Sector Report

September 7, 2020

Sector Report

Content of the report

A) Hygiene, health and packaged-food to drive outperformance ………………………………………………………… 3

B) Strength comes from uncertainty; mapping companies response to COVID on NPDs, pricing and discounting …………………………………………………………………………………………………………………….. 15

C) Fundamental recovery in rural still not in-sight; better distribution efficiency to drive outperformance ………………………………………………………………………………………………………………………. 27

D) International business recovery to be faster compared to India ………………………………………………………… 38

E) P/E re-rating justified on intrinsic basis ……………………………………………………………………………………………… 43

F) Company section:

a. Hindustan Unilever ……………………………………………………………………………………………………..…………… 51

b. ITC……………………………………………………………………………………………………………………………………….…… 69

c. Nestle ………………………………………………………………………………………………………………………………………. 83

d. Britannia……………………………………………………………………………………………….…………………………………. 103

e. Dabur ………………………………………………………………………………………………………………………………………. 123

f. Godrej Consumer……………………………………………………………………………………………………………………… 141

g. Marico ………………………………………………………………………………………………….…………………………………. 159

Sector Report

FMCG Anti-fragility to rescue under-performance Investment rationale

COVID19 has made mankind realize its fragility-quotient in this universe. On similar  NEST, BRIT and ITC to benefit from favorable industry tailwinds note, we get to know the fragility-quotient of companies in FMCG space as well. We expect that the shift from out-of-home to in-home consumption will help The famous quote; “One should never cross a river 4 feet deep on an average” NEST, BRIT and ITC to record strong growth in packaged food led by favorable should always be remembered to protect risk of wealth-destruction. In this report industry tailwinds. In our view, this trend will persist for next 7-9 months. Large we attempt to dissect anti-fragile companies which, in our view, will continue to players will gain market share led by distribution efficiency and switch from un- outperform in wealth creation over a long period of time. We initiate coverage on branded products to branded products by customers due to safety concerns. ITC Ltd (ITC) with BUY rating, TP Rs259, Godrej Consumer (GCPL) with BUY rating,  Outperformance hinges on distribution efficiency and not rural-urban mix TP Rs817, Britannia (BRIT) with BUY rating, TP Rs4,267, Marico (MRCO) with Despite low number of COVID cases in rural India we note that fundamentals and ACCUMULATE rating, TP Rs397, Hindustan Unilever (HUL) with ACCUMULATE re-enforcement of lockdown is not supporting rural recovery. Hence, we expect rating, TP Rs2,424,Nestle (NEST) with HOLD rating, TP Rs16,940, and Dabur superior distribution infrastructure to be the key to drive outperformance. HUL (DABUR) with HOLD rating, TP Rs491. ranks at the top on distribution efficiency followed by NEST, ITC and BRIT.  Hygiene, health and packaged-food to drive outperformance  Business recovery in international market to be faster compared to India FMCG sector has resumed revenue growth with-in 3-4 months in the last 3 Asian Daily new COVID cases in top 7 countries (which represent c. 72% of revenue of crises. However, since this crisis has forced people to work-from-home and avoid Indian FMCG companies in foreign geographies), has either declined or social gathering, we expect companies with high exposure to health, hygiene and witnessed flattening of the curve. Though, in India it continues to rise. We expect food portfolio (a.k.a. anti-fragile companies) to deliver better revenue growth business recovery of MRCO to be faster in international markets followed by during FY21-22E. NEST, BRIT, HUL and GCPL have anti-fragile portfolio of DABUR and GCPL. products and score over others on this parameter. Positively, these companies also outperformed in wealth creation during pre-covid times (FY15-19).  P/E re-ratings are fundamentally justified; don’t anticipate cut in multiples P/E multiple of all FMCG companies is fairly justified. As we note that there are  In hygiene; GCPL competes with focus on price-disruption while HUL on variety three vectors for P/E re-rating; (i) higher dividend pay-out ratio (ii) higher We like GCPL’s approach of democratizing hygiene portfolio through innovative fundamental growth rate (retention rate * ROE), and (iii) lower cost of capital. launches and disruptive pricing (Protekt is first-ever powder to liquid hand-wash FMCG companies with high ROE and growth rate (supported by anti-fragility at Rs15/200ml; 1/4rth the price of existing handwash). However, HUL competes factor) to continue enjoy higher valuation multiple (refer exhibit 85 to 91 for with a wide portfolio; multiple brands straddling at several price points. In FMCG working on each of the 7 stocks). industry, we expect HUL and GCPL to gain market share in hygiene portfolio led by better distribution efficiency and leading brand positioning.

Valuation snapshot CMP TP Mkt Cap Revenue (Rs mn) EPS (Rs) P/E (x) EV/EBITDA (x) RoE (%) RoCE (%)

Companies (Rs) (Rs) Reco. (Rs mn) FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E FY22E FY22E Hindustan Unilever 2,125 2,424 ACCUMULATE 4,988,189 442,095 507,800 38.0 44.1 55.9 48.2 39.2 33.6 84.4 90.4 ITC 187 259 BUY 2,296,868 465,602 529,518 11.3 13.2 16.5 14.1 12.8 10.8 23.8 30.9 Nestle 16,231 16,940 HOLD 1,564,967 153,019 171,048 270.0 308.0 60.1 52.7 40.7 35.9 62.1 49.5 Britannia 3,706 4,267 BUY 892,081 136,829 148,128 80.9 85.3 45.8 43.4 34.4 32.3 31.8 31.4 Dabur 484 491 HOLD 854,897 91,958 105,331 9.3 10.9 52.0 44.3 42.8 36.0 24.4 24.0 Godrej Consumer 655 817 BUY 670,083 104,560 117,341 15.7 18.2 41.8 36.1 28.2 24.5 21.2 21.6 Marico 374 397 ACCUMULATE 482,851 74,465 82,261 8.9 9.9 41.8 37.7 30.1 26.9 36.5 39.6 Source: IDBI Capital Research

FMCG | Sector Report

Hygiene, health and packaged food to drive outperformance

HUL, BRIT and NEST well positioned to drive outperformance led by anti-fragile hygiene-health-food driven portfolio  Unlike any past crisis, COVID has forced people to stay-at-home, avoid socializing (even during one’s own wedding) while companies have been forced to operate with minimal staff, for restricted timings and with uncertainty of re- enforcement of lockdown.  Flight to safety; as enforced by regulatory authorities on corporates and as chosen by consumers will have cascading impact on change in buying and selling strategies. Incrementally customers are choosing convenience (online, home deliveries) and buys essentials while corporates are deploying investments towards core portfolio and value pricing.  We believe consumption of out-of-home products (ice creams, bottled water, RTD beverages, confectionaries etc) and non-essentials (value added hair oils, premium skin care, air care etc.) will take long time to re-cover as people rush to save money to fight adversity/uncertainties (of losing job or catching virus) in their own families, change in lifestyle (work from home) inducing people to consume less of non-essential products like personal grooming/suave look etc.  Hence, companies having dominant presence in essentials and health & hygiene with strong execution strength are likely to outperform wannabe’/smaller players. BRIT, NEST and HUL are top three companies with highest exposure to essential category in our coverage universe. We believe, these companies should outperform consumer staple space during FY21-22E.  Even during pre-COVID time (during FY15-19) NEST, BRIT and HUL outperformed peers in wealth-creation led by both premiumization and efficiency led operating profit growth.  MRCO has highest exposure to non-essential category (33% revenue share) followed by DABUR (26% revenue share) compared to competition. As per management, positively MRCO is now shifting its focus towards core portfolio, value pricing, accelerating NPDs (new product development) in food & hygiene space and ramping up direct distribution. While Dabur has ramped up immunity boosting health portfolio followed by NPDs in hygiene.

FMCG | Sector Report

Exhibit 1: Revenue break-up company and category wise Exhibit 2: 4QFY20; a test of anti-fragility given 10 days national lock-down 4QFY20 Revenue change 4QFY20 PBT change Subs as % of No. of distinct % revenue break-up Non essentials Essentials Semi essential (% YoY) (% YoY) revenue Britannia Industries Ltd. - 90% 10% Standalone Standalone Subs Standalone Subs countries (FY15-20) Nestle India Ltd. - 75% 25% Britannia 1% 34% 9% -518% 7% 4 Hindustan Unilever Ltd. 22% 74% 4% Dabur -17% 3% -27% -196% 29% 14

Marico Ltd. 33% 65% 2% GCPL -18% -5% -26% -55% 46% 24 HUL -9% -22% -11% -82% 3% 1 Godrej Consumer Products Ltd. 19% 50% 31% ITC -6% 13% -9% 23% 7% 7 Dabur India Ltd. 26% 51% 23% Marico -8% -3% 0% 121% 19% 6 ITC Ltd. 10% 35% 55%

Nestle 11% 0% - -

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 3:1QFY21; a test of anti-fragility given 2 months national lockdown

1QFY21 Revenue 1QFY21 PBT FY20 revenue break up Subs as % of No. of distinct Change (% YoY) Change (% YoY) 1QFY21; BRIT outperformed all other % non- % semi- revenue Standalone St. Alone Subs St. Alone Subs countries companies due to 22% volume growth in essentials essentials (FY15-20) packaged food portfolio. Britannia 25 66 78 -7760 0 10 7 4 Dabur -8 -24 9 -42 26 23 29 14 GCPL 5 -8 18 -23 12 32 46 24 HUL 4 -32 -6 -46 22 5 3 1 ITC -23 52 -35 21 10 55 7 7 Marico -15 5 0 81 34 2 19 6 Nestle 2 -1 0 25 - -

Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 4: Wealth creation table before COVID19 crisis Before COVID; NEST, BRIT, GCPL and % CAGR FY15-19 HUL outperformed competition in Companies Market cap Revenue Operating profit wealth creation led by premiumization/ Nestle India Ltd. 32% 11% 16% efficiency driven growth in operating Britannia Industries Ltd. 30% 10% 21% profit Godrej Consumer Products Ltd. 19% 6% 16% Hindustan Unilever Ltd. 18% 6% 12% Marico Ltd. 16% 6% 12% Dabur India Ltd. 12% 4% 11% ITC Ltd. 9% 5% 7%

Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 5: Britannia; category break up as % of total revenue Exhibit 6: Nestle; category break up as % of total revenue

80% BRIT 50% NEST 40% 60% 30% 20% 40% 10% 46% 29% 12% 13% 0% 20% Milk Products and Prepared dishes and Beverages (RTD) Confectionary (white 8% 77% 5% 10% Nutrition (cereals for cooking aids (noodles, and waffers) 0% infants and milk pasta soups) Biscuits Bread and rusks Dairy Cake and others products) Essentials Semi essentials Essential Semi-essential

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 7: HUL; category break up as % of total revenue Exhibit 8: GCPL; category break up as % of total revenue

30% HUVR GCPL 25% 20% 35% 15% 30% 10% 25% 5% 26% 19% 10% 7% 6% 3% 2% 2% 2% 15% 7% 20% 0% 15% 10% Tea

Soaps 5% Coffee Others 22% 28% 31% 8% 11% Skin care Oral care Shampoo

Ice cream 0% Home care Home

Fabric wash Personal wash Household Hair colour Air care Others

Jams/Ketchup Insecticide Essentials Semi essentials Non essentials Essential Semi-essential Non-essential

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 9: Dabur; category break up as % of total revenue Exhibit 10: ITC; category break up as % of total revenue 25% DABUR ITC 50% 20% 15% 40% 10% 30% 5% 19% 6% 9% 17% 16% 7% 21% 5% 0% 20%

10% 4% 21% 13% 46% 10% 6%

Gulabari) 0% culinary (Honey, Odomos) Glucose D Skin care (Fem, Vatika, Anmol) Hair care (Amla, Pudin Hara) Branded Agri business Cigarettes Paper and Hotel FMCG Others Chyawanprash, OTC and Ethical Meswak, Babool)

Home care (Odonil, packaged goods packaging Jucie, beverage and Health supplements Digestives (Hajmola, Oral care (Red paste, (Dabur Laal, Honitus) Essentials Semi essential Non essential Essential Semi-essential Non essentials Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 11: Marico; category break up as % of total revenue

MRCO

50% 40% 30% 20% 10% 5% 4% 44% 21% 2% 24% 0% Coconut oil Saffola edible oil Saffola oats VAHO Premium personal Others care Essential Semi essential Non-essentials

Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 12: Category break-up and likely impact of COVID19

Source: Crisil; IDBI Capital Research

FMCG | Sector Report

Exhibit 13: Evolved hygiene’ and staple foods fly off shelves as countries enter restricted living (value growth %)

Packaged food and hygiene products growing at higher rate post COVID.

Source: Nielsen; IDBI Capital Research

FMCG | Sector Report

Exhibit 14: Lesson’s from the past

During last 3 Asian crises: FMCG retail has recovered to normalcy within 3-4 months

Source: Nielsen; IDBI Capital Research

FMCG | Sector Report

Exhibit 15: FMCG sector value growth (%)

14% 11% 8% 7% 6% 5%

FMCG sector growth now back to normalcy in the month of Jun’20 Q1'CY19 Q2'CY19 Q3'CY19 Q4'CY19 Q1'CY20 Q2'CY20 Jun'CY20

-17% Apr+May'CY20

-28%

Source: Nielsen; IDBI Capital Research

Exhibit 16: Home care less impacted by lock-down; hygiene category grew at higher rate post lock-down

200

159 Demand for Hygiene based products 147 (soap, hand-wash, floor cleaners) 114 111 118 100 101 100 101 105 100 100 100 100 90 98 96 increased significantly post unlock1 in 80 86 Jun’20

Washing powder Detergents cakes/bar Toilet soaps Liquid toilet soaps Floor cleaners Jan-Feb'20 Pre Covid (Mar'20) Lockdown 3&4 Unlock 1 (June'20)

Source: Nielsen; IDBI Capital Research

FMCG | Sector Report

Exhibit 17: BPC category reflecting strong recovery post unwinding of lock-down Exhibit 18: Packaged food; cheese grew at higher rate led by high in-home consumption

120 116 111 108 110 100 100 100 100 102 100 101 103 100 100100 100 99 107 87 89 106 82 79 105 77 103 102 102 100 100 100 48 43 97 19

Deo Hair colour Skin care Shampoo Hair oil Toothpaste Packaged atta Refined oil Cheese Jan-Feb'20 Pre Covid (Mar'20) Lockdown 3&4 Unlock 1 (June'20) Jan-Feb'20 Pre Covid (Mar'20) Lockdown 3&4 Unlock 1 (June'20)

Source: Nielsen; IDBI Capital Research Source: Nielsen; IDBI Capital Research

Exhibit 19: Strategy to be followed by FMCG and retail leaders

FMCG and retail leaders will have to recalibrate innovation and distribution strategy

Source: Nielsen; IDBI Capital Research

FMCG | Sector Report

Strength comes from uncertainty; mapping companies’ response to COVID on NPDs, pricing and discounting

In hygiene GCPL is disruptive on pricing; HUL straddles across price points with multiple-brands In hand-wash, we expect GCPL to outperform with clear-cut brand  We believe, uncertain time makes pro-active organizations strong. Lockdown and in-ability of companies to sell non- differentiation (under the brand Protekt) essentials has forced companies to re-draw growth strategies. Most of the FMCG companies (including Marico, and disruptive pricing. GCPL, HUL, ITC, Dabur) have recalibrated there strategy by shifting focus towards essentials, hygiene and immunity GCPL expects Protekt (soap and hand boosting food portfolio. wash brand) to be Rs 500mn brand in  In hygiene we believe GCPL and HUL are highly competitive on brand perception, price-positioning and distribution. next three years. In soaps category, HUL straddles across the price points with several brands; for example Lifebuoy and Lux at value price (Rs 250-260/kg); Rexons, Hamam and Pears at popular price (Rs 300-400/kg) and Dove at premium price (Rs +500/kg). However, GCPL competes aggressively on pricing but has few number of brands at value and popular price points i.e. Godrej No. 1, Cinthol and Protekt. We note that, MRP of GCPL soap in both value and popular range is 7- 14% lower if compared with HUL.  Positively, post COVID both HUL and GCPL have taken price hike to the tune of 6-14% for several SKUs. This will Price hike: post COVID, HUL and GCPL improve margin, given deflationary cost of raw material. has hiked price of few of its SKUs in  soaps by 6-14%. In hand-wash, GCPL’s newly launched brand Protekt is most aggressive on pricing/promotion (offers highest discount at c. 33-35% over MRP) compared to competition (c. 7-17% over MRP). The aggressiveness on pricing is in- line with GCPL’s management expectation to grow Protekt brand to Rs 5000mn revenue during next three years. In health DABUR and HUL to benefit from aggressive promotion of immunity-boosting products

Immunity boosting product portfolio;  In health/food portfolio we like Dabur’s strategy of launching several immunity-boosting products (over and above Dabur to outperform given the company existing pipelines). has competitive edge in naturals  In food portfolio, HUL aggressively promoted Horlicks’s high zinc content formula which helps to improve children’s portfolio. HUL to also benefit led by its immunity against respiratory infections. Given rise of in-home consumption, we expect HUL to significantly benefit newly acquired Horlicks brand which from the industry tailwind in beverage segment (Horlicks and Boost). boasts of high-zinc content that helps to improve immunity in children.  Horlicks had 4.3 mg of Zinc/100g and based on a clinical study, HUL increased this to 8.3 mg Zinc/100 g. This has boosted immunity in children with respect to both respiratory and gastrointestinal infections.

FMCG | Sector Report

In packaged food; NEST, BRIT and ITC to benefit from rising in-home consumption and shift from unbranded to branded  In packaged food industry, we expect shift from out-of-home to in-home consumption will help NEST, BRIT and ITC to record strong growth led by favorable industry tailwinds. Also, we expect the trend of shift from un-organized to organized to gain momentum led by (i) relative distribution in-efficiency of small players compared to large- organized companies (ii) safety concerns leading customers to switch from un-branded to branded companies. We expect this trend to persist for the next 7-9 months.  Evidently, we see BRIT, ITC and NEST grew the topline in food portfolio at the rate of 25%, 12% and 2% during 1QFY21 respectively.

Exhibit 20: Products/brands launched by FMCG companies in health and hygiene portfolio during APR-AUG’20 In hygiene, HUL and GCPL leads from the Company Hygiene Health (immunity improvement products) front in soaps, hand wash and disinfectant sprays. GCPL Godrej Protekt (soap, powder to liquid hand wash, sanitizers), NA Cinthol (soaps, handwash), Good Knight liquid vaporizer in HI In food; Dabur leads in immunity-driven natural’s portfolio. HUL Lifebuoy ( soap, hand wash, sanitizers), Domex (germ-removal Horlicks (Zinc improves immunity in children) , Red wipes, disinfectant spray Label Natural Care (natural herbs enhance Positively, Marico has launched Saffola immunity) Honey in June’20 to enhance its foray into food’s portfolio Dabur Dabur hand sanitizers, Odonil air sanitizer, Dazzl surface Tulsi drops, Haldi drops, Immunity kit, Amla Juice, cleaner, Herbl sanitizing body wash, Dabur veggie wash, Fem Neem and tulsi juice, Trikatu churna handwash, Dabur sanitize disinfectant spray

ITC Savlon (disinfectant spray), Savlon wipes, Neem wash B natural immunity beverages

Marico Mediker (sanitizer), Veggie clean Saffola Honey launched in June’20

Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 21: Soaps and detergents brand size Exhibit 22: Brand and price positioning in soaps In soap, while HUL is strongly present at Companies > Rs 5 bn > Rs 10 bn > Rs 20bn 600 all price points; value price (Lux, 500 400 Lifebuoy), popular price (Rexona, HUL Pears Dove Lifebuoy 300 200 Hamam, Pears) and Premium price 100 Sunlight Lux Surf Excel 0 (Dove). However, MRP of GCPL in both - Rin Wheel Lux Dove Pears

value and popular categories are 7-14% Dettol

Cinthol Rexona Hamam Santoor lower compared to HUL. - Vim - Lifebuoy

Godrej No. 1 GCPL Cinthol Godrej No. 1 - GCPL HUL Wipro GCPL HUL Reckitt HUL Cons B. ITC Vivel - - Price per kg

Source: Company, IDBI Capital Research Source: Company, IDBI Capital Research channel check

Exhibit 23: MRP trend of key players in soap Company HUL GCPL Brand Pears Pure Dove Cream Lux Soft Touch French Lifebuoy Total 10 Cinthol Lime Godrej No. 1 & Gentle Soap Bar Beauty Bathing Bar Rose and Almond Oil Soap Bar Germ Protection Soap Bar Refreshing Deo Soap Sandal & Turmeric Soap FY SKU 4x125 gms 3x125 gms 4x100 gms 3x100 gms 3x150 gms 5x125 gms 4x100 gms 3x150 gms FY20 Apr 265 140 265 155 108 150 112 102 May 265 140 265 155 108 150 112 102

Jun 265 140 265 155 108 150 112 102

Jul 265 140 265 155 108 150 112 102

Jan 240 140 240 155 108 150 112 102

Feb 240 140 240 155 108 150 112 102

Mar 240 140 240 155 108 150 124 102

FY21 Apr 240 140 240 155 108 150 124 102 May 259 140 240 155 114 150 124 102

Jun 259 140 240 155 114 165 124 102

Jul 259 150 240 160 114 165 124 102

Price per kg 518 400 600 533 253 264 310 227 Offers Free: 125 gm Soap NA Free: 100 gm Soap NA NA NA Free: 100 gm Soap Free: 150 gm Soap % price hike post COVID 8% 7% 0% 3% 6% 10% 0% 0%

Source: IDBI Capital Research

FMCG | Sector Report

Exhibit 24: Handwash; 750 ml MRP Exhibit 25: Handwash; 750 ml after discount (DMART Price)

HUL’s Lifebuoy hand wash is most 115 115 119 99 101 99 99 109 99 89 89 92 expensive on MRP compared to 77 76 competition.

However, GCPL’s Protekt brand is most disruptive on pricing by offering highest discount at around 33-34% discount Pouch Pouch Pouch Pouch Original Original Pouch Pouch over MRP (as per our channel check in Handwash Handwash Dettol Liquid Dettol Liquid Savlon Moisture Savlon Moisture Savlon Herbal Savlon Herbal Shield Handwash Shield Handwash Lifebuoy Total 10 Lifebuoy Total 10 Handwash Refill - Handwash Refill - Handwash Refill Handwash Refill Handwash Refill Handwash Refill

DMART) compared to competition. Santoor Handwash Santoor Handwash Liquid Masterchef's Liquid Masterchef's SensitiveHandwash SensitiveHandwash Liquid Masterblaster Liquid Masterblaster GCPL HUL ITC Reckitt B. Wipro GCPL HUL ITC Reckitt B. Wipro Cons Cons Source: IDBI Capital Research Source: IDBI Capital Research

FMCG | Sector Report

Company’s response to COVID led disruption

Exhibit 26: HUL’s response to COVID disruptions Exhibit 27: HUL’s response to COVID disruptions

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 28: HUL’s product portfolio snapshot as on Jun’20

Health, hygiene and nutrition contribute 80% to overall revenue

Source: Nielsen; IDBI Capital Research

FMCG | Sector Report

Exhibit 29: Dabur’s response to COVID in healthcare Exhibit 30: Dabur’s response to COVID in HPC

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 31: Dabur’s response to COVID in food portfolio Exhibit 32: Dabur’s response to COVID; international business

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 33: Dabur’s response to COVID; international business Exhibit 34: Dabur’s advertisement on improving immunity

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 35: GCPL’s response to COVID disruption

Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 36: Cinthol brand equity to be capitalize for foray into health and hygiene Exhibit 37: Launched anti-mosquito surface spray and Good Knight liquid vaporizer with visible vapors in Household Insecticides

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 38: GCPL democratizing hand wash category at lower price point Exhibit 39: Benefit of powder to liquid hand wash formula

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 40: Products launched by ITC during lockdown

Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 41: MRCO launched Mediker sanitizer Exhibit 42: MRCO launched veggie clean

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 43: MRCO Launched Mediker sanitizer in Exhibit 44: MRCO launched Xmen sanitizer in Vietnam Bangladesh

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

FMCG | Sector Report

Fundamental recovery in rural still not in-sight; better distribution efficiency to drive outperformance

Fundamentals and lock-down is not supporting rural recovery  Currently we don’t see any green-shoots of fundamental recovery in rural India. Macro data suggests that weakness Supply side constraints due to re- is likely to persist in near future. Increase in MSP rates did not lead to improvement in whole sale prices during enforcement of lock-down to remain FY15-20. Good rainfall seems to be the only savior. However, the correlation between good rainfall and FMCG bigger challenge to handle growth is only 25% thereby highlighting the reasoning-fallacy of monsoon driving rural-recovery. Rural recovery to take time until wage  We believe unless wage growth (43% of rural household income) and wholesale price improves, recovery in rural growth and whole-sale price improves. India will be tough.  Re-enforcement of lock-down in rural India (for example; UP, Bihar) to prevent spread of COVID will continue to impact economic recovery both from supply-side as well as from the demand-side.

Exhibit 45: FMCG Sector break up (CY19) Exhibit 46: Rural Growth rate lower than urban growth Exhibit 47: FMCG Sector growth based on geography rate (Rural/Urban)

1.4 1.4 1.4 Rural 1.3 1.3 36% 1.2 1.2 1.2 3% 1.1 1.1 1.1 0.9 3%

0.7 3% 0.6 13% 4% 9% 5% 6%

Urban Dec'18 Dec'19 Dec'18 Dec'19 64% Rural Urban Q3FY… Q4FY… Q1FY… Q2FY… Q3FY… Q4FY… Q1FY… Q2FY… Q3FY… Q4FY… Q1FY… Q2FY… Q3FY… Q4FY… Volume growth Price led growth

Source: Nielsen, IDBI Capital Research Source: Nielsen, IDBI Capital Market Research Source: Nielsen, IDBI Capital Market Research

FMCG | Sector Report

Exhibit 48: Rural sales contribution to revenue (%)

50 45 40 35 30 25 20 15 10 5 0 Dabur HUL Britannia Marico GCPL ITC Nestle

Source: Company; IDBI Capital Research

Exhibit 49: Rural household break up Exhibit 50: Rural Income break up

48% of households are identified as Government/ agricultural household in rural i.e. they private sector Agricultural 24% Wage labour receive some value of produce from Household, 43% 48% agricultural activity and having atleast Other sources one member self-employed in 2% agriculture Non Agricultural Other household, enterprises 52% 8% Livestock rearing 4% Cultivation 19% Source: NABARD; IDBI Capital Research Source: NABARD; IDBI Capital Research

FMCG | Sector Report

Exhibit 51: Rural Agri wage growth & Rural CPI Exhibit 52: Rural non agri wage growth & rural CPI 7.0% 9.0%

6.0% 8.0% 7.0% 5.0% 6.0% 4.0% 5.0% 3.0% 4.0% 3.0% 2.0% 2.0% 1.0% 1.0% 0.0% 0.0% Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Rural CPI Rural Agri wage growth Rural CPI Rural non agri wage growth Source: RBI; IDBI Capital Research Source: RBI; IDBI Capital Research

Exhibit 53: DBT No. of beneficiary (In Mn) Exhibit 54: DBT Fund transfer (In Bn) During last 7 years; to revive demand, 1446 3816 government has increased direct benefit 1292 3298 fund transfer (DBT) by 52x whereas no. of DBT beneficiaries rose by 13x. 1038

1909

313 357 228 619 747 108 389 74

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: dbtbharat; IDBI Capital Research Source: dbtbharat; IDBI Capital Research

FMCG | Sector Report

Exhibit 55: MSP & Wholesale price growth (FY15-20)

Correlation between MSP and Wholesale price is negative 17%

6% 5% 6% 4% 6% 6% 0% 9% 1% -1%

Rice Wheat Tur dal Urad Dal Moong dal MSP Wholesale

Source: Department of consumer affairs; IDBI Capital Research

FMCG | Sector Report

Exhibit 56: MSP rates and growth (%) Rs/quintal MSP 2020-21 Growth (%,YoY) 2014-21 CAGR % Kharif crop Paddy (Grade A) 1,888 3% 5% MSP for Kharif crops has increased by Jowar (Hybrid) 2,620 3% 8% 5% on an average for FY21 while Rabi Bajra 2,150 8% 8% crop price has increased by 5-6% in Maize 1,850 5% 5% FY20. Ragi 3,295 5% 12% Arhar (Tur) 6,000 3% 5% Moong 7,196 2% 7% Urad 6,000 5% 5% Cotton (Long Staple) 5,825 5% 6% Groundnut in shell 5,275 4% 4% Sunflower seed 5,885 4% 7% Soybean (Yellow) 3,880 5% 6% Sesame 6,855 6% 6% Niger seed 6,695 13% 10% Rs/quintal MSP 2019-20 Growth (%,YoY) 2014-20 CAGR % Rabi crops Wheat 1,925 5% 6% Barley 1,525 6% 6% Gram 4,875 6% 9% Masur (Lentil) 4,800 7% 9% Rapeseed/Mustard 4,425 5% 7% Safflower 5,215 5% 11% Other Crops Copra (Ball) - Calendar Year 10,300 33% 13% Jute (CY) 2,571 27% 13% Sugarcane (CY) 3,950 7% 10%

Source: Department of Agriculture, cooperation & farmer welfare; IDBI Capital Research

FMCG | Sector Report

Exhibit 57: Statewide rainfall (1st June, 2020-27th Aug, 2020)

Till 27th August, 2020, 89% of states have received normal or excess rainfall.

