Consumer Staples & Discretionary

Equity Research INDIA July 6, 2020 BSE Sensex: 36021 Consumer Staples & Discretionary ICICI Securities Limited is the author and Playing with averages (and a prayer!) distributor of this report An important challenge faced by analysts (both buy side, sell side) and portfolio managers currently is forecasting earnings for FY21 and FY22 (due to GIGO). In this report, we suggest solutions and (also) request corporates for improved Sector update disclosures. Read on.  4-quarter moving average volumes have better utility in forecasting future trajectory than just QoQ and YoY figures. For example, for paints, the timing of Diwali festival (whether it's the first or second week of October) has a significant impact on the volume growth for both September and December quarters. Also, for paint volumes, in September quarter, the number of rainy days is what matters (which is beyond forecasting) rather than the actual quantum of rainfall (which most in sell- side religiously track and write reports on). Note that number of rainy days impacts the ability to paint (particularly exterior paints), even if the consumer is willing to do so.

 Disclosures on revenue performance in FY21 versus average monthly sales of FY20 (adjusting for seasonality) would be helpful to track underlying demand trends.  For Consumer Staples (FMCG), disclosures on primary (company to distributor), secondary (distributor to retailer), and tertiary (retailer to consumer) sales are important.  Recruitment of new consumers and /or households into the category/brand. Take the case of Saffola edible oil of Marico which has got a lifeline (it was (relatively) struggling otherwise in last few years) due to consumers spending more time at home and hence cooking food (rather than eating out). If we consider a normalised scenario of consumer behavior in FY22, Saffola is likely to see a volume decline in FY22. However, if the brand has recruited newer consumers / households into it in FY21, the DCF-value of the brand (and hence Marico stock) has increased significantly. That said, the household (HH) penetration data, at this point, is not easy to track even for the corporate given the challenges in market research. What's helpful for the analyst / investor would be qualitative comments on HH penetration.  Commentary about medium-term outlook. For example, as an index of 100, how much the CXO believe the revenues would be over one year (whether it’s January - Dec 2020 or April 2020 - March 2021 matters less). This will help us gauge the "lost revenue" versus "postponed revenue". The implicit assumption is that a restaurant or airline revenue for April and May 2020 are "lost revenues" whereas Paints and /or Jewellery are "postponed". We reckon that the consensus (as always) is over- optimistic or generous about the "postponed" assumption!  While disclosures about production levels of 70, 90 or 100% have some utility, what's useful would be primary / secondary revenue numbers.  What's the revenue, profit contribution of top-5 cities, Middle India, small towns?  In Retail (ex -Grocery), headlines of "we've reached x% of pre-COVID demand"

have utility, however, a low one. The current demand likely has a significant pent- up demand element and hence any comparisons month-on-month or even YoY has less relevance. Again, statistics, if feasible, on HH penetration (quantitative) and

Research Analysts: consumer behavior (qualitative) would be of immense value.  What are the structural (if at all) changes to channel dynamics which the CXO Manoj Menon sees and your action points into future. For example, newer D2C (direct to [email protected] +91 22 6637 7209 consumer) models are evolving in FMCG, there's a thrust on ecommerce in Retail Vismaya Agarwal, CFA (watches, eyewear, apparel etc.). What we know is that companies with better [email protected] managerial bandwidth will evolve stronger from FY21 with good learnings about +91 22 2277 7632 newer distribution models, some of them might well continue as an additional way to Karan Bhuwania reach the consumer in the long term (essentially DCF-accretive models). [email protected] +91 22 6637 7351 Please refer to important disclosures at the end of this report

