Equity Research INDIA April 1, 2021 BSE Sensex: 50030 Consumer Staples & Discretionary ICICI Securities Limited is the author and Value trap or trapped value #3 distributor of this report Over the past year, the trio of seemingly-value stocks in our Consumer coverage have delivered returns of 48-186% - Emami (+186%), Bajaj Consumer (+96%), Sector update Jyothy Labs (+48%). Despite this strong near-term performance (from the lows), these stocks still trade at 48-67% discount to peers, and, in our opinion, remain good value picks (must see our previous notes here - #1, #2). The trio appears to be in varying stages of solving (or having solved) their technical issues (promoter pledge, dividend distribution policy etc.) and are also relatively better placed ("this time it’s different"?) with improving fundamentals. We note that the trio reported faster-than-expected growth in 3QFY21 – (1) BaCo – outperformed hair oil category despite Almond Drops being a premium product with volume growth of 18%, (2) JYL - FMCG sales and volume grew by 15% despite Fabric care segment struggling due to category issues and (3) Emami – 13% volume growth in Q3. The near-term (4QFY21 and 1HFY22) outlook for all three appears promising. BaCo, in our opinion, is a likely outperformer in the long-term, with improving fundamentals likely to drive stock re-rating – we like the strategic initiatives by Jaideep Nandi (execution is key) as interim dividend (announcement) somewhat allays consensus concerns on cash utilization. There are triggers/drivers for others as well – 85% essential portfolio for JYL with Fabric Care (~40% of business) portfolio likely returning to growth trajectory and continued momentum for Emami with likely good summer season and incremental changes to leadership team. We have constructive stock views on all three - Bajaj Consumer (BUY), Jyothy Labs (BUY) and Emami (ADD). Bajaj Consumer – strategic initiatives under Jaideep Nandi’s leadership continues to instil confidence: We like the initiatives taken to improve the sustainability of volume growth and market share gains – (1) focus on overall hair oil category by (a) dialling up presence in Amla (utilising Almond Drops as carrier pack) in key markets and (b) foray into Premium Hair Oil category with launch of Bajaj Zero Grey, (2) likely diversification into adjacent related categories, (3) relaunch of Almond Drops with advanced formulation, (4) launch of new SKUs across price points (filling white spaces) supported with communication (integrated campaign, thrust on digital and improved brand visibility across retail outlets), (5) drive distribution expansion and penetration by differentiated trade schemes and margins and (6) focus on improving presence in Modern Trade and e-commerce (launched alternate trade only SKUs; currently under-indexed versus peers). Jyothy Labs – Category tailwinds in core portfolio and agile execution augurs well: We see acceleration in growth from (1) premiumisation in dishwash to sustain (new consumers acquired during the lockdown likely to stick), (2) resurgence in Household Insecticide (predominantly mosquito repellent) category, (3) return of growth trajectory in post-wash detergents category when consumers start venturing out and (4) personal care segment supported by new launches (Margo Hand Wash). Further, margin outperformance (at 17.2% in 9MFY21) versus a guidance of 15-16% for FY21 provides ample room to invest behind core brands and drive geographic expansion. Emami – momentum to continue with likely good summer season, turnaround and tailwinds in parts of portfolio: We believe Emami is well poised to continue its strong growth performance driven by – (1) likely outperformance of summer portfolio, (2) resurgence of Zandu with increased focus on healthcare segment Research Analysts: (higher ad-spends, new launches etc.) to capture amplified demand, (3) dialling up Manoj Menon investments in modern trade and e-commerce, (3) entry into home care / hygiene [email protected] category (non-seasonal) to capture category tailwinds and (4) turnaround in (a) +91 22 6637 7209 premium hair oil segment (Kesh King and 7 Oils in One) driven by category Karan Bhuwania performance and (b) male grooming range driven by re-launch. We also note that [email protected] promoter pledge currently stands at ~39% (declined from ~47% largely due to stock +91 22 6637 7351 performance) and management commentary that they are committed to completely remove the pledge by diluting non-core assets.
Please refer to important disclosures at the end of this report
Consumer Staples & Discretionary, April 1, 2021 ICICI Securities
Valuation and risks
We value stocks on DCF (WACC and TG ranging from 10-13%, 3- 6% respectively) except Godrej Cons. and Tata Cons. which we value on SoTP basis. Key upside risk is better-than-expected gross margins due to correction in input prices. Key downside risk is unexpected irrational competition due to deceleration in general consumption demand. Please refer Table 1 for revised estimates, target prices and ratings.
