Consumer Goods Agile supply chain to moderate impact of the second wave Sector Update

Consumer goods companies under Sharekhan’s coverage universe are likely to post Q1FY2022 Results Preview double-digit revenue growth of 11-30%, led by agile supply chain aiding products to remain available on store shelves, resilient demand, and low base of corresponding Sector: Consumer Goods quarter last year. Double-digit revenue growth will largely be driven by mix of volume and price increases (undertaken to pass on raw-material inflation). Q1FY2021 was badly Sector View: Positive affected by stringent lockdown norms, affecting manufacturing and supply of products during the first 45 days of the quarter. Taking the cognizance of the impact of the first Our coverage universe wave, most companies took decisive steps and kept agile its manufacturing/supply chain to feel less heat of the second wave of COVID-19 in Q1FY2022. Further, unlike national CMP PT Companies Reco. lockdown in the first wave, lockdown norms were state specific, defining the containment (Rs) (Rs) zones based on the efficacy of the virus spread. This did not have any significant impact 3,040 Buy 3,255 on the manufacturing and supply of products. General trade/standalone modern trade Bajaj 297 Buy 355 shops were operational on all days with restricted hours during the quarter. Sales through online channels continue to see better traction on a q-o-q basis. Our interaction Consumer with companies indicated demand was resilient in urban and rural markets and, hence, Care good recovery was seen in June 2021, as lockdown norms eased out with reduction in Britannia 3,530 Buy 4,200 COVID-19 cases. The companies such as Asian Paints, , Industries Limited (GCPL), and posted 20%+ growth during the quarter. ITC’s revenue is likely Colgate- 1,726 Buy 1,850 to grow by 22%, largely driven by 28% growth in cigarette business (with volume growth Palmolive of 32%). Britannia is expected to post a decline in revenue due to high base of 25%+ () revenue growth in Q1FY2021, led by pantry loading. HUL, Nestle India, Limited (TCPL), Colgate Palmolive India Limited (Colgate), and India are Dabur India 594 Buy 675 expected to post 11-17% revenue growth. Overall, Sharekhan’s consumer goods universe Emami 553 Buy 636 is expected to post revenue growth of ~15% in Q1FY2022. Limited Key input prices such as palm oil, Copra, raw tea, HPDE, and Tio2 were higher by 85%, Globus 719 Positive 756 18%, 20.4%, 46.4%, and 14%, respectively, during the quarter. Hence, gross margins of Spirits most companies under coverage are expected to remain lower on a y-o-y basis. Price Godrej 963 Buy 1,115 hikes undertaken by the company are not sufficient to fully mitigate input cost pressure. Consumer Further, ad spends started going up from Q3FY2021/Q4FY2021 with normalisation of business environment. We expect it to remain high in Q1FY2022 versus cut on ad-spends Products in Q1FY2021 to curtail cost in a disrupted quarter. Hence, OPM for most companies will Hindustan 2,478 Buy 2,790 be lower on a y-o-y basis (except for Asian Paints, Colgate, ITC, and Nestle India). Thus, Unilever Sharekhan’s consumer goods universe PAT is expected to grow by ~13% in Q1FY2022. ITC 204 Buy 265 Outlook Jyothy Labs 177 Buy 188 Demand remains resilient; Margins to improve sequentially Marico 533 Buy 610 Pre-quarter commentary of most consumer goods companies indicated strong sales Nestle India 17,709 Buy 19,055 recovery from June 2021 with easing of lockdown restrictions in most parts of the country. Tata 764 Buy 875 Demand, which started recovering from Q3FY2021, remained resilient in Q1FY2022. With expected normal monsoon for the third consecutive year, agri production is predicted to Consumer be better in Kharif season 2021. This will give further boost to rural demand in the coming Products quarters. We believe the shift in demand for branded products, rural demand staying ahead Zydus 2,171 Buy 2,505 of urban demand, gradual recovery in out-of-home categories, and new product launches Wellness remain key catalysts for revenue growth in the near to medium term. On the other hand, Source: Sharekhan Research key raw-material prices (including palm oil, copra, and raw tea) have started correcting from UR = Under Review their high. The substance of same along with calibrated price hikes would enable consumer goods companies to post better OPM on a sequential basis. Profitability is likely to be better off in H2FY2022. Improving revenue mix and better operational efficiencies remain key margin drivers in the medium term. Valuation The consumer goods sector saw fast recovery compared to some of the other sectors in the Price chart pandemic environment. In the large-cap space, we continue to like HUL and Asian Paints as 18000 7000 both companies are market leaders in key categories, have strong distribution reach to cater 16000 to improving demand, and sturdy balance sheet to lead its innovation strategy. Change in 6000 14000 leadership and strong growth prospects in domestic and international markets make GCPL a good pick in the FMCG space. We also like Marico because of its strong product profile 12000 5000 and receding raw-material headwinds, providing visibility of strong earnings growth in the 10000 near term. With consistent double-digit revenue growth, steady margin improvement, and 8000 4000 stable working capital management, TCPL expects return ratios to consistently improve in 21 21 20 21 20 21 20 21 21 20 21 20 20 ------the coming years. Jul Jul Jan Jun - Oct Apr Feb Sep Dec Aug Nov Mar May Nifty 50 Nifty consumption Key risks: Increased competition in some of the high penetrated categories and sustained spike in key input prices would act as key risks to the performance of consumer goods companies. Q1FY2022 leaders: Asian Paints, GCPL, Colgate, ITC, and Globus Spirits. Q1FY2022 Laggards: Tata Consumer products, Britannia Industries, Jyothy Labs and Bajaj Consumer Care. Preferred picks: Asian Paints, , Godrej Consumer Products, Marico, and Tata Consumer Products.

