 332.7 6.7 10.7 11.2 -56 29.0 8.9 - Grand Total 49928.0 44778.4 11.5 25.5 26.5 -91 9613.8 8908.4 7.9 Source: Company, Sharekhan estimates * Estimates for HUL and Tata Consumer Products are including the merger of acquired businesses # Nestle India is a calendar year ending company and hence, estimates are for Q4CY2020

Trend in the key input prices Particulars Q3FY21 Q3FY20 yoy% Q2FY21 qoq% Copra (Rs/kg) 125.6 104.1 20.7 112.9 11.2 Kardi oil (Rs/kg) 163.6 197.3 -17.1 166.7 -1.9 Rice bran oil (Rs/kg) 82.0 64.4 27.3 76.8 6.8 LLP (Rs/Ltr) 47.0 45.0 4.4 42.0 11.9 HDPE (Rs/kg) 98.0 85.0 15.3 92.0 6.5 Titanium dioxide (Rs/kg) 260.0 257.0 1.2 256.0 1.6 Palm oil prices (MYR / tonne) 3590.0 2586.0 38.8 3150.0 14.0 Mentha oil (Rs/kg) 963.0 1252.2 -23.1 1094.5 -12.0 Raw tea prices 207.9 141.3 47.1 240.0 -13.4 Barley (WPI)) 150.0 172.0 -12.8 154.0 -2.6 Wheat (Rs/kg) 25.0 30.0 -16.7 27.0 -7.4 Sugar (Rs/kg) 33.0 33.0 0.0 34.0 -2.9 Source: Bloomberg, Sharekhan Research

Valuations Price EPS (Rs) P/E (x) Company CMP (Rs) Reco Target (Rs) FY21E FY22E FY23E FY21E FY22E FY23E Asian Paints 2,803 Buy UR 28.2 35.6 43.4 99.6 78.7 64.6 Britannia Industries 3,538 Buy 4,200 75.7 85.2 98.4 46.7 41.5 36.0 Colgate-Palmolive (India) 1,598 Buy 1,850 31.7 35.1 38.5 50.4 45.5 41.5 Dabur India 534 Buy 605 9.5 11.6 13.7 56.2 46.0 39.0 Emami Limited 451 Buy 510 13.6 16.5 19.7 33.1 27.3 22.9 Godrej Consumer Products 745 Buy 850 17.0 19.7 22.6 43.8 37.8 33.0 Hindustan Unilever* 2,417 Buy 2,790 35.9 45.3 51.7 67.3 53.4 46.8 ITC 205 Buy 250 10.2 12.4 14.2 20.1 16.6 14.5 Jyothy Labs 148 Buy 170 5.4 6.5 7.6 27.3 22.7 19.4 Marico 419 Buy 477 8.6 10.5 11.9 48.7 39.9 35.2 Nestle India# 18511 Buy 19,055 229.8 270.8 311.0 80.6 68.4 59.5 Tata Consumer Products* 605 Buy 630 10.0 12.0 13.8 60.5 50.4 43.8 Zydus Wellness 2,087 Buy 2,300 30.0 47.1 59.0 69.6 44.3 35.4 Source: Company, Sharekhan estimates UR = Under Review * Nestle India is a calendar year ending company # Estimates for HUL and Tata Consumer Products are including the merger of acquired businesses