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Consumer Staples & Discretionary, April 1, 2021 ICICI Securities
Table 1: Valuation summary CMP* TP Upside PE (x) EV/EBITDA (x) ADTV Market Cap Company Rating (Rs) (Rs) (%) FY22E FY23E FY22E FY23E (US$ mn) (Rs bn) (US$ bn) Staples
Bajaj Consumer 260 350 35 BUY 16 16 14 13 5.5 40 0.5 Britannia 3,625 3,200 (12) REDUCE 45 40 34 30 36.4 874 11.9 Colgate 1,559 1,700 9 ADD 42 37 28 25 14.1 425 5.8 Dabur 541 580 7 ADD 51 44 44 38 27.8 950 12.9 Emami 486 550 13 ADD 29 25 25 23 5.7 217 2.9 GCPL 730 800 10 ADD 40 34 30 26 17.8 742 10.1 HUL 2,432 2,700 11 ADD 63 54 44 37 74.7 5,643 76.8 ITC 219 240 10 ADD 18 17 14 13 117.4 2,708 36.9 Jyothy Labs 137 190 39 BUY 20 16 15 13 1.5 53 0.7 Marico 411 450 9 ADD 42 36 30 25 15.0 525 7.1 Mrs. Bector's Foods 352 400 14 ADD 29 24 14 12 34.1 20 0.3 Nestle 17,165 16,800 (2) HOLD 66 54 43 37 31.8 1,647 22.4 Tata Consumer 639 750 17 BUY 50 42 31 27 36.3 600 8.2 Varun Beverages 1,003 1,100 10 ADD 41 32 18 16 5.3 291 4.0 Zydus Wellness 1,972 2,500 27 BUY 35 28 29 25 1.4 127 1.7 Discretionary Avenue Supermarts 2,859 2,600 (9) REDUCE 80 63 56 44 27.4 1,882 25.6 Bata 1,406 1,300 (8) REDUCE 48 41 21 18 16.8 183 2.5 Jubilant Foodworks 2,911 3,300 13 ADD 68 59 30 27 44.9 388 5.3 Page Industries 30,317 32,000 6 ADD 60 48 40 33 22.8 335 4.6 Sheela Foam 1,977 2,500 26 BUY 30 23 21 17 0.7 97 1.3 Titan 1,558 1,700 9 ADD 59 47 38 30 47.5 1,385 18.9 United Spirits 556 600 8 ADD 40 33 25 22 22.0 395 5.4 Westlife Development 460 500 9 ADD 64 52 22 18 2.0 71 1.0 Paints Akzo Nobel 2,296 2,800 22 BUY 38 33 25 21 0.8 108 1.5 Asian Paints 2,537 2,800 10 ADD 64 56 42 37 89.2 2,441 33.2 Berger Paints 765 750 (2) HOLD 84 72 54 47 14.3 743 10.1 Kansai Nerolac 601 650 8 ADD 50 44 32 28 3.3 319 4.3 Source: Bloomberg, Company data, I-Sec research
EV/ sales (x) P/B (x) P/CEPS (x) RoE (%) RoCE (%) CAGR (FY21-23E) (%) Company FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E Revenues EBITDA PAT Staples Bajaj Consumer 3.8 3.4 4 3 16 15 25 22 26 25 8 7 4 Britannia 6.5 5.7 16 13 41 36 36 32 25 24 8 7 7 Colgate 8.1 7.4 21 20 35 31 57 61 68 72 9 9 10 Dabur 9.1 8.0 11 10 45 39 23 24 18 19 11 14 12 Emami 7.2 6.6 10 8 28 23 36 36 35 34 8 4 15 GCPL 6.5 5.9 8 7 36 31 21 23 17 19 9 10 13 HUL 11.1 9.7 13 12 56 48 20 23 19 21 13 16 16 ITC 5.0 4.6 4 4 16 15 25 26 27 28 13 12 12 Jyothy Labs 2.4 2.2 4 3 16 14 19 20 18 19 10 9 17 Marico 6.3 5.6 14 13 37 32 36 39 33 36 11 14 14 Mrs. Bector's Foods 2.0 1.7 4 4 16 14 15 15 16 18 19 15 17 Nestle 10.7 9.2 61 47 57 47 107 97 39 39 15 19 21 Tata Consumer 4.5 4.1 4 4 41 35 8 9 9 10 12 15 22 Varun Beverages 3.5 3.2 7 6 23 19 17 19 16 19 26 28 55 Zydus Wellness 5.7 5.2 3 2 33 26 8 9 8 9 11 24 44 Discretionary Avenue Supermarts 5.1 4.1 13 11 68 54 17 18 22 23 36 50 53 Bata 5.6 5.0 8 7 26 23 19 19 26 26 38 84 nm Jubilant Foodworks 8.4 7.4 22 17 40 35 38 33 28 27 25 33 69 Page Industries 9.0 7.8 