Source: IMD; IDBI Capital Research

FMCG | Sector Report

Exhibit 58: Normal monsoon vs FMCG sector value growth 20% 15% As against popular belief, correlation 10% between normal monsoon and FMCG 5% sector growth is low at 25% over last 9 years. 0% CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 -5% -10% -15% -20% % of normal monsoon FMCG Sector growth Source: Industry; IDBI Capital Research

Exhibit 59: Rural v/s urban COVID cases Exhibit 60: COVID cases in rural India increasing at a faster pace than urban India

Source: Crisil; IDBI Capital Research Source: Crisil; IDBI Capital Research

FMCG | Sector Report

Distribution efficiency to be the key to tide over lock-down uncertainties  During current times, distribution is bigger challenge compared to manufacturing. Hence, we expect companies having better distribution efficiency and higher exposure to health, hygiene and packaged food will outperform, irrespective of the revenue-mix from rural/urban.  In our coverage universe, distribution efficiency of HUL is highest at Rs 48,481 revenue per outlet (2.3x above sector- average). NEST, ITC and BRIT ranks 2nd, 3rd and 4rth after HUL on distribution efficiency. Ability to sell more products from same outlets is a function of both better product portfolio and superior ability to re-fill stores led by efficient distribution infrastructure (people + technology).  Most of the FMCG companies resorted to technology to solve COVID led disruption in supply chain;  HUL’s commentary on distribution; “…in some areas our salesman could not physically reach the stores to take order for essential categories. The app-based ordering capability was quickly rolled out to these stores to restore our ability to capture orders and meet consumer demands. Similarly, extensive data about the stores and market they operate in helped us to almost overnight redesign the service model and create new optimized routes for delivery – avoiding containment zones and other restrictions” “Here also the power of automated warehouse kicked in and enabled us to deliver to stores even in situations where the distributor was not operational. There is no doubt that such capabilities allow us to be more responsive to the volatile and uncertain environment and we remain committed to our 'Reimagine HUL' agenda”

 ITC’s commentary on distribution; “First mover in speedily entering into collaborations with service delivery partners leveraging the synergy of the availability of our trusted brands with the reach of some of our partners direct to homes. The Company’s tie-ups for delivery of its products to consumers include diverse companies such as Dominos, Swiggy, Zomato, Dunzo, Amway etc.” “Innovations including ‘ITC Store on Wheels’ to ensure direct reach to consumers in residential agglomerations, increased availability in ecommerce platforms including the ‘ITC eStore,’ direct store deliveries to Modern Trade and substantially expanding presence of its product portfolio in alternative outlets, were some of the measures deployed to ensure easier access to our products”.

FMCG | Sector Report

Exhibit 61: ITC using technology driven platforms for Exhibit 62: … Continued distribution ….

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

 Britannia’s commentary on distribution; “We are diligently studying the impact of Covid 19 on short-term & long-term changes in consumer preferences, distribution models and are confident of overcoming challenges with agility.”

FMCG | Sector Report

Exhibit 63: BRIT’s distribution network post COVID Exhibit 64: BRIT’s using innovative approach to drive distribution

BRIT reached pre-covid levels in direct reach at the end of June’20.

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 65: Total distribution reach (in Mn) Exhibit 66: Direct Reach (in Mn) Exhibit 67: Direct Reach as % of total reach

9 3.5 45% 40% 8 3 7 35% 2.5 6 30% 5 2 25% 4 1.5 20% 3 1 15% 2 10% 0.5 1 5% 0 0 0% HUL Dabur ITC GCPL Britannia Marico Nestle HUL Britannia Nestle GCPL Dabur Marico Britannia HUL Nestle GCPL Marico Dabur Source: Company, IDBI Capital Research Source: Company, IDBI Capital Market Research Source: Company, IDBI Capital Market Research

FMCG | Sector Report

Exhibit 68: Revenue/outlet (Rs) Exhibit 69: Total distribution reach (FY15-20 CAGR)

60,000 9.0% 50,000 8.0% 40,000 7.0% 30,000 6.0% 20,000 5.0% 10,000 4.0% 0 3.0% 2.0% ITC Ltd. Marico Ltd. Ltd.

Ltd. 1.0% Products Ltd.

Dabur India Ltd. 0.0% Nestle India Ltd. Godrej Consumer

Hindustan Unilever Britannia GCPL Marico ITC Nestle Dabur HUL Britannia Industries Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

FMCG | Sector Report

International business recovery to be faster compared to India

 COVID cases in top 7 countries, which represent c. 72% of total revenue enjoyed by Indian FMCG companies in COVID cases are more controlled in foreign geographies, has significantly subsided. New COVID cases in these countries is either declining or there is international markets compared to flattening of curve. Out of top 7 countries; except Nepal all other countries have witnessed significant decline or India. flattening of daily new cases. In South Africa, US, UK and Bangladesh no. of daily new Covid cases has declined significantly while UAE and Indonesia has witnessed flattening of the curve.  We expect international operation of FMCG companies to be less impacted from COVID compared to Indian MRCO is likely to recover fastest in operations as number of new COVID cases in India continues to rise. international market followed by DABUR  We expect MRCO to recover fastest as most of the countries (4 out of 6), where MRCO has presence, are witnessing and GCPL. meaningful decline in number of COVID cases. DABUR is second best positioned to witness business-recovery followed by GCPL.

Exhibit 70: Revenue contribution from subsidiaries Exhibit 71: Operating profit margin of subsidiaries during during FY15-20 FY15-20

46% 19% 18% 16% 16% 29% 13% 11% 9% 19% 11% 7% 7% 3%

Godrej Dabur Marico FMCG ITC Ltd. Britannia Hindustan Godrej Dabur Marico FMCG ITC Ltd. Britannia Hindustan Consumer India Ltd. Ltd. Industry Industries Unilever Consumer India Ltd. Ltd. Industry Industries Unilever Products Ltd. Ltd. Products Ltd. Ltd. Ltd. Ltd. Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

FMCG | Sector Update

Exhibit 72: Operating profit margin comparison of FMCG companies in India over last 5 years (FY15-20) Company Subs Revenue/Consol Foreign EBIT margin % (1) India EBIT margin % (2) (1) – (2) Godrej Consumer Products Ltd. 46% 16% 22% -6% Operating profit margin enjoyed by Dabur India Ltd. 29% 18% 20% -2% FMCG companies in domestic market Marico Ltd. 19% 9% 17% -8% (India) is 400bp higher compared to FMCG Industry 11% 16% 20% -4% international markets. ITC Ltd. 7% 19% 26% -7% Britannia Industries Ltd. 7% 13% 11% 1% Hindustan Unilever Ltd. 3% 11% 16% -6%

Source: Company; IDBI Capital Research

Exhibit 73: FMCG Industry in India; country-wise Exhibit 74: Mapping COVID in top 7 countries where revenue break-up during FY15-20 FCMG companies have max exposure

Bangladesh, South Africa, 4% 4%

UK, 5% Indonesia, In top 7 countries, daily new COVID 19 20% cases have either declined significantly or have reached flattened curve. USA, 9%

Nepal, 16% UAE, 14%

Source: Company; IDBI Capital Research Source: Worldometers; IDBI Capital Research

FMCG | Sector Report

Exhibit 75: TOP 7 countries; company wise exposure Exhibit 76: TOP 7 countries; company wise exposure Subsidiary Revenue % PAT margin Subsidiary Revenue % PAT Company Name Company Name Country total % Country total margin % Godrej Consumer Godrej Consumer Indonesia 100% 7% UK 43% 18% Products Ltd. Products Ltd. Indonesia 20% 7% ITC Ltd. 37% 3% Total Nepal ITC Ltd. 64% 25% Dabur India Ltd. 20% 22%

Dabur India Ltd. 22% 7%

UK Total 5% 13% Hindustan Unilever Ltd. 14% 18%

Britannia Industries Ltd. 0% -2% Bangladesh Marico Ltd. 78% 21% Nepal Total 16% 20% Dabur India Ltd. 11% 9% UAE Dabur India Ltd. 54% 13% Godrej Consumer Britannia Industries Ltd. 18% 3% 10% -21% Products Ltd. Godrej Consumer 17% 19% Bajaj Consumer Care Ltd. 0% -37% Products Ltd. Marico Ltd. 11% -3% Britannia Industries Ltd. 0% NA Bajaj Consumer Care Ltd. 0% -17% Bangladesh UAE Total 14% 10% 4% 15% Total Godrej Consumer USA ITC Ltd. 42% 2% South Africa 84% -1% Products Ltd. Dabur India Ltd. 30% 1% Marico Ltd. 14% 1%

Godrej Consumer 29% 6% Dabur India Ltd. 1% -10% Products Ltd. South Africa USA Total 9% 3% 4% 0% Total

Source: Company; IDBI Capital Research Source: Company, IDBI Capital Research

FMCG | Sector Report

Exhibit 77: GCPL country wise average revenue Exhibit 78: DABUR country wise average revenue Exhibit 79: MRCO country wise average revenue contribution and PAT margin during FY15-20 contribution and PAT margin during FY15-20 contribution and PAT margin during FY15-20 Country Revenue PAT margin % Daily New cases Country Revenue PAT margin % Daily New cases Country Revenue PAT margin % Daily New Cases Indonesia 39% 7% Flattened UAE 38% 13% Flattened Bangladesh 43% 21% Declining South Africa 7% -1% Declining Nepal 17% 7% Rising Vietnam 26% 9% Declining Mauritius 6% 57% Negligible USA 13% 1% Declining UAE 19% -3% Flattened Nigeria 5% 0% Declining Turkey 10% 3% Flattened South Africa 8% 1% Declining Kenya 5% -5% Declining Egypt 8% 16% Declining Egypt 5% -26% Declining USA 5% 6% Declining UK 5% 22% Declining Malaysia 0% -111% Flattened UAE 5% 19% Flattened Bangladesh 2% 9% Declining 100% 9%

UK 4% 18% Declining Sri Lanka 2% -3% Declining Argentina 4% 5% Rising Nigeria 2% -2% Declining Mozambique 4% 14% Declining Pakistan 2% 5% Flattened Lebanon 3% 26% Rising South Africa 0% -10% Declining Malaysia 3% 100% Declining Tunisia 0% -15% Chile 3% 11% Declining British Virg.Isl 0% 94% Netherland 1% 91% Iran 0% -90% Ghana 1% -2% Brazil 0% -1850% Bangladesh 1% -21% 100% 9% Tanzania 1% -10% Sri Lanka 1% -9% Uruguay 0% -3% Zambia 0% -17% Peru 0% -12% Senegal 0% -223% Brazil 0% -35% Uganda 0% NA 100% 14%

Source: Company, Worldometers, IDBI Capital Research Source: Company, Worldometer, IDBI Capital Market Research Source: Company, Worldometers, IDBI Capital Market Research

FMCG | Sector Report

Exhibit 80: Count of countries where Indian FMCG companies are doing business

Companies FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Godrej Consumer Products Ltd. 11 13 17 15 18 18 21 22 22 21 GCPL and DABUR expanded its Dabur India Ltd. 9 9 10 11 10 10 11 12 13 15 geographical reach by 1.6-2x over last ITC Ltd. 6 6 7 7 6 6 7 6 7 7 10 years. Marico Ltd. 7 7 7 6 6 6 6 5 5 5 Britannia Industries Ltd. 4 3 3 3 3 3 3 4 4 5 Hindustan Unilever Ltd. 1 1 1 1 1 1 1 1 1 1 Grand Total 23 25 28 27 27 27 31 30 31 33

Source: Company; IDBI Capital Research

FMCG | Sector Report

P/E re-rating justified on instrinsic basis

 During the last 5 years (FY15-20) wealth creation in most of the FMCG companies has largely been a function of P/E re-rating. P/E of MNC companies like NEST and HUL witnessed steep rerating during FY15-20; up by 59% (to 73x vs 46x during FY10-14) and 92% (to 56x vs 29x during FY10-14) respectively. Amongst domestic FMCG companies, BRIT P/E grew at 72% (to 50x) followed by 40-45% re-rating in DABUR (to 44x), GCPL (to 39x) and MRCO (to 42x). P/E rerating is justified based on  We note that there are three vectors for P/E re-rating; (i) higher dividend pay-out ratio (ii) higher fundamental dividend discount model….different P/E growth rate (retention rate * ROE), and (iii) lower cost of capital. multiple for different companies are  We went 15 years back and computed implied P/E using 2-stage dividend discount model. We have assumed reflective of difference in the quality of weighted average ROE and actual dividend growth rates for respective companies during last 15 years. Also, we earnings (ROE), and growth in cash flow (this will be function of dividend pay-out have assumed cost of capital at 11% hurdle rate, 10 year government bond rate traded at 6-9% over last 10 years. ratio and EPS growth)  We note that; P/E multiple of all FMCG companies are fairly justified (reflective of either better ROE or higher growth). Therefore, multiple re-rating in FMCG sector has not been a bug but a feature of improving fundamentals.

FMCG | Sector Report

Exhibit 81: Wealth creation in FMCG sector vs PE re-rating during last 15 years Exhibit 82: Wealth creation in FMCG sector vs PE re-rating during last 15 years

Market Cap (1) EBIT (2) P/E Market Cap (1) EBIT (2) P/E (1) / (2) (1) / (2)

Particulars (% CAGR) (% CAGR) Particulars (% CAGR) (% CAGR)

2005-2009 12% 1% 22 12.65 2005-2009 20% 15% 22 1.31 2010-2014 28% 31% 29 0.88 Britannia Industries Ltd. 2010-2014 29% 19% 29 1.53 2015-2020 20% 17% 50 1.16 ITC Ltd. 10 Years (2010-20) 33% 25% 47 1.29 2015-2020 -4% 7% 25 -0.58

2005-2009 28% 24% 26 1.16 10 Years (2010-20) 8% 12% 27 0.64 2010-2014 23% 18% 31 1.29 Dabur India Ltd. 2005-2009 27% 36% 26 0.74 2015-2020 11% 7% 44 1.54

10 Years (2010-20) 19% 12% 40 1.59 2010-2014 20% 19% 30 1.02 Marico Ltd. 2005-2009 18% 23% 22 0.78 2015-2020 7% 11% 42 0.64

Godrej Consumer 2010-2014 38% 28% 28 1.33 10 Years (2010-20) 18% 15% 39 1.22 Products Ltd. 2015-2020 8% 9% 39 0.95

10 Years (2010-20) 21% 17% 36 1.20 2005-2009 28% 18% 33 1.54

2005-2009 5% 17% 27 0.27 2010-2014 14% 14% 46 1.01 2010-2014 26% 16% 29 1.60 Nestle India Ltd. Hindustan Unilever Ltd. 2015-2019 32% 16% 73 1.95 2015-2020 21% 12% 56 1.79

10 Years (2010-20) 25% 14% 47 1.85 10 Years (2010-19) 19% 10% 61 1.79

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 83: Market cap % CAGR during FY15-20 Exhibit 84: % change in P/E during FY15-20 vs FY10-14 32% 92%

Except ITC, all other FMCG companies in 72% India witnessed 40-92% P/E rerating 21% 20% 59% during FY15-20 (vs FY10-14) 45% 40% 40% 11% 8% 7%

HUL BRIT NEST DABUR GCPL MRCO ITC HUL BRIT NEST DABUR GCPL MRCO ITC -4% -15% Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 85: Britannia intrinsic P/E multiple Exhibit 86: ITC intrinsic P/E multiple Exhibit 87: Dabur intrinsic P/E multiple

High Growth Period High Growth Period High Growth Period

Length of high-growth period 15 Length of high-growth period 15 Length of high-growth period 15 (n) = (n) = (n) = Growth rate during period (g) 19% Growth rate during period (g) 13% Growth rate during period (g) 19% Actual ROE = 33% Actual ROE = 26% Actual ROE = 30% = = = Payout ratio during period (_) 42% Payout ratio during period (_) 50% Payout ratio during period (_) 37% = = = 11.00% Cost of Equity during 11.00% 11.00% Cost of Equity during period= Cost of Equity during period= period=

Stable Growth Period Stable Growth Period Stable Growth Period

6.00% Growth rate in steady state 6.00% 6.00% Growth rate in steady state = Growth rate in steady state = = 60.00% Expected ROE Payout ratio in steady state 60.00% Expected ROE 60.00% Expected ROE Payout ratio in steady state = 15% 15% Payout ratio in steady state = 15% = = = = Cost of Equity in steady state 11.00% 11.00% Cost of Equity in steady state 11.00% Cost of Equity in steady state = = = Output Output Output

48 Last 15 year 25 Last 15 year Price/Earnings Ratio = 44x Price/Earnings Ratio = 26x 46 Last 15 year actual P/E Price/Earnings Ratio = 39x actual P/E actual P/E

Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 88: GCPL intrinsic P/E multiple Exhibit 89: Marico intrinsic P/E multiple Exhibit 90: HUL intrinsic P/E multiple

High Growth Period High Growth Period High Growth Period

Length of high-growth period (n) 15 15 15 Length of high-growth period (n) = Length of high-growth period (n) = = 18% 17% 16% Growth rate during period (g) = Actual ROE = 27% Growth rate during period (g) = Actual ROE = 34% Growth rate during period (g) = Actual ROE = 82% 32% 50.% 81% Payout ratio during period (_) = Payout ratio during period (_) = Payout ratio during period (_) =

11.00% 11.00% 11.00% Cost of Equity during period= Cost of Equity during period= Cost of Equity during period=

Stable Growth Period Stable Growth Period Stable Growth Period

6.00% 6.00% 6.00% Growth rate in steady state = Growth rate in steady state = Growth rate in steady state =

60.00% 60.00% 80.00% Payout ratio in steady state = Expected ROE = 15% Payout ratio in steady state = Expected ROE = 15% Payout ratio in steady state = Expected ROE = 30% 11.00% 11.00% 11.00% Cost of Equity in steady state = Cost of Equity in steady state = Cost of Equity in steady state =

Output Output Output

42 Last 15 year 40 Last 15 year 48 Last 15 year Price/Earnings Ratio = 35x Price/Earnings Ratio = 38x Price/Earnings Ratio = 44x

actual P/E actual P/E actual P/E

Source: Company; IDBI Capital Research

FMCG | Sector Report

Exhibit 91: Nestle intrinsic P/E multiple

High Growth Period

Length of high-growth period (n) = 15

Growth rate during period (g) = 19% Actual ROE = 50%

Payout ratio during period (_) = 62%

Cost of Equity during period= 11.00%

Stable Growth Period

Growth rate in steady state = 6.00%

Payout ratio in steady state = 78.57% Expected ROE = 28%

Cost of Equity in steady state = 11.00%

Output

Last 15 year Price/Earnings Ratio = 64 57x actual P/E

Source: Company; IDBI Capital Research

FMCG | Sector Report

Peer Valuation Table

Exhibit 92: Peer valuation table India Market cap. EV/EBITDA EV/Sales P/E ROE (%) 2020-2022E CAGR (%) Companies (USD mn) 2019 2020 2021E 2022E 2019 2020 2021E 2022E 2019 2020 2021E 2022E 2019 2020 2021E 2022E Revenue EBITDA PAT Hindustan Unilever 68,200.6 52.7 47.3 39.2 33.7 11.9 11.7 11.1 9.6 76.0 68.1 55.9 48.2 81.9 85.9 95.3 84.4 14.4 22.9 24.0 ITC 31,403.7 13.0 11.1 11.3 9.7 4.9 5.0 4.9 4.3 18.4 15.2 16.5 14.1 22.8 24.8 21.2 23.8 6.6 6.4 3.5 Nestle 21,396.9 53.9 47.4 40.7 35.9 12.6 11.5 10.0 8.8 79.5 70.2 60.1 52.7 70.3 91.4 73.7 62.1 11.4 13.6 14.7 Britannia 12,196.9 51.4 49.0 34.3 32.2 8.1 7.8 6.5 5.9 77.3 62.7 45.8 43.4 30.1 32.8 38.3 31.8 13.0 21.6 20.9 Marico 6,601.7 36.3 32.9 30.1 26.8 6.6 6.6 6.4 5.8 43.3 47.3 41.8 37.7 40.6 34.0 36.5 36.5 6.0 10.1 12.0 Dabur 11,688.5 49.2 47.5 42.8 36.0 10.0 9.8 9.2 7.9 59.2 59.1 52.0 44.3 25.3 23.5 23.3 25.0 10.0 13.7 15.5 Godrej Consumer 9,161.6 32.6 32.3 28.2 24.5 6.7 7.0 6.5 5.8 28.6 44.8 41.8 36.1 34.6 19.7 19.7 21.2 8.8 13.8 11.4 Emami 2,248.0 11.2 22.7 20.3 18.7 3.0 6.2 5.6 5.1 25.5 33.0 29.1 27.1 15.5 25.8 26.2 25.6 10.3 10.2 12.2 Colgate-Palmolive 5,059.3 28.1 28.1 25.4 22.7 7.5 7.9 7.2 6.6 41.7 43.2 38.7 34.5 53.7 53.0 57.4 60.8 9.4 11.2 11.7 Bajaj Corp 338.9 15.7 9.9 8.9 8.3 4.8 2.6 2.4 2.2 10.6 12.0 11.1 10.3 46.2 28.9 26.7 27.5 9.2 9.4 2.4 Jyothy 699.6 14.6 18.4 16.7 14.9 2.1 2.9 2.7 2.4 19.9 26.0 22.6 19.5 13.3 16.3 17.6 19.2 9.9 11.3 14.3 Average 32.6 32.3 28.2 24.5 6.7 7.0 6.5 5.8 41.7 44.8 41.8 36.1 34.6 28.9 26.7 27.5 9.9 11.3 12.2

Global Market cap. EV/EBITDA EV/Sales P/E ROE (%) 2019-2022E CAGR (%) Companies (USD mn) 2019 2020E 2021E 2022E 2019 2020E 2021E 2022E 2019 2020E 2021E 2022E 2019 2020E 2021E 2022E Revenue EBITDA PAT Nestle AG 3,45,682.1 16.6 18.7 18.1 17.2 3.5 4.1 4.0 3.9 24.4 25.9 24.2 22.6 23.1 26.1 25.9 28.1 0.7 2.6 3.2 Procter and Gamble 3,44,215.1 16.6 18.0 17.0 16.0 4.5 5.0 4.8 4.7 23.4 25.7 24.0 22.4 27.8 29.9 31.3 NA 3.2 35.1 57.9 Pepsico 1,92,976.3 16.6 17.8 16.1 15.0 3.3 3.4 3.2 3.0 24.9 26.0 23.5 21.4 49.9 52.5 61.9 63.9 3.0 5.1 7.5 Unilever 1,54,686.4 14.7 13.9 13.2 13.2 3.0 3.2 3.1 3.0 NA 20.2 19.0 18.1 45.8 46.2 46.0 41.2 2.6 6.5 9.3 Coca Cola 2,16,833.8 23.1 23.4 20.8 19.1 7.3 7.6 6.9 6.5 26.0 27.7 24.4 22.1 49.6 43.3 51.3 56.0 2.0 2.2 3.6 Danone 45,918.9 13.2 11.6 10.9 10.5 2.4 2.1 2.1 2.0 25.1 16.7 15.5 14.6 11.5 12.3 12.5 12.6 2.1 5.1 13.2 Kraft Heinz 41,017.5 15.6 10.8 11.2 11.1 2.7 2.6 2.7 2.6 11.0 13.0 13.4 13.0 3.7 5.6 6.0 6.1 -1.5 9.9 14.4 Mondelez 82,600.8 19.0 18.9 17.7 16.7 3.7 3.9 3.7 3.6 22.4 22.3 20.6 19.1 14.6 13.8 14.9 15.7 2.4 5.4 2.8 Johnson and Johnson 3,93,738.8 14.3 14.4 12.7 11.8 4.8 5.0 4.6 4.4 20.1 18.9 16.5 15.2 25.4 32.2 34.3 33.9 4.0 8.9 20.3 Average 16.6 17.7 16.0 14.9 3.5 3.9 3.7 3.6 23.9 22.5 20.8 19.2 25.4 29.9 31.3 31.0 2.4 5.4 9.3

Source: Company, Bloomberg,IDBI Capital Market Research

FMCG | Sector Report

COMPANY SECTION

Initiating Coverage

TP Rs2,424 Key Stock Data Hindustan Unilever ACCUMULATE CMP Rs2,125 Bloomberg / Reuters Perfection in the DNA! Potential upside / downside +14% Sector Personal Products Shares o/s (mn) 2,350 Summary V/s Consensus Market cap. (Rs mn) 4,995,546 We initiate coverage on Hindustan Unilever (HUL) with ACCUMULATE rating and TP of EPS (Rs) FY21E FY22E Market cap. (US$ mn) 72,127 Rs 2,424 (+14% upside) based on 55x FY22E EPS (derived from DDM model). HUL armed IDBI Capital 38.0 44.1 3-m daily average value (Rs mn) 1,602.9 with diversified portfolio in c. 14 categories with leadership position in over 90% of Consensus 35.7 42.4 52-week high / low Rs 2,614 / 1,756 portfolio is best prepared to face current slowdown. Brands straddling at all price % difference 6.5 4.0 Sensex / Nifty 38,357 / 11,334 points (mass, popular and premium) will help HUL to sustain likely trend of down- trading due to decline in income-level. Wide distribution and efficient execution to act Shareholding Pattern (%) Relative to Sensex (%) as catalyst for market share gain in value-segment as, given availability of products in Promoters 61.9 stores, customers are likely to prefer leading-brands over local-brands. We believe, the FII 14.8 current time is also a boon for HUL to drive aggressive growth of recently acquired DII 8.2 GSK’s health-based food portfolio (Boost and Horlicks) through advertisements and Public 15.1 execution. We expect HUL’s EPS to grow at 19% CAGR over FY20-22E. Key Highlights and Investment Rationale Price Performance (%)  Diverse portfolio across price point to help sustain down-trading -1m -3m -12m HUL has meticulously created strong brands across price points (premium, value and Absolute (3.2) 1.8 16.1 mass) in all its core categories (Detergents, soap, hair care, cosmetics, and skin cream). Rel to Sensex (5.0) (10.1) 11.5 Consequently, we expect HUL to be less impacted by down-trading from customers due to decline in disposable-income because of COVID related job-loss / salary-cut. Financial snapshot (Rs mn)  Strength in execution will drive HUL to stay ahead of competition Year FY18 FY19 FY20 FY21E FY22E With widest distribution network amongst peers, high focus on channels of the Revenue 352,180 382,240 387,850 442,095 507,800 future, and significant investment in technology (to build strong analytics) HUL has EBITDA 72,760 86,370 96,000 125,354 145,005 been able to create formidable moats around its business. Evolution of HUL over last EBITDA (%) 20.7 22.6 24.8 28.4 28.6 decade in terms operating efficiency has been very impressive; HUL’s EBITDA margin Adj. PAT 52,370 60,360 67,380 89,282 103,556 doubled from 12% in FY12 to 25% in FY20. We believe HUL’s primary strength in EPS (Rs) 24.2 27.9 31.2 38.0 44.1 execution will help the company to stay ahead of competition during tough-times. EPS Growth (%) 16.6 15.3 11.6 21.8 16.0 PE (x)  Merger with GSK to drive margin expansion and aggressive growth in food portfolio 87.6 76.0 68.1 55.9 48.2 Dividend Yield (%) 0.8 1.0 1.4 1.3 1.4 Merger with GSK will help HUL to aggressively drive growth into less penetrated category EV/EBITDA (x) 62.6 52.7 47.3 39.2 33.7 of health-food-drinks (Boost and Horlicks). We believe, given HUL’s strength in branding RoE (%) 77.2 81.9 85.9 95.3 84.4 and execution, food and refreshment portfolio of HUL will witness strong growth and RoCE (%) 84.6 90.0 86.6 96.8 90.4 margin expansion (as HFD is highly margin accretive vs HUL’s current food portfolio). Source: Company; IDBI Capital Research Varun Singh | [email protected] | +91-22-2217 1727  Upasana Madan | [email protected] | +91-22-2217 1860 September 7, 2020

Hindustan Unilever | Initiating Coverage

Exhibit 1: HUL is leading FMCG company in India Exhibit 2: % CAGR during last 15 years 1 Consolidated (Rs bn, FY20) Market Cap Revenue EBIT margin (%) 26% HUL dominates Indian FMCG industry Hindustan Unilever Ltd. 4,964 398 22 21% with highest market capitalization and ITC Ltd. 2,114 514 33 17% industry leading profit margins. 15% Dabur India Ltd. 796 87 20 12% HUL has been able to drive wealth Britannia Industries Ltd. 647 116 14 creation for investors at a rate of 17% Godrej Consumer Products Ltd. 532 99 19 5% CAGR over last 15 years (FY05-20) led by Marico Ltd. 355 73 17 operating profit growth and P/E Colgate-Palmolive (India) Ltd. 341 45 22 2005-2009 2010-2014 2015-2020 rerating. Bajaj Consumer Care Ltd. 20 9 23 Hindustan Unilever Ltd. Grand Total 9,768 1,341 24 Market cap Operating profit

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 3: % change in P/E during FY15-20 Exhibit 4: Average ROIC during FY15-20

FY15-20 vs FY10-14 80% 92% 100% 60% 72% During last five years (FY15-20) HUL has 80% 54% 59% 42% witnessed steep P/E rerating compared 60% 43% 45% 40% 40% 35% 32% 26% 25% 24% to competition led by prudent capital 40% 25% 20% 20% -15% allocation (HUL enjoys highest ROIC in 0% India) and calibrated growth strategy. -20% ITC Ltd. ITC Ltd. Marico Ltd. Ltd. Ltd. Ltd. Consumer… Marico Ltd. Ltd. Ltd. (India) Ltd. Products Ltd. FMCG Sector Dabur India Ltd. Glaxosmithkline Nestle India Ltd. (India) Ltd. Godrej Consumer Colgate-Palmolive Products Ltd. Dabur India Ltd. Nestle India Ltd. Hindustan Unilever Britannia Industries Godrej Consumer Bajaj Consumer Care Colgate-Palmolive Hindustan Unilever Britannia Industries Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

1 Market Cap as on 31st March’20

Hindustan Unilever | Initiating Coverage

Exhibit 5: HUL is no. 1 laundry company in India Exhibit 6: HUL is no. 1 hair care company in India

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 7: HUL is no. 1 tea company in India

Source: Company; IDBI Capital Research

Hindustan Unilever | Initiating Coverage

Exhibit 8: HUL’s strategy to create category of future

HUL is most efficient in creating categories of future through a rigorous process-oriented approach.

c. 20% of HUL’s portfolio has grown at 2x the company’s average growth rate.