July 07, 2021 1 Sector Update

Q1FY2022 earnings estimates Net sales (Rs cr) OPM (%) Adjusted PAT (Rs cr) Company Q1FY22E Q1FY21 YoY (%) Q1FY22E Q1FY21 Y-o-Y BPS Q1FY22E Q1FY21 Y-o-Y % Asian Paints 3762.7 2922.7 28.7 17.4 16.6 84 346.5 219.6 57.8 Bajaj Consumer Care 223.3 196.1 13.9 22.9 29.0 -610 49.4 54.2 -8.9 Britannia Industries 3091.7 3420.7 -9.6 16.8 21.0 -411 397.0 542.7 -26.8 Colgate-Palmolive (India) 1157.8 1040.6 11.3 30.5 29.6 94 231.8 198.2 17.0 Dabur India 2306.0 1980.0 16.5 20.3 21.0 -71 393.4 341.3 15.3 Emami 599.8 481.3 24.6 24.7 25.5 -88 102.0 85.1 19.9 Globus Spirits 282.6 230.1 22.8 22.5 17.1 539 34.9 18.7 87.0 Godrej Consumer Products 2799.6 2327.3 20.3 20.0 20.3 -35 392.7 305.4 28.6 Hindustan Unilever 11714.3 10560.0 10.9 24.4 25.0 -59 2023.9 1889.1 7.1 ITC 11542.2 9501.8 21.5 29.8 27.9 198 2883.6 2342.8 23.1 Jyothy Labs 473.6 432.9 9.4 15.8 17.7 -182 49.1 50.0 -1.8 Marico 2425.0 1925.0 26.0 20.4 24.3 -388 367.0 336.8 9.0 Nestle India 3439.5 3050.5 12.8 25.2 24.5 72 561.1 486.6 15.3 Tata Consumer Products 3141.6 2713.9 15.8 13.8 17.8 -394 268.4 305.8 -12.2 Zydus Wellness 594.2 537.4 10.6 21.3 22.8 -152 90.6 89.2 1.6 Grand Total 47553.9 41320.2 15.1 23.4 23.7 -33 8191.5 7265.2 12.7 Source: Company, Sharekhan estimates * Estimates for HUL and Tata Consumer Products are including the merger of acquired businesses # Nestle India is a calendar year ending company and, hence, estimates are for Q2CY2021