30 24 52 43 55 56 43 44 27 43 51 Sheela Foam 3.0 2.7 6 5 24 19 24 24 23 23 21 19 29 Titan 4.5 3.7 15 13 50 40 29 29 34 35 40 69 86 United Spirits 4.3 3.9 8 7 32 26 21 22 23 24 18 38 57 Westlife Development 4.1 3.5 12 10 28 24 20 21 26 33 43 139 nm Paints Akzo Nobel 3.5 3.1 7 6 29 25 19 19 19 19 16 21 21 Asian Paints 9.5 8.4 17 15 52 45 30 29 27 26 18 18 21 Berger Paints 9.7 8.5 20 17 67 58 26 26 22 22 17 18 22 Kansai Nerolac 5.2 4.6 7 6 39 35 15 15 15 15 18 20 22 Source: Bloomberg, Company data, I-Sec research *Prices as on 31-Mar-2021
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Consumer Staples & Discretionary, April 1, 2021 ICICI Securities
Table 2: Stock Performance# Absolute Return (%) Relative Return (%)* Company 1m 2m 3m 6m 12m 24m 36m 1m 2m 3m 6m 12m 24m 36m Staples Bajaj Consumer 7 24 21 42 96 (16) (45) 6 16 16 12 25 (42) (90) Britannia 8 4 1 (5) 35 17 46 7 (4) (4) (35) (36) (9) 1 Colgate (1) (3) (0) 9 24 25 50 (2) (10) (5) (22) (46) (2) 5 Dabur 7 5 1 6 20 32 67 6 (3) (4) (25) (51) 6 22 Emami 7 1 15 38 186 22 (9) 6 (7) 10 8 115 (5) (54) GCPL 6 (2) (1) 1 40 6 0 5 (10) (6) (30) (31) (20) (45) HUL 14 7 2 18 6 43 83 13 (0) (4) (13) (65) 17 38 ITC 7 8 5 27 27 (26) (14) 6 (0) (1) (3) (44) (53) (60) Jyothy Labs (8) (16) (7) (7) 48 (25) (31) (9) (23) (12) (38) (22) (52) (76) Marico 3 (1) 2 13 50 19 26 2 (9) (3) (17) (21) (8) (19) Mrs. Bector's Foods (12) (6) (31) NA NA NA NA (13) (14) (37) NA NA NA NA Nestle 7 1 (7) 8 5 59 112 5 (7) (12) (23) (66) 33 67 Tata Consumer 5 14 8 28 117 213 147 4 6 3 (3) 46 187 102 Varun Beverages (4) 12 9 44 89 74 139 (5) 4 4 13 19 47 94 Zydus Wellness 3 2 (1) 7 52 51 67 2 (6) (6) (23) (19) 25 22
Discretionary Avenue Supermarts (5) 8 3 30 31 94 116 (6) 0 (2) (1) (40) 68 71 Bata (2) (6) (11) 7 14 0 93 (3) (14) (16) (24) (57) (26) 47 Jubilant Foodworks (3) 12 4 24 98 102 150 (4) 5 (1) (6) 27 75 105 Page Industries 8 12 10 42 79 21 35 7 4 5 11 8 (5) (11) Sheela Foam (3) 1 14 49 54 57 33 (4) (7) 9 18 (17) 31 (13) Titan 11 10 (1) 30 67 36 65 10 2 (6) (1) (4) 10 20 United Spirits 4 (4) (4) 8 15 0 (11) 3 (12) (9) (23) (56) (26) (56) Westlife Development (8) (1) 1 16 42 7 44 (9) (9) (4) (14) (29) (19) (2)
Paints Akzo Nobel 6 3 (4) 6 4 27 28 5 (5) (9) (25) (67) 1 (17) Asian Paints 11 5 (8) 28 52 70 126 10 (2) (13) (3) (19) 44 81 Berger Paints 13 8 1 31 54 136 198 11 0 (4) 0 (17) 110 153 Kansai Nerolac 8 10 (1) 20 55 31 19 6 2 (6) (11) (16) 5 (26) Source: Bloomberg, I-Sec research *Relative to Nifty 50 Index #Prices as on 31-Mar-2021
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Consumer Staples & Discretionary, April 1, 2021 ICICI Securities
Price charts Akzo Nobel Asian Paints Avenue Supermarts Bajaj Consumer Bata India 2,700 3,100 3,600 550 2,000 2,500 3,200 2,600 2,300 2,800 475 1,500 2,400 2,100 2,100 400 2,000 1,000 (Rs) (Rs)