Source: Company; IDBI Capital Research

Exhibit 9: HUL’s execution strategy

HUL’s is known for top-class execution. Historically, the company has been able to; significantly reduce inventory holding period, increase retail distribution, upgrade effective assortment and adopt new distribution-channels in a profitable way.

Source: Company; IDBI Capital Research

Hindustan Unilever | Initiating Coverage

Exhibit 10: HUL’s core strategy; Winning In Many India’s (WIMI)

Winning in many India’s (WIMI); this is the core of HUL’s business strategy. Under this strategy; the company breaks India into different clusters (based on income and culture) and designs its branding/product-execution strategy accordingly.

Source: Company; IDBI Capital Research

Hindustan Unilever | Initiating Coverage

Exhibit 11: HUL’s recent acquisitions Exhibit 12: % contribution to overall sales

Year Acquisition Consideration Business HUL’s recent acquisition has been in 19% niche categories (intimate hygiene and FY16 Indulekha Rs 3.3 bn Hair care 29% natural hair care etc.) Aaditya FY18 Rs 0.8 bn Ice cream 45% Milk brand 39%

With acquisition of GSK the contribution Health FY18 GSK Rs 30.45 bn of Food segment is expected to increase food drinks 35% 32%

from 19% to 29% FY20 FY21E FY19 V Wash NA Intimate hygiene Home care Beauty & Personal care Food

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 13: Penetration levels of HFD Exhibit 14: Increased physical reach

Source: Company; IDBI Capital Research Source; Company, IDBI Capital Research

Hindustan Unilever | Initiating Coverage

Exhibit 15: HUL’s strategy for Horlicks Exhibit 16: HUL’s strategy for Horlicks

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 17: HUL-GSK synergy benefit

Source: Company, IDBI Capital Market Research

Hindustan Unilever | Initiating Coverage

Financials

We expect HUL’s revenue to grow at Exhibit 18: Revenue and Revenue growth (%) Exhibit 19: Segment wise revenue growth trend (%) 14% CAGR over FY20-22E led by superior 14.9% 600.00 16.0% 69% distribution efficiency and strong brand 14% 14.0% portfolio in health, hygiene and nutrition 500.00 12.0% segments (c. 80% revenue share). HUL’s 400.00 8.5% 10.0% newly acquired food portfolio from GSK 34% 300.00 8.0% (c. 12% revenue share) is likely to grow 6.0% 16% 200.00 14% 15% at 10-15% rate during FY21-22E led by 3.0% 8% 11% 10% 4.0% 5% 7% 6% 4% 2.1% 2% 2% 1% 3% immunity-based brand positioning and 100.00 1.5% 2.0% 345 352 382 388 442 508 -1% better distribution reach of HUL. We 0.00 0.0% -2% have assumed beauty and personal care FY17 FY18 FY19 FY20 FY21E FY22E FY17 FY18 FY19 FY20 FY21E FY22E revenue to decline by 1% in FY21E Revenue (in Rs Bn) Revenue Growth (%) Home Care Beauty & Personal Care Foods & Refreshments followed by 16% recovery in FY22E. Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 20: Gross margin (%) and EBITDA Margin (%) trend Exhibit 21: Earnings per share trend 56.3% We expect EBITDA margin to expand by 60.0% 53.7% 53.1% 52.3% 54.1% 53.8% 44.1 386bp to 28.6% over FY20-22E led by 50.0% cost savings from structural initiatives 38.0 40.0% 31.2 like; SKU rationalizations (HUL has 27.9 currently reduced no. of SKUs by 50% to 30.0% 24.2 20.8 28.6% maximize output. Post COVID, HUL 20.0% 26.0% 22.6% 24.8% expects to permanently remove 20% of 20.7% 10.0% 17.5% pre-covid SKUs to simplify overall 0.0% business, lower its travel spend, FY17 FY18 FY19 FY20 FY21E FY22E rationalize ad-spends. EBITDA Margin (%) Gross Margin (%) FY17 FY18 FY19 FY20 FY21E FY22E We expect EPS to grow at 19% CAGR Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research over FY20-22E

Hindustan Unilever | Initiating Coverage

Valuation

 We value HUL at 55x FY22E EPS with ACCUMULATE rating and target price of Rs 2,424. As per 2-stage dividend As per dividend discount model, 55x is discount model (DDM) we estimate PER of 55x to be fundamentally justified multiple with following assumptions (i) fundamentally justified multiple during high growth period (20 years) HUL should maintain dividend payout of 75% (over last 15 years, HUL dividend payout ratio stood at 74%) and ROE should stay minimum 60% (ROE during FY05-20 stood at 82%) (ii) During stable growth ROE moderates to 25% while dividend payout (function of terminal growth rate and ROE) stands at 76%.

Exhibit 22: Valuation table Exhibit 23: Dividend discount model; fair P/E multiple Valuation parameters FY22E High Growth Period

Length of high-growth period (n) = 20 EPS 44.1 Growth rate during period (g) = 15.00% Actual ROE = 60.00% Payout ratio during period (_) = 75.00% Fair P/E multiple 55x Cost of Equity during period = 11.00%

Stable Growth Period Fair value 2,424 Growth rate in steady state = 6.00%

Payout ratio in steady state = 76.00% Expected ROE = 25% Current market price 2,125 Cost of Equity in steady state = 11.00%

Output % upside 14% Price/Earnings Ratio =

55x

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Hindustan Unilever | Initiating Coverage

Exhibit 24: Discounted cash flow valuation FCF Calculation FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY30E FY35E FY40E Free Cash Flow to Firm 35,774 51,540 62,020 56,510 68,560 91,090 1,07,151 4,25,138 7,32,662 11,02,227 Growth (%) 44 20 -9 21 33 18 19 12 10 PV of FCF 56,510 68,560 81,977 86,784 1,38,582 1,50,221 1,48,758

Assumptions Sensitivity Analysis

Average Risk Free Rate 6.4% Terminal Growth Rate

Market Premium 4.8% 4.0% 5.0% 6.0% 7.0% 8.0%

Beta 1 9.0% 3,224 3,691 4,458 5,949 10,113

Ke [=Rf+Beta(Rm-Rf)] 11.1% 10.0% 2,528 2,792 3,185 3,829 5,083

Kd 10.0% 11.0% 2,044 2,204 2,426 2,757 3,300

WACC Tax Rate 25.2% 12.0% 1,692 1,794 1,929 2,116 2,395

After Tax Kd 7.5% 13.0% 1,427 1,494 1,580 1,694 1,853

Debt to Capital 0.0%

Equity to Capital 100.0%

WACC 11.1%

Terminal Growth 6.0%

FCFF Calculation Assumption PV of Free Cash Flows 26,13,629 Stage Year Growth rate

Terminal Value 2,51,18,811 1st Stage FY23-30 19%

PV of Terminal Value 30,50,917 2nd Stage FY31-35 12%

Implied TEV 56,64,546 3rd Stage FY36-40 10%

Less: Net Debt -36,880

Equity Value 57,01,427

# Share 2,350

Equity Value 2,426

Source: Company; IDBI Capital Research

Hindustan Unilever | Initiating Coverage

Exhibit 25: Price/EPS band chart Exhibit 26: Price/BV band chart Exhibit 27: EV/EBITDA band chart 3,000 1 Yr fwd PE 4,000 1 Yr fwd P/BV 6,000,000 1Yr fwd Ev/ebitda 2,500 5,000,000 3,000 2,000 4,000,000

1,500 2,000 3,000,000

1,000 2,000,000 1,000 500 1,000,000

0 0 0 Jul-13 Jul-19 Jul-13 Jul-19 Jan-14 Jan-20 Jul-13 Jul-19 Jan-14 Jan-20 Jun-18 Jun-18 Oct-10 Oct-16 Oct-10 Oct-16 Apr-11 Apr-11 Feb-15 Sep-15 Feb-15 Sep-15 Dec-12 Dec-18 Dec-12 Dec-18 Aug-09 Aug-14 Aug-20 Jan-14 Jan-20 Aug-09 Aug-14 Aug-20 Nov-11 Nov-17 Jun-18 Nov-11 Nov-17 Mar-10 Mar-16 Oct-10 Oct-16 Mar-10 Mar-16 Apr-11 Feb-15 Sep-15 May-12 May-17 Dec-12 Dec-18 May-12 May-17 Aug-09 Aug-14 Aug-20 Nov-11 Nov-17 Mar-10 Mar-16 May-12 May-17 1 yr fwd PE Min 24 -sd 30 CMP Min 17.4 -sd 22.0 1Yr fwd EV Min 17.7 -sd 23.0 Avg 40 Max 61 Avg 30.2 Max 49.5 Avg 28.8 Max 42.6 Source: Company; Bloomberg, IDBI Capital Research

Hindustan Unilever | Initiating Coverage

Company background

Hindustan Unilever is the Indian subsidiary of Unilever PLC, a British-Dutch MNC. It operates in three main segments: Home care, Beauty & Personal care and Food & Refreshment. HUL owns more than 44 brands in 14 distinct categories including fabric solutions, home and hygiene, life essentials, skin cleansing, skin care, hair care, color cosmetics, oral care, deodorants, tea, coffee, ice cream & frozen dessert, Foods and health food drinks. Some of the key brands are: Surf excel, Rin, Vim, Wheel, Dove, Pond’s, Vaseline, Clinic plus, Sunsilk, Indulekha, Closeup, Pepsodent, Axe, Lipton, Brooke Bond, Kwality Walls, Knorr etc. HUL is market leader in laundry, soaps, hair care, home care, skin care, tea etc.

Exhibit 28: Revenue break up (FY20) Exhibit 29: EBIT break up (FY20) Food & Others, 1% refreshment Food & 14% Home care refreshment, Home care, 30% 19% 35%

Beauty and personal Beauty and care, 45% personal care 56% Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Hindustan Unilever | Initiating Coverage

Exhibit 30: HUL Manufacturing units

Source: Company; IDBI Capital Research

Hindustan Unilever | Initiating Coverage

Exhibit 31: Key Managerial Personnel Name Designation Background Mr Sanjiv Mehta Chairman & Managing director Mr. Sanjiv Mehta is a Chartered Accountant from The Institute of Chartered Accountants of India. He has also completed the Advanced Management Program at Harvard Business School. He has been a part of Unilever for 26 years and during the last 17 years has led businesses in different parts of the world. He has been leading Unilever’s India and South Asia business since Oct 13 as CEO and Managing Director. He was also appointed as a member of Unilever Leadership Executive in May-19. He chairs the FMCG Committee of FICCI as well as national committee on MNCs of CII Mr Srinivas Phatak Executive Director, Finance and IT and Mr. Srinivas Phatak is a Chartered Accountant (ICAI-1996) and Cost & Works Accountant (ICWAI- Chief Financial Officer 1996). He has been with Unilever for 20 years and worked extensively in India and different parts of the world. He has been Vice President category for deodrants and oral care (2012-13), Vice President Supply chain finance America (2014-16) and Head of financial shared services for Univeler (2017). He is also the Vice President Finance for Unilever, South Asia Mr Willem Uijen Executive Director, Supply Chain Mr Willem Uijen holds a Master of Science (M.Sc.) degree in Applied Physics from Eindhoven University in the Netherlands. He has been with Unilever since 1999 and has been involved in Supply chain and Research & Development. He has been Supply Chain Vice President for Unilever, Mexico and Caribbean (2012-15), vice president home care, Latin America (2015-16) and recently headed Unilever’s Supply chain, home care division based out of London. He was appointed as Executive Director, Supply chain of HUL from Jan-20. Mr. Dev Bajpai Executive Director, Legal and Mr Dev Bajpai is a fellow member of the Institute of Company Secretaries of India and has a law corporate affairs & Company Secretary degree from the University of Delhi. He completed an Executive Program for Corporate counsels at Harvard conducted by Harvard Law School. He has 30 years of experience in diverse industries like automobiles, FMCG, hospitality and private equity in the areas of legal, governance, tax and corporate affairs. He has been a member of the management committee of HUL since May 10 and was inducted on the Board of Directors of HUL as Whole time director with effect from Jan 17.

Source: Company; IDBI Capital Research

Hindustan Unilever | Initiating Coverage

Exhibit 32: Key shareholders Major Institutional Shareholders (%) Life Insurance Corporation limited 2.6 Vanguard Group 1.3 Blackrock INC 1.1 Republic of Singapore 1.0 SBI Funds Management Pvt Ltd 0.9 ICICI Prudential Life Insurance 0.6 Nomura Holding 0.5 ICICI Prudential Asset Management 0.4 Source: Bloomberg

Hindustan Unilever | Initiating Coverage

Financial Summary

Profit & Loss Account (Rs mn) Cash Flow Statement (Rs mn)

Year-end: March FY19 FY20 FY21E FY22E Year-end: March FY19 FY20 FY21E FY22E

Net sales 382,240 387,850 442,095 507,800 Pre-tax profit 85,220 90,920 1,21,472 1,40,892

Growth (%) 8.5 1.5 14.0 14.9 Depreciation 5,240 9,380 10,760 11,739 Operating expenses (295,870) (291,850) (316,741) (362,794) Tax paid (26,850) (24,650) (32,190) (37,336) EBITDA 86,370 96,000 125,354 145,005 Chg in working capital (2,920) (380) (2,761) 5,114 Growth (%) 18.7 11.1 30.6 15.7 Other operating activities (3,410) (2,220) 1,184 1,244 Depreciation (5,240) (9,380) (10,760) (11,739) Cash flow from operations (a) 57,280 73,050 98,465 1,21,652 EBIT 81,130 86,620 114,594 133,266 Capital expenditure (6,620) (7,540) (7,375) (14,501) Interest paid (280) (1,060) (1,184) (1,244) Chg in investments (130) 22,250 - - Other income 6,640 7,330 8,063 8,869 Other investing activities 4,110 4,550 - - Pre-tax profit 87,490 92,890 121,472 140,892 Cash flow from investing (b) (2,640) 19,260 (7,375) (14,501) Tax (24,860) (23,540) (32,190) (37,336) Equity raised/(repaid) - - - - Effective tax rate (%) 28.4 25.3 26.5 26.5 Debt raised/(repaid) - - - - Minority Interest - - - - Dividend (incl. tax) (45,460) (62,440) (62,510) (72,380) Net profit 62,630 69,350 89,282 103,556

Exceptional items 2,270 1,970 - - Chg in minorities - - - -

Adjusted net profit 60,360 67,380 89,282 103,556 Other financing activities (9,160) (4,320) (1,184) (1,244)

Growth (%) 15.3 11.6 32.5 16.0 Cash flow from financing (c) (54,620) (66,760) (63,694) (73,624)

Shares o/s (mn nos) 2,160 2,160 2,350 2,350 Net chg in cash (a+b+c) 20 25,550 27,396 33,528

Hindustan Unilever | Initiating Coverage

Balance Sheet (Rs mn) Financial Ratios

Year-end: March FY19 FY20 FY21E FY22E Year-end: March FY19 FY20 FY21E FY22E

Net fixed assets 47,200 55,870 52,485 55,247 Adj. EPS (Rs) 27.9 31.2 38.0 44.1

Investments 2,560 2,520 2,520 2,520 Adj. EPS growth (%) 15.3 11.6 21.8 16.0

Other non-curr assets 15,190 18,730 18,730 18,730 EBITDA margin (%) 22.6 24.8 28.4 28.6

Current assets 1,13,700 1,18,900 1,56,838 1,97,405 Pre-tax margin (%) 22.9 23.9 27.5 27.7

Inventories 24,220 26,360 28,013 32,176 ROE (%) 81.9 85.9 95.3 84.4

Sundry Debtors 16,730 10,460 19,350 22,226 ROCE (%) 90.0 86.6 96.8 90.4

Cash and Bank 36,880 50,170 77,566 1,11,093 Turnover & Leverage ratios (x)

Marketable Securities - - - - Asset turnover (x) 2.2 2.1 2.1 2.0

Loans and advances - - - - Leverage factor (x) 2.4 2.4 2.3 2.1

Total assets 1,78,650 1,96,020 2,30,573 2,73,902 Net margin (%) 15.8 17.4 20.2 20.4

a Net Debt/Equity (x) (0.5) (0.6) (0.7) (0.8)

Shareholders’ funds 76,590 80,310 1,43,742 2,21,448 Working Capital & Liquidity ratio

Share capital 2,160 2,160 2,160 2,160 Inventory days 23 25 23 23

Reserves & surplus 74,430 78,150 1,04,922 1,36,098 Receivable days 16 10 16 16

Total Debt - - - - Payable days 87 93 94 94

Secured loans - - - -

Unsecured loans - - - - Valuation

Other liabilities 18,530 24,670 24,670 24,670 Year-end: March FY19 FY20 FY21E FY22E

Curr Liab & prov 83,530 91,040 98,821 1,10,974 P/E (x) 76.0 68.1 55.9 48.2

Current liabilities 78,520 86,860 94,641 1,06,794 Price / Book value (x) 59.9 57.1 46.6 36.1

Provisions 5,010 4,180 4,180 4,180 PCE (x) 70.0 59.8 49.9 43.3

Total liabilities 1,02,060 1,15,710 1,23,491 1,35,644 EV / Net sales (x) 11.9 11.7 11.1 9.6

Total equity & liabilities 1,78,650 1,96,020 2,30,573 2,73,902 EV / EBITDA (x) 52.7 47.3 39.2 33.7

Book Value (Rs) 35 37 46 59 Dividend Yield (%) 1.0 1.4 1.3 1.4

Source: Company; IDBI Capital Research

This page is kept blank intentionally Initiating Coverage

TP Rs259 Key Stock Data ITC BUY CMP Rs187 Bloomberg / Reuters ITC IN / ITC.BO Blend of reasonable valuation and decent growth Potential upside / downside +39% Sector FMCG Shares o/s (mn) 12,287 V/s Consensus Summary Market cap. (Rs mn) 2,296,678 We initiate coverage on ITC Limited (ITC) with BUY rating and TP of EPS (Rs) FY21E FY22E Market cap. (US$ mn) 31,289 Rs 259 (+39% upside) based on SOTP valuation. We believe ITC offers perfect blend of IDBI Capital 11.3 13.2 3-m daily average value (Rs mn) 2,568.9 reasonable valuation, decent growth and high dividend yield. ITC is less exposed to Consensus 11.5 13.2 52-week high / low Rs 266 / 135 non-essential categories. Revenue contribution from essentials/semi essentials stands % difference (1.4) (0.1) Sensex / Nifty 38,357 / 11,334 at 90% led by cigarettes and branded packaged food. Concerns on GST cess hike on cigarette (85% contribution to EBIT) by the government to meet fiscal deficit targets are Shareholding Pattern (%) Relative to Sensex (%) temporary. In-elastic demand and ability of ITC to hike prices would support the Promoters 0.0 bottom-line. We expect ITC to continue growing profitably in the branded FMCG FII 14.6 business with renewed focus on health and hygiene. In hotel business we expect ITC to DII 39.2 emerge out stronger from the current pandemic led by cash flow support from strong Public 46.2 balance sheet compared to competition. Key Highlights and Investment Rationale Price Performance (%)  Cigarette business back to normalcy; expect tax hikes to be followed by price hikes -1m -3m -12m Post the lifting of lockdown, cigarette volume trends are back to pre-covid levels. Absolute (3.2) (6.7) (23.6) Being category leader in cigarettes (revenue at 10x compared to nearest competition) Rel to Sensex (5.0) (18.5) (28.3) ITC can comfortably pass any tax-hikes to customers by raising prices (as cigarette demand is in-elastic to price changes). We expect revenue from cigarette segment in Financial snapshot (Rs mn) FY21E to decline by c. 12% (impacted by lock-down during Apr-May’20) while in Year FY18 FY19 FY20E FY21E FY22E FY22E to rise by 13% (at level similar to FY20). Revenue 443,298 457,844 465,999 465,602 529,518  Branded packaged food business to grow at strong double digit rate EBITDA 1,55,410 1,73,055 1,79,044 1,71,563 2,02,625 In FMCG-ex-tobacco segment we expect branded packaged food (c.77% of fmcg-ex- EBITDA (%) 35.1 37.8 38.4 36.8 38.3 tobacco revenue) to grow at strong double digit rate (c.10-11%) during FY21-22E. ITC Adj. PAT 1,12,233 1,24,643 1,51,362 1,38,951 1,62,235 is market leader in branded packaged food segment especially in categories like; EPS (Rs) 9.2 10.2 12.3 11.3 13.2 aata, salted snacks, biscuits, noodles etc. EPS Growth (%) 9.7 10.4 21.2 (8.2) 16.8 PE (x) 20.3 18.4 15.2 16.5 14.1  Strong balance sheet offers support to high-fixed-cost Hotels’ business Dividend Yield (%) 2.5 2.7 3.1 4.8 5.8 We expect tourism industry to be most impacted by COVID-crisis. Consequently, we EV/EBITDA (x) 14.5 13.0 11.1 11.3 9.7 believe hotel industry is ripe for consolidation as smaller players with weak balance RoE (%) 23.2 22.8 24.8 21.2 23.8 sheets are likely to struggle. We expect ITC to emerge out strongly from the current RoCE (%) 28.5 28.1 30.6 27.6 30.9 pandemic led by superior brand image and stronger balance sheet. Source: Company; IDBI Capital Research Varun Singh | [email protected] | +91-22-2217 1727  Upasana Madan | [email protected] | +91-22-2217 1860 September 7, 2020

ITC | Initiating Coverage

Exhibit 1: Revenue of FMCG companies (Rs in Bn, FY20) Exhibit 2: ITC: segment wise revenue CAGR (FY10-20) 12% 500 ITC is the largest FMCG Company in 450 9% 7% India in terms of revenue. 400 6% 350 Except Cigarette, the company has been 300 1% able to drive aggressive growth in other 250 segments like; branded FMCG, agri- 200 150 business, paper and packaging and Hotel hotel. 100 50 Agri-business FMCG:Others

0 FMCG:Cigarette and packaging

ITC HUL Nestle Britannia GCPL Dabur Marico Paper, paper boards

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Despite decline in revenue share from Exhibit 3: ITC; revenue break-up Exhibit 4: ITC; EBIT break up cigarette (from 59% in FY11 to 41% in 1% 3% 4% 4% FY20), profitability share has increased 11% 12% 7% 12% 5% 2% 14% from 81% in FY11 to 85% in FY20. This is 20% 8% largely because, ITC being category 13% leader in cigarette (10x revenue 25% 85% compared to nearest competition) has 81% been able to take price hikes higher than 59% 41% tax-hikes.

-4% Improvement in profitability, especially FY11 FY20 FY11 FY20 in FMCG-others, will help ITC to FMCG:Cigarette FMCG:Others Agri Paper Hotel Cigarettes FMCG(Others) Agri Paper & Packaging Hotels command higher valuation multiples. Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

ITC | Initiating Coverage

Exhibit 5: Key Competitors revenue in Cigarette business (Rs bn) Exhibit 6: Key innovations in cigarette segment in last few years

25 Revenue of ITC in cigarette business is 10x compared to nearest competition. 20

In the last three years, ITC has 10 launched 2 value brands: Waves and Players and mid-priced brand 5 American Club. It also entered in electronic vaping devices- EON Myx.