Valuations Price EPS (Rs) P/E (x) Company CMP (Rs) Reco Target (Rs) FY2021 FY2022E FY2023E FY2021 FY2022E FY2023E Asian Paints 3,040 Buy 3,255 33.4 39.6 48.4 90.9 76.7 62.8 Bajaj Consumer Care 297 Buy 355 15.2 15.8 18.5 19.6 18.8 16.0 Britannia Industries 3,530 Buy 4,200 76.8 85.6 97.7 46.0 41.2 36.1 Colgate-Palmolive (India) 1,726 Buy 1,850 38.1 39.3 42.5 45.3 44.0 40.6 Dabur India 594 Buy 675 9.6 11.0 13.4 61.9 54.1 44.5 Emami Limited 553 Buy 636 10.2 15.5 19.4 54.1 35.6 28.4 Globus Spirits 719 Positive 756 48.9 58.0 81.6 14.7 12.4 8.8 Godrej Consumer Products 963 Buy 1,115 17.3 20.1 23.8 55.8 48.0 40.5 Hindustan Unilever 2,478 Buy 2,790 34.6 42.1 49.4 71.5 58.8 50.1 ITC 204 Buy 265 10.6 11.7 13.8 19.3 17.5 14.7 Jyothy Labs 177 Buy 188 5.7 6.6 8.1 31.2 26.7 21.8 Marico 533 Buy 610 9.2 10.6 12.7 58.2 50.2 42.0 Nestle India 17,709 Buy 19,055 216.0 260.5 306.6 82.0 68.0 57.8 Tata Consumer Products 764 Buy 875 10.3 12.0 14.4 73.9 63.5 52.9 Zydus Wellness 2,171 Buy 2,505 39.4 48.4 62.6 55.1 44.8 34.7 Source: Company, Sharekhan estimates # Nestle India is a calendar year ending company * Estimates for HUL and Tata Consumer Products are including the merger of acquired businesses

Trend in key input prices Particulars Q1FY22 Q1FY21 yoy% Q4FY21 qoq% Copra (Rs./kg) 121.5 103.2 17.7 138.2 -12.1 Kardi oil (Rs./kg) 198.3 189.0 4.9 170.0 16.6 Rice bran oil (Rs./kg) 120.7 68.0 77.5 89.1 35.5 LLP (Rs./ltr) 58.0 38.0 52.6 58.0 0.0 HDPE (Rs./kg) 123.0 84.0 46.4 114.0 7.9 Titanium dioxide (Rs./kg) 295.0 258.8 14.0 275.0 7.3 Palm oil prices (MYR / tonne) 3918.0 2117.8 85.0 3661.7 7.0 Mentha oil (Rs./kg) 1275.0 1133.3 12.5 1135.0 12.3 Raw tea prices 183.1 152.0 20.4 156.0 17.4 Wheat (Rs./kg) 18.0 17.7 1.9 17.8 1.1 Sugar (Rs./kg) 32.0 32.0 0.2 31.0 3.2 Source: Bloomberg, Sharekhan Research