Consumer Staples & Discretionary, July 6, 2020 ICICI Securities

 A simple question and any response from CXO is valuable. What's your view about FY22? How much is it versus FY20. For example, if you had thought FY22 as an index of 100 pre-COVID, what do you think (as feasible) now?  Formalisation - Reality versus expectation. The consensus narrative is about larger (and stronger) players gaining significant market shares in this period. In reality, we reckon that given the supply chain complexity of larger players, there's a case for smaller players gaining shares in the interim.  Structural changes in consumption pattern of certain commodities: We expect there will be structural changes in consumption of certain commodities such as milk, coconut water, road-side juices, and palm oil. We believe the competitors of these commodities will be net beneficiaries. The dairy companies will enjoy lower inflationary pressures in FY21 due to lower milk consumption by HoReCa. The beverage companies like Varun Beverages will benefit as consumption of road-side juices and coconut water will reduce in FY21.  Percentage margins matter less; disclosure about fixed costs, and importantly actions to manage / reduce it is a significant input for forecasting FY21 and FY22 (and beyond). We reckon that there's a significant potential earnings upside (by FY22, when revenue trajectory is expected to normalise) for those companies which are utilising the current phase to reduce the fixed costs.  Possibility of structural savings in ad-spends: The need to spend on out-of- home media is lower. The local brands are likely to suffer the most as they prefer to advertise through OOH and newspapers instead of national channels. Reduction in competitive pressures may structurally allow national players to benefit the most. National dairy companies such as Amul are expected to gain market share from regional dairy companies.  Higher sales of larger SKUs for home consumption and lower out-of home sales: While out-of-home consumption has reduced, the in-home consumption has increased. Also the consumption of larger SKUs has increased and consumption of smaller SKUs has declined. There is (generally) higher price loyalty in case of larger SKUs. Some of the food products such as ice creams, beverages may suffer due to lower realizations of larger SKUs as well as margins. It will be interesting to note the efforts of companies to drive in-home consumption of single serve packs. (E.g. HUL has started selling Magnum ice cream through Zomato).  Focus on value-for-money products: Until FY20, most companies used to focus on driving premiumization. This may be changing at the margin. Asian Paints has introduced Tractor Sparc, value-for-money emulsion. We believe the companies which focus largely on value-for-money products will be in sweet spot in FY21. E.g. Berger (Paints), Hatsun (Dairy).  Consumer and trade promotions: Companies have significantly reduced consumer and trade promotions given the inherent demand for health and hygiene products and lower competitive intensity. We therefore believe that disclosing the impact of reduced promotions would give a clearer picture in terms of the underlying performance.  Delays in receiving payments: Relevant for staples companies with higher share of Canteen Stores Department (CSD) sales and liquor companies (USL in our coverage) given the high share of institutional sales which could see delay in payments.  Direct rural reach expansion plans as wholesale channel may remain disrupted through FY21.

Consumer Staples & Discretionary, July 6, 2020 ICICI Securities

Figure 1: Stock Performance Absolute Return (%) Relative Return (%)* Company 1m 2m 3m 6m 12m 24m 36m 1m 2m 3m 6m 12m 24m 36m Staples Bajaj Consumer (5) 8 9 (38) (55) (66) (63) (10) (6) (22) (26) (46) (64) (73) Britannia 3 18 38 17 27 11 90 (1) 4 7 29 35 13 80 Colgate 2 3 11 (4) 18 20 25 (2) (11) (21) 8 26 22 15 Dabur 2 2 9 4 16 24 55 (2) (12) (22) 16 25 27 46 Emami 12 27 26 (25) (24) (58) (57) 8 13 (5) (13) (16) (56) (66) GCPL 9 41 35 3 10 (15) 11 5 27 4 14 18 (12) 1 HUL 4 8 1 13 24 28 99 (1) (6) (30) 25 32 31 89 ITC 5 27 17 (12) (25) (24) (38) 1 12 (15) (0) (17) (22) (48) Jyothy Labs 5 14 29 (17) (25) (46) (33) 0 (0) (2) (5) (17) (44) (42) Marico 8 18 37 8 (3) 3 11 4 4 6 20 5 5 1 Nestle (0) (4) 11 16 41 69 141 (5) (18) (21) 27 50 71 132 Tata Consumer 4 18 48 27 50 44 159 0 4 17 39 59 46 149 Varun Beverages 12 13 30 (0) 9 40 99 8 (1) (1) 11 17 42 89

Discretionary Avenue Supermarts (7) 5 11 28 64 46 160 (11) (9) (20) 40 73 49 151 Bata (7) (1) 9 (24) (9) 55 130 (12) (15) (22) (12) (1) 57 121 Jubilant Foodworks 3 12 34 3 40 23 222 (1) (3) 3 15 48 25 213 Page Industries 6 21 25 (10) 3 (30) 18 2 6 (6) 2 12 (28) 9 Sheela Foam 4 6 17 12 9 (3) 15 (1) (8) (14) 23 17 (1) 6 Titan (2) 14 16 (13) (20) 22 88 (6) 0 (15) (2) (12) 24 78 United Spirits (1) 19 26 4 1 (8) 15 (6) 5 (5) 15 10 (6) 6 Westlife Development 5 10 (3) (8) 8 (13) 37 1 (4) (34) 3 16 (10) 27