0 ITC Godfrey VST

Source: Company; IDBI Capital Research Source; Company, IDBI Capital Research

Exhibit 7: World v/s India: Tobacco consumption Exhibit 8: Tobacco consumption v/s tax collection Exhibit 9: Legal and Illegal cigarette volume growth (Bn units)

122 3% CAGR 10% 87% 85% 103 102 -5%CAGR

77 85%

90% 4% CAGR

26 13% 11% 20 4% 15% 0%

World India Legal Cigarette Illegal cigarette Other tobacco products Legal Cigarette Illegal Cigarette Total Cigarette Others (Bidi,smokless tobacco) Share of tobacco consumption Share of tax revenue 2011 2017 Source: Industry; IDBI Capital Research

ITC | Initiating Coverage

Exhibit 10: Tax increase on cigarettes over the years (%) Exhibit 11: Cigarette industry break-up

22% 20% 20% 19% 18%

80% 78% 76% 76% 13% 83% 81% 11% 10%

24% 24% 17% 19% 20% 22%

FY13 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18* FY19 FY20 Illegal cigarette volumes Legal cigarette volume Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 12: Revenue break-up of FMCG segment (FY20) Exhibit 13: FMCG segment brand portfolio

Others (stationary, agarbatti)

Branded packaged goods

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

ITC | Initiating Coverage

Exhibit 14: FMCG brand wise revenue break up (FY20) Exhibit 15: FMCG EBIT and EBIT Margin

4500 3.1% 3.3% 3.5% Others 4000 3.0% 3500 Aashirwad 2.5% Vivel FMCG-ex-tobacco segment continues 3000 Mangaldeep 2500 2.0% to record improvement in operating 1.4% 2000 1.5% profit margin during FY18-20. Yippee 1500 0.7% 1.0% 1000 0.4% Classmate 0.3% 500 0.5% 340.8 705.1 281.2 1641.2 3861.2 4230.5 0 0.0% Bingo Sunfeast FY15 FY16 FY17 FY18 FY19 FY20 EBIT (In Mn, LHS) EBIT Margin (%), RHS Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 16: ITC’s Key brands in FMCG and market position Exhibit 17: Key acquisitions in FMCG others Market Consumer spends Amount Segment Brand Year Company Segment % stake position (Rs bn) (Rs Mn) Branded atta Aashirwad 1 60 2020 M/s Sunrise Foods Pvt Ltd Spices NA 100% Cream biscuit Sunfeast 1 40 2019 Delectable technologies Vending machine 75 33% Bridges segment of snacks food Bingo 1 27 Notebook Classmate 1 14 2018 Nimyle Floor cleaners NA 100% Noodles Yippee 2 13 2018 Charmis Skin care NA 100% Deodrant Engage 2 NA 2017 Savlon Antiseptic brand 2500-3000* 100% Body wash Fiama 2 NA 2017 Shower to shower Personal care brands 100% Dhoop Mangaldeep 1 8 Agarbatti Mangaldeep 2 8 2014 B Naturals Natural Juice brand 1000 100%

Source: Company; IDBI Capital Research Source; Company, IDBI Capital Research,* for Savlon & Shower to Shower

ITC | Initiating Coverage

Exhibit 18: Product innovations in dairy segment during FY19-20 Exhibit 19: Product innovation in food segment during FY19-20

Source: Company; IDBI Capital Research Source; Company, IDBI Capital Research

Exhibit 20: Product innovations in personal care segment during FY19-20 Exhibit 21: Product innovations during lockdown in health and hygiene segment

Source: Company; IDBI Capital Research Source; Company, IDBI Capital Research

ITC | Initiating Coverage

Exhibit 22: Manufacturing facilities of ITC

Source: Company; IDBI Capital Research

ITC | Initiating Coverage

Financials

We expect revenue to grow at 7% CAGR Exhibit 23: Revenue and Revenue growth (%) Exhibit 24: Segment wise revenue growth (%) during FY20-22E led by 10-12% growth 600 13.7% 20.0% 71% in FMCG packaged food business and 6- 15.0% 500 7% growth in Agri business. We assume 6.7% 10.0% 3.3% 17% 1.8% 16% 9% 10% 18% 400 0% 5.0% 10% 12% 12% cigarette and hotel business to decline 2% 3% 4% 10% 6% 7% 6% 0.0% by 12% and 41% respectively in FY21E 300 -5.0% -10% -13% -7% given the non-essential nature of the 200 -10.0% -45% categories. We expect normalcy to -20.1% -15.0% 100 -20.0% return in FY22E with 18% increase in 554 443 458 466 466 530 0 -25.0% revenue from cigarettes while hotel FY19 FY20 FY21E FY22E FY17 FY18 FY19 FY20 FY21E FY22E Cigarette FMCG: Others business to reach revenue levels of FY20. Revenue (in Rs Bn) Revenue Growth (%) Agribusiness Paperboards, paper and packaging Hotel Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research We expect operating profit margins to be impacted during FY21-22E due to Exhibit 25: Gross margin (%) and EBITDA Margin (%) trend Exhibit 26: EPS to grow at 4% CAGR negative operating leverage from the 13.3 hotel business. 80.0% 71.2% 12.3 70.0% 64.4% 62.2% 63.0% 62.0% 62.0% 11.5 We expect EPS to grow at 4% CAGR over 60.0% 10.2 FY20-22E. 9.2 50.0% 8.4 40.0% 30.0% 38.4% 38.3% 35.1% 37.8% 36.8% 20.0% 26.3% Key risks; (i) re-enforcement of lock- 10.0% down if daily new cases is not contained 0.0% will slow-down the business recovery FY17 FY18 FY19 FY20 FY21E FY22E rate (ii) If unemployment-levels don’t EBITDA Margin (%) Gross Margin (%) FY17 FY18 FY19 FY20 FY21E FY22E improve post lifting of lock-down, Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research demand for premium/discretionary products might be impacted negatively.

ITC | Initiating Coverage

Valuation

 We value the company on FY22E, using SOTP methodology, where we assign EV/EBITDA of 15x to the Cigarettes business, 4x EV/Sales to FMCG-Others, 10x EV/EBITDA to Hotel segment, 1x EV/Sales to Agri-business and 6x EV/EBITDA to Paperboard business. As per SOTP valuation we estimate Rs 259 as fair value for ITC.

Exhibit 27: Valuation based on SOTP Valuation parameters Metric Multiple(x) Per share value Cigarette EV/EBITDA 15 190 FMCG: Others EV/Sales 4 52 Hotels EV/EBITDA 10 2 Agri-Business EV/Sales 1 1 Paperboards EV/EBITDA 6 6 Less: Net debt 9

Total equity value 259

Source: Company; IDBI Capital Research

Exhibit 28: P/E band chart Exhibit 29: Price/BV band chart Exhibit 30: EV/EBITDA band chart 500 1 Yr fwd PE 500 1 Yr fwd P/BV 5,000,000 1Yr fwd Ev/ebitda 400 400 4,000,000

300 300 3,000,000

200 200 2,000,000

100 100 1,000,000

0 0 0 Jul-13 Jul-19 Jan-14 Jan-20 Jun-18 Jul-13 Jul-19 Oct-10 Oct-16 Jul-13 Jul-19 Apr-11 Feb-15 Sep-15 Dec-12 Dec-18 Aug-09 Aug-14 Aug-20 Nov-11 Nov-17 Jan-14 Jan-20 Jan-14 Jan-20 Mar-10 Mar-16 Jun-18 Jun-18 Oct-10 Oct-16 Oct-10 Oct-16 Apr-11 May-12 May-17 Feb-15 Sep-15 Apr-11 Feb-15 Sep-15 Dec-12 Dec-18 Dec-12 Dec-18 Aug-09 Aug-14 Aug-20 Aug-09 Aug-14 Aug-20 Nov-11 Nov-17 Nov-11 Nov-17 Mar-10 Mar-16 Mar-10 Mar-16 May-12 May-17 May-12 May-17 1 yr fwd PE Min 6 -sd 15 CMP Min 1.7 -sd 5.0 1Yr fwd EV Min 10.6 -sd 15.0 Avg 21 Max 34 Avg 5.2 Max 7.4 Avg 17.8 Max 24.6 Source: Company; Bloomberg, IDBI Capital Research

ITC | Initiating Coverage

Company background

ITC, founded in 1910, is an Indian multinational conglomerate headquartered in Kolkata, West Bengal. It operates 13 businesses across 5 segments (FMCG, Hotels, Paperboards and packaging, Agri business and Information technology). ITC enjoys market leading position in cigarette business with revenue 10x higher than the nearest competitor. ITC’s FMCG portfolio consists of packaged food, personal care, education and stationery, lifestyle retailing, agarbattis and safety matches. Key brands include; Aashirvad, Sunfeast, Bingo, Yippee!, Candyman, Fiama, Vivel, Classmate, Mangaldeep. In 1975 ITC ventured into Hotel segment and currently operates more than 100 hotels in 70 destinations across India. The company is also into the business of paperboards and speciality paper business with a market leading positions.

Exhibit 31: ITC Revenue break-up (FY20) Exhibit 32: ITC EBIT break up (FY20) Hotel Paper & Packaging, Hotels, 1% Paper 3% 7% 12% Agri Business, 5%

FMCG:Cigarette 41% FMCG(Others), 2%

Agri 20%

FMCG:Others 24% Cigarettes, 85% Source: Company, IDBI Capital Market Research Source: Company , IDBI Capital Market Research

ITC | Initiating Coverage

Exhibit 33: Key Managerial Personnel Name Designation Background Mr. Sanjiv Puri Chairman & Managing director Mr. Sanjiv Puri is an alumnus of IIT, Kanpur and Wharton Business School. He joined ITC in 1986. Prior to his appointment as a Director on Board of ITC, he was President, FMCG Business- Cigarettes, Foods, Personal care, education & stationary products, matches and agarbatti since Dec 2014. He has held business leadership positions and also handled wide range of responsibilities in manufacturing, operations and information and digital technology. He was appointed as the chairman and MD in May-19 Mr Rajiv Tandon Executive Director and CFO Mr Rajiv Tandon is a fellow member of Institute of Chartered Accountants of India with over four decades of experience in finance, accounting, internal audit and IT functions. He has held important positions like: Member, Managing Committee, The Bengal Chamber of Commerce & Industry, Chairman of the Expert Committee on Banking and Finance, Indian Chamber of Commerce, and Member, Taxation and Company Law Committee, CII. He is presently on the board of Russell credit ltd, Gold flake corporation ltd, wimco ltd, amongst others Mr Chitranjan Dar Head- Quality Assurance, Mr Chitranjan Dar is an engineer from IIT, Delhi and an MBA from IIM-A. he started his career in LSTC, CPO and EHS ITC’s packaging and printing business in 1981. In 2003, he joined the lifestyle retailing business division as its chief executive and continued that role till 2008 post which he became CEO of Food business. Currently, he is responsible for overall supervision of Quality Assurance, ITC Life sciences & Technology center, central projects organisations and environment, health and safety since June-15 Mr. S Sivakumar Divisional chief executive, Mr S. Sivakumar joined ITC in 1989,prior to which he worked with a farmer’s co-operative. He Agri & IT Businesses oversees Agri and IT businesses of the company. He is also the chairman of Technico Agri Sciences Limited and Vice Chairman of ITC Infotech India Limited and its subsidiaries in the UK and USA. He has been on the board of NABARD and IRMA. He also serves on the advisory council to Ministry of Rural development on National Rural Livelihoods Mission. Mr. Sanjay Singh Divisional chief executive, Mr Sanjay Singh is a chemical engineer from IIT Kanpur. He joined ITC Bhadrachalam paperboards ltd. Paperboards and Speciality paper As a management trainee in 1977 and rose to become a whole time director in 1999. Consequent to merger of ITC Bhadrachalam paperboards ltd with ITC ltd in March 2002 he took charge of the Paperboards & Specialty Papers Division as Executive Vice President (Manufacturing)

Source: Company, IDBI Capital Market Research

ITC | Initiating Coverage

Exhibit 34: Key shareholders Major Institutional Shareholders (%) British American Tobacco PLC 29.4 Life Insurance Corp of India 16.2 Unit Trust of India 7.9 SBI Funds Management 2.5 HDFC Asset Management 2.2 General Insurance Corp of India 1.7 JPMorgan Chase & Co 1.6 ICICI Prudential Asset Management 1.6 Source: Bloomberg

ITC | Initiating Coverage

Financial Summary

Profit & Loss Account (Rs mn) Cash Flow Statement (Rs mn) Year-end: March FY19 FY20E FY21E FY22E Year-end: March FY19 FY20E FY21E FY22E

Net sales 457,844 465,999 465,602 529,518 Pre-tax profit 184,442 191,670 185,763 216,892

growth (%) 3.3 1.8 (0.1) 13.7 Depreciation 13,117 15,633 16,858 18,344

Operating expenses (2,84,789) (2,86,955) (2,94,039) (3,26,893) Tax paid (54,859) (46,501) (46,812) (54,657)

EBITDA 1,73,055 1,79,044 1,71,563 2,02,625 Chg in working capital (4,997) 4,180 884 (9,053)

growth (%) 11.4 3.5 -4.2 18.1 Other operating activities (20,213) (26,919) 585 614 Depreciation (13,117) (15,633) (16,858) (18,344) Cash flow from operations (a) 117,491 138,062 157,278 172,140 EBIT 1,59,938 1,63,412 1,54,705 1,84,281 Capital expenditure (27,686) (21,404) (20,321) (23,585) Interest paid (342) (557) (585) (614) Chg in investments (38,419) (39,275) - - Other income 24,845 30,137 31,643 33,226 Other investing activities 15,288 5,511 - - Pre-tax profit 1,84,442 1,92,991 1,85,763 2,16,892 Cash flow from investing (b) (50,818) (55,167) (20,321) (23,585) Tax (59,798) (40,308) (46,812) (54,657) Equity raised/(repaid) 9,691 6,253 - - Effective tax rate (%) 32.4 20.9 25.2 25.2 Debt raised/(repaid) (69) - - - Minority Interest - - - - Dividend (incl. tax) (62,852) (70,487) (111,161) (133,033) Net profit 124,643 152,683 138,951 162,235

Chg in monorities - - - - Exceptional items - 1,321 - -

Adjusted net profit 124,643 151,362 138,951 162,235 Other financing activities (12,776) (14,675) (585) (614)

growth (%) 11.1 21.4 (8.2) 16.8 Cash flow from financing (c) (66,006) (78,909) (111,746) (133,647)

Shares o/s (mn nos) 12,259 12,287 12,287 12,287 Net chg in cash (a+b+c) 667 3,986 25,211 14,908

ITC | Initiating Coverage

Balance Sheet (Rs mn) Financial Ratios

Year-end: March FY19 FY20E FY21E FY22E Year-end: March FY19 FY20E FY21E FY22E

Net fixed assets 218,878 222,322 225,785 231,026 Adj. EPS (Rs) 10.2 12.3 11.3 13.2

Adj. EPS growth (%) 10.4 21.2 (8.2) 16.8 Investments 140,715 138,410 138,410 138,410 EBITDA margin (%) 37.8 38.4 36.8 38.3 Other non-curr assets 42,698 26,553 26,553 26,553 Pre-tax margin (%) 40.3 41.4 39.9 41.0 Current assets 295,690 365,069 389,371 418,060 ROE (%) 22.8 24.8 21.2 23.8 Inventories 75,872 80,381 79,981 90,961 ROCE (%) 32.5 30.6 27.6 30.9

Sundry Debtors 36,462 20,920 20,410 23,212 Turnover & Leverage ratios (x)

Cash and Bank 37,687 68,433 93,644 108,552 Asset turnover (x) 0.7 0.6 0.6 0.7

Total assets 697,979 752,354 780,118 814,049 Leverage factor (x) 1.2 1.2 1.2 1.2

Net margin (%) 27.2 32.5 29.8 30.6

Net Debt/Equity (x) (0.1) (0.1) (0.1) (0.2) Shareholders' funds 579,498 640,292 668,082 697,284 Working Capital & Liquidity ratio Share capital 12,259 12,292 12,292 12,292 Inventory days 60 63 63 63 Reserves & surplus 567,239 627,999 655,790 684,992 Receivable days 29 16 16 16

Total Debt 79 56 56 56 Payable days 43 44 43 44

Secured loans 79 56 56 56

Other liabilities 22,187 21,112 21,112 21,112 Valuation

Year-end: March FY19 FY20E FY21E FY22E Curr Liab & prov 96,216 90,894 90,868 95,596 P/E (x) 18.4 15.2 16.5 14.1 Current liabilities 95,963 89,715 89,689 94,417 Price / Book value (x) 3.9 3.6 3.4 3.3 Provisions 252 1,179 1,179 1,179 PCE (x) 16.6 13.7 14.7 12.7 Total liabilities 118,481 112,062 112,036 116,764 EV / Net sales (x) 4.9 5.0 4.9 4.3

Total equity & liab. 697,979 752,354 780,118 814,049 EV / EBITDA (x) 13.0 11.1 11.3 9.7

Book Value (Rs) 47 52 54 57 Dividend Yield (%) 2.7 3.1 4.8 5.8

Source: Company; IDBI Capital Research

Initiating Coverage

TP Rs16,941 Key Stock Data Nestle India HOLD CMP Rs16,231 Bloomberg / Reuters NEST IN /NEST.BO The king of packaged food; getting more aggressive Potential upside / downside +4% Sector FMCG Shares o/s (mn) 96 Summary V/s Consensus Market cap. (Rs mn) 1,564,967 We initiate coverage on Nestle India Limited (NEST) with a HOLD rating and TP of EPS (Rs) CY21E CY22E Market cap. (US$ mn) 22,596 Rs 16,941 (+4% upside) based on 55x CY22E EPS (DDM model). NEST enjoys c. 90% IDBI Capital 270.0 308.0 3-m daily average value (Rs mn) 416.1 revenue from essential products. Strong distribution network and R&D support from Consensus 264.0 299.0 52-week high / low Rs18,301 / 12,355 the parent company has helped NEST to aggressively launch new products over CY16- % difference 2.2 3.0 Sensex / Nifty 38,357 / 11,334 19; targeting new categories and premium pricing. We expect NEST to (i) be prime

beneficiary of shift in consumption from out-of-home to in-home in packaged food category (Maggi, Coffee, Chocolates which contribute c. 54% to total revenue) (ii) Shareholding Pattern (%) Relative to Sensex (%) continue gaining market share in infant milk formula (currently at 67%). Promoters 62.8 Key Highlights and Investment Rationale FII 12.1  Essential products dominate revenue mix; less vulnerable to COVID19 DII 8.5 NEST will be least impacted by disruption from COVID19 as 90% of its product Public 16.6 portfolio falls under essential category. In packaged food category, we expect industry tailwinds will be positive in Milk Products and Maggi segments (c. 75% of Price Performance (%) NEST’s revenue). NEST being category leader in 85% of its product portfolio, to continue gain market share driven by differentiated brand positioning and superior -1m -3m -12m distribution network. Absolute (1.6) (5.1) 28.8  Pricing power and innovation edge; key catalysts to drive growth Rel to Sensex (3.4) (16.9) 24.1 NEST enjoys superior pricing power. Despite taking price hike of c.4% in Milk Product and Nutrition portfolio, NEST gained significant market share in its largest segment Financial snapshot (Rs mn) i.e. Infant Milk Formula (0-2year baby) by 2,120bp to 67% during CY16-19. Further, Year CY2018 CY2019 CY2020E CY2021E CY2022E post Maggi fiasco in CY15, NEST has been aggressive on product launches (launched Revenue 112,923 123,689 134,510 153,019 171,048 70 products during CY16-19). This has largely been supported by R&D of the parent EBITDA 26,177 28,795 32,485 37,491 42,158 company. Pricing power and competitive edge in innovation will help NEST to drive EBITDA (%) 23.2 23.3 24.2 24.5 24.6 double digit revenue growth through a channel of 4.6mn efficient distribution Adj. PAT 16,069 19,691 22,279 26,036 29,699 network across India. EPS (Rs) 166.7 204.2 231.1 270.0 308.0  Moving towards new categories and premium products EPS Growth (%) 31.2 22.5 13.1 16.9 14.1 We note that over the last two years (CY18-19); (i) NEST launched several products to PE (x) 97.1 79.3 70.1 60.0 52.6 create new categories; Maggi Upma, Maggi Poha and Nesplus Breakfast Cereals, Dividend Yield (%) 0.7 1.9 0.8 0.9 1.0 Nescafe E-smart coffee machine, Nescafe Ready to Drink Cans (ii) launched premium EV/EBITDA (x) 59.3 54.0 47.5 40.8 35.9 products especially in confectionary segment under existing brands; KitKat, Munch RoE (%) 45.3 70.3 91.4 73.7 62.1 and Milky Bar. We believe these initiatives will help NEST to drive sustainable RoCE (%) 37.7 45.8 53.2 51.9 49.5 growth in both topline and profitability going forward. Source: Company; IDBI Capital Research Varun Singh | [email protected] | +91-22-2217 1727  Upasana Madan | [email protected] | +91-22-2217 1860 September 7, 2020

Nestle India | Initiating Coverage

Exhibit 1: Revenue of FMCG companies (Rs in bn, FY20)1 Exhibit 2: Revenue from F&B category (Rs in bn, FY20)

600 140

500 120 100 400 Nestle is the 3rd largest FMCG company 80 in India, primarily dominating packaged 300 food and beverages category. 60 200 40 100 20

0 0 ITC HUL Nestle Britannia GCPL Dabur Marico Nestle Britannia ITC HUL Dabur Marico

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 3: NEST; sales mix (CY19) Exhibit 4: Category growth( % CAGR, CY11-19); volume vs price

8% Being leader in respective categories, 7% Confectionary 6% 6% 13% 5% NEST has been able to drive revenue 4% 4% 4% growth through price hikes over CY11- 2% 19. 0% Powdered Positively, NEST gained market share in and liquid Milk Products -1% -1% beverages and Nutrition most of its core categories despite 12% 46% Prepared taking price hikes (refer Exhibit: 7) dishes and

cooking aid Confectionary Confectionary Confectionary

29% Milk products &… Milk products &… Milk products &… Prepared dishes &… Prepared dishes &… Prepared dishes &… Powdered & liquid… Powdered & liquid… Powdered & liquid… Revenue Price Hike Volume growth (%)

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

1 NEST financial numbers are as on Dec’19

Nestle India | Initiating Coverage

Exhibit 5: NEST; segmental revenue mix, market share and brand presence 2 Chg in Mkt (i) Milk Products % market (ii) Prepared dishes and Chg in Mkt Share 46% Share Brands 29% Brands and Nutrition (% revenue) share cooking aid (% revenue) (CY16-19 in bp) (CY16-19 in bp) % of segment % of segment total total Lactogen, Naan, Infant milk formula (0-2 years) 45% 67% +2,120bp Instant noodles 80% 59% +720bp Maggi Nestogen Infant cereal (dried baby food, 6-24 months) 27% 97% -10bp Cerelac, Nestum Sauce/Ketchup 12% 21% -330bp Maggi Dairy whitener 13% 44% +170bp Everyday Instant pasta 4% 74% +1700bp Maggi UHT Milk 14% NA NA Active+ Soups 4% NA NA Maggi Condensed milk 1% NA NA Milkmaid Seasoning 1% NA NA Maggi Yogurt/Dahi 1% NA NA Grekyo, Active+ (iii) Powdered & Liquid Beverages 12% (iv) Confectionary (% revenue) 13% (% revenue) % of segment total % of segment total

Milkybar, Munch, Instant Coffee 92% 51% +10bp Nescafe, Sunrise Chocolates:Whites and wafers 80% 63% -30bp Kit Kat Instant tea 5% NA NA Nestea Chocolates & Sugar confectionary 20% NA NA KitKat, Munch RTD 3% NA NA Milo

Source: Company, IDBI Capital Market Research

2 As per company presentation as on Jun’19

Nestle India | Initiating Coverage

Exhibit 6: Market share and brand position Exhibit 7: Market share vs price hike trend over CY16-19 NEST is market leader in 85% of its Mkt share Category Price hike portfolio. gain/loss Milk Products and Nutrition 4%

Post the Maggi fiasco in CY15, NEST Dairy Whitener 170 resorted to gain market share in noodles Infant cereal -10 through aggressive pricing. NEST gained Infant milk formula 2,120 720bp market share (to 59%) in instant Prepared dishes and cooking aid 0% Instant noodles 720 noodles over CY16-19. Ketchup -330

In milk products and nutrition category Instant pasta 1,700

(largest segment), NEST gained Powdered and liquid beverages -1% significant market share in infant milk Instant coffee 10 formula by 2120bp to 67% during CY16- Confectionary 0%

19 led by superior brand positioning and Whites and wafers chocolate -30 strong competitive moat. Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 8: Maggi market Share trend in instant noodles Exhibit 9: Market share trend; Maggi vs competition 75.0% 10% In Maggi, even though NEST could re- 19% 15% gain significant market share after CY15 59.5% 59.1% 59.1% 52.0% 22% debacle, Yippee and Chings has cornered a fair bit of NEST’s market share through 42.0% differentiated brand positioning. 75% Overall, NEST still continues to dominate 59% the instant noodle category with 59% market share. Jan-15 Jan-17 Jun-15 Dec-15 Jun-16 Jun-17 Jun-18 Dec-18 Maggi Yippee Others

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Nestle India | Initiating Coverage

Exhibit 11: NEST; product innovation category wise Product innovation and launches: NEST Exhibit 10: NEST; yearly product innovations (number) (number) significantly ramped up new product Milk Prepared Powdered launches after Maggie crisis. The Products dishes Confe- Grand Year and liquid 20 20 & &cooking ctionary Total company launched 70 products during 19 beverages Nutrition aid CY16-19 compared to historical run-rate of 9-10 product launches each year. CY16 4 6 5 4 19

11 11 Most of the new launches have been 10 CY17 4 3 1 3 11 9 9 focused on (i) health conscious products (ii) new categories (Maggi upma, Maggi CY18 8 5 3 4 20 poha, Nesplus breakfast cereal, coffee 3 CY19 7 6 4 3 20 machine etc) (iii) premium products (RTD cans, tetra pack Nestea etc) CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 Grand Total 23 20 13 14 70

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 12: Key product innovation in milk and nutrition segment CY16-19

NEST is moving towards organic based product pipe-line in milk and nutrition segment.

Source: Company, IDBI Capital Market Research

Nestle India | Initiating Coverage

Exhibit 13: Product innovation in prepared dish and cooking aid (CY16-17) Exhibit 14: Product innovation in prepared dish and cooking aid (CY18-19) New Category New Category

New Category

Source: Company; IDBI Capital Research Source; Company, IDBI Capital Research

Nestle India | Initiating Coverage

Exhibit 15: Product innovation in beverage segment (CY16-17) Exhibit 16: Product innovation in beverage segment (CY18-19); moving towards premium portfolio

Coffee Machine!

Source: Company; IDBI Capital Research Source; Company, IDBI Capital Research

Nestle India | Initiating Coverage

Exhibit 17: Product innovation in Confectionary segment (CY16-17) Exhibit 18: Product innovation in Confectionary segment (CY18-19)

Premium price products!

Source: Company; IDBI Capital Research Source; Company, IDBI Capital Research

Exhibit 19: Nestle has ~8% market share in Indian Exhibit 20: Nestle S.A. portfolio of brands in Nestle has 8% market share in the confectionary confectionary segment confectionary segment in India. Others, 21% We believe, NEST can pursue attractive Mondelez India, 27% growth opportunities in confectionary Mars India, 1% segment by; penetrating in new categories (Toffee, gums, boiled sweets Ferrero, 4% etc.) either organically or launching Parle, 5% global brands from the portfolio of the parent company (currently only 3 out of ITC, 6% 8 global brands available/launched in Perfetti Van Nestle India, Melle, 16% India). 8% Wrigley India, 12%

Source: Industry; IDBI Capital Research Source: Industry; IDBI Capital Research

Nestle India | Initiating Coverage

Two observations; (i) despite NEST Exhibit 21: NEST; R&D expense trend over CY15-19 Exhibit 22: NEST; A&P expense trend over CY15-19 being most aggressive during CY16-19 0.33% 350 0.35% 9000 6.4% 6.5% 6.4% 7.0% w.r.t product launches, its R&D expense 0.28% 8000 300 0.26% 0.30% 5.3% 6.0% declined. This is due to NEST’s ability to 0.25% 5.0% 0.23% 7000 250 0.25% 5.0% take advantage of the R&D done by 6000 parent company. Parent company’s 200 0.20% 5000 4.0% expenditure on R&D is 583x of NEST 150 0.15% 4000 3.0% 3000 India (ii) Led by increase in product 100 0.10% 2.0% 2000 launches, NEST positively ramped up 50 0.05% 1000 1.0% investments on A&P to drive growth. 228 301 265 254 233 5,252 4,996 5,060 7,294 7,853 0 0.00% 0 0.0% CY15 CY16 CY17 CY18 CY19 CY15 CY16 CY17 CY18 CY19 R&D expense (Rs mn) R&D as % of revenue (RHS) A&P (Rs mn) A&P as % of revenue (RHS)

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 23: NEST global; county wise contribution to Exhibit 24: NEST global; revenue growth (CY19 vs CY18) revenue (CY19)

NEST India contributes only 2% to total 31% 11% 26% revenue of NEST global. However, NEST 8% 7% 6% 5% India is the fastest growing company (at 3% 3% 3% 2% 11%) in NEST’s portfolio of global 2% 1% 1% 7% companies. 5% 4% 3% 3% 3% 3% 2% 2% 2% 2% 2% 2% 2% 1% -1% -1% 0% 0% -5% UK UK USA USA Italy Italy India India Spain Brazil Spain Brazil China Japan China Japan Russia Russia France France Mexico Canada Mexico Canada Australia Australia Germany Germany Philippines Philippines Switzerland Switzerland Rest of the world Rest of the world

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Nestle India | Initiating Coverage

Financials

We expect Nestle’s revenue to grow at Exhibit 25: Revenue and Revenue growth (%) Exhibit 26: Volume and price trend (%) 11% CAGR over CY19-22E driven by 8- 180.00 16.0% 11% 13.8% 11% 10% volume growth and 3-4% price hike. 160.00 14.0% 10% 11.8% 9% 140.00 8% Higher in home consumption, shift to 10.8% 12.0% 7% 120.00 9.5% branded products, new product launches 8.7% 10.0% 100.00 7.6% 4% 4% and expansion of distribution reach to 8.0% 3% 80.00 3% aid in volume growth of 8-10% over 6.0% 60.00 CY20-22E 40.00 4.0% 0% 20.00 2.0% 0.00 0.0% -3% Inflationary raw material price (of milk CY17 CY18 CY19 CY20E CY21E CY22E CY17 CY18 CY19 CY20E CY21E CY22E Revenue (in Bn) Revenue Growth (%) % volume growth % price growth and milk-derivates) will keep gross

margin expansion under check. Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research However, cut in A&P spends, cost rationalization and operating leverage Exhibit 28: Earnings per share trend to help EBITDA margin expand by 140bp Exhibit 27: Gross margin (%) and EBITDA Margin (%) trend to 24.6% during CY19-22E. 70.0% 308 59.4% 57.5% 57.8% 56.6% 57.0% 57.3% 60.0% 270

50.0% 231 We expect EPS to grow at 15% CAGR 204 40.0% over FY19-22E 167 30.0% 127 20.0% 23.2% 23.3% 24.2% 24.5% 24.6% 20.6% 10.0%

Key risks; (i) re-enforcement of lock- 0.0% down if daily new cases is not contained CY17 CY18 CY19 CY20E CY21E CY22E EBITDA Margin (%) Gross Margin (%) CY17 CY18 CY19 CY20E CY21E CY22E will slow-down the business recovery

rate (ii) If unemployment-levels don’t Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research improve post lifting of lock-down, demand for premium/discretionary products might be impacted negatively.

