We welcome your support in Asiamoney Brokers Poll. Please CLICK HERE to vote. Sector Update FMCG COVID and Inflation; the two demons to be slayed! Investment rationale In this report we have attempted to analyze; raw material cost trend, price hikes, DABUR’s international market exposure is more immune to COVID and impact of COVID uncertainty on Indian FMCG companies. Our primary In international market, out of 23 countries where Indian FMCG companies have observations and conclusions are as follows; (i) raw material cost for edible oil, maximum exposure; 88% countries have already witnessed either 3rd or 4th wave. packaging material and paint-related-products (TIO2, VAM etc) rose significantly Also, around 61% countries are witnessing meaning full decline in number of during 1QFY22; category leaders (MRCO in Edible Oil, HUL in soaps) have taken daily COVID cases. Dabur’s exposure to international market is relatively more nd rd larger price hikes compared to 2 /3 brand to protect margins (ii) in international immune compared to other FMCG companies in India (exhibit 15). market; 88% of the regions, where Indian FMCG company has significant business India to unmask by Dec’21; expect discretionary segment to recover faster presence, have already witnessed 3rd/4rth wave and is now more stable; we Based on current vaccination rate (at 28 lakh doses per day) and government of observe that subsidiaries of DBUR are relatively more immune to COVID India target of vaccinating adult population by Dec 21, the discretionary disruptions as most of the countries where the company has presence are consumption, led by increase in the mobility of people at malls and other public witnessing significant decline in number of daily COVID cases. (iii) We expect places will improve significantly. And thus the recovery in companies having normalization of mobility and lockdown by end of Dec’21; this would help business exposure to discretionary segments (apparel, juices, cola drinks paints etc.) to be recovery of TRENT, TCNS, DMART, JUBI to accelerate. In our coverage universe; faster in 2HFY22. We also concur with the view that there will be significant DMART, BRIT and GCPL are our preferred pick. normalization of mobility and lockdown by Dec’21 as India is most likely to Top executors to drive outperformance achieve 80% vaccination rate; this would help business recovery for TRENT, nd During 2 COVID wave the strategy of micro-containment used by India has TCNS, DMART, JUBI FOOD to faster than expected. helped FMCG companies to report better business recovery compared to the Top picks; DMART, BRIT, GCPL strategy of blanket-lockdown during the 1st wave. We observe that; post COVID We like DMART, BRIT, and GCPL amongst our coverage universe. We believe crisis companies which are top executors (HUL, BRIT, DABUR, GCPL, MRCO, DMART is a classic case of a platform company; as it is creating an expensive- APNT, DMART, JUBI, TRENT) outperformed competition (exhibit 18). We expect platform (DMART owns the land parcel and does its own construction) where these companies to continue outperformance as India moves to gradual manufacturers can keep their products while customers can buy it. We believe, unlocking. DMART can compound revenue/EPS growth at 25-30% over next 25 years. In Inflationary pressure continues; price hikes taken in 1QFY22 to support margin case of BRIT; we are bullish on the company’s approach to drive premiumization On raw material, cost of packaging material and edible oil witnessed major in the value segment through milk-bikis portfolio. Poor people love to indulge in inflation (+40-62% YoY) during 1QFY22. FMCG companies have taken price hikes cheap luxury; we expect BRIT to drive success in premiumization through top- to offset any impact on margin. We note that; category leaders (MRCO, HUL) class execution. On GCPL; we are bullish on turnaround of South Africa business have taken larger price hikes compared to 2nd/3rd brand (exhibit 2 to 10). We while HI business in India likely to continue growth momentum. understand this symbolizes the power of brand. July 2, 2020 FMCG | Sector Update Exhibit 1: Valuation Table CMP TP Mkt Cap Revenue (Rs mn) EPS (Rs) PER (x) EV/EBITDA (x) RoE(%) RoCE(%) Companies (Rs) (Rs) Reco (Rs mn) FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E FY23E FY23E Hindustan Unilever Ltd 2,477 2,607 ACCUMULATE 58,19,345 5,19,301 5,72,603 42.9 47.4 57.5 52.1 39.8 35.9 21.4 23.5 Asian Paints Ltd 3,023 2,444 HOLD 28,99,943 2,49,371 2,83,788 38.5 44.4 77.6 67.3 50.4 43.7 24.6 29.1 ITC Ltd 203 274 BUY 24,98,695 5,27,584 5,80,426 12.8 14.0 15.9 14.4 12.5 11.2 27.3 30.0 Avenue Supermarts Ltd 3,315 3,502 BUY 21,47,049 3,07,874 4,30,447 26.1 38.1 128.2 87.7 84.6 57.2 16.2 20.9 Nestle India Ltd 17,642 