January 06, 2021 15 Sector Update Q3FY2021 Consumer Goods earnings preview Company wise key expectations Company Q3FY21E Y-o-Y (%) Q-o-Q (%) Comments Asian Paints Sales (Rs crore) 5946.8 9.7 11.2 Volume growth in decorative paints business to sustain in double digits due to good demand in tier III and IV towns and a gradual recovery in key metros OPM (%) - BPS 23.3 251 -29 Lower input prices and cost saving initiatives would help the OPM to expand by 251 bps Adjusted PAT (Rs 932.4 19.6 9.5 PAT is expected to grow by ~20% led steady revenue growth and crore) margin expansion. Britannia Industries Sales 3259.3 9.3 (4.7) We expect domestic business volume growth to be at 7-8% OPM (%) - BPS 19.0 220 -80 Benign input prices (including milk and wheat) and efficiencies would help OPM expand by 220 bps Adjusted PAT 451.5 22.1 (8.9) Steady volume growth and margin expansion would help PAT to grow by over 20% Colgate-Palmolive (Colgate) Sales (Rs crore) 1202.7 4.8 (6.4) Volume growth in toothpaste category is expected to be in mid-single digit; Toothbrush category sales will recover close to pre-COVID levels OPM (%) - BPS 29.7 215 -214 Higher gross margins and cost saving initiatives would help OPM to expand by 215 bps Adjusted PAT 234.2 17.6 (14.6) PAT expected to grow in high teens in line with double digit growth in the operating profit. Dabur India Sales (Rs crore) 2671.4 13.5 6.2 Domestic volume growth likely to sustain in double digits with strong double digit growth expected in categories such as healthcare and OTC products while oral care expected to post high single to low double digit growth. OPM (%) - BPS 21.5 58 -111 OPM to expand by 58 bps led by efficiencies Adjusted PAT 485.7 17.0 0.5 Strong performance by domestic business would help high teens PAT growth Emami Sales (Rs crore) 939.2 15.6 27.8 Higher demand for winter and healthcare products would help achieve ~16% revenue growth OPM (%) - BPS 35.1 260 10 OPM to expand by 260 bps to 35% Adjusted PAT 243.5 21.8 25.6 Expected double digit volume growth and margin expansion would aid PAT to grow by 20%+ Godrej Consumer Products Limited (GCPL) Sales (Rs crore) 3059.6 11.1 5.7 Double-digit growth in domestic soaps, recovery in the hair colour and high single digit growth in HI category coupled with double-digit growth in Africa business would help clock an over 10% revenue growth OPM (%) - BPS 23.4 54 -21 Higher palm oil prices and other key input prices would result in lower gross margins. Lower ad spends and other expenses would help in OPM to expand by 50 bps Adjusted PAT 486.2 15.4 6.1 PAT to grow by ~14% Hindustan Unilever (HUL) Sales (Rs crore) 11782.5 20.1 3.0 Core business volume growth is expected to recover to 6-7% with better demand for winter products and higher sales of personal wash products. OPM (%) - BPS 24.5 -44 -100 Higher palm oil prices and packaging cost would result in a 44 bps decline in the OPM to 24.5% Adjusted PAT 2048.2 21.3 (1.0) PAT to grow by 21%

January 06, 2021 16 Sector Update

Company wise key expectations Company Q3FY21E Y-o-Y (%) Q-o-Q (%) Comments ITC Sales (Rs crore) 12240.0 1.9 2.2 Cigarette sales volume recovered on month-on-month basis post the easing of lockdown norms and likely to grow in low single digit. Non- cigarette FMCG business revenues to grow at mid-to-high teens. OPM (%) - BPS 34.3 -406 43 Change in revenue mix and lower profitability in hotel business would affect overall profitability Adjusted PAT 3564.9 (8.6) 10.3 Adjusted PAT expected to decline by ~9% Jyothy Labs (JLL) Sales (Rs crore) 439.1 7.8 (12.1) Ujala Fabric whitener sales recovered to 100%, while dishwashing and soaps categories are expected maintained the double digit growth momentum. HI is expected to grow in the single digits due to a seasonally weak quarter for the category with higher presence in north India. OPM (%) - BPS 16.2 25 -154 Higher input prices such as crude derivatives and palm oil prices would result in decline in gross margins by 28 bps. However prudent ad-spends and lower other expenses would help margins to stay at around 16% PAT 45.9 7.6 (24.4) PAT to grow by ~8% in-line with revenue growth Marico Sales (Rs crore) 2012.4 10.3 1.2 Domestic business to achieve double digit volume growth with Parachute rigid packs likely to achieve a 7-8% volume growth, Saffola (to see 16- 17% volume growth) and value-added hair double digit volume growth. Globally, Bangladesh would maintain double-digit growth momentum. OPM (%) - BPS 20.0 -45 44 Higher copra and other key edible oil prices would result 162 bps decline in gross margins. But lower promotional spends and cost- saving initiatives would arrest significant reduction in the OPM. Adjusted PAT 304.5 10.3 3.6 PAT likely to grow in-line with double digit revenue growth Nestle India Sales (Rs crore) 3209.9 8.4 (4.2) Volume growth is expected to be at 7-8% which will be largely deliv- ered by strong growth in Maggie portfolio. We believe farmer's agita- tion in North India is likely to have impact on the supply and distribution at the fag end of the quarter. OPM (%) - BPS 25.1 210 -202 Benign input prices would help gross margins to expand by 43 bps. While lower other expenses and judicious ad-spends would help OPM to expand by 210 bps Adjusted PAT 530.6 12.2 (23.2) Adjusted PAT is expected to grow by 12% led by margin expansion. Tata Consumer Products (TCPL) Sales (Rs crore) 2809.9 43.2 1.0 India beverage to grow by 15%, US coffee to grow by 5%, to grow by 12% and the India food business to grow by 16% OPM (%) - BPS 13.0 76 -140 Gross margins will be lower by 316 bps due to higher domestic tea prices and higher international coffee prices. Synergistic benefits would help OPM to expand by 76 bps Adjusted PAT 257.2 88.5 (13.5) Strong PAT growth would be deliver on back of healthy growth in reve- nues and OPM expansion Zydus Wellness (Zydus) Sales (Rs crore) 355.1 6.7 3.8 Revenues are expected to grow by ~7% driven by sequentially better demand for Complan, sustained good traction for Sugarfree and good response to new product launches. OPM (%) - BPS 10.7 -56 273 Lower gross margins and higher ad-spends would result in 56 bps decline in OPM Adjusted PAT 29.0 - - The company's PAT likely to stand at Rs. 29 crore as against Rs. 4.2crore in Q3FY20 largely on account of lower interest costs. Source: Sharekhan estimates