Nestle India | Initiating Coverage

Valuation

 We value NEST at 55x CY22E EPS with a HOLD rating and target price of Rs 16,941. As per 2-stage dividend discount model (DDM) we estimate 55x to be fundamentally justified multiple with following assumptions (i) during high growth period (20 years) NEST should deliver 15% CAGR in dividend (during last 20 years actual dividend grew at 17% CAGR) and able to maintain 50% ROE (ii) during stable growth ROE moderates to 30% while dividend payout As per dividend discount model, 55x is (function of terminal growth rate and ROE) increases to 80% fundamentally justified multiple Exhibit 29: Valuation table Exhibit 30: Dividend discount model; fair P/E multiple Valuation parameters FY22E High Growth Period

Length of high-growth period (n) = 20 EPS 308 Growth rate during period (g) = 15.00% Actual ROE = 50% Payout ratio during period (_) = 70.00% Fair P/E multiple 55x Cost of Equity during period = 11.00%

Stable Growth Period Fair value 16,941 Growth rate in steady state = 6.00%

Payout ratio in steady state = 80.00% Expected ROE = 30% Current market price 16,231 Cost of Equity in steady state = 11.00%

Output % upside 4% Price/Earnings Ratio = 55x

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Nestle India | Initiating Coverage

Exhibit 31: Discounted cash flow valuation FCF Calculation CY16 CY17 CY18 CY19 CY20E CY21E CY22E CY30E CY35E CY40E Free Cash Flow to Firm 14,597 18,332 25,034 29,286 25,701 29,443 34,595 1,25,695 2,47,369 3,89,163 Growth (%) 26 37 17 -12 15 18 18 15 10 PV of FCF 0 23,129 23,846 25,216 37,282 44,449 47,267

Assumptions Sensitivity Analysis

Average Risk Free Rate 6.4% Terminal Growth Rate

Market Premium 4.8% 4.0% 5.0% 6.0% 7.0% 8.0%

Beta 1.0 9.0% 22803 26151 31648 42341 72196

Ke [=Rf+Beta(Rm-Rf)] 11.1% 10.0% 17734 19612 22402 26982 35891

Kd 10.0% 11.0% 14,238 15,365 16,930 19,260 23,083

WACC Tax Rate 25.2% 12.0% 11714 12424 13366 14675 16622

After Tax Kd 7.5% 13.0% 9827 10291 10885 11674 12771

Debt to Capital 0.0%

Equity to Capital 100%

WACC 11.1%

Terminal Growth 6.0%

FCFF Calculation Assumption PV of Free Cash Flows 7,38,526 Stage Year Growth rate

Terminal Value 80,62,544 1st Stage CY23-30 18% PV of Terminal Value 8,81,292 2nd Stage CY31-35 15%

Implied TEV 16,19,818 3rd Stage CY36-40 10%

Less: Net Debt -12,549

Equity Value 16,32,367

# Share 96

Equity Value 16,930

Source: Company; IDBI Capital Research

Nestle India | Initiating Coverage

Exhibit 32: P/E band chart Exhibit 33: P/BV band chart Exhibit 34: EV/EBITDA band chart 25,000 2,000,000 35,000 1 Yr fwd PE 1 Yr fwd P/BV 1Yr fwd Ev/ebitda 30,000 20,000 1,500,000 25,000

20,000 15,000 1,000,000 15,000 10,000 10,000 500,000 5,000 5,000

0 0 0 Jul-14 Jul-19 Jan-14 Jan-20 Jun-13 Oct-16 Apr-11 Apr-17 Sep-10 Feb-15 Sep-15 Dec-12 Dec-18 Aug-20 Nov-11 Nov-17 Jul-14 Jul-19 Mar-16 May-12 May-18 Jan-14 Jan-20 Jul-14 Jul-19 Jun-13 Oct-16 Apr-11 Apr-17 Sep-10 Feb-15 Sep-15 Dec-12 Dec-18 Jan-14 Jan-20 Aug-20 Jun-13 Nov-11 Nov-17 Oct-16 Mar-16 Apr-11 Apr-17 Sep-10 Feb-15 Sep-15 May-12 May-18 Dec-12 Dec-18 Aug-20 Nov-11 Nov-17 Mar-16 1 yr fwd PE Min 29 -sd 36 May-12 May-18 CMP Min 14.6 -sd 20.0 1Yr fwd EV Min 19.1 -sd 23.0 Avg 52 Max 114 Avg 26.5 Max 55.3 Avg 29.9 Max 49.9

Source: Company; Bloomberg, IDBI Capital Research

Nestle India | Initiating Coverage

Company background

Nestle (India) is subsidiary of Nestle S.A and is 3rd largest FMCG Company in India (in terms of revenue) after HUL and ITC. Primary business segment include milk products and nutrition (46% of revenue), prepared dishes and cooking aid (28.5% of revenue), powdered and liquid beverage (12% of revenue) and confectionary (13% of revenue). Nestle enjoys market leadership in 85% of its product portfolio. Nescafe, Maggi, Milky Bar, Milo, Kit Kat, Bar One, Milkmaid and Nestea are some of the key brands of the company. NEST has 8 manufacturing units, 29 distribution centres and distribution reach to 4.6 mn retail outlets across India.

Exhibit 35: Nestle Revenue break-up segment wise Exhibit 36: Nestle revenue breakup, geography wise (%, CY19) (%,CY19) Confectionary Export , 13.4% 5%

Powdered and liquid beverage, Milk products 12.2% and nutrition, 46.0%

Prepared dish Domestic and cooking business aid, 28.5% 95%

Source: Company, IDBI Capital Market Research Source: Company , IDBI Capital Market Research

Nestle India | Initiating Coverage

Exhibit 37: Nestle; Manufacturing units and offices

NEST has total 8 manufacturing units in India; half in north India while other half in South. The company has commenced construction of 9th factory at Sanand, Gujarat

Source: Company, IDBI Capital Market Research

Nestle India | Initiating Coverage

Exhibit 38: Key Managerial Personnel Name Designation Background Mr Suresh Narayan Chairman and Mr. Suresh Narayan holds a Master’s degree in Economics from Delhi School of Economics. He has a Diploma Managing director from IMD Program for Executive Development and has participated in Nestle Leadership program of the London Business School. He has over 30 years of experience in FMCG sector having worked in companies like HUL and Colgate Palmolive, prior to Nestle. He joined Nestle in 1999 as Executive Vice President for Sales in India. He has managerial position in Nestle Singapore, Egypt and Phillipines before being appointed as Chairman and MD of Nestle India in 2015 Mr Shobinder Duggal Director, Mr. Shobinder Duggal is an Economics (Hons) graduate from St. Stephens College, Delhi University and a Finance & Control and CFO Chartered Accountant. He has attended the Executive Development Program at IMD, Lausanne. He has 29 years of work experience with Nestle. Before becoming the CFO and member of Nestle India board in 2004, he handled various responsibilities like Vice President Corporate Control, Head of Internal Audit and some important assignments at Nestle group headquarters in Switzerland Mr Martin Roemkens Director, Mr Martin Roemkens holds Bachelors of Engineering from University of Western Australia. He has over 20 Technical years of experience in technical and production functions. Before Nestle India, he was the technical manager in Nestle’s North East Africa region. He joined the Board of Directors of Nestle India from 1st April, 2017 as a whole time director.

Source: Company, IDBI Capital Market Research

Nestle India | Initiating Coverage

Exhibit 39: Key shareholders Major Institutional Shareholders (%) Life Insurance Corporation limited 1.9 Axis Asset Management 1.5 SBI Funds Management 1.3 Vanguard Group 0.8 Blackrock Inc 0.8 UTI Asset Management 0.5 ICICI Prudential Life Insurance 0.4

Source: Bloomberg

Nestle India | Initiating Coverage

Financial Summary

Profit & Loss Account (Rs mn) Cash Flow Statement (Rs mn)

Year-end: March CY19 CY20E CY21E CY22E Year-end: March CY19 CY20E CY21E CY22E

Net sales 123,689 134,510 153,019 171,048 Pre-tax profit 26,746 29,772 34,794 39,689

Growth (%) 9.5 8.7 13.8 11.8 Depreciation 3,297 3,656 3,736 3,754 Operating expenses (94,894) (102,026) (115,528) (128,890) Tax paid (6,728) (7,494) (8,758) (9,990) EBITDA 28,795 32,485 37,491 42,158 Chg in working capital 6,384 (96) 107 522 Growth (%) 10.0 12.8 15.4 12.4 Other operating activities (7,362) 1,649 1,813 1,995 Depreciation (3,297) (3,656) (3,736) (3,754) Cash flow from operations (a) 22,337 27,487 31,692 35,970 EBIT 25,498 28,829 33,756 38,404 Capital expenditure (1,545) (1,787) (2,249) (2,530) Interest paid (1,221) (1,649) (1,813) (1,995) Chg in investments (134) - - - Other income 2,469 2,592 2,851 3,279 Other investing activities 2,509 - - - Pre-tax profit 26,746 29,772 34,794 39,689 Cash flow from investing (b) 830 (1,787) (2,249) (2,530) Tax (7,054) (7,494) (8,758) (9,990) Equity raised/(repaid) - - - - Effective tax rate (%) 26.4 25.2 25.2 25.2 Debt raised/(repaid) - - - - Minority Interest - - - - Dividend (incl. tax) (29,503) (12,147) (14,320) (16,334) Net profit 19,691 22,279 26,036 29,699

Exceptional items - - - - Chg in minorities - - - -

Adjusted net profit 19,691 22,279 26,036 29,699 Other financing activities (5,897) (1,648) (1,813) (1,995)

Growth (%) 22.5 13.1 16.9 14.1 Cash flow from financing (c) (35,400) (13,796) (16,133) (18,329)

Shares o/s (mn nos) 96 96 96 96 Net chg in cash (a+b+c) (12,233) 11,905 13,309 15,111

100

Nestle India | Initiating Coverage

Balance Sheet (Rs mn) Financial Ratios

Year-end: March CY19 CY20E CY21E CY22E Year-end: March CY19 CY20E CY21E CY22E

Net fixed assets 23,700 21,831 20,345 19,120 Adj. EPS (Rs) 204.2 231.1 270.0 308.0

Investments 7,436 7,436 7,436 7,436 Adj. EPS growth (%) 22.5 13.1 16.9 14.1

Other non-curr assets 1,274 1,274 1,274 1,274 EBITDA margin (%) 23.3 24.2 24.5 24.6

Current assets 38,172 51,480 66,919 84,105 Pre-tax margin (%) 21.6 22.1 22.7 23.2

Inventories 12,831 14,004 15,931 17,808 ROE (%) 70.3 91.4 73.7 62.1

Sundry Debtors 1,243 1,474 1,677 1,874 ROCE (%) 45.8 53.2 51.9 49.5

Cash and Bank 13,081 24,985 38,294 53,406 Turnover & Leverage ratios (x)

Marketable Securities - - - - Asset turnover (x) 1.6 1.8 1.7 1.6

Loans and advances - - - - Leverage factor (x) 2.7 3.1 2.5 2.2

Total assets 70,582 82,021 95,974 1,11,935 Net margin (%) 15.9 16.6 17.0 17.4

a Net Debt/Equity (x) (0.6) (0.8) (0.9) (1.0)

Shareholders’ funds 19,323 29,454 41,170 54,535 Working Capital & Liquidity ratio

Share capital 964 964 964 964 Inventory days 38 38 38 38

Reserves & surplus 18,358 28,490 40,206 53,570 Receivable days 4 4 4 4

Total Debt 531 531 531 531 Payable days 57 58 58 60

Secured loans 531 531 531 531

Unsecured loans - - - - Valuation

Other liabilities 29,253 29,253 29,253 29,253 Year-end: March CY19 CY20 CY21E CY22E

Curr Liab & prov 21,475 22,783 25,020 27,616 P/E (x) 79.5 70.2 60.1 52.7

Current liabilities 20,621 21,928 24,165 26,762 Price / Book value (x) 81.0 53.1 38.0 28.7

Provisions 855 855 855 855 PCE (x) 68.1 60.3 52.6 46.8

Total liabilities 51,259 52,567 54,804 57,401 EV / Net sales (x) 12.6 11.5 10.0 8.8

Total equity & liabilities 70,582 82,021 95,974 1,11,935 EV / EBITDA (x) 53.9 47.4 40.7 35.9

Book Value (Rs) 200 305 427 566 Dividend Yield (%) 1.9 0.8 0.9 1.0

Source: Company; IDBI Capital Research

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TP Rs4,267 Key Stock Data Britannia Industries BUY CMP Rs3,706 Bloomberg / Reuters BRIT IN / BRIT.BO Top class execution and industry tailwinds to drive growth Potential upside / downside +15% Sector FMCG Shares o/s (mn) 241 Summary V/s Consensus Market cap. (Rs mn) 892,081 We initiate coverage on Britannia Industries Limited (BRIT) with BUY rating and TP of Rs EPS (Rs) FY19E FY20E Market cap. (US$ mn) 12,880 4,267 (+15% upside) based on 50x FY22E EPS. The on-going health crisis has led to IDBI Capital 80.9 85.3 3-m daily average value (Rs mn) 708.4 significant shift in demand from out-of-home consumption to in-home consumption Consensus 78.0 83.0 52-week high / low Rs4,015 / 2,101 primarily led by rise in work-from-home culture. With dominant presence in urban % difference 3.7 2.7 Sensex / Nifty 38,357 / 11,334 cities and variety of value-to-premium products at popular price points (Rs5/Rs10), we expect BRIT to be biggest beneficiary of the positive industry tailwinds. Evidently, BRIT Shareholding Pattern (%) Relative to Sensex (%) with superior distribution network (40% direct distribution) has been able to seize the Promoters 50.6 opportunity and outperform competition with a strong 27% YoY revenue growth during FII 14.7 1QFY21. Impressive execution and superior product portfolio will help BRIT to continue DII 12.4 its journey of outperformance during FY21-22E. Public 22.3 Key Highlights and Investment Rationale  BRIT to benefit from shift in demand from out-of-home to in-home consumption Price Performance (%) We expect BRIT to be one of the key beneficiaries of shift in consumption from out- -1m -3m -12m of-home to in-home due to restrictions on public movement (to follow social Absolute (3.8) 6.9 38.3 distancing) and continuance of work-from-home especially in urban cities where BRIT Rel to Sensex (5.6) (5.0) 33.6 has higher exposure(c. 63% revenue share). Evidently, BRIT recorded 27% YoY revenue growth during 1QFY21 which has been highest since several decades. Financial snapshot (Rs mn)  Direct distribution and low unit packs to drive market share gains Year FY2018 FY2019 FY2020 FY2021E FY2022E BRIT is better placed to drive market share gains in the current time led by (i) better Revenue 99,901 110,548 115,995 136,829 148,128 distribution network (BRIT has direct control over 40% of its total retail network) (ii) EBITDA 15,017 17,335 18,431 25,968 27,243 strong presence in all categories (value to premium) at low price unit packs EBITDA (%) 15.0 15.7 15.9 19.0 18.4 (Rs5/Rs/10/Rs20). BRIT enjoys c. 40% of overall sales from products priced at Adj. PAT 10,037 11,519 14,185 19,406 20,484 Rs5/Rs10. EPS (Rs) 41.8 48.0 59.1 80.9 85.3  Cost efficiencies to aid margin expansion; initiate with a BUY rating EPS Growth (%) (43.3) 14.7 23.2 36.8 5.6 PE (x) 88.6 77.3 62.7 45.8 43.4 We believe BRIT will continue its journey of margin expansion led by value Dividend Yield (%) 0.4 0.4 0.5 0.7 0.7 engineering and cost efficiencies. We expect Gross and EBITDA margin to improve by EV/EBITDA (x) 59.2 51.4 49.0 34.3 32.2 150bp (to 41.7%) and 250bp (to 18.4%) respectively over FY20-22E. We expect BRIT RoE (%) 32.9 30.1 32.8 38.3 31.8 to grow EPS at 21% CAGR during FY20-22E. We initiate coverage on BRIT with a BUY RoCE (%) 42.0 38.8 31.6 35.8 31.4 rating and TP at Rs 4267 (valued at 50x FY22E EPS). Source: Company; IDBI Capital Research Varun Singh | [email protected] | +91-22-2217 1727  Upasana Madan | [email protected] | +91-22-2217 1860 September 7, 2020

Britannia Industries | Initiating Coverage

Exhibit 1: BRIT dominates biscuit market in India with c. Exhibit 2: Over last five years, Britannia has been 33% market share constantly gaining market share in biscuits

Britannia

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 3: BRIT’s sales mix (as on FY20) Exhibit 4: New category penetration by BRIT

Industry % growth Brand launched New Category BRIT is aiming to become a total food Dairy Size (Rs bn) rate by BRIT company…consequently, the company has ventured into several new and Bread, Cake Salted Snacks 25.0 20% Time Pass promising categories (which are and Rusks growing at 20-27% CAGR) such as; Milk Shakes 2.8 27% Winkin Cow salted snacks (c. 80% the size of biscuit industry), milk shakes, croissants and Biscuits Croissants NA NA Treat wafers. Cream Wafers 7.0 25% Treat

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 5: Baked Salted snacks Exhibit 6: Milk shakes Exhibit 7: Croissant Exhibit 8: Cream Waffers

Source: Company; IDBI Capital Research Source; Company, IDBI Capital Research Source; Company, IDBI Capital Research Source; Company, IDBI Capital Research

Exhibit 9: Total distribution reach of BRIT (in mn) Exhibit 10: Direct reach of BRIT (in mn)

5.6 5.5 2.5 2.2 5.4 2.0 5.2 1.6 5 1.5 4.8 4.7 4.6 1.0 4.4 0.5 4.2 FY17 FY20 0.0 Total reach FY17 FY20 Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 11: BRIT sales mix (as on FY20); rural vs urban Exhibit 12: No. of rural preferred dealers (in ‘000) Direct reach is growing at a faster rate (13% CAGR during FY17-20) vs total 25 21 reach. This is positive as direct reach will 20 enable (i) better control over distribution Rural (ii) better profit margins 15 37%

10 7

BRIT has been able to grow number of 5 rural preferred dealers at 25% CAGR Urban 63% during FY15-20. This will help the 0 FY15 FY16 FY17 FY18 FY19 FY20 company to grow its market share in rural India which currently contributes c.

37% to total revenue. Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 13: BRIT’s response to COVID19 on distribution Exhibit 14: BRIT’s response to COVID19 on distribution

BRIT’s adopted innovative ways to ensure availability of its products to customers to fight disruption in the supply chain during the lock-down period in April’20 and May’20

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 15: BRIT’s focused approach to revive distribution w.r.t challenge faced due to lock-down

Focused approach to tackle disruption in distribution due to lock-down

Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 16: Focus on safety and hygiene of staff

Source: Company; IDBI Capital Research

Exhibit 17: Product benchmarking of biscuits in Marie category; Britannia vs competition

Quantity Company Product MRP Retail Discount (%) Highest retail discount

Product benchmarking; MRP is mostly 1 kg ITC Sunfeast Marie Light Biscuit 120 17% Parle same across brands for a given Britannia Britannia Marie Gold Biscuit 120 19% SKU…..however, Parle offers higher Parle Parle-G Gold Biscuits 115 23% retail discount as compared to 250 gms ITC Sunfeast Marie Light 30 13% competition Parle Parle Bake Smith Original English Marie Biscuits 30 15% Parle Parle Marie Biscuits 30 13% Britannia Britannia Marie Gold Biscuits 30 12% Patanjali Patanjali Marie Biscuit 28 0% Source: IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 18: Britannia’s product portfolio at different price point (Rs/kg)

Product ladder; BRIT has uniquely 500 designed product portfolio at several 400 price points ranging from Rs 74-500. 290 267 However, the company has launched 167 167 most of its products at popular price 132 133 100 120 120 125 point of Rs 10 (by changing quantity). 74

Rs 5 and Rs 10 are popular price points Tiger Tiger Marie Milk Bikis 50-50 Good Day Treat Bourbon Nutri Little Nutri Nutri Pure which contribute c. 40% of overall sales Glucose Cream Gold Cream Choice Hearts Choice Choice Magic primarily led by Good Day biscuits (c. Oats Heavens 25% of total sales). Economy Premium Super Premium Source: IDBI Capital Research

Exhibit 19: BRIT’s focused marketing campaign

Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 20: BRIT’s new product launches during 1QFY21

Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 21: Product Innovation in Premium cookie segment from FY16-20 Exhibit 22: Product Innovation in Cake segment from FY16-20

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 23: Product Innovation in adjacent categories in the last 4 years

BRIT has expanded its product offering to biscotti, layerz, brownie and swiss rolls in cake category

In premium cookies, it introduced new sub-brands like Star and Burst as well as more variety (mixed fruit, jeera, choco chunks) in existing brands like Good Day

Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 24: Ranjangaon mega food park; scaled up to 5 biscuit lines, 2 cake lines, 1 Exhibit 25: Commenced Nepal operations croissant line and snacks line respectively

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 26: Revenue contribution from subsidiary (FY15-20) Exhibit 27: Subsidiary revenue break up (FY17-20)

46% FY15-20 BRIT has low exposure to foreign geography. Revenue contribution from 29% UAE, 28% nd subsidiaries at 7% is 2 lowest in our 19% Oman, 13% Nepal, 1% coverage universe. Other, 1% 7% 7% 3% India, 58% Mauritius, 0% Godrej Dabur India Marico Ltd. ITC Ltd. Britannia Hindustan Consumer Ltd. Industries Unilever Products Ltd. Ltd. Ltd. Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 28: Financial performance of top 5 subsidiaries

Revenue (Rs mn) PAT (Rs n) PAT margin (%) Top 5 subsidiaries Country FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20 Strategic Food International Co. LLC UAE 3,556 3,551 3,603 22 -63 102 1% -2% 3% Britannia Dairy Pvt Ltd. India 3,132 3,105 2,919 319 416 170 10% 13% 6% Al Sallan Food Industries Co. SAOC Oman 1,836 1,576 1,659 94 -12 33 5% -1% 2% JB Mangharam Foods Pvt Ltd. India 1,214 2,347 2,421 13 17 7 1% 1% 0% Sunrise Biscuit Company Pvt Ltd. India 770 614 221 30 36 25 4% 6% 11% Total 10,508 11,193 10,823 477 393 337 5% 4% 3% % of total subsidiary revenue 90% 90% 71%

Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Financials

Exhibit 29: Revenue and Revenue growth (%) Exhibit 30: Domestic revenue and volume growth trend We expect BRIT’s revenue to grow at yoy, % 13% CAGR over FY20-22E, led by 2-3% 160.00 18.0% 20.0% 18% price hike and robust volume growth. 140.00 18.0% 16.0% 14% We have assumed volume to grow at 120.00 14.0% 12% 14% rate during FY21E led by significant 100.00 10.7% 12.0% 9% increase in in-home consumption and 80.00 8.1% 8.3% 10.0% 8% 8% 9% 7.1% 7% shift from un-branded to branded due to 60.00 8.0% 4.9% 5% 5% 6.0% 4% safety concerns. We expect normalcy to 40.00 4.0% return in FY22E with gradual opening-up 2% 20.00 2.0% of the economy and improvement in 0.00 0.0% out-of-home consumption. We have FY17 FY18 FY19 FY20 FY21E FY22E FY17 FY18 FY19 FY20 FY21E FY22E assumed 5% volume growth in FY22E. Consol Revenue (in Rs Bn) Revenue Growth (%) Volume Growth (%) Standalone revenue growth (%) Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 31: Gross Margin (%) and EBITDA Margin (%) Exhibit 32: Earnings per share trend

We expect gross margins to expand by 85.3 45.0% 40.6% 41.5% 41.7% 147bp to 41.7% during FY20-22E led by 40.1% 38.9% 40.3% 80.9 40.0% 73.8 improvement in the efficiency of raw 35.0% material procurement and hedging. 58.4 30.0% We expect BRIT’s EPS to grow at 21% 25.0% 48.0 41.8 CAGR over FY20-22E. 20.0% 15.0% 19.0% 18.4% 15.7% 15.9% 10.0% 13.7% 15.0% 5.0% 0.0% FY17 FY18 FY19 FY20 FY21E FY22E FY17 FY18 FY19 FY20 FY21E FY22E EBITDA Margin (%) Gross Margin (%) Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Valuation

 We value BRIT at 50x FY22E EPS with a ACCUMULATE rating and target price of Rs 4,267. As per 2-stage dividend discount model (DDM) we estimate 50x to be fundamentally justified multiple with following assumptions (i) during high growth period (20 years) BRIT should deliver 15% CAGR in dividend (during last 20 years actual dividend grew at 21% CAGR) and able to maintain 33% ROE (ii) during stable growth ROE moderates to 25% while dividend payout (function of terminal growth rate and ROE) more than doubles to 76%.

Exhibit 33: Valuation table Exhibit 34: Dividend discount model; fair P/E multiple

Valuation parameters FY22E Dividend discount model As per dividend discount model, 50x is Length of high-growth period (n) = 20 fundamentally justified multiple EPS 85.3 Growth rate during period (g) = 15% Actual ROE = 33.00% Payout ratio during period (_) = 54.2% Fair P/E multiple 50x Cost of Equity during period = 11.0%

Stable Growth Period Fair value 4,267 Growth rate in steady state = 6.0%

Payout ratio in steady state = 76.0% Expected ROE = 25% Current market price 3,706 Cost of Equity in steady state = 11.00%

Output % upside 15% Price/Earnings Ratio = 50

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 35: Discounted cash flow valuation

FCF Calculation FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY30E FY35E FY40E Free Cash Flow to Firm 7,008 4,326 8,770 9,129 15,787 18,816 21,174 69,066 1,38,916 2,44,720 Growth (%) -38 103 4 73 19 13 18 15 12 PV of FCF 9,129 14,211 15,247 15,444 24,125 28,680 29,860

Assumptions Sensitivity Analysis

Average Risk Free Rate 6.4% Terminal Growth Rate

Market Premium 4.8% 4.0% 5.0% 6.0% 7.0% 8.0%

Beta 1.0 9.0% 5,814 6,695 8,156 11,054 19,564

Ke [=Rf+Beta(Rm-Rf)] 11.1% 10.0% 4,503 4,993 5,727 6,944 9,358

Kd 10.0% 11.0% 3,602 3,895 4,304 4,916 5,932

WACC Tax Rate 25.2% 12.0% 2,953 3,137 3,382 3,724 4,235

After Tax Kd 7.5% 13.0% 2,469 2,589 2,743 2,948 3,234

Debt to Capital 2.3%

Equity to Capital 97.7%

WACC 11.0%

Terminal Growth 6.0%

FCFF Calculation Assumption PV of Free Cash Flows 4,67,611 Stage Year Growth rate

Terminal Value 50,93,516 1st Stage FY23-30 18%

PV of Terminal Value 5,65,630 2nd Stage FY31-35 15%

Implied TEV 10,33,241 3rd Stage FY36-40 10%

Less: Net Debt 282

Equity Value 10,32,959

# Share 240

Equity Value 4304

Source: IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 36: Price/EPS band chart Exhibit 37: Price/BV band chart Exhibit 38: EV/EBITDA band chart

6,000 1 Yr fwd PE 6,000 1 Yr fwd P/BV 1,500,000 1Yr fwd Ev/ebitda

4,000 4,000 1,000,000

2,000 2,000 500,000

0 0 0 Jul-15 Jan-16 Jun-14 Jun-20 Oct-12 Oct-18 Jul-16 Apr-18 Sep-17 Jul-18 Dec-14 Aug-16 Nov-13 Nov-19 Mar-12 Mar-17 Jan-17 Jan-13 Jan-18 May-13 May-19 Oct-13 Oct-19 Jun-17 Apr-14 Oct-15 Feb-18 Sep-18 Apr-15 Dec-15 Sep-14 Feb-19 Aug-12 Aug-17 Dec-16 Nov-14 Aug-13 Aug-19 Mar-13 Mar-19 Mar-14 Mar-20 May-15 May-20 May-16 1 yr fwd PE Min 8 -sd 12 CMP Min 3.3 -sd 5.0 1Yr fwd EV Min 10.1 -sd 16.0 Avg 29 Max 64 Avg 9.3 Max 18.6 Avg 25.4 Max 45.6

Source: Company; Bloomberg IDBI Capital Research

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Britannia Industries | Initiating Coverage

Company background

Britannia Industries (founded in 1892) is a packaged food company and is engaged in manufacturing of products like; biscuits, cookies, bread, cake, rusk, wafers, salted snacks and dairy-products. Biscuits account for ~75% of total revenue. Tiger, Good Day, Nutri Choice, Marie Gold and Milk Bikis are some of the key brands of BRIT. It is market leader in biscuit category with c. 33% share market share. The company is aiming to become a ‘Total Food Company’ and has ventured in new segments like salted snacks, milkshakes, cream wafers and croissants in FY19. These new segments contributed 2% to FY20 total revenue. BRIT has 10 manufacturing units in India, direct reach of 2.2Mn and total reach of 5.5Mn retail outlets. BRIT exports its products to over 79 countries around the world. BRIT is a part of the Wadia group (headed by Nusli Wadia) which comprises companies like Bombay Dyeing, Bombay Burmah Trading Corporation, National Peroxide, Go Air etc.