July 07, 2021 2 Sector Update

Q1FY2022 Consumer Goods earnings preview Company wise key expectations Company Q1FY22E Y-o-Y (%) Q-o-Q (%) Comments Asian Paints Sales (Rs. crore) 3762.7 28.7 (43.4) Low base would aid volume growth to sustain in strong double digits. The company will continue to witness market share gains in key markets. OPM (%) 17.4 84 -241 Higher crude prices would result in a 174-bps decline in gross margins. However, better operating leverage and low base of last year would lead to 84-bps improvement in OPM. Adjusted PAT (Rs 346.5 57.8 (60.2) PAT is expected to grow by ~58% mainly on account of strong double- crore) digit revenue growth and OPM improvement. Bajaj Consumer Care Sales 223.3 13.9 (9.2) Sales are expected to grow by 14% y-o-y, led by high single-digit volume growth in Bajaj Almond drops. The company took a price hike of ~5% in its product portfolio. Sales are expected to lower by 9% on a sequential basis. OPM (%) 22.9 -610 -178 Higher vegetable oil prices and LLP would lead to a ~400-bps decline in gross margins. Adjusted PAT 49.4 (8.9) (8.4) PAT is expected to decline by 9% y-o-y. Britannia Industries Sales 3091.7 (9.6) (1.2) Revenue is expected to be lower by ~10% as the base quarter saw strong growth of 26% in revenue due to pantry loading. With better supply chain compared to Q1FY2021, the company has not witnessed any trend of pantry loading. Revenue is expected to remain flat on a sequential basis. OPM (%) 16.8 -411 71 Gross margin will be lower by 65 bps y-o-y due to increased vegetable oil prices. OPM will decline by 411 bps from high of 21% in Q1FY2021. Adjusted PAT 397.0 (26.8) 10.4 PAT is likely to decline by 27%, largely due to sharp decline in OPM. Colgate-Palmolive (Colgate) Sales (Rs. crore) 1157.8 11.3 (9.8) Volume growth in the toothpaste category is expected to be in high single digit; Toothbrush category sales to see strong recovery on a y-o-y basis due to low base. OPM (%) 30.5 94 -233 Better revenue mix and efficiencies would help OPM to expand by 94 bps y-o-y. Adjusted PAT 231.8 17.0 (26.3) Adjusted PAT is expected to grow by 17% due to better operating per- formance with improvement in OPM. Dabur India Sales (Rs. crore) 2306.0 16.5 (1.3) Dabur's revenue is expected to grow by 16.5% on low base of 13% revenue decline in Q1FY2021. On the category front, oral care and health care will maintain the growth momentum. Revenue of the health supplement categories is expected to grow modestly due to high base of Q1FY2021. OPM (%) 20.3 -71 139 Gross margin is expected to be lower by 67 bps y-o-y due to raw- material inflation. Adjusted PAT 393.4 15.3 4.1 PAT is expected to grow by 15% y-o-y. Emami Sales (Rs crore) 599.8 24.6 (17.9) Emami's revenue is expected to grow by ~25% on a low base. Domestic health care and pain management categories are expected to perform well. OPM (%) 24.7 -88 239 Higher mentha prices on a y-o-y basis would result in a 98-bps dip in gross margin. Adjusted PAT 102.0 19.9 (23.0) PAT to grow by ~20% y-o-y.