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

January 06, 2021 17 Know more about our products and services

For Private Circulation only

Disclaimer: This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity to which it is addressed to. This Document may contain confidential and/or privileged material and is not for any type of circulation and any review, retransmission, or any other use is strictly prohibited. This Document is subject to changes without prior notice. This document does not constitute an offer to sell or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report. The information contained herein is obtained from publicly available data or other sources believed to be reliable and SHAREKHAN has not independently verified the accuracy and completeness of the said data and hence it should not be relied upon as such. While we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Recipients of this report should also be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different conclusions from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject SHAREKHAN and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. The analyst certifies that the analyst has not dealt or traded directly or indirectly in securities of the company and that all of the views expressed in this document accurately reflect his or her personal views about the subject company or companies and its or their securities and do not necessarily reflect those of SHAREKHAN. The analyst further certifies that neither he or its associates or his relatives has any direct or indirect financial interest nor have actual or beneficial ownership of 1% or more in the securities of the company at the end of the month immediately preceding the date of publication of the research report nor have any material conflict of interest nor has served as officer, director or employee or engaged in market making activity of the company. Further, the analyst has also not been a part of the team which has managed or co-managed the public offerings of the company and no part of the analyst’s compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document. Sharekhan Limited or its associates or analysts have not received any compensation for investment banking, merchant banking, brokerage services or any compensation or other benefits from the subject company or from third party in the past twelve months in connection with the research report. Either SHAREKHAN or its affiliates or its directors or employees / representatives / clients or their relatives may have position(s), make market, act as principal or engage in transactions of purchase or sell of securities, from time to time or may be materially interested in any of the securities or related securities referred to in this report and they may have used the information set forth herein before publication. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind.

Compliance Officer: Mr. Joby John Meledan; Tel: 022-61150000; email id: [email protected]; For any queries or grievances kindly email [email protected] or contact: [email protected]

Registered Office: Sharekhan Limited, 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), – 400042, . Tel: 022 - 61150000. Sharekhan Ltd.: SEBI Regn. Nos.: BSE / NSE / MSEI (CASH / F&O / CD) / MCX - Commodity: INZ000171337; DP: NSDL/CDSL-IN-DP-365-2018; PMS: INP000005786; Mutual Fund: ARN 20669; Research Analyst: INH000006183;

Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and the T&C on www.sharekhan.com; Investment in securities market are subject to market risks, read all the related documents carefully before investing.