Exhibit 39: BRIT Sales mix (%, FY20) Exhibit 40: BRIT is the market leader in the biscuit category with c.33% share

Dairy

Bread, Cake Britannia and Rusks

Biscuits

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 41: Key Managerial Personnel Name Designation Background Mr Varun Berry Managing Director Mr. Varun Berry holds a graduate degree in BE Mechanical from Punjab University. He has also attended a course in Strategic Management from Wharton University and Global Leadership Program at IMD, Switzerland. Prior to joining Britannia, he had 27 years of experience in companies like HUL and PepsiCo. He joined Britannia in Jan-13 and was made Executive Director in Nov-13. He was appointed as the Managing Director in Apr-14. Mr N. Venkatraman Chief Financial Officer Mr. N Venkatraman joined Britannia in 2007. Prior to this, he was working as General Manager- Finance with Eicher Motors. He handles finance and commercial related activities of the business across regions and manufacturing units of the company. Mr Vinay Singh Kushwaha Chief Supply Chain Officer Mr Vinay Sing Kushwaha completed his B.Tech degree in mechanical engineering from IIT Delhi and joined HUL in 1986 as a management trainee. He worked with HUL for 22 years post which he worked with Dabur India. He joined Britannia in Aug-10 as VP-Supply chain. Currently, he is responsible for manufacturing, projects, technology, planning & replenishment Mr Sudhir Nema Chief Development & Quality Officer Mr. Sudhir Nema is a graduate from J.N.K.V.V., Jabalpur and has done his M.Sc. in Food technology from CFTRI, Mysore. He joined Hindustan Lever Research centre post his graduation and worked there for 8 years in beverage R&D. Subsequently, he joined PepsiCo R&D and worked on various food categories for 11 years. He joined Britannia as Vice President- R&D and Quality from 1st Aug 2014 Mr Vinay Subramanyam Head-Marketing Mr Vinay Subramanian holds a management degree from Mudra Institute of Communication, Ahmedabad. He joined Britannia in Feb-15 and has over 17 years of experience of sales and marketing in FMCG companies like Kellogg’s and General Mills Mr Annu Gupta Head-International Business Mr Annu Gupta completed his Production and Industrial engineering from Delhi College of Engineering in 1996 and PDGM from IIM Lucknow in 1998. He has worked in companies like Asian Paints, Colgate Palmolive, Dabur and Watanmal Group before joining Britannia. He joined BRIT in 2012 and was responsible for managing sales and marketing for Middle East and Africa before moving into the role of Head-International business

Source: Company; IDBI Capital Research

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Britannia Industries | Initiating Coverage

Exhibit 42: Key shareholders Major Institutional Shareholders (%) Life Insurance Corporation limited 5.2 General Insurance Corporation of India 1.5 Arisaig Partners Asia Pte Ltd 1.5 JP Morgan Chase & Co 1.4 SBI Funds Management Pvt Ltd 1.3 Kotak Mahindra Asset Management Co. 1.2 Arisaig India Fund Limited 1.1 ICICI Prudential Life Insurance Co 1.0 Source: Bloomberg

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Financial Summary

Profit & Loss Account (Rs mn) Cash Flow Statement (Rs mn)

Year-end: March FY19 FY20 FY21E FY22E Year-end: March FY19 FY20 FY21E FY22E

Net sales 110,548 115,995 136,829 148,128 Pre-tax profit 17,689 18,438 26,096 27,545

Growth (%) 10.7 4.9 18.0 8.3 Depreciation 1,619 1,848 2,166 2,379

Operating expenses (93,213) (97,564) (110,861) (120,885) Tax paid (5,961) (5,033) (6,568) (6,933)

EBITDA 17,335 18,431 25,968 27,243 Chg in working capital (134) 1,511 99 54

Growth (%) 15.4 6.3 40.9 4.9 Other operating activities (1,655) (1,919) 919 854

Depreciation (1,619) (1,848) (2,166) (2,379) Cash flow from operations (a) 11,558 14,845 22,711 23,898

EBIT 15,717 16,583 23,802 24,865 Capital expenditure (4,012) (2,442) (3,895) (2,724)

Interest paid (91) (769) (919) (854) Chg in investments (5,712) (14,151) (122) (128)

Other income 2,065 2,794 3,213 3,534 Other investing activities 1,169 1,276 - -

Pre-tax profit 17,690 18,608 26,096 27,545 Cash flow from investing (b) (8,555) (15,316) (4,017) (2,853)

Tax (6,125) (4,507) (6,568) (6,933) Equity raised/(repaid) 298 240 - -

Effective tax rate (%) 34.6 24.2 25.2 25.2 Debt raised/(repaid) - 6,407 (1,000) (1,000)

Minority Interest (46.3) (85.9) (121.6) (128.3) Dividend (incl. tax) (3,544) (4,325) (6,016) (6,350)

Net profit 11,519 14,015 19,406 20,484 Chg in minorities - - - -

Exceptional items - (170) - - Other financing activities (281) (1,742) (919) (854)

Adjusted net profit 11,519 14,185 19,406 20,484 Cash flow from financing (c) (3,527) 579 (7,935) (8,204)

Growth (%) 14.8 23.1 36.8 5.6 Net chg in cash (a+b+c) (524) 108 10,760 12,842

Shares o/s (mn nos) 240 240 240 240

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Britannia Industries | Initiating Coverage

Balance Sheet (Rs mn) Financial Ratios

Year-end: March FY19 FY20 FY21E FY22E Year-end: March FY19 FY20 FY21E FY22E

Net fixed assets 17,748 19,033 20,762 21,108 Adj. EPS (Rs) 48.0 59.1 80.9 85.3

Investments 7,411 18,989 18,989 18,989 Adj. EPS growth (%) 14.7 23.2 36.8 5.6

Other non-curr assets 1,995 3,651 3,651 3,651 EBITDA margin (%) 15.7 15.9 19.0 18.4

Current assets 35,263 36,750 49,416 63,291 Pre-tax margin (%) 16.0 16.0 19.1 18.6

Inventories 7,814 7,410 8,740 9,462 ROE (%) 30.1 32.8 38.3 31.8

Sundry Debtors 3,942 3,204 3,779 4,091 ROCE (%) 38.8 31.6 35.8 31.4

Cash and Bank 1,098 1,229 11,988 24,830 Turnover & Leverage ratios (x)

Marketable Securities - - - - Asset turnover (x) 1.9 1.6 1.6 1.5

Loans and advances - - - - Leverage factor (x) 1.5 1.6 1.7 1.5

Total assets 62,418 78,422 92,817 107,039 Net margin (%) 10.4 12.2 14.2 13.8

a Net Debt/Equity (x) 0.0 0.3 0.0 (0.2)

Shareholders’ funds 42,533 44,028 57,418 71,552 Working Capital & Liquidity ratio

Share capital 240 241 241 241 Inventory days 26 23 23 23

Reserves & surplus 42,292 43,788 57,178 71,312 Receivable days 13 10 10 10

Total Debt 1,380 15,141 14,141 13,141 Payable days 45 42 43 43

Secured loans 1,380 15,141 14,141 13,141

Unsecured loans - - - - Valuation

Other liabilities 426 724 724 724 Year-end: March FY19 FY20 FY21E FY22E

Curr Liab & prov 17,753 18,173 20,178 21,265 P/E (x) 77.3 62.7 45.8 43.4

Current liabilities 15,788 16,261 18,265 19,353 Price / Book value (x) 20.9 20.2 15.5 12.4

Provisions 1,965 1,913 1,913 1,913 PCE (x) 67.8 55.5 41.2 38.9

Total liabilities 19,559 34,038 35,042 35,130 EV / Net sales (x) 8.1 7.8 6.5 5.9

Total equity & liabilities 62,418 78,422 92,817 1,07,039 EV / EBITDA (x) 51.4 49.0 34.3 32.2

Book Value (Rs) 177 183 239 298 Dividend Yield (%) 0.4 0.5 0.7 0.7

Source: Company; IDBI Capital Research

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Initiating Coverage

TP Rs491 Key Stock Data Dabur India HOLD CMP Rs484 Bloomberg / Reuters Positives priced-in Potential upside / downside 2% Sector FMCG Shares o/s (mn) 1,766 Summary V/s Consensus Market cap. (Rs mn) 854,901 We initiate coverage on Dabur (DABUR) with HOLD rating and TP of EPS (Rs) FY21E FY22E Market cap. (US$ mn) 12,343 Rs 491 (2% upside) based on 45x FY22E EPS. DABUR’s leadership position in health IDBI Capital 9.3 10.9 3-m daily average value (Rs mn) 444.4 (especially in immunity boosting portfolio) and personal care space is positive for the Consensus 9.3 10.8 52-week high / low Rs528 / 385 company during current times. We expect revenue from health supplements and % difference 0.4 1.3 Sensex / Nifty 38,357 / 11,334 immunity boosting OTC portfolio to grow at 38% and 27% respectively during FY21E. However, non-essential portfolio (c. 26% revenue share; hair and skin care) is likely to Shareholding Pattern (%) Relative to Sensex (%) be a drag on growth in FY21E. Overall, we continue to be positive on DABUR’s long Promoters 67.9 term narrative; focus on power-brands, aggressive push towards rural-network and FII 17.6 chemist channels expansion, fast new product developments and efforts to gain market DII 7.4 share by leveraging the core Ayurveda positioning. We expect these strategies to help Public 7.1 DABUR sustain double-digit topline growth over a long period of time. However, at current price valuation looks expensive. Price Performance (%) Key Highlights and Investment Rationale -1m -3m -12m  Leadership in natural’s portfolio to drive immunity against slowdown Absolute (3.8) 4.5 10.2 DABUR’s leading market position in (i) immunity boosting natural’s portfolio Rel to Sensex (5.7) (7.3) 5.5 (Chyawanprash, Honey, Fruit Juices, Pudin Hara) (ii) hygiene and health portfolio; Financial snapshot (Rs mn) mosquito repellant cream, toilet cleaners, air fresheners etc will help the company to Year FY2018 FY2019 FY2020 FY2021E FY2022E drive aggressive revenue growth led by favorable industry tailwinds. Revenue 77,483 85,331 87,036 91,958 105,331  Focus on power brands, NPDs and rural distribution to be key growth drivers EBITDA 16,174 17,396 17,924 19,699 23,166 DABUR’s strategy of developing strength in core portfolio (a.k.a 9 power brands) EBITDA (%) 20.9 20.4 20.6 21.4 22.0 through higher investments in A&P, innovation, premiumization and distribution Adj. PAT 13,544 14,423 14,450 16,432 19,283 expansion has worked successfully (most of the power brands revenue grew at high EPS (Rs) 7.7 8.2 8.2 9.3 10.9 double digits rates over last 2 years). We believe focus on power brands, NPDs and EPS Growth (%) 6.1 6.2 0.2 13.7 17.3 increasing rural reach will help Dabur to sustain higher revenue growth rate. PE (x) 62.9 59.2 59.1 52.0 44.3  Non-essential’s portfolio to face head-winds Dividend Yield (%) 0.5 1.6 0.6 1.0 1.1 EV/EBITDA (x) We expect Hair Care (Dabur Amla, Vatika and Anmol) and Skin Care (Dabur FEM, 53.0 49.2 47.5 42.8 36.0 RoE (%) Gulabari) portfolio to face headwinds as these products fall under non-essential 25.7 25.4 23.6 23.4 24.4 RoCE (%) 23.0 24.0 23.3 22.6 24.0 category. Non-essentials contribute 26% to DABUR to total revenue. Source: Company; IDBI Capital Research Varun Singh | [email protected] | +91-22-2217 1727  Upasana Madan | [email protected] | +91-22-2217 1860 September 7, 2020

Dabur India | Initiating Coverage

DABUR, a leader in Ayurveda and Exhibit 1: DABUR amongst top 3 FMCG company in India Exhibit 2: Revenue contribution from international mkt

1 FY20 EBIT natural healthcare category, is amongst Consolidated (Rs bn) Market Cap FY20 Revenue FY15-20 margin (%) 46% top 3 FMCG company in India as per Hindustan Unilever 4,964 398 19% market capitalization. ITC 2,114 514 33% 29% DABUR enjoys market leadership (no. 1, Dabur India. 796 87 20% 19% 2 and 3 positions) in its core portfolio Britannia Industries 647 116 14% both in India as well as international Godrej Consumer Products 532 99 19% 7% 7% 3% market. Marico 355 73 17% Colgate-Palmolive (India) 341 45 22% In international market; DABUR ranks Godrej Dabur India Marico Ltd. ITC Ltd. Britannia Hindustan Bajaj Consumer Care 20 9 23% Consumer Ltd. Industries Unilever 3rd with total revenue of Rs 24bn as on Grand Total 9,768 1,341 24% Products Ltd. Ltd. FY20. GCPL and ITC occupies 1st and 2nd Ltd. rank with revenue of Rs 44-45bn as on Source: Company; IDBI Capital Research, Source: Company; IDBI Capital Research FY20.

Exhibit 3: DABUR’s market position in India business Exhibit 4: DABUR’s market position in international market

Source: Company; IDBI Capital Research Source; Company, IDBI Capital Research

1 Market Cap as on 31st March,20

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Dabur India | Initiating Coverage

HPC contributes c. 50% to DABUR’s Exhibit 5: India business Revenue break up (FY20) Exhibit 6: Segment wise revenue CAGR (FY15-20) 7% overall revenue. During FY15-20, we 6% note that HPC led the growth of Health care 34% 4% 4% DABUR’s top-line driven by strong 3% 2% growth in oral care (benefit of positive 1% industry tailwinds in herbal portfolio) and home care segment.

HPC Foods 50% Skin Care Hair Care Oral Care

Digestives -1% Home Care Health Suplements Food OTC and Chemicals 16% HPC Healthcare Food Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 7: Dabur; segment-wise revenue contribution (FY20) Exhibit 8: Dabur; category wise key brands

Skin care, 5% Category Key brands Category Key brands Digestives, 6% Hair care, 21% Health Oral care Home care, 7% supplements

Digestives Home care OTC & Ethicals, 9%

OTC & Skin care Health supplements, Ethicals 19%

Foods, 16% Hair care Food Oral care, 17%

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Dabur India | Initiating Coverage

Exhibit 9: Dabur’s international presence

Middle East and Africa comprises c. 49% of Dabur’s international revenue

Source: Company, IDBI Capital Market Research

Exhibit 10: Revenue break-up of international market as Exhibit 11: Business economics of international market on FY20 FY16-20 Country % Intl Sales Net profit margin UAE 42% 13% Turkey, Egypt, 8% Nepal 17% 6% USA, Bangladesh, Dabur is profitable in most of the foreign 11% India, 3% USA 13% 3% 13% 3% geographies Turkey 10% 4% Nepal, Other, 9% Nigeria, 3% Egypt 8% 17% 16% Pakistan, 2% Bangladesh 3% 9% Sri Lanka 2% -1% UAE, 38% Sri Lanka, 2% Pakistan 2% 6% Nigeria 2% -4% South Africa 1% -8% Total/Average 99% 5%

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Dabur India | Initiating Coverage

Exhibit 12: Power Brand of Dabur Dabur has identified 9 power-brands which the company believes has potential to be scaled up significantly through higher investments on:

1) Higher A&P Investments 2) Innovation & Premiumisation 3) Distribution Expansion

Source: Company, IDBI Capital Market Research Dabur has higher exposure to rural India (45% of revenue) compared to other Exhibit 13: Dabur sales mix (FY20) Exhibit 14: Distribution reach (in mn) FMCG companies. We expect Dabur’s performance in essentials to be better 6.7 than competition as COVID is less- Rural, 45% 6.3 spread in rural India.

DABUR is now incrementally focussing on ramping up direct distribution. 1.2 During FY15-20 direct distribution 0.91 network grew at 5%CAGR as against 1% Urban, 55% CAGR increase in total distribution. This FY15 FY20 FY15 FY20 is positive as increase in direct Total distribution reach Direct reach distribution network improves Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research competitive positioning by reducing dependence on third party.

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Dabur India | Initiating Coverage

Exhibit 15: Key innovation in healthcare segment during lockdown Exhibit 16: Key innovation in HPC segment during lockdown

Source: Company; IDBI Capital Research Source; Company, IDBI Capital Research

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Dabur India | Initiating Coverage

Exhibit 17: Dabur; Manufacturing units and offices

In India, most of Dabur’s manufacturing units are in north, west and north east part of the country.

Source: Company, IDBI Capital Market Research

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Dabur India | Initiating Coverage

Exhibit 18: Manufacturing units; International market

In global market; Dabur has 8 manufacturing locations. Localized manufacturing is superior to centralized manufacturing as it helps to save transportation cost, drive speed and flexibility in execution.

Source: Company, IDBI Capital Market Research

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Dabur India | Initiating Coverage

Financials

Exhibit 19: Revenue and revenue growth (%) Exhibit 20: Segment wise revenue growth (%) We expect revenue to grow at 10% 120.00 16.0% CAGR over FY20-22E led by (i) double 14.5% 25% 14.0% 100.00 digit value growth in health and hygiene 12.0% 10.1% 13% 14% portfolio and (ii) market share gain in 10.0% 80.00 8% 7% 6% 8% existing categories. Out of home 5.7% 8.0% 2% 1% 1% consumption to remain tepid during 60.00 6.0% FY21E; we expect revenue from Juice 2.0% 4.0% 0% 40.00 0.6% 2.0% -4% -6% and digestive category to decline by 7% -8% -8% -8% 0.0% and 2% in FY21E followed by 25% and 20.00 -2.0% -14% -15% 105.33 77.01 -2.1% 77.48 85.33 87.04 91.96 20% growth in FY22E. 0.00 -4.0% FY17 FY18 FY19 FY20 FY21 FY22 FY17 FY18 FY19 FY20 FY21E FY22E A. Consumer care business (% YoY) B. Food business (% YoY) Consol Revenue (in Rs Bn) Revenue Growth (%) C. Other segments (% YoY) Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Cost saving initiatives under Project Samriddhi and rationalization of SKUs to Exhibit 21: Gross margin (%) and EBITDA margin (%) trend Exhibit 22: Earnings per share trend aid operating profit margin expansion. 60.0% 10.9 We expect 140 bps of EBITDA margin 50.1% 50.4% 49.5% 49.9% 50.1% 50.7% 50.0% expansion over FY20-22E. 9.3 8.2 8.2 40.0% 7.7 We expect EPS to grow at 16% CAGR 7.2 over FY20-22E 30.0%

20.0% 22.0% 19.6% 20.9% 20.4% 20.6% 21.4% Key risks; (i) re-enforcement of lock- 10.0%

down if daily new cases is not contained 0.0% will slow-down the business recovery FY17 FY18 FY19 FY20 FY21E FY22E rate (ii) If unemployment-levels don’t EBITDA Margin (%) Gross Margin (%) FY17 FY18 FY19 FY20 FY21E FY22E improve post lifting of lock-down, Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research demand for premium/discretionary products might be impacted negatively.

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Dabur India | Initiating Coverage

Valuation

 We value DABUR at 45x FY22E EPS with a HOLD rating and target price of Rs 491. As per 2-stage dividend discount model (DDM) we estimate 46x to be fundamentally justified multiple with following assumptions (i) during high growth period (20 years) DABUR should deliver 17% CAGR in dividend (during last 20 years actual dividend grew at 17% CAGR) and able to maintain 26% ROE (ii) during stable growth ROE moderates to 15% while dividend payout (function of terminal growth rate and ROE) increases to 60%

Exhibit 23: Valuation table Exhibit 24: Dividend discount model; fair P/E multiple

Valuation parameters FY22E High Growth Period

Length of high-growth period (n) = 20 EPS 10.9 Growth rate during period (g) = 17.00% Actual ROE = 26.00% As per dividend discount model, 46x is Payout ratio during period (_) = 36.50% fair PE multiple for DABUR Fair P/E multiple 45x Cost of Equity during period = 11.00%

Stable Growth Period Fair value 491 Growth rate in steady state = 6.00%

Payout ratio in steady state = 60.00% Expected ROE = 15% Current market price 496 Cost of Equity in steady state = 11.00%

Output % upside 2% Price/Earnings Ratio = 46x

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Dabur India | Initiating Coverage

Exhibit 25: Discounted cash flow valuation FCF Calculation FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY30E FY35E FY40E Free Cash Flow to Firm 11,601 10,571 12,922 14,572 13,617 16,669 18,662 65,532 1,14,462 1,70,024 Growth (%) -9 22 13 -7 22 12 17 12 8 PV of FCF 0 0 15,007 15,126 21,995 23,919 23,633

Assumptions Sensitivity Analysis

Average Risk Free Rate 6.4% Terminal Growth Rate

Market Premium 4.8% 4.0% 5.0% 6.0% 7.0% 8.0%

Beta 1.0 9.0% 660 757 920 1,250 2,280

Ke [=Rf+Beta(Rm-Rf)] 11.1% 10.0% 515 569 650 785 1,061

Kd 10.0% 11.0% 416 448 492 560 673

WACC Tax Rate 25.2% 12.0% 344 364 391 428 484

After Tax Kd 7.5% 13.0% 290 303 320 342 373

Debt to Capital 4.7%

Equity to Capital 95.3%

WACC 10.9%

Terminal Growth 6.0%

FCFF Calculation Assumption PV of Free Cash Flows 4,23,147 Stage Year Growth rate

Terminal Value 39,73,142 1st Stage FY23-30 17% PV of Terminal Value 4,48,668 2nd Stage FY31-35 12%

Implied TEV 8,71,815 3rd Stage FY36-40 9%

Less: Net Debt 1,961

Equity Value 8,69,854

# Share 1,766

Equity Value 492

Source: Company; IDBI Capital Research

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Dabur India | Initiating Coverage

Exhibit 26: P/E band chart Exhibit 27: Price/BV band chart Exhibit 28: EV/EBITDA band chart 600 1 Yr fwd PE 800 1 Yr fwd P/BV 1,200,000 1Yr fwd Ev/ebitda 500 1,000,000 600 400 800,000

300 400 600,000

200 400,000 200 100 200,000

0 0 0 Jul-13 Jul-19 Jul-13 Jul-19 Jul-13 Jul-19 Jan-14 Jan-20 Jan-14 Jan-20 Jun-18 Jun-18 Oct-10 Oct-16 Oct-10 Oct-16 Jan-14 Jan-20 Apr-11 Apr-11 Jun-18 Feb-15 Sep-15 Feb-15 Sep-15 Oct-10 Oct-16 Dec-12 Dec-18 Dec-12 Dec-18 Apr-11 Aug-09 Aug-14 Aug-20 Aug-09 Aug-14 Aug-20 Feb-15 Sep-15 Nov-11 Nov-17 Nov-11 Nov-17 Dec-12 Dec-18 Mar-10 Mar-16 Mar-10 Mar-16 Aug-09 Aug-14 Aug-20 Nov-11 Nov-17 May-12 May-17 May-12 May-17 Mar-10 Mar-16 May-12 May-17 1 yr fwd PE Min 9 -sd 24 CMP Min 4.6 -sd 9.0 1Yr fwd EV Min 1.3 -sd 3.0 Avg 34 Max 55 Avg 10.0 Max 13.9 Avg 2.9 Max 4.8 Source: Company; Bloomberg,IDBI Capital Research

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Dabur India | Initiating Coverage

Company background

Dabur started operating in 1884 as an Ayurvedic medicine company and over the years transformed into a consumer goods company. Dabur is a world leader in Ayurveda with a portfolio of over 250 Herbal/Ayurvedic products. In FMCG business it operates in 3 segments: Healthcare (Health supplements, digestives, OTC and ethical), HPC (Hair care, oral care, skin care and home care) and Food. Some of the key brands of the company are: Dabur Chyawanprash, Dabur Honey, Dabur red paste, Babool, Hajmola, Honitus, Vatika, Real, Odomos etc. Dabur enjoys total distribution network of c. 6.7 mn retail outlets.

Exhibit 29: Consolidated revenue break up (FY20) Exhibit 30: Domestic revenue break up (FY20)

Others (H&B stores, Food Health supplements Fem Pharma and 16% 19% Guar business)

Home care Digestives International 7% 6%

Skin care 5% OTC and ethicals 9%

Oral care India 17% Hair care 21% Source: Company, IDBI Capital Market Research Source: Company , IDBI Capital Market Research

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Dabur India | Initiating Coverage

Exhibit 31: Key Managerial Personnel Name Designation Background

Mr Amit Burman Chairman Mr. Amit Burman holds a MBA degree from University of Cambridge, a M.Sc degree in Industrial Engineering from Columbia University and a B.Sc degree in Industrial Engineering from Lehigh University, Bethlehem, PA, USA. Prior to joining Dabur, he has worked at Colgate Palmolive, USA in the Manufacturing strategy department and at Tishcon Corporation, NY where he was responsible for safety of stock and optimum inventory. He started his career at Dabur from the Industrial Engineering department where he was responsible for method improvement, manpower reduction and improving product packaging. He was appointed as the CEO of Dabur Foods in 1999 and forayed into processed food and packaged juice segment. He was appointed as Chairman of Dabur India in 2019

Mr Mohit Burman Vice- Chairman Mr Mohit Burman graduated from Richmond College, London in Business Administration and Economics and subsequently completed his Master of Business Administration degree in Finance. He started his career with Welbeck Property Partnership, London and then joined Dabur Finance Ltd as a senior manager.

Mr Aditya Burman Director Mr. Aditya Burman started his career as an intern at Dabur Pharma Ltd., a family owned Oncology focussed pharmaceutical firm. Under his stewardship, Dabur Pharma emerged as a leading research-driven pharmaceutical firm with a global presence. The company was subsequently sold to Fresenius Kabi in 2008. He is also on the board of Oncquest Laboratories Ltd., a clinical pathology and molecular diagnostics company. He also serves on the board of Dabur Nepal Pvt Ltd. And is the President of the Delhi Chapter of Entrepreneur’ Organisation , a global network for entrepreneur

Mr Mohit Malhotra Chief Operating Officer Mr Mohit Malhotra is a management graduate from Pune University and holds Executive Masters in International business from Indian Institute of Foreign Trade, New Delhi. He joined Dabur in 1994. He took over as the business head of European Union in 2001 and in 2004 he moved into Dabur’s International Business as Head of Marketing. In 2008, he was appointed as Chief Executie officer of Dabur International

Mr. PD Narang Chief Legal Officer Mr Narang specialized in finance and started his professional career in 1979 with his own practice. He joined Dabur in 1983 as a Management consultant with a mandate to streamline the finance, accounts and audit function of the company. He has held various positions during his time at Dabur: In 1990 he was appointed as G.M. (Finance) and company secretary, and Director- Corporate Affairs in 1998. He was given the responsibility of heading the Corporate and commercial affairs of the group in 2002 and Group Director, Corporate affairs in 2003.