Paints Akzo Nobel (6) (9) (13) (8) 4 (4) (2) (10) (23) (44) 4 12 (2) (12) Asian Paints 4 5 11 (1) 27 24 50 (1) (9) (20) 11 35 27 40 Berger Paints 1 8 12 3 65 67 106 (4) (6) (19) 14 73 70 96 Kansai Nerolac 16 15 20 (8) 8 (8) 4 12 1 (11) 3 16 (6) (6) Source: Bloomberg, I-Sec research *Relative to Nifty 50 Index

Consumer Staples & Discretionary, July 6, 2020 ICICI Securities

Figure 2: Valuation summary CMP TP Upside PE (x) EV/EBITDA (x) ADTV Market Cap Company (Rs) (Rs) (%) Rating FY21E FY22E FY21E FY22E (US$ mn) (Rs bn) (US$ bn) Staples Bajaj Consumer 145 160 10 ADD 11 11 9 9 0.8 21 0.3 Britannia 3,538 3,000 (15) REDUCE 49 43 38 34 41.2 820 10.8 Colgate 1,383 1,300 (6) HOLD 45 41 29 27 20.8 365 4.8 Dabur 467 480 3 ADD 53 49 48 43 23.1 783 10.3 Emami 230 220 (4) HOLD 22 19 16 15 2.3 88 1.2 GCPL 717 700 (2) ADD 44 40 32 29 17.1 655 8.6 HUL 2,174 2,400 10 ADD 59 51 44 38 236.3 4,899 64.4 ITC 208 220 6 ADD 17 16 13 12 77.4 2,244 29.5 Jyothy Labs 122 125 2 ADD 23 20 16 15 0.6 43 0.6 Marico 359 380 6 ADD 40 35 28 25 16.2 427 5.6 Nestle 16,696 17,500 5 HOLD 73 59 50 42 40.5 1,562 20.5 Tata Consumer 396 415 5 ADD 52 43 27 24 1.9 340 4.5 Varun Beverages 698 600 (14) HOLD 77 43 20 16 0.2 191 2.5

Discretionary Avenue Supermarts 2,290 2,200 (4) REDUCE 114 63 71 42 13.7 1,541 20.2 Bata 1,299 1,100 (15) REDUCE 191 45 34 18 21.1 170 2.2 Jubilant Foodworks 1,737 1,500 (14) HOLD 212 55 38 22 34.5 220 2.9 Page Industries 20,622 19,000 (8) HOLD 180 53 90 35 10.3 202 2.7 Sheela Foam 1,450 1,650 14 ADD 67 26 34 17 0.1 70 0.9 Titan 1,004 1,000 (0) HOLD 98 44 56 27 57.4 857 11.3 United Spirits 589 620 5 ADD 78 40 43 26 35.5 442 5.8 Westlife Development 322 300 (7) HOLD (126) 65 35 16 1.5 46 0.6

Paints Akzo Nobel 1,800 2,500 39 BUY 36 29 24 19 0.5 83 1.1 Asian Paints 1,696 1,600 (6) HOLD 72 58 44 36 64.4 1,548 20.3 Berger Paints 504 490 (3) HOLD 85 69 51 43 10.4 491 6.4 Kansai Nerolac 387 350 (10) HOLD 59 38 35 24 1.7 208 2.7 Source: Bloomberg, I-Sec research

EV/ sales (x) P/B (x) P/CEPS (x) RoE (%) RoCE (%) CAGR (FY20-22E) (%) Company FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E Revenues EBITDA PAT Staples Bajaj Consumer 2.4 2.2 3 2 11 10 25 23 26 24 2 2 3 Britannia 6.7 6.0 16 13 44 39 33 30 22 21 11 16 18 Colgate 8.1 7.6 21 21 36 33 52 56 61 66 5 8 8 Dabur 9.4 8.7 11 10 46 42 22 22 16 16 5 7 5 Emami 4.1 3.8 6 6 23 19 26 30 29 32 2 3 2 GCPL 7.4 6.9 9 8 39 35 20 21 16 17 6 10 8 HUL 11.3 10.1 14 13 53 46 39 26 32 22 14 18 20 ITC 4.9 4.4 4 4 15 14 24 26 26 29 9 8 4 Jyothy Labs 2.6 2.5 4 3 18 16 16 17 14 15 4 11 13 Marico 6.0 5.5 14 12 35 32 37 37 32 34 7 12 11 Nestle 11.9 10.2 62 46 64 53 97 89 39 39 12 15 17 Tata Consumer 3.6 3.3 2 2 38 33 4 4 5 5 6 7 11 Varun Beverages 3.8 3.1 5 5 25 19 7 12 9 13 1 (1) (4)