July 07, 2021 3 Sector Update

Company wise key expectations Company Q1FY22E Y-o-Y (%) Q-o-Q (%) Comments Globus Spirits (GSL) Sales (Rs crore) 282.6 22.8 (20.8) Revenue is expected to grow by 23%, led by 22% growth in the bulk alcohol business and 35% growth in the consumer business. OPM (%) 22.5 539 -28 Better mix would help OPM to improve by 539 bps y-o-y to 22.5%. Adjusted PAT 34.9 18.7 (31.0) PAT to grow by ~19% during the quarter. Godrej Consumer Products Limited (GCPL) Sales (Rs. crore) 2799.6 20.3 2.5 Domestic business is expected to grow in high teens on account of double-digit growth in the soaps and household insecticide categories. Africa business is expected to grow by 50%, while Indonesia business revenue will remain flat. OPM (%) 20.0 -35 -108 Higher palm oil prices and other key input prices would result in a ~130 bps decline in gross margins. Efficiencies would help OPM to remain almost flat on a y-o-y basis. Adjusted PAT 392.7 28.6 3.6 Strong topline growth along with reduction in interest cost due to repayment of debt would help PAT to grow by ~29% y-o-y. Hindustan Unilever (HUL) Sales (Rs. crore) 11714.3 10.9 (3.4) Volume growth in the domestic business is expected to be at 7-8%. Strong demand for personal wash and hygiene products would help in good growth in personal care products. Home care would maintain steady performance. Nutrition business will continue to gain good traction, while tea business will grow in double digits due to price hikes undertaken. OPM (%) 24.4 -59 7 Higher palm oil prices and packaging cost would result in a 109-bps decline in gross margin. OPM to decline by ~60 bps y-o-y. Adjusted PAT 2023.9 7.1 (4.8) PAT to grow by 7% y-o-y. ITC Sales (Rs. crore) 11542.2 21.5 (18.5) Cigarette business revenue is expected to increase by 28% with volume growth of 32-33%. Non-cigarette FMCG business is expected to grow by 12-13%. OPM (%) 29.8 198 -176 Better operating leverage and low base would help OPM to improve by ~200 bps y-o-y. Adjusted PAT 2883.6 23.1 (23.1) PAT to grow by ~23% during the quarter. Jyothy Labs (JLL) Sales (Rs. crore) 473.6 9.4 (4.4) JLL’s sales are expected to grow by ~9% as some of the southern states have seen late recovery from the second wave. Post wash category will continue to post weakness due to state-wise lockdown. OPM (%) 15.8 -182 152 Higher input prices such as crude derivatives and palm oil prices would result in a decline in gross margins by 121 bps. Ad spends are expected to be higher on a y-o-y basis, which would lead to OPM standing lower by ~180 bps y-o-y. PAT 49.1 (1.8) 10.5 PAT to remain flat on a y-o-y basis. Marico Sales (Rs. crore) 2425.0 26.0 20.5 Strong double digit aided by low base of Q1FY2021. Parachute rigid is expected to post 9-10% volume growth; Saffola will maintain strong growth momentum and would post low double-digit growth on high base. VAHO is expected to grow close to 30% due to improved traction. International business is expected to grow by 20%+ on constant currency basis. OPM (%) 20.4 -388 452 Higher copra and other key edible oil prices would result in significant reduction in gross margins. Adjusted PAT 367.0 9.0 52.3 With lower OPM, PAT is expected to grow by 9% lower than strong topline growth.

July 07, 2021 4 Sector Update

Company wise key expectations Company Q1FY22E Y-o-Y (%) Q-o-Q (%) Comments Nestle India Sales (Rs. crore) 3439.5 12.8 (4.7) Volume growth is expected to be at high single digit. Better supply chain compared to base quarter would lead to strong sales in products such as Maggie, Kit Kat, and infant products. OPM (%) 25.2 72 -52 OPM is expected to be higher by 72 bps y-o-y, led by relative stable input prices and efficiencies. Adjusted PAT 561.1 15.3 (6.8) PAT to grow by 15% during the quarter. Tata Consumer Products (TCPL) Sales (Rs. crore) 3141.6 15.8 3.4 Revenue growth would largely be driven by mix of volume and value during the quarter. India beverage business and foods business are expected to grow 37% and 25%, respectively. OPM (%) 13.8 -394 396 Gross margin will be lower by 471 bps due to higher domestic tea prices and higher international coffee prices. Consolidated OPM is expected to stand at 13.8%. Adjusted PAT 268.4 (12.2) 120.6 Substantial drop in OPM would lead to a 12.2% decline in PAT during the quarter. Zydus Wellness (Zydus) Sales (Rs. crore) 594.2 10.6 (1.9) The company is expected to post revenue growth of ~11% during the quarter. Summer products are expected to see good traction. OPM (%) 21.3 -152 -274 Higher vegetable oil prices would result in 115 bps decline in gross margin. OPM is expected to decline by 152 bps to 21.3%. Adjusted PAT 90.6 1.6 (31.9) PAT is expected to remain flat at Rs. 90.6 crore. Source: Sharekhan estimates

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

July 07, 2021 5 Know more about our products and services

For Private Circulation only

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

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

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

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