(Rs) 1,900 325 (Rs) 1,600 1,600 (Rs) 1,700 1,200 250 500 1,500 800 1,100 175 1,300 400 0 600 100 Apr-18 Oct-18 Apr-19 Oct-19 Apr-18 Oct-18 Apr-19 Oct-19 Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21 Mar-20 Mar-21 Sep-20 Mar-20 Mar-21 Sep-20 Sep-20 Apr-18 Oct-18 Apr-19 Oct-19 Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21 Mar-20 Mar-21 Sep-20 Sep-20
Berger Paints Britannia Colgate Dabur Emami 900 4,500 1,800 600 700 800 4,000 600 1,600 550 700 3,500 500 500 600 3,000 1,400 450 400 (Rs) 500 2,500 1,200 400 (Rs) 300 (Rs) (Rs) 400 (Rs) 350 2,000 1,000 200 300 1,500 300 100 200 1,000 800 250 0 100 600 200 Apr-18 Oct-18 Apr-19 Oct-19 Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21 Mar-20 Mar-21 Sep-20 Sep-20 Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21 Sep-20 Apr-18 Oct-18 Apr-19 Oct-19 Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21
Sep-20 Mar-20 Mar-21
Sep-20
GCPL HUL ITC Jubilant Foodworks Jyothy Labs 1,020 2600 375 3,700 300 920 3,200 250 2300 325 820 2000 2,700 200 720 275 150 1700 2,200 (Rs) (Rs) (Rs)
(Rs) 100 (Rs) 620 1400 225 1,700 50 520 1100 1,200 175 0 420 800 700 320 125 200 Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21 Sep-20 Apr-18 Oct-18 Apr-19 Mar-20 Mar-21 Sep-19 Sep-20 Apr-18 Oct-18 Apr-19 Oct-19 Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21 Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21 Sep-20 Sep-20 Mar-20 Mar-21 Sep-20 Kansai Nerolac Marico Mrs. Bector’s Nestle Page Industries 700 450 700 20,000 42,000 650 600 18,000 37,000 600 400 500 550 16,000 400 32,000 500 350 14,000 450 (Rs) 300 12,000 27,000 (Rs) (Rs) (Rs)
400 (Rs) 300 200 10,000 22,000 350 100 8,000 17,000 300 250 0 6,000 250 4,000 12,000 200 04-Jan 16-Jan 28-Jan 09-Feb 21-Feb 05-Mar 17-Mar 29-Mar 23-Dec Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21 Apr-18 Oct-18 Apr-19 Oct-19 Sep-20 Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21 Sep-20 Mar-20 Mar-21 Sep-20 Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21 Sep-20
Sheela Foam Tata Consumer Titan United Spirits Varun Beverages 2,200 700 1,750 800 1,200 2,000 600 1,550 1,000 1,800 500 1,350 600 800 1,600 400 1,150 600 (Rs) (Rs) 1,400 (Rs) (Rs) 300
(Rs) 950 1,200 200 400 400 750 1,000 100 200 550 800 0 200 0 350 Apr-18 Oct-18 Apr-19 Oct-19 Apr-18 Oct-18 Apr-19 Oct-19 Apr-18 Oct-18 Apr-19 Oct-19 Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21 Mar-20 Mar-21 Mar-20 Mar-21 Sep-20 Sep-20 Sep-20 Mar-20 Mar-21 Sep-20 Apr-18 Oct-18 Apr-19 Oct-19 Mar-20 Mar-21 Sep-20
Westlife Development Zydus Wellness 600 2,500 500 2,000 400 1,500 (Rs) 300 (Rs) 200 1,000 100 500 Apr-18 Oct-18 Apr-19 Oct-19 Apr-18 Oct-18 Mar-20 Mar-21 Mar-19 Mar-20 Mar-21 Sep-20 Sep-19 Sep-20 Source: Bloomberg
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Consumer Staples & Discretionary, April 1, 2021 ICICI Securities
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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return
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