Source: Company, IDBI Capital Market Research

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Exhibit 32: Key shareholders Major Institutional Shareholders (%) Life Insurance Corporation limited 2.0 First State Investments ICVC 1.7 Mitsubishi UFJ Financial Group Inc 1.3 First Sentier Investors 1.3 First State Global Umbrella Fund 1.3 Blackrock Inc 1.2 Aditya Birla Sun Life Trustee 1.1 Vanguard Group 1.0 Source: Bloomberg

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Financial Summary

Profit & Loss Account (Rs mn) Cash Flow Statement (Rs mn)

Year-end: March FY19 FY20 FY21E FY22E Year-end: March FY19 FY20 FY21E FY22E

Net sales 85,331 87,036 91,958 105,331 Pre-tax profit 17,249 17,277 19,636 23,043

Growth (%) 10.1 2.0 5.7 14.5 Depreciation 1,769 2,205 2,533 2,741 Operating expenses (67,935) (69,112) (72,259) (82,165) Tax paid (3,507) (3,089) (3,181) (3,733) EBITDA 17,396 17,924 19,699 23,166 Chg in working capital (656) (388) (445) (1,099) Growth (%) 7.6 3.0 9.9 17.6 Other operating activities 137 132 490 490 Depreciation (1,769) (2,205) (2,533) (2,741) Cash flow from operations (a) 14,991 16,136 19,033 21,442 EBIT 15,627 15,719 17,166 20,425 Capital expenditure (2,344) (4,175) (2,364) (2,780) Interest paid (596) (495) (490) (490) Chg in investments 3,268 (3,476) - - Other income 2,962 3,053 2,960 3,108 Other investing activities 2,444 2,482 - - Pre-tax profit 17,993 18,277 19,636 23,043 Cash flow from investing (b) 3,369 (5,168) (2,364) (2,780) Tax (2,786) (2,797) (3,181) (3,733) Equity raised/(repaid) 5 (4) - - Effective tax rate (%) 15.5 15.3 16.2 16.2 Debt raised/(repaid) (2,402) (1,829) - - Minority Interest (29.6) (29.7) (22.7) (26.6) Dividend (incl. tax) (13,247) (5,125) (8,216) (9,642) Net profit 15,177 15,450 16,432 19,283

Exceptional items 753 1,000 - - Chg in minorities - - - -

Adjusted net profit 14,423 14,450 16,432 19,283 Other financing activities (3,238) (3,472) (513) (517)

Growth (%) 6.5 0.2 13.7 17.3 Cash flow from financing (c) (18,882) (10,430) (8,729) (10,159)

Shares o/s (mn nos) 1,766 1,766 1,766 1,766 Net chg in cash (a+b+c) (522) 538 7,940 8,504

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Balance Sheet (Rs mn) Financial Ratios

Year-end: March FY19 FY20 FY21E FY22E Year-end: March FY19 FY20 FY21E FY22E

Net fixed assets 19,807 23,477 23,308 23,347 Adj. EPS (Rs) 8.2 8.2 9.3 10.9

Investments 26,855 14,608 14,608 14,608 Adj. EPS growth (%) 6.2 0.2 13.7 17.3

Other non-curr assets 1,842 6,653 6,653 6,653 EBITDA margin (%) 20.4 20.6 21.4 22.0

Current assets 35,862 48,802 57,986 65,372 Pre-tax margin (%) 21.1 21.0 21.4 21.9

Inventories 13,005 13,796 14,109 16,738 ROE (%) 25.4 23.6 23.4 24.4

Sundry Debtors 8,336 8,139 9,070 9,812 ROCE (%) 24.0 23.3 22.6 24.0

Cash and Bank 3,282 8,113 16,053 24,557 Turnover & Leverage ratios (x)

Marketable Securities - - - - Asset turnover (x) 1.0 1.0 0.9 1.0

Loans and advances - - - - Leverage factor (x) 1.5 1.4 1.4 1.4

Total assets 84,366 93,540 1,02,555 1,14,468 Net margin (%) 16.9 16.6 17.9 18.3

a Net Debt/Equity (x) 0.0 (0.1) (0.2) (0.2)

Shareholders’ funds 56,631 66,422 74,638 79,791 Working Capital & Liquidity ratio

Share capital 1,766 1,767 1,767 1,767 Inventory days 56 58 58 58

Reserves & surplus 54,551 64,290 72,507 82,148 Receivable days 36 34 34 34

Total Debt 5,243 4,671 4,671 4,671 Payable days 78 78 79 79

Secured loans 5,243 4,671 4,671 4,671

Unsecured loans - - - - Valuation

Other liabilities 872 850 850 850 Year-end: March FY19 FY20 FY21E FY22E

Curr Liab & prov 21,621 21,596 22,395 24,666 P/E (x) 59.2 59.1 52.0 44.3

Current liabilities 20,318 19,941 20,739 23,011 Price / Book value (x) 15.2 12.9 11.5 10.2

Provisions 1,302 1,655 1,655 1,655 PCE (x) 52.8 51.3 45.0 38.8

Total liabilities 27,736 27,118 27,916 30,188 EV / Net sales (x) 10.0 9.8 9.2 7.9

Total equity & liabilities 84,366 93,540 1,02,555 1,14,468 EV / EBITDA (x) 49.2 47.5 42.8 36.0

Book Value (Rs) 32 38 42 48 Dividend Yield (%) 1.6 0.6 1.0 1.1

Source: Company; IDBI Capital Research

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TP Rs817 Key Stock Data Godrej Consumer Products BUY CMP Rs655 Bloomberg / Reuters GAIL IN / GAIL.BO Price disruption and differentiation to help win customers Potential upside / downside +25% Sector Oil & Gas Shares o/s (mn) 1,022 Summary V/s Consensus Market cap. (Rs mn) 670,083 We initiate coverage on Godrej Consumer Products Limited (GCPL) with BUY rating and EPS (Rs) FY21E FY22E Market cap. (US$ mn) 9,675 TP of Rs 817 (+25% upside) based on 45x FY22E EPS. We like the GCPL’s approach of IDBI Capital 15.7 18.2 3-m daily average value (Rs mn) 506.2 disruptive pricing and product differentiation as a core strategy to drive growth in Consensus 16.0 18.1 52-week high / low Rs772 / 425 FMCG sector. Market leading position in HI and personal care (soaps in India, baby % difference (1.8) 0.7 Sensex / Nifty 38,357 / 11,334 wipes in Indonesia) will help GCPL to benefit from positive industry tailwinds due to

COVID concerns. GCPL expects hygiene category to be the new household insecticide Shareholding Pattern (%) Relative to Sensex (%) category. We are positive on GCPL’s ability to deliver strong performance in hygiene category backed by robust R&D and efficient distribution. In international markets, we Promoters 63.2 expect Indonesia to bounce back strongly while Africa and Latin America, which has FII 26.8 large exposure to non-essentials (89% revenue from hair-color), will continue to face DII 3.2 growth headwinds. Public 6.8 Key Highlights and Investment Rationale Price Performance (%)  Strongly positioned to grow by wining market share in health and hygiene GCPL’s 80% revenue share comprises from health, hygiene and value for money -1m -3m -12m products. Differentiated and market leading positioning in HI and soaps provide GCPL Absolute (5.1) 0.9 9.3 a competitive edge to benefit from industry tailwinds (increase in frequency of Rel to Sensex (6.0) (11.0) 5.6 usage). We believe, backed by strong R&D and emphasis on quality-product-at- disruptive-pricing, GCPL to grow by winning market share in health and hygiene Financial snapshot (Rs mn) segments. Year FY2018 FY2019 FY2020 FY2021E FY2022E  India and Indonesia to outperform led by high exposure to HI and Personal Care Revenue 99,408 1,03,143 99,108 1,04,560 1,17,341 India and Indonesia enjoys c. 60% revenue from HI and Personal Care (Soaps in India, EBITDA 20,686 21,176 21,347 24,284 27,621 Wet Wipes for baby in Indonesia). However, Africa, USA and Middle East derive 89% EBITDA (%) 20.8 20.5 21.5 23.2 23.5 revenue from hair care. We believe due to COVID19 concerns; HI, Soaps and Baby Adj. PAT 16,346 23,415 14,966 16,021 18,561 Wipes portfolio to grow at higher rate compared to hair care portfolio. EPS (Rs) 16.0 22.9 14.6 15.7 18.2 EPS Growth (%) (16.6) 43.2 (36.1) 7.1 15.9  Expect EPS to grow at 11% CAGR PE (x) 41.0 28.6 44.8 41.8 36.1 We expect revenue/EBITDA/PAT to grow at 9%/14%/11% CAGR over FY20-22E led Dividend Yield (%) 0.9 1.8 1.2 1.7 1.7 by 11-15% revenue growth in India and Indonesia. In Africa we expect 10% decline EV/EBITDA (x) 33.1 32.6 32.3 28.2 24.5 in revenue in FY21E followed by 15% recovery in FY22E. In other geographies RoE (%) 28.3 34.6 19.7 19.7 21.2 (c. 5% revenue share) we expect slow recovery; assumed 10% revenue decline over RoCE (%) 19.3 19.0 18.0 19.9 21.6 FY20-22E. Source: Company; IDBI Capital Research Varun Singh | [email protected] | +91-22-2217 1727  Upasana Madan | [email protected] | +91-22-2217 1860 September 7, 2020

Godrej Consumer Products | Initiating Coverage

Exhibit 1: FMCG sector revenue (Rs bn, FY 20) Exhibit 2: Analysis of revenue from subsidiaries GCPL is 5th largest FMCG Company by Revenue (% CAGR) % revenue from subsidiary 514 revenue in our coverage universe. The Companies FY11-20 FY05-09 FY10-14 FY15-20 398 company has been able to grow revenue GCPL 12% 16% 42% 46% at highest rate (12% CAGR) during FY11- 20 compared to peers. This was largely 123 116 Britannia. 11% 5% 9% 7% 99 87 73 driven by GCPL’s successful penetration Marico 10% 14% 24% 19% into emerging markets; Asia, Africa and Latin America. ITC. 10% 5% 4% 7% ITC Ltd. Dabur India 9% 18% 27% 29% Marico Ltd Ltd. Nestle India Products Ltd. Dabur India Ltd. Hindustan Unilever 8% 2% 4% 3% Godrej Consumer

Britannia Industries

Hindustan Unilever Ltd. Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 3: Geography wise; revenue break up in FY09 Exhibit 4: … and now (FY20)

Middle East, Latin Others, 1% South Africa, 1% America, 4% 7% Revenue contribution from international business has increased from 22% in FY09 to 46% in FY20 (dominated by revenue UK, 14% Africa, USA, from Indonesia and Africa). Middle East, 24% India, 54%

India, 78% Indonesia, GCPL divested UK business in FY18, to 17% focus on emerging market

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Exhibit 5: EBIT margin during FY18-20 Exhibit 6: Capex/EBIT during FY18-20 India and Indonesia are most profitable 26% 26% geographies of GCPL operating at c. 26% 49% EBIT margin while Africa and Others operate at c. 8-10% margin.

27% 10% 8%

7% 4%

India Indonesia Africa Others India Indonesia Africa Others Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 7: Revenue break-up as on FY20 Exhibit 8: Market position trend in key geography Africa, USA and Country Category FY16 FY17 FY18 FY19 FY20 Categories India Indonesia GCPL has been able to maintain market Middle east India HI 1 1 1 1 1 leading position in core portfolio across Air care 6% 28% Soaps 2 2 2 2 2

key geographies Hair colour 1 1 1 1 1 Hair care 11% 1% 89% Liquid Detergent 1 1

HI 39% 34% 1% Air Freshner 2 1 1 1 1

Others 12% 19% 5% Indonesia HI 1 1 1 1 1 Air Freshner 1 1 1 1 1 Personal care 32% 18% 5% Hair colour 3 3

Grand Total 100% 100% 100% Wet wipes 1 1 1 1 1

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Exhibit 9: Consolidated revenue break up FY09 Exhibit 10: … and now (FY20)

Others GCPL moved from 50% soaps portfolio in Air care 11% 8% FY09 to a more balanced, strategic portfolio over the last decade. Others, 24% Personal wash Air care launched by GCPL in FY12 now 22% Personal HI contributes c. 8% to revenue. In this Hair care, wash, 53% 28% 23% segment, GCPL enjoys market leadership Hair care in both India and Indonesia. 31%

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Exhibit 11: Brand portfolio

Top 9 brands contribute ~70% of revenue

Source: Company, IDBI Capital Market Research

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Exhibit 12: GCPL’s key brands on overall basis

GCPL is category leader in 75% of its portfolio.

As a category leader, GCPL has gained market share in 70% of portfolio over last 2 years.

Source: Company, IDBI Capital Market Research

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Exhibit 13: Hand sanitizer brand in India and Bangladesh Exhibit 14: Hand sanitizer brand in Indonesia

GCPL has launched different brands of hand sanitizers in different countries (instead of launching same product in different geographies). We believe, in FMCG sector, differentiation is the mantra for success. Hence, approach of GCPL to drive a commodity-oriented category through brand-differentiation will help the company to grow by winning market share from competition. Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 15: Hand sanitizer brand in Argentina Exhibit 16: Hand sanitizer brand in USA

GCPL expects to replicate the success in house-hold insecticide category to the newly-discovered-essential hygiene category.

In 1QFY21; hygiene portfolio grew at 15% while GCPL launched 45 new products in the category across geographies.

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Exhibit 17: Hand sanitizer in South Africa Exhibit 18: Hand sanitizer and hand washes

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Exhibit 19: Product innovation in FY16-17 Exhibit 20: Product Innovation in FY18-19

Source: Company; IDBI Capital Research Source; Company, IDBI Capital Research

Exhibit 21: Product Innovation in FY20

Source: Company, IDBI Capital Market Research

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Financials

We expect GCPL’s revenue to grow at Exhibit 22: Revenue and Revenue growth (%) Exhibit 23: Country wise revenue growth trend (%) 9% CAGR over FY20-22E led by strong 13% 140.00 12% 14% 48% growth in Household insecticide and 12% 120.00 hygiene business in India and Indonesia. 10% 100.00 6% 8% We expect Africa and Latin America to 4% 6% 80.00 3% 16% 4% 13% 13% 15% 15% be significantly impacted due to COVID 10% 11% 10% 12% 60.00 2% 6% 7% 6% in FY21E as 89% of portfolio belongs to 4% 40.00 0% hair-care. However, we expect strong -2% 20.00 -4%

96.09 99.41 103.14 -4% 104.56 117.34 -4% -6% recovery in FY22E led by better 99.11 -10% 0.00 -6% -11% execution under new management FY17 FY18 FY19 FY20 FY21E FY22E FY17 FY18 FY19 FY20 FY21E FY22E (GCPL hired ex-CEO of Nestle Nigeria as Consol Revenue (in Rs Bn) Revenue Growth (%) India Indonesia Africa head of Africa business) and category extension (GCPL plans to cross-pollinate Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research HI business from India to Africa).

Benefit of cost rationalization measures Exhibit 24: Gross margin (%) and EBITDA Margin (%) trend Exhibit 25: Earnings per share and control on ad spends to aid EBITDA 57.0% 57.0% 55.4% 56.6% 56.0% 56.8% 60.0% 22.9 margin expansion by 200 bps to 23.5% 50.0% 19.2 during FY20-22E. 18.2 40.0% 16.0 15.7 We expect EPS to grow at 11% CAGR 14.6 over FY20-22E 30.0% 20.0% 23.2% 23.5% 19.7% 20.8% 20.5% 21.5% Key risks; (i) re-enforcement of lock- 10.0% down if daily new cases is not contained 0.0% will slow-down the business recovery FY17 FY18 FY19 FY20 FY21E FY22E rate (ii) If unemployment-levels don’t EBITDA Margin (%) Gross Margin (%) FY17 FY18 FY19 FY20 FY21E FY22E improve post lifting of lock-down, demand for premium/discretionary Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research products might be impacted negatively.

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Valuation

 We value GCPL at 45x FY22E EPS with a BUY rating and target price of Rs 817. As per 2-stage dividend discount model (DDM) we estimate 45x to be fundamentally justified multiple with following assumptions (i) during high growth period (20 years) GCPL should deliver 19% CAGR in dividend (during last 15 years actual dividend grew at 19% CAGR) and able to maintain 27% ROE (ii) during stable growth phase, ROE to moderate at 15% while dividend payout (function of terminal growth rate and ROE) could increase to 60%.

Exhibit 26: Valuation table Exhibit 27: Dividend discount model; fair P/E multiple As per dividend discount model, 45x is Valuation parameters FY22E High Growth Period fundamentally justified P/E multiple for GCPL Length of high-growth period (n) = 20 EPS 18.2 Growth rate during period (g) = 19% Actual ROE = 27% Payout ratio during period (_) = 29% Fair P/E multiple 45x Cost of Equity during period = 11%

Stable Growth Period Fair value 817 Growth rate in steady state = 6%

Payout ratio in steady state = 60% Expected ROE = 15% Current market price 655 Cost of Equity in steady state = 11%

Output % upside 25% Price/Earnings Ratio = 45x

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Exhibit 28: Discounted cash flow valuation FCF Calculation FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY30E FY35E FY40E Free Cash Flow to Firm 7,669 18,439 16,473 22,194 16,973 17,835 19,678 66,772 1,15,072 1,70,562 Growth (%) 140 -11 35 -24 5 10 17 12 6 PV of FCF 22,194 16,973 16,054 15,946 23,329 23,763 20,819

Assumptions Sensitivity Analysis

Average Risk Free Rate 6.4% Terminal Growth Rate

Market Premium 4.8% 4.0% 5.0% 6.0% 7.0% 8.0%

Beta 1 9.0% 1,086 1,239 1,492 1,987 3,392

Ke [=Rf+Beta(Rm-Rf)] 11.1% 10.0% 853 940 1,069 1,282 1,698

Kd 10.0% 11.0% 691 744 817 925 1,105

Tax Rate 25.2% WACC 12.0% 573 606 650 712 804

After Tax Kd 7.5% 13.0% 483 505 533 571 623

Debt to Capital 0.8%

Equity to Capital 99.2%

WACC 11.1%

Terminal Growth 6.0%

FCFF Calculation Assumption PV of Free Cash Flows 4,21,015 Stage Year Growth rate

Terminal Value 35,52,723 1st Stage FY23-30 17%

PV of Terminal Value 4,33,657 2nd Stage FY31-35 12%

Implied TEV 8,54,672 3rd Stage FY36-40 6%

Less: Net Debt 19,810

Equity Value 8,34,862

# Share 1,022

Equity Value 817

Source: Company; IDBI Capital Research

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Exhibit 29: P/E band chart Exhibit 30: Price/BV band chart Exhibit 31: EV/EBITDA band chart 1 Yr fwd PE 2,000 1 Yr fwd P/BV 1,500,000 1Yr fwd Ev/ebitda 1,500 1,500 1,000,000 1,000 1,000

500 500,000 500

0 0 0 Jul-13 Jul-19 Jul-13 Jul-19 Jan-14 Jan-20 Jun-18 Oct-10 Oct-16 Jul-13 Jul-19 Apr-11 Feb-15 Sep-15 Dec-12 Dec-18 Jan-14 Jan-20 Aug-09 Aug-14 Aug-20 Jun-18 Nov-11 Nov-17 Oct-10 Oct-16 Mar-10 Mar-16 Jan-14 Jan-20 Apr-11 Feb-15 Sep-15 Jun-18 Dec-12 Dec-18 Oct-10 Oct-16 May-12 May-17 Aug-09 Aug-14 Aug-20 Apr-11 Feb-15 Sep-15 Nov-11 Nov-17 Dec-12 Dec-18 Mar-10 Mar-16 Aug-09 Aug-14 Aug-20 Nov-11 Nov-17 May-12 May-17 Mar-10 Mar-16 May-12 May-17 1 yr fwd PE Min 4 -sd 6 CMP Min 1.4 -sd 2.0 1Yr fwd EV Min 7.7 -sd 17.0 Avg 20 Max 50 Avg 4.9 Max 13.1 Avg 24.2 Max 47.5 Source: Company; Bloomberg, IDBI Capital Research

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Company background

GCPL is a consumer goods company engaged in the business of personal and household care products. In India, GCPL is market leader in household insecticide, hair color and air freshener and no. 2 player in soaps. In international market; GCPL ranked as largest household insecticide (no. 1 player in India, no. 2 in Indonesia) and hair care (no. 1 in India and Africa) player in emerging market. Also, GCPL is number one player in air care and wet tissues in Indonesia. International business accounts for 45% revenue share as on FY20.

Exhibit 32: Consolidated revenue break up (FY20) Exhibit 33: Geography wise revenue break up (FY20) Others Air care 4% Personal wash 8% 27% International, 45%

HI 29% India, 55%

Hair care 32% Source: Company, IDBI Capital Market Research Source: Company , IDBI Capital Market Research

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Exhibit 34: Key Managerial Personnel Name Designation Background Mrs Nisaba Godrej Managing director Mrs Nisaba Godrej has a B.Sc. Degree from The Wharton School at the University of Pennsylvania and an MBA from Harvard Business School. She is the chairperson of Teach for India and sits on the board of Godrej Agrovet and VIP Industries She was announced as the executive chairperson of GCPL in May-17 and was appointed as Managing Director in June-20 Mr V. Srinivasan Chief Financial Officer and CS Mr. V. Srinivasan is a chartered accountant and company secretary. He has also completed middle and senior management courses at IIM-A and University of Michigan respectively. He started his career as an Executive trainee at Godrej. Over 25 years he has held key positions across Godrej Agrovet, Godrej Industries and Godrej Properties. In Feb-15, he was appointed as the Chief Financial Officer and company secretary of GCPL Mr Omar Momin Head- M&A and Business Development Mr Omar Momin graduated in Chemical engineering from Mumbai University Institute of Chemical Technology and Masters in Management from Indian School of Business (ISB), Hyderabad in 2004. He joined Godrej group after his masters and was executive assistant to Chairman Adi Godrej for two years. Currently, he is responsible for driving new vectors of growth for GCPL, including through M&A Mr. Jishnu Batabyal Head- Planning &Strategy Mr Jishnu has done his B.E.(Hons) in Chemical Engineering from Jadavpur University and MBA from Indian Institute of Management, Banglore. Prior to joining Godrej, he was an engagement manager at Bain & Company. He joined Godrej Industries in 2014 as a member of the Corporate and Strategy team, where he was responsible for the turnaround of Godrej Industries’ Chemical division Mr. Anirban Banerjee Head- Global Innovation & BBlunt Mr. Anirban graduated from St. Stephen’s college, Delhi and completed his Master’s in Business Administration from Symbiosis Center of Management & HRD, Pune. He has over 20 years of experience in sales, marketing and nurturing new business and product initiatives. He has worked in companies like Reliance Infocomm and AB Electrolux before joining Godrej

Source: Company, IDBI Capital Market Research

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Exhibit 35: Key shareholders Major Institutional Shareholders (%) First State Investments ICVC 2.1 Baytree Investments (Mauritius) Pte Limited 2.4 Arisaig India Fund Limited 1.0 Government of Singapore 1.0 St. James Place Asia Pacific Unit Trust 1.3 Vanguard group 1.3

Source: Bloomberg

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Financial Summary

Profit & Loss Account (Rs mn) Cash Flow Statement (Rs mn)

Year-end: March FY19 FY20 FY21E FY22E Year-end: March FY19 FY20 FY21E FY22E

Net sales 1,03,143 99,108 1,04,560 1,17,341 Pre-tax profit 18,328 18,515 21,410 24,804

Growth (%) 3.8 (3.9) 5.5 12.2 Depreciation 1,700 1,973 2,077 2,201 Operating expenses (81,967) (77,761) (80,276) (89,720) Tax paid (4,351) (3,441) (5,395) (6,251) EBITDA 21,176 21,347 24,284 27,621 Chg in working capital (384) (1,456) (498) (525) Growth (%) 2.4 0.8 13.8 13.7 Other operating activities 1,996 290 2,184 2,211 Depreciation (1,700) (1,973) (2,077) (2,201) Cash flow from operations (a) 17,289 15,881 19,777 22,440 EBIT 19,476 19,374 22,207 25,420 Capital expenditure (2,077) (1,520) (1,943) (2,762) Interest paid (2,243) (2,174) (2,184) (2,211) Chg in investments 3,672 (4,382) 6 826 Other income 1,088 1,206 1,387 1,595 Other investing activities 921 570 - - Pre-tax profit 18,321 18,406 21,410 24,804 Cash flow from investing (b) 2,516 (5,333) (1,936) (1,936) Tax 2,562 (2,638) (5,395) (6,251) Equity raised/(repaid) (7) 0 - - Effective tax rate (%) (14.0) 14.3 25.2 25.2 Debt raised/(repaid) - 2,473 - - Minority Interest 6.3 8.1 6.5 7.5 Dividend (incl. tax) (12,265) (8,178) (11,244) (11,244) Net profit 20,890 15,776 16,021 18,561

Exceptional items (2,526) 811 - - Chg in minorities - - - -

Adjusted net profit 23,415 14,966 16,021 18,561 Other financing activities (8,115) (7,249) (2,184) (2,211)

Growth (%) 43.2 (36.1) 7.1 15.9 Cash flow from financing (c) (20,387) (12,953) (13,428) (13,455)

Shares o/s (mn nos) 1,022 1,022 1,022 1,022 Net chg in cash (a+b+c) (583) (2,405) 4,413 7,049

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Balance Sheet (Rs mn) Financial Ratios

Year-end: March FY19 FY20 FY21E FY22E Year-end: March FY19 FY20 FY21E FY22E

Net fixed assets 87,223 92,884 92,750 93,311 Adj. EPS (Rs) 22.9 14.6 15.7 18.2

Investments 347 348 348 348 Adj. EPS growth (%) 43.2 (36.1) 7.1 15.9

Other non-curr assets 7,247 8,254 8,254 7,436 EBITDA margin (%) 20.5 21.5 23.2 23.5

Current assets 46,884 48,083 54,258 65,019 Pre-tax margin (%) 17.8 18.6 20.5 21.1

Inventories 15,586 17,031 18,047 20,253 ROE (%) 34.6 19.7 19.7 21.2

Sundry Debtors 12,929 11,573 12,318 13,824 ROCE (%) 19.0 18.0 19.9 21.6

Cash and Bank 8,947 7,702 12,114 19,163 Turnover & Leverage ratios (x)

Marketable Securities - - - - Asset turnover (x) 0.7 0.7 0.7 0.7

Loans and advances - - - - Leverage factor (x) 2.1 1.9 1.9 1.8

Total assets 1,41,701 1,49,570 1,55,610 1,66,114 Net margin (%) 22.7 15.1 15.3 15.8

a Net Debt/Equity (x) 0.3 0.2 0.2 0.1

Shareholders’ funds 72,669 78,984 83,760 91,077 Working Capital & Liquidity ratio

Share capital 1,022 1,022 1,022 1,022 Inventory days 55 63 63 63

Reserves & surplus 71,647 77,961 82,738 90,055 Receivable days 46 43 43 43

Total Debt 28,757 26,637 26,637 26,637 Payable days 113 116 119 119

Secured loans 28,757 26,637 26,637 26,637

Unsecured loans - - - - Valuation

Other liabilities 4,066 3,671 3,671 3,671 Year-end: March FY19 FY20 FY21E FY22E

Curr Liab & prov 36,208 40,279 41,542 44,729 P/E (x) 28.6 44.8 41.8 36.1

Current liabilities 35,700 39,719 40,982 44,169 Price / Book value (x) 9.2 8.5 8.0 7.4

Provisions 509 560 560 560 PCE (x) 26.7 39.6 37.0 32.3

Total liabilities 69,032 70,587 71,850 75,037 EV / Net sales (x) 6.7 7.0 6.5 5.8

Total equity & liabilities 1,41,701 1,49,570 1,55,610 1,66,114 EV / EBITDA (x) 32.6 32.3 28.2 24.5