16,195 HOLD 17,00,928 1,52,949 1,70,974 260.6 294.4 65.6 58.0 43.2 38.2 97.2 74.9 Dabur India Ltd 590 526 HOLD 10,43,033 1,09,551 1,18,948 10.3 11.7 55.4 48.7 43.2 37.1 22.7 23.9 Godrej consumer products ltd 888 961 ACCUMULATE 9,08,325 1,22,061 1,31,621 19.9 21.3 43.8 40.7 30.3 28.1 20.2 24.5 Britannia Industries Ltd 3,594 4,395 BUY 8,65,572 1,44,055 1,58,637 79.0 87.9 46.2 41.5 34.5 30.6 37.8 34.2 Berger Paints Ltd 809 628 SELL 7,85,389 79,891 93,370 9.3 11.4 87.0 70.5 52.7 43.4 25.9 29.6 Marico Ltd 535 450 ACCUMULATE 6,90,375 88,343 97,886 9.7 11.2 54.5 47.2 39.4 33.9 37.7 40.9 Jubilant Foodworks Ltd 3,113 2,774 HOLD 4,10,780 47,126 54,530 38.8 50.5 79.4 61.0 33.4 27.1 31.1 26.8 Kansai Nerolac Ltd 572 599 ACCUMULATE 3,08,208 55,155 64,022 12.1 15.0 46.7 37.6 30.3 24.4 16.4 20.5 Trent Ltd 858 559 SELL 3,04,955 37,234 44,348 6.0 7.5 142.1 114.0 42.0 32.5 11.1 8.3 TCNS Clothing Co Ltd. 576 476 SELL 35,458 10,819 13,615 13.5 15.9 42.7 36.2 15.2 10.2 16.4 11.1 Source: Company, IDBI Capital Research 4 FMCG | Sector Update Inflationary pressure continues; but price hike is also following up On raw material; we observe that cost of packaging material and the edible oil basket continues to witness significant amount of inflation during 1QFY22. Price of LDPE and Polypropylene rose by 62%YoY in 1QFY22. In edible oil basket; price of copra and palm oil increased by 37% and 46% YoY respectively. Raw material cost inflation in paint sector also continues to rise as the price of TIO2, VAM and Acetic Acid rises by 13%, 22% and 164% YoY in Q1FY22. We note that companies have already taken price hikes in 4QFY21 and is likely to take more hike in 1QFY22 to offset inflationary pressure; MRCO has already taken 30% price hike in 2HFY21 and 15-20% hike in 1QFY22 for Saffola brand. In parachute brand; MRCO has taken 9% price hike in 2HFY21. BRIT expects to take 3% price hike to offset inflation in material cost primarily coming from edible oil, packaging material and rise in diesel cost. DABUR has taken 3% price hike in 4QFY21 and expects to take 2nd round of hike in 1QFY22. APNT has taken 2.8% price hike in 1QFY22 BRGR has taken 2.2-2.5% price hike in the month of May’21. The company expects more price hike in coming months. KNPL has taken 3-8% price hike in industrial coating products; 8% hike in Powder Coating, 5% hike in refinish and 3% hike in general industrial coatings. Based on our survey of SKUs that we conduct on monthly basis, we observe following; MRCO has taken price hike c. 300bp higher than competition in edible oil basket (Saffola vs Fortune) during Jan- Jun’21. This reflects brand power of Saffola as a brand. Saffoly enjoys c. 81% volume market share in premium edible oil category. In Soap’s portfolio we note that HUL has taken price hike of c. 17% which is c. 900bp higher compared to competition (GCPL, Reckitt B., Patanjali, Private Labels) In Shampoo segment; HUL has taken 8-10% price hike over Jan-June’21 5 FMCG | Sector Update In tea; we observe that HUL has been laggard in taking price hike compared to Tata Consumer. Over last six months; HUL has taken c. 5% price hike while Tata Consumer has taken price hike in 1-2 SKUs only. Exhibit 2: Cost of packaging material trend (%YoY) Financial year FM LDPE ($/ton) Polypropylene ($/ton) 2020 Q1 -14.71% -11.21% Q2 -18.69% -16.21% Price of LDPE and Polypropylene has Q3 -21.55% -16.02% Q4 -18.37% -14.08% risen significantly over last 3 quarters 2020 Total -18.27% -14.38% 2021 Q1 -25.68% -26.64% Q2 -4.66% -11.51% Q3 15.69% 7.95% Q4 35.19% 38.74% 2021 Total 3.45% 0.52% 2022 Q1 62.84% 61.55% Source: Bloomberg, IDBI Capital Research 6 FMCG | Sector Update Exhibit 3: Food related raw material cost basket (%YoY) trend Exhibit 4: Edible oil raw material cost basket (%YoY) trend Tea Coffee Milk Powder Mentha Paraffin Palm Malaysian FY FM Barley Wheat Sugar FY FM Copra Groundnut PFAD Index Index - Delhi oil Wax oil Palm oil 2020 Q1 24% 12% 11% 13% NA 33% 2020 Q1 11% 22% -20% 6% 3% -10% -17% Q2 14% 9% 2% 11% NA 64% Q2 -7% 17% -17% -24% -6% -13% -7% Q3 11% 10% 5% 12% NA 69% Q3 -14% 7% 36% -24% -20% -3% 30% Q4 8% 7% 2% -8% NA 58% Q4 -26% 20% 46% -23% -21% 20% 34% 2020 Total 14% 9% 5% 7% NA 56% 2020 Total -9% 16% 8% -17% -11% -2% 8% 2021 Q1 -14% 1% -1% -13% NA 9% 2021 Q1 -27% 36% 24% -18% -16% 18% 15% Q2 -25% -13% -1% 26% NA -11% Q2 -15% 24% 50% -22% -14% 25% 37% Q3 -32% -19% -3% 32% -11% -17% Q3 -2% 32% 42% -21% -6% 28% 35% Q4 -26% -14% -2% 26% -3% -12% Q4 31% 28% 41% -17% -4% 25% 46% 2021 Total -25% -12% -2% 17% -7% -9% 2021 Total -5% 30% 39% -20% -10% 24% 34% 2022 Q1 21% -4% 3% 17% 13% -5% 2022 Q1 37% 14% 90% -14% -2% 46% 92% Source: Bloomberg; IDBI Capital Research Source: Bloomberg; IDBI Capital Research Exhibit 5: Raw material cost for paint industry is up by 20% over last