Discretionary Avenue Supermarts 5.4 3.9 12 10 89 53 11 17 15 23 25 29 32 Bata 6.8 4.7 9 8 40 23 5 18 8 25 6 3 6 Jubilant Foodworks 6.4 4.9 20 15 50 29 10 31 9 23 7 9 18 Page Industries 9.8 6.8 26 21 118 46 15 44 13 35 7 11 12 Sheela Foam 3.5 2.3 7 5 40 20 11 24 10 23 16 17 15 Titan 4.7 3.0 12 10 69 36 13 25 13 30 17 14 17 United Spirits 5.8 4.6 10 8 54 32 13 22 14 24 2 5 17 Westlife Development 3.9 2.7 9 8 51 22 (7) 13 1 23 10 19 179

Paints Akzo Nobel 3.4 2.8 6 5 27 22 17 19 17 19 1 3 7 Asian Paints 8.9 7.4 15 13 53 44 22 25 19 22 4 4 2 Berger Paints 8.6 7.3 16 14 63 53 20 22 17 19 4 4 4 Kansai Nerolac 5.8 4.5 6 6 47 34 9 13 9 13 2 4 3 Source: Bloomberg, I-Sec research

Consumer Staples & Discretionary, July 6, 2020 ICICI Securities

Price charts Akzo Nobel Asian Paints Avenue Supermarts Bajaj Consumer Bata India 2,700 2,000 2,800 550 2,000 2,500 1,800 2,400 475 1,500 2,300 1,600 2,000 2,100 400 1,400 1,600 1,000 (Rs) (Rs)

(Rs) 1,900 325 1,200(Rs) 1,200 (Rs) 1,700 1,000 250 500 1,500 800 800 175 1,300 400 0 600 100 Jul-17 Jul-18 Jul-19 Jul-20 Jul-17 Jul-18 Jul-19 Jul-20 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jan-18 Jan-19 Jan-20 Jan-18 Jan-19 Jan-20 Jul-17 Jul-18 Jul-19 Jul-20 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jan-18 Jan-19 Jan-20

Berger Paints Britannia Colgate Dabur Emami 700 4,000 1,800 560 800 600 3,500 520 1,600 480 3,000 600 500 1,400 440 2,500 400 400 (Rs) 1,200 400 (Rs) 360 (Rs) (Rs)

2,000 (Rs) 300 1,000 320 1,500 200 280 200 1,000 800 240 100 600 200 0 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jul-17 Jul-18 Jul-19 Jul-20 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jul-17 Jul-18 Jul-19 Jul-20

Jan-18 Jan-19 Jan-20 Jan-18 Jan-19 Jan-20

GCPL HUL ITC Jubilant Foodworks Jyothy Labs

1,020 2600 375 2,200 300 920 2300 250 325 2000 1,700 820 200 720 1700 275 1,200 (Rs) 150

1400(Rs) (Rs) (Rs) (Rs) 620 225 1100 100 520 800 700 175 50 420 500 320 125 200 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jul-17 Jul-18 Jul-19 Jul-20 Jul-17 Jul-18 Jul-19 Jul-20 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jan-18 Jan-19 Jan-20 Jan-18 Jan-19 Jan-20

Kansai Nerolac Marico Nestle Page Industries Sheela Foam 600 450 20,000 42,000 2,050 550 18,000 1,850 500 400 16,000 32,000 1,650 450 350 14,000 1,450 12,000 22,000 (Rs)

400 (Rs) (Rs)

1,250(Rs)

(Rs) 10,000 350 300 8,000 12,000 1,050 300 250 6,000 850 250 4,000 2,000 200 650 Jul-17 Jul-18 Jul-19 Jul-20 Jul-17 Jul-18 Jul-19 Jul-20 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jan-18 Jan-19 Jan-20 Jan-18 Jan-19 Jan-20 Jul-17 Jul-18 Jul-19 Jul-20 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jan-18 Jan-19 Jan-20

Tata Consumer Titan United Spirits Varun Beverages Westlife Development 450 1,550 1,000 1,000 600 400 1,350 800 500 350 1,150 800 300 600 400 950 600 (Rs) (Rs) (Rs) 250 400 (Rs) 300

(Rs) 750 200 550 400 150 200 200 350 100 200 0 100 150 Jul-17 Jul-18 Jul-19 Jul-20 Jul-17 Jul-18 Jul-19 Jul-20 Jul-17 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jan-18 Jan-19 Jan-20 Jun-18 Jan-18 Jan-19 Jan-20 Dec-17 Dec-18 Nov-19 May-19 May-20 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20

Source: Bloomberg

Consumer Staples & Discretionary, July 6, 2020 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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