Book Value (Rs) 71 77 82 89 Dividend Yield (%) 1.8 1.2 1.7 1.7

Source: Company; IDBI Capital Research

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TP Rs397 Key Stock Data Marico ACCUMULATE CMP Rs374 Bloomberg / Reuters Shifting focus to the core Potential upside / downside +6% Sector FMCG Shares o/s (mn) 1,291 Summary V/s Consensus Market cap. (Rs mn) 482,851 We initiate coverage on Marico Limited (MRCO) with ACCUMULATE rating and TP of Rs EPS (Rs) FY21E FY22E Market cap. (US$ mn) 6,972 397 (+6% upside) based on 40x FY22E EPS (DDM Model). MRCO grew operating profit at IDBI Capital 8.9 9.9 3-m daily average value (Rs mn) 598.9 fastest rate over last 15-20 years at 20-22% CAGR. This is led by company’s ability to Consensus 8.7 9.8 52-week high / low Rs404 / 234 innovate and differentiate the core product portfolio with sharp focus on value-price % difference 1.8 1.5 Sensex / Nifty 38,357 / 11,334 USP. After COVID, we like the way management has shifted its focus towards core-

portfolio, value price, product launches in hygiene and food categories, and Shareholding Pattern (%) Relative to Sensex (%) strengthening of direct distribution. With gradual opening up of economy, we expect MRCO to bounce back strongly. We expect EPS of MRCO to grow at 12% CAGR during Promoters 59.6 FY20-22E. FII 23.7 Key Highlights and Investment Rationale DII 9.7 Public 7.0  Focus shift towards core portfolio and value price to address current slow-down In the view of evolving situation, MRCO has positively tweaked its strategy in favor of (i) becoming aggressive in core-portfolio (coconut oil and saffola) by sharpening price Price Performance (%) points (passing on the benefits of low raw material cost) (ii) shifting focus towards -1m -3m -12m value price (as against premiumization) to benefit from likely down-trading from Absolute 3.0 14.6 (2.9) decline in household income. In core portfolio MRCO enjoys 60-70% market share. In Rel to Sensex 1.1 2.7 (7.6) FMCG industry we expect leaders to gain market share as customers will prefer branded goods over unbranded due to safety concerns. Financial snapshot (Rs mn)  Entry in hygiene and NPDs in food to reduce dependency on non-essentials Year FY2018 FY2019 FY2020 FY2021E FY2022E After COVID19, MRCO forayed into hygiene category by launching (i) Mediker Revenue 63,330 73,340 73,150 74,465 82,261 Sanitizer (Rs50/100/250 price points) and (ii) Veggie Clean (Rs 150/290 price point) EBITDA 11,375 13,260 14,690 15,944 17,804 (iii) House Protect (indoor disinfectant) and Travel Protect (out-door disinfectant). In EBITDA (%) 18.0 18.1 20.1 21.4 21.6 food portfolio, MRCO launched Honey under the brand Saffola in June’20. MRCO is Adj. PAT 8,143 11,150 10,210 11,541 12,804 also aggressively broadening and scaling up its existing food portfolio; oats, soup, EPS (Rs) 6.3 8.6 7.9 8.9 9.9 green tea, green coffee etc. Hygiene and food will help MRCO to reduce dependency EPS Growth (%) 1.9 36.9 (8.4) 13.0 10.9 on non-essential products. PE (x) 59.3 43.3 47.3 41.8 37.7  Ramping up of direct distribution to drive market share gains Dividend Yield (%) 1.1 1.2 2.1 1.8 1.8 Under project ONE, MRCO is aiming to ramp-up direct distribution (currently 18% of EV/EBITDA (x) 42.5 36.3 32.9 30.1 26.8 total distribution) which will enable superior control over supply-chain. Improvement RoE (%) 33.6 40.6 34.0 36.5 36.5 in distribution abilities will help MRCO to deliver market share gains in existing RoCE (%) 37.1 36.4 37.6 39.0 39.6 categories. Source: Company; IDBI Capital Research Varun Singh | [email protected] | +91-22-2217 1727  Upasana Madan | [email protected] | +91-22-2217 1860 September 7, 2020

Marico | Initiating Coverage

Exhibit 1: MRCO; % revenue share (as on FY20) Exhibit 2: % market share

44%

23% 14% 38% 54% 48% 45% 24% 75% 65% 21% Focused approach has helped MRCO to 76% 86% 62% 46% 52% 55% gain market share in all its core- 5% 35% 2% 4% 25% categories. FY11 FY20 FY11 FY20 FY11 FY20 FY20 FY20 Coconut oil Saffola Saffola oats VAHO Premium Others edible oil personal Coconut oil Saffola Edible Oil VAHO Saffola Set wet care oats hair gel Essential Semi Non-essentials Marico Others essential

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Exhibit 3: MRCO’s journey so far

Source: Company; IDBI Capital Research

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Exhibit 4: Brand portfolio of MRCO in India

Source: Company; IDBI Capital Research

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Exhibit 5: Brand portfolio of MRCO in international market

Source: Company; IDBI Capital Research

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Exhibit 6: New products launched by MRCO post COVID19 Exhibit 7: Detail of brands launched post COVID19

Brand name Country of Key comments Launch

Veggie clean India  Fruits and vegetable cleaner  100% natural cleaning action removes 99.9% germs and pesticides  Launched in 200ml and 400 ml packs across all channels

Mediker hand sanitizer India  Contains 70% alcohol  Launched in 90ml, 200ml and 500ml packs across all channels

House Protect/Travel India  House protect: suitable for furniture, cushions, curtains, mattress. Protect Available in 200ml packs  Travel protect; suitable for seats and handle during commute, toilet seat and office desk. Available in 75ml and 200ml packs

Keep by safe India  Premium personal and out of home personal hygiene Saffola Honey India  Launched in 250gm, 500gm and 1 kg PET and glass jars

Mediker Safelife Bangladesh  Hand sanitizer, hand wash and veggie wash

Prachute Shampoo Bangladesh  Launched paraben free natural range of shampoo in three variants; Nourishing Care, Damage Repair and Anti Hair Fall

X-Men Go Vietnam  Cleansing gel

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Exhibit 8: Distribution channel Exhibit 9: Rising penetration in rural India

85% 74% Revenue from modern trade grew at a 69% 76% higher rate due to MRCO’s higher exposure to urban India.

Strengthening of distribution network in 31% 26% rural India has helped MRCO to increase 17% revenue share from 26% in FY12 to 31% 7% 8% 7% in FY20. FY12 FY20 FY12 FY20 General trade Modernt trade and e-com CSD Urban Rural Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 10: Share of international business revenue (%) Exhibit 11: PAT Margin trend of subsidiaries

South Africa, Other, 6% PAT Margin 2015 2016 2017 2018 2019 11% 7% MEENA, 12% International business is c. 20-22% of MEENA, 33% Marico Subsidiaries 12% 11% 9% 5% 12% South East group revenue 3% Asia, 26% Bangladesh 19% 19% 21% 21% 23%

Bangladesh, Bangladesh, Vietnam 14% 11% 3% 7% 8% 53% 49% South Africa 3% 2% 2% -2% 1%

FY10 FY20 Bangladesh South East Asia MEENA South Africa Other UAE -3% -3% -8% -2% 0%

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Exhibit 12: MRCO international portfolio In Bangladesh MRCO is;

No. 1 player in coconut oil (82% market share)

No. 2 player in VAHO (23% market share)

In Vietnam MRCO is:

No. 1 player in shampoo (X-men brand)

NO. 2 player in male deodrants (X-men brand)

Source: Company; IDBI Capital Research

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Financials

Exhibit 13: Revenue and Revenue growth (%) Exhibit 14: Volume trend in key categories Strong volume led growth in Saffola 100.00 20.0% 22.0% edible oil portfolio (due to higher in 15.8% home cooking), focus on bottom of the 80.00 15.0% pyramid products in VAHO, NPDs in 10.5% 9.5% hygiene category and recalibration of 60.00 10.0% 8.0% 8.0% 8.0% 9.0% 9.0% 6.7% 7.0% 7.0% food segment strategy to drive revenue 4.0%4.0% 4.0% 40.00 5.0% 2.0% growth for MRCO in the next two years 1.8% 0.0% -0.3%

-1.5% 20.00 0.0% We expect MRCOs revenue to grow at -1.0% -2.0% -3.0% 6% CAGR over FY20-22E. 59.36 63.33 73.34 73.15 74.46 82.26 0.00 -5.0% -7.0% FY17 FY18 FY19 FY20 FY21E FY22E FY17 FY18 FY19 FY20 FY21 FY22 Consol Revenue (in Rs Bn) Revenue Growth (%) Coconut Oil VAHO Saffola Edible oil Deflationary copra prices to aid gross Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research margin expansion over FY20-22E. SKU rationalization and cost control measures (ad spend savings, consumer Exhibit 15: Gross margin (%) and EBITDA Margin (%) Exhibit 16: Earnings per share trend pricing and promotions etc) to aid trend EBITDA Margin expansion by 156 bps to 60.0% 52.3% 47.1% 48.8% 49.1% 49.2% 9.9 50.0% 45.2% 21.6% in FY22E 8.6 8.9 7.9 We expect EPS to grow at 12% CAGR 40.0% 6.2 6.3 over FY20-22E 30.0% 20.0% 20.1% 21.4% 21.6% 10.0% 19.5% 18.0% 18.1%

0.0% Key risks; (i) re-enforcement of lock- FY17 FY18 FY19 FY20 FY21E FY22E down if daily new cases is not contained FY17 FY18 FY19 FY20 FY21E FY22E EBITDA Margin (%) Gross Margin (%) will slow-down the business recovery Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research rate (ii) If unemployment-levels don’t improve post lifting of lock-down, demand for premium/discretionary products might be impacted negatively.

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Valuation

 We value MRCO at 40x FY22E EPS with a ACCUMULATE rating and target price of Rs 397. As per 2-stage dividend discount model (DDM) we estimate 42x to be fundamentally justified multiple with following assumptions (i) during high growth period (20 years) MRCO should deliver 15% CAGR in dividend (during last 20 years actual dividend grew at 24% CAGR) and able to maintain 33% ROE (ii) during stable growth ROE moderates to 15% while dividend payout (function of terminal growth rate and ROE) increases to 60%

Exhibit 17: Valuation table Exhibit 18: Dividend discount model; fair P/E multiple Valuation parameters FY22E Dividend discount model

Length of high-growth period (n) = 20

EPS 9.9 Growth rate during period (g) = 15% As per dividend discount model, 42X is Actual ROE = 33.00% Payout ratio during period (_) = 54.54% fundamentally justified P/E multiple Fair P/E multiple 40x Cost of Equity during period = 11.00%

Stable Growth Period

Fair value 397 Growth rate in steady state = 6.00%

Payout ratio in steady state = 60.00% Expected ROE = 15% Current market price 374 Cost of Equity in steady state = 11.00%

Output % upside 6% Price/Earnings Ratio = 42

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Exhibit 19: Discounted cash flow valuation FCF Calculation FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY30E FY35E FY40E Free Cash Flow to Firm 8,477 5,131 6,059 12,240 11,150 12,155 12,020 39,406 63,463 94,100 Growth (%) -39 18 102 -9 9 -1 16 10 7 PV of FCF 12,240 11,150 10,974 9,799 14,189 13,713 12,201

Assumptions Sensitivity Analysis

Average Risk Free Rate 6.4% Terminal Growth Rate

Market Premium 4.8% 4.0% 5.0% 6.0% 7.0% 8.0%

Beta 1 9.0% 524 600 732 1,014 2,043

Ke [=Rf+Beta(Rm-Rf)] 11.1% 10.0% 413 454 518 628 862

Kd 10.0% 11.0% 337 361 396 449 541

WACC Tax Rate 25.2% 12.0% 282 298 318 347 391

After Tax Kd 7.5% 13.0% 241 251 264 281 305

Debt to Capital 10.0%

Equity to Capital 90.0%

WACC 10.8%

Terminal Growth 6.0%

FCFF Calculation Assumption PV of Free Cash Flows 2,63,200 Stage Year Growth rate

Terminal Value 20,98,162 1st Stage FY23-30 16% PV of Terminal Value 2,45,636 2nd Stage FY31-35 10%

Implied TEV 5,08,836 3rd Stage FY36-40 7%

Less: Net Debt -2,030

Equity Value 5,10,866

# Share 1,290

Equity Value 396

Source: Company; IDBI Capital Research

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Exhibit 20: P/E band chart Exhibit 21: P/BV band chart Exhibit 22: EV/EBITDA band chart 500 1 Yr fwd PE 600 1 Yr fwd P/BV 700,000 1Yr fwd Ev/ebitda

500 600,000 400 500,000 400 300 400,000 300 300,000 200 200 200,000 100 100 100,000

0 0 0 Jul-13 Jul-19 Jul-13 Jul-19 Jul-13 Jul-19 Jan-14 Jan-20 Jan-14 Jan-20 Jun-18 Jun-18 Oct-10 Oct-16 Oct-10 Oct-16 Jan-14 Jan-20 Apr-11 Apr-11 Feb-15 Sep-15 Feb-15 Sep-15 Jun-18 Dec-12 Dec-18 Dec-12 Dec-18 Oct-10 Oct-16 Aug-09 Aug-14 Aug-20 Aug-09 Aug-14 Aug-20 Apr-11 Feb-15 Sep-15 Nov-11 Nov-17 Nov-11 Nov-17 Dec-12 Dec-18 Mar-10 Mar-16 Mar-10 Mar-16 Aug-09 Aug-14 Aug-20 Nov-11 Nov-17 May-12 May-17 May-12 May-17 Mar-10 Mar-16 May-12 May-17 1 yr fwd PE Min 8 -sd 15 CMP Min 2.6 -sd 5.0 1Yr fwd EV Min 10.7 -sd 18.0 Avg 28 Max 48 Avg 9.3 Max 16.2 Avg 23.7 Max 36.3 Source: Company; Bloomberg, IDBI Capital Research

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Company background

MRCO, founded in 1988, is a leading consumer products company with a product portfolio spanning across hair care, skincare, edible oil, healthy food, male grooming and fabric care. MRCO is currently present in 25 countries across Asia, Africa and Middle East. International business contributes c. 23% to total revenue. Primary brands of MRCO in India includes; Parachute, Parachute Advanced, Nihar, Nihar Naturals, Saffola, Revive, Mediker, Set wet etc. In international market MRCO is represented by brands like; Parachute, HairCode, Just for Baby, Fiancee, Caivil, Hercules, Black Chic etc. Marico has a total of 13 manufacturing units; 8 in India and 5 overseas. Distribution reach of MRCO stands at 5 Mn outlets as on FY20.

Exhibit 23: Revenue break up (FY20) Exhibit 24: Domestic revenue break up (FY20) Premium Others International personal care 4% 23% 5%

VAHO Coconut oil 24% 44%

India Saffola edible 77% oil & food 23% Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

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Exhibit 25: Key Managerial Personnel Name Designation Background Mr Saugata Gupta Managing director & CEO Mr. Saugata Gupta holds a chemical engineering degree from IIT Kharagpur and is an alumnus of IIM Bangalore. He started his career with Cadbury (Mondelez) where he spent 9 years in sales and marketing in India and United Kingdom. Subsequently, he went on to become Chief of Marketing and Group sales at ICICI Prudential. He joined Marico in Jan-04 as Head of Marketing and was elevated to CEO of India business in 2007. Under Mr Gupta’s leadership, Marico restructured its consumer product business in India and International Business group into a unified FMCG Business Mr Vivek Karve Chief Financial Officer Mr Vivek Karve is a Chartered Accountant, Cost Accountant and B.Com from University of Bombay. He has more than 19 years of experience in Finance, Banking and IT across four organisations-Marico, Siemens, ICICI and P&G. He joined Marico in 2000, as a manager in corporate finance and took charge as the CFO of the company in April 2014. He has served as a member of FICCI’s corporate finance committee Mr Sanjay Mishra Chief Operating Officer Mr Sanjay Mishra did his B.Sc. in 1992 from City College, Kolkata and completed his Business management from Institute of Management Technology, Ghaziabad in 1995. He started his career with Dunlop India and worked for companies like PepsiCo and Spencer Retail

Mr. Gaurav Mediratta Chief Legal Officer Mr Gaurav Mediratta holds a Bachelor’s degree in Commerce and has completed Bachelor of legislative law (LLB) from Delhi University. In 2001, he completed a diploma in cyber laws from the Indian law institute. He sits on the FMCG as well as the cosmetics regulatory committees of FICCI and is an active member of the CII National Committee on Food processing industries. He has worked for companies like HUL and Genpact before joining Marico. Mr. Koshy George Chief Marketing Officer Mr Koshy George holds a B.Com (Hons) degree from The Hindu College and is an alumnus of the Institute of Management Technology, Ghaziabad. He started his career with Marico in 2001 as a management trainee and was an Area Sales manager before moving to HUL. During his tenure at HUL, he was responsible for the global leadership of two personal care brands- Lifebuoy and Pears. He also served on HUL’s home and personal care leadership team from 2010-16. He re-joined Marico in 2019 and is responsible for the brand marketing initiatives of the company

Source: Company; IDBI Capital Research

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Exhibit 26: Key shareholders Major Institutional Shareholders (%) First State Investments ICVC 5.4 Life Insurance Corporation limited 3.6 Blackrock Inc 1.3 Arisaig India Fund Limited 1.2 Vanguard Group 1.2 Mitsubishi UFJ Financial group 0.6 First sentier investor 0.6 UTI Asset Management 0.5 Source: Bloomberg

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Financial Summary

Profit & Loss Account (Rs mn) Cash Flow Statement (Rs mn)

Year-end: March FY19 FY20 FY21E FY22E Year-end: March FY19 FY20 FY21E FY22E

Net sales 73,340 73,150 74,465 82,261 Pre-tax profit 12,630 13,740 15,156 16,814

Growth (%) 15.8 (0.3) 1.8 10.5 Depreciation 960 1,500 1,585 1,852 Operating expenses (60,080) (58,460) (58,521) (64,457) Tax paid (3,200) (2,890) (3,410) (3,783) EBITDA 13,260 14,690 15,944 17,804 Chg in working capital 840 470 (179) (1,229) Growth (%) 16.6 10.8 8.5 11.7 Other operating activities (1,050) (640) 503 503 Depreciation (1,310) (1,400) (1,585) (1,852) Cash flow from operations (a) 10,180 12,180 13,655 14,156 EBIT 11,950 13,290 14,359 15,952 Capital expenditure (1,620) (1,940) (1,500) (2,136) Interest paid (400) (500) (503) (503) Chg in investments (2,380) 770 - - Other income 1,030 1,240 1,299 1,365 Other investing activities 490 730 - - Pre-tax profit 12,580 14,030 15,156 16,814 Cash flow from investing (b) (3,510) (440) (1,500) (2,136) Tax (1,260) (3,310) (3,410) (3,783) Equity raised/(repaid) - - - - Effective tax rate (%) 10.0 23.6 22.5 22.5 Debt raised/(repaid) 400 (150) - - Minority Interest (170.0) (220.0) (205.0) (227.4) Dividend (incl. tax) (5,890) (10,250) (8,708) (8,708) Net profit 11,150 10,500 11,541 12,804

Exceptional items - 290 - - Chg in minorities - - - -

Adjusted net profit 11,150 10,210 11,541 12,804 Other financing activities (1,040) (1,060) (707) (730)

Growth (%) 36.9 (8.4) 13.0 10.9 Cash flow from financing (c) (6,530) (11,460) (9,415) (9,437)

Shares o/s (mn nos) 1,291 1,290 1,290 1,290 Net chg in cash (a+b+c) 140 280 2,740 2,582

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Balance Sheet (Rs mn) Financial Ratios Year-end: March FY19 FY20 FY21E FY22E Year-end: March FY19 FY20 FY21E FY22E Net fixed assets 11,750 12,910 12,825 13,109 Adj. EPS (Rs) 8.6 7.9 8.9 9.9

Investments 760 1,220 1,220 1,220 Adj. EPS growth (%) 36.9 (8.4) 13.0 10.9

Other non-curr assets 4,580 4,070 4,070 4,070 EBITDA margin (%) 18.1 20.1 21.4 21.6

Current assets 32,000 31,820 34,955 39,362 Pre-tax margin (%) 17.2 19.2 20.4 20.4

Inventories 14,110 13,800 14,077 15,551 ROE (%) 40.6 34.0 36.5 36.5

Sundry Debtors 5,170 5,390 5,508 5,860 ROCE (%) 36.4 37.6 39.0 39.6

Cash and Bank 5,520 2,790 5,530 8,112 Turnover & Leverage ratios (x)

Marketable Securities - - - - Asset turnover (x) 1.6 1.5 1.4 1.5

Loans and advances - - - - Leverage factor (x) 1.7 1.7 1.6 1.6

Total assets 49,090 50,020 53,070 57,762 Net margin (%) 15.2 14.0 15.5 15.6

a Net Debt/Equity (x) (0.1) 0.0 (0.1) (0.1)

Shareholders’ funds 29,750 30,230 33,063 37,159 Working Capital & Liquidity ratio

Share capital 1,290 1,290 1,290 1,290 Inventory days 70 69 69 69

Reserves & surplus 28,460 28,940 31,773 35,869 Receivable days 26 27 27 26

Total Debt 3,490 3,350 3,350 3,350 Payable days 57 61 62 60

Secured loans 3,490 3,350 3,350 3,350

Unsecured loans - - - - Valuation

Other liabilities 1,840 1,710 1,710 1,710 Year-end: March FY19 FY20 FY21E FY22E

Curr Liab & prov 13,890 14,600 14,817 15,413 P/E (x) 43.3 47.3 41.8 37.7

Current liabilities 13,320 14,020 14,237 14,833 Price / Book value (x) 16.2 16.0 14.6 13.0

Provisions 570 580 580 580 PCE (x) 38.8 41.6 36.8 32.9

Total liabilities 19,220 19,660 19,877 20,473 EV / Net sales (x) 6.6 6.6 6.4 5.8

Total equity & liabilities 49,090 50,020 53,070 57,762 EV / EBITDA (x) 36.3 32.9 30.1 26.8

Book Value (Rs) 23 23 26 29 Dividend Yield (%) 1.2 2.1 1.8 1.8

Source: Company; IDBI Capital Research

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Notes

Dealing (91-22) 6836 1111 [email protected]

Key to Ratings Stocks: BUY: Absolute return of 15% and above; ACCUMULATE: 5% to 15%; HOLD: Upto ±5%; REDUCE: -5% to -15%; SELL: -15% and below.

IDBI Capital Markets & Securities Ltd. Equity Research Desk 6th Floor, IDBI Tower, WTC Complex, Cuffe Parade, Colaba, Mumbai – 400 005. Phones: (91-22) 2217 1700; Fax: (91-22) 2215 1787; Email: [email protected] SEBI Registration: BSE & NSE (Cash & FO) – INZ000007237, NSDL – IN-DP-NSDL-12-96, Research – INH000002459, CIN – U65990MH1993GOI075578 Compliance Officer: Christina D’souza; Email: [email protected]; Telephone: (91-22) 2217 1907

Disclaimer This report has beenpublished by IDBI Capital Markets & Securities Ltd.(hereinafter referred to as “IDBI Capital”) for private circulation. This report should not be reproduced or copied or made available to others. No person associated with IDBI Capital is obligated to call or initiate contact with you for the purposes of elaborating or following up on the information contained in this report. The information contained herein is strictly confidential and meant for solely for the selected recipient and may not be altered in any way, transmitted to copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without the prior written consent of IDBI Capital. Recipients may not receive this report at the same time as other recipients. IDBI Capital will not treat recipients as customers by virtue of their receiving this report. The information contained herein is from the public domain or sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up-to-date and it should not be relied upon as such. While reasonable care has been taken to ensure that information given is at the time believed to be fair and correct and opinions based thereupon are reasonable, due to the very nature of research it cannot be warranted or represented that it is accurate or complete and it should not be relied upon as such. In so far as this report includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Opinions expressed are current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis, the information discussed in this material, IDBI Capital, its directors, employees are under no obligation to update or keep the information current. Further there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. IDBI Capital, its directors and employees and any person connected with it, will not in any way be responsible for the contents of this report or for any losses, costs, expenses, charges, including notional losses/lost opportunities incurred by a recipient as a result of acting or non- acting on any information/material contained in the report. This is not an offer to sell or a solicitation to buy any securities or an attempt to influence the opinion or behavior of investors or recipients or provide any investment/tax advice. This report is for information only and has not been prepared based on specific investment objectives. The securities discussed in this report may not be suitable for all investors. Investors must make their own investment decision based on their own investment objectives, goals and financial position and based on their own analysis. Trading in stocks, stock derivatives, and other securities is inherently risky and the recipient agrees to assume complete and full responsibility for the outcomes of all trading decisions that the recipient makes, including but not limited to loss of capital. Opinions, projections and estimates in this report solely constitute the current judgment of the author of this report as of the date of this report and do not in any way reflect the views of IDBI Capital, its directors, officers, or employees. 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 IDBI Capital and associates 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 report may come are required to inform themselves of and to observe such restriction. E-mail is not a secure method of communication. IDBI Capital cannot accept responsibility for the accuracy or completeness of any e-mail message or any attachment(s). This transmission could contain viruses, be corrupted, destroyed, incomplete, intercepted, lost or arrived late. IDBI Capital, its directors or employees or associates accept no liability for any damage caused, directly or indirectly, by this email.

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Analyst Disclosures We Varun Singh and Upasana Madan, hereby certify that the views expressed in this report accurately reflect our personal views about the subject companies and / or securities. We also certify that no part of our compensation were, are or would be directly or indirectly related to the specific recommendations or views expressed in this report. Principally, We will be responsible for the preparation of this research report and have taken reasonable care to achieve and maintain independence and objectivity in making any recommendations herein.

Other Disclosure

IDBI Capital Markets & Securities Ltd.(hereinafter referred to as “IDBI Capital”) was incorporated in the year 1993 under Companies Act, 1956 and is a wholly owned subsidiary of IDBI Bank Limited. IDBI Capital is one of India’s leading securities firm which offers a full suite of products and services to individual, institutional and corporate clients namely Stock broking (Institutional and Retail) , Distribution of financial products, Merchant Banking, Corporate Advisory Services, Debt Arranging & Underwriting, Portfolio Manager Services and providing Depository Services. IDBI Capital is a registered trading and clearing member of BSE Ltd. (BSE) and National Stock Exchange of India Limited (NSE). IDBI Capital is also a SEBI registered Merchant Banker, Portfolio Manager and Research Analyst. IDBI Capital is also a SEBI registered depository participant with National Securities Depository Limited (NSDL) and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI).

IDBI Capital and its associates IDBI Bank Ltd. (Holding Company), IDBI Intech Ltd. (Fellow Subsidiary), IDBI Asset Management Ltd. (Fellow Subsidiary) and IDBI Trusteeship Services Ltd. (Fellow Subsidiary).

IDBI Groupis a full-serviced banking, integrated investment banking, investment management, brokerage and financing group. Details in respect of which are available on www.idbicapital.com IDBI Capital along with its associates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our associates have investment banking and other business relationships with a significant percentage of the companies covered by our Research Department. Investors should assume that IDBI Capital and/or its associates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material. IDBI Capital generally prohibits its analysts, persons reporting to analysts, and their dependent family members having a financial conflict of interest in the securities or derivatives of any companies that the analysts cover. Additionally, IDBI Capital generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our sales people, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Directors of IDBI Capital or its associates may have interest in the Companies under recommendation in this report either as Director or shareholder. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of IDBI Capital. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. We and our associates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have “long” or “short” positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. For the purpose of calculating whether IDBI Capitaland its associates holds beneficially owns or controls, including the right to vote for directors, 1% of more of the equity shares of the subject issuer of a research report, the holdings does not include accounts managed by IDBI Asset Management Company/ IDBI Mutual Fund.

IDBI Capital hereby declares that our activities were neither suspended nor we have materially defaulted with any Stock Exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advice letters or levied minor penalty on IDBI Capital for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. IDBI Capital, its directors or employees or associates, may from time to time, have positions in, or options on, and buy and sell securities referred to herein. IDBI Capital or its associates, during the normal course of business, from time to time, may solicit from or perform investment banking or other services for any company mentioned in this document or their connected persons or be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or their affiliate companies or act as advisor or lender / borrower to such company(ies)/associates companies or have other potential conflict of interest. This report may provide hyperlinks to other websites. Except to the extent to which the report refers to the website of IDBI Capital, IDBI Capital states that it has not reviewed the linked site and takes no responsibility for the content contained in such other websites. Accessing such websites shall be at recipient's own risk. IDBI Capital encourages the practice of giving independent opinion in research report preparation by the analyst and thus strives to minimize the conflict in preparation of research report. Accordingly, neither IDBI Capital nor Research Analysts have any material conflict of interest at the time of publication of this report. We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us. The Research Analyst has not served as an officer, director or employee of Subject Company. We or our associates may have received compensation from the subject company in the past 12 months. We or our associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. We or our associates may have received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research Analyst or his/her relative’s may have financial interest in the subject company. IDBI Capitalor its associates may have financial interest in the subject company. Research Analyst or his/her relatives does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. IDBI Capital or its associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. The Subject Company may have been a client during twelve months preceding the date of distribution of the research report. Price history of the daily closing price of the securities covered in this note is available at www.bseindia.com; www.nseindia.com and www.economictimes.indiatimes.com/markets/stocks/stock